Undisclosed Short Sale Payments May Be Illegal

Real Estate Agent with REALTY ONE GROUP SOUTHWEST CAL BRE #01856708


Red Flag

Important information provided by the California Association of Realtors

Undisclosed Short Sale Payments May Be Illegal

"Undisclosed payments in short sale transactions, especially those paid outside of escrow, may violate the law, including RESPA, laws against loan fraud, and licensing laws.  Short sale agents have increasingly reported to C.A.R. about requests for agents and their clients to pay junior lien-holders and others, oftentimes outside of escrow.

One common scenario is when a short sale seller's senior lender authorizes a payment of $3,000, for example, to extinguish a junior lien, but the junior lender demands that the buyer pays an additional $9,000 outside of escrow.  Not only would it be risky for a buyer to pay outside of escrow, but concealing this additional payment from a federally-insured senior lender may constitute loan fraud, which is a crime punishable by 30 years imprisonment plus a $1 million fine (18 U.S.C. section 1014).  Furthermore, omitting from the HUD-1 Statement any charges paid at settlement by either a buyer or seller may violate the Real Estate Settlement Procedures Act (RESPA) (Appendix A to 24 C.F.R. Part 3500).  Depending on the specific circumstances, carrying out these payment requests may also violate other laws and regulations, and an agent's participation in the scheme may be subject to license revocation by the Department of Real Estate or other disciplinary action."

Agents and their clients are encouraged to file any complaints regarding fraudulent activities to the proper authorities, including the following agencies:

Attorney General's Office

California Department of Justice

Telephone: 800-952-5225



Department of Housing and Urban Development (HUD)

HUD Office of Inspector General Hotline (GFI)

Telephone: 800-347-3735



Federal Bureau of Investigation (FBI)

Telephone: 202-324-3000




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Posted by

 Dori Kay, REALTOR®

Prudential California Realty

 CA DRE Salesperson License  #01856708    Office License #01208606

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Comments (14)

Joni Bailey
101 Main St. Realty - Huntsville, TX
Your Huntsville / Lake Livingston Area REALTOR®
Wow! That is crazy! I am glad that you put the word out to warn The public. Agents should know better, but the consumer may not realize, until it is brought to their attention, that this is illegal. Great post!!
Nov 04, 2012 08:10 PM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Anything not on the HUD in a short sale or any transaction involving borrowed funds from a bank is illegal - that is real estate 101.


Nov 04, 2012 10:42 PM
Dori Kay

Joni - What's crazy is getting a response from a post I submitted over 2 1/2 years ago....but thank you for the kind words.

Sharon -  You are right...RE 101.  Unfortunately, some missed the course.....or just lack morals.


Nov 05, 2012 12:49 AM
Kathleen Daniels, Probate & Trust Specialist
KD Realty - 408.972.1822 - San Jose, CA
Probate Real Estate

Dori,  I had such a demand from the buyer's lender about 2 years ago. I asked her if she was aware that what she was asking me to do was illegal.  She said nothing.  She knew the critical situation we were in. If we did not close on that transaction the property would go to foreclosure.  And it did. I offered to pay upfront on the HUD the $6,000 she demanded. They did not want it on the HUD they wanted it under the table. NO DEAL.  I explained to the sellers who understood and did not want me to pay the random even if it was disclosed. 

Nov 11, 2012 01:29 AM
Dori Kay

Kathleen - That is really sad. Makes you wonder where that $6,000 might have been going to.  Good thing is you are able to sleep at night, and a big shout out to your sellers for their understanding and support.  Hopefully they will be contacting you soon for a new purchase! 

Nov 11, 2012 03:16 AM