Q Where does a broker submit a request for DRE’s review of an advance fee agreement? A A request for DRE’s review of an advance fee agreement should be sent to: Department of Real Estate Mortgage Loan Activities Unit Post Office Box 187000 Sacramento, California 95818-7000
Q Can a broker submit an advance fee agreement for providing limited services, such as reviewing the borrower’s financial condition, obtaining property information, or reviewing the borrower’s documents? A No. According to the DRE, an advance fee loan modification agreement must provide for the broker to submit to, or negotiate with, the lender or loan servicing agent a proposed modification or other solution. Services such as reviewing the borrower’s financial condition, obtaining property information, or reviewing the borrower’s documents are just some of the steps in a single transaction where the borrower seeks assistance on his or her loan. The DRE will not consider advance fee agreements that only provide for partial services with no requirement to contact the lender or servicing agent. (See “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008), available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf.)
Q Is a real estate license required for providing loan modification services? A Yes, in most cases. A real estate broker’s license is generally required when someone acting for profit performs loan modification services for a borrower. More specifically, unless an exemption applies (see Question below), a real estate broker’s license is required for someone who, for compensation or in expectation of compensation, does or negotiates to do any of the following acts on behalf of another: • Negotiates loans secured by real property; • Performs services for borrowers, lenders or note holders for loans secured by real property; • Solicits borrowers or lenders for loans secured by real property; or • Collects payments for loans secured by real property. ( “Unless otherwise exempt, a real estate license is required to solicit, market, or provide loan modification, short sale and other loss mitigation services that involve the negotiation or renegotiation of the terms of a loan or sale of a property”), available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf.
Q Why is a real estate license generally required for loan modification services? A The purpose of a real estate license is to protect the public from dealing with incompetent or untrustworthy real estate practitioners. With the recent mortgage crisis, loan modification scams have exploded onto the real estate scene. REALTORS® who offer legitimate loan modification services often find themselves pitted against loan modification scam artists.
Q Are there any exemptions to the real estate licensing requirement for persons performing loan modification services? A Yes. Homeowners can perform loan modification services on their own behalf. Another exemption from licensing requirements is available for housing counselors who provide loan modification services free of charge. Attorneys are also exempt from the real estate licensing requirements, but only to a limited extent as discussed below. For other exemptions to the licensing requirements, C.A.R. offers a legal article entitled Licensing Chart for REALTORS®.
Q Is a real estate broker’s license required for an attorney who provides loan modification services? A It depends. An attorney rendering legal services to a client is exempt from licensing requirements if the attorney is not using or attempting to use the exemption for the purpose of evading the licensing laws. Moreover, for loan modifications and other loan-related activities, the exemption from the real estate license requirement for an attorney only applies if all of the following conditions are met: • The attorney is licensed to practice law in California; • The attorney renders services in the course of his or her practice as an attorney; • The attorney is not actively and principally engaged in the business of negotiating loans secured by real property; • The attorney’s disbursements are not charges or costs and expenses regulated by Article 7 loans and • The attorney’s fees and disbursements are not shared, directly or indirectly, with the person negotiating the loan or the lender.
Q Can a loan modification business circumvent the advance fee or licensing requirements by affiliating or associating itself with an attorney? A No, in many cases. REALTORS® and their clients should be wary of unscrupulous people who claim that their affiliation or association with an attorney enables them to practice real estate without a license, to collect advance fees, or both. One common scenario is a broker who claims the advance fee being charged is exempt from the advance fee requirements because the broker has an in house attorney or an affiliation with a law firm to negotiate the loan modification with the lender. In truth, there is no such exemption from the advance fee requirements. Furthermore, although attorneys may not be subject to DRE requirements for advance fees, an attorney or law firm is generally prohibited from “fee splitting” or sharing legal fees with a person who is not an attorney. Another common scenario is for a loan modification business to claim exemption from both the real estate licensing laws and advance fee requirements due to its affiliation with an attorney or law firm. Yet, in truth, a loan modification business is not exempt from the real estate licensing merely because it is affiliated with an attorney or law firm. Furthermore, an attorney rendering legal services is not exempt from the real estate licensing requirements unless certain parameters are met as discussed above. Other than these two scenarios, there are many other business arrangements involving attorneys. Some of them are legitimate enterprises, whereas others are not, depending on their specific facts and circumstances. The DRE is currently conducting a number of investigations of people who are attempting to affiliate with attorneys to circumvent the advance fee and licensing requirements (available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf). For referral arrangements involving attorneys, see Question above.
V. REFERRAL ARRANGEMENTS
Q Can a real estate broker pay, or receive compensation from, an attorney in exchange for the referral of loan modification business? A No, according to the DRE. REALTORS® may be propositioned by attorneys (or people who claim to be attorneys) to refer loan modification business in exchange for a fee. The DRE states that it has been advised by the Department of Housing and Urban Development (HUD) that “referral fees paid or received in a loan modification transaction would constitute a violation of the Real Estate Settlement Procedures Act (RESPA).” See “Advance Fees and Loan Modifications” in DRE’s Mortgage Loan Bulletin (Fall 2008), available at http://www.dre.ca.gov/pdf_docs/mlb_fall08.pdf). Furthermore, an attorney or law firm is generally prohibited under State Bar rules from paying a referral fee to a non-attorney. Under RESPA, a real estate agent is generally prohibited from giving or receiving anything of value in exchange for a referral for a transaction involving one-to-four residential units with a federally-related mortgage loan as defined. A federally-related mortgage loan includes first trust deeds, junior liens, purchase money loans and refinances. However, RESPA specifically exempt, among other things, a loan conversion which is defined as any “conversion of a federally related mortgage loan to different terms that are consistent with provisions of the original mortgage instrument, as long as a new note is not required, even if the lender charges an additional fee for the conversion”. The Fall 2008 DRE Mortgage Loan Bulletin does not address the RESPA exemption for loan conversions under 24 C.F.R. § 3500.5(b)(6). Also exempt from RESPA is a payment for reasonable services actually rendered. For more information about RESPA, C.A.R. has a legal article entitled Referral Fees and Arrangements.
Q Can a real estate broker pay, or receive compensation from, an unlicensed loan modification servicer or other unlicensed person in exchange for the referral of loan modification business? A No, according to the DRE.
Q Can a real estate broker pay or receive compensation from another real estate broker in exchange for the referral of loan modification business? A Probably not for RESPA transactions involving one-to-four residential units with a federally related mortgage loan. RESPA exempts referral arrangements between real estate agents and brokers, but not mortgage brokers. Because loan modification may be construed as mortgage brokerage activity, a broker-to-broker referral arrangement for loan modification may arguably violate RESPA.