Short sale negotiation and the law

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Not too long ago I wrote a post about short sale negotiation and included information from Ned Blumenthal about how the law relates to real estate agents and brokers. Ned was kind enough to email some more information back in April and I want to share it with you today as it is very important to those of you who operate in Georgia.

Let's back track momentarily so I can repeat my stance on "Loss Mitigators" who do not work for the lender, "Loss Mitigation Specialists" who took a class online and got a certification, and anyone else who gets in the mix who could royally blow your credit for as much as the next seven to ten years. They should get out of the way and should be held accountable, personally and financially, for any damage they have caused.

Negotiating a short sale, or any mortgage modification, is not a "no brainer". It requires experience, skill and personal liability. As licensed loan officers (now referred to as mortgage loan originators) employees of mortgage brokerages and lenders are held to a level of liability that should greatly diminish foul play. However there are people who are outside of these NMLS and State Regulatory licensing requirements who are prohibited, by law, from acting as intermediaries who still get in the mix. Some of them are licensed real estate agents who, likely unknowingly, are violating certain sections of (Georgia) law.

If you are not aware of Mr. Blumenthal he is a co-author, along with Seth Weissman, of the Red Book on Georgia Real Estate. In other words he is The Authority. Part of his job is to work with agents to defend them in criminal charges if it comes to that point. His experience along with the words directly from the Georgia Department of Banking and Finance are not subjective but reasonably "black and white".

In Mr. Blumenthal's article of April 2010 his second paragraph reads, "The Georgia Residential Mortgage Act (the “Act”) as modified to comply with the Secure and Fair Enforcement for Mortgage Licensing Act (the “S.A.F.E. Act), prohibits any person from engaging in the activities of a mortgage loan originator without first obtaining and maintaining a mortgage loan origination license." 

You just read that and about the bold part perhaps thought, "I'm not acting like a mortgage loan originator so this does not apply to me." Let me provide you with Mr. Blumenthal's contact information so you can put him on retainer because you may be in need of his services in the near future.

In the first letter Mr. Blumenthal wrote:

"Normally, real estate brokers and agents do not get involved in negotiating the terms of loans for their clients and should not run afoul of the Act.  However, what about in short-sale situations?  If an agent contacts the seller’s lender trying to negotiate terms for a short-sale, does this violate the Act?  We do not have any definitive case law on this yet, but the answer certainly appears to be “yes”. 

So, what’s an honest agent to do?  In short, the agent should limit their role to that of information provider and have no hand in actual negotiations with the seller’s lender.

It is okay for a real estate agent to gather information about the property, undertake a market analysis, create a BPO, suggest a list price for the property, assist in the negotiation of the terms of the sale to a buyer, and to generally do all the things agents normally do for non-short-sale sellers.

It is probably fine for an agent to provide all of the above information to the seller’s lender and to provide the lender with any other information or documentation it may request.

However, it is not okay, and likely a violation of the Act, for the agent to negotiate with the lender on behalf of the seller."

The example he gives in his letter is included in the FAQ from the Georgia Department of Banking and Finance and provides a more static view as opposed to theory:

Bob owns a house that, in today’s market, is worth $250,000.  Bob purchased the house in 2004, paying $400,000.  Bob’s current loan balance is $375,000, meaning that he is $125,000 “upside down”.  Last year Bob lost his job as a corporate manager.   He finally found work 6 months later but for a significantly reduced salary (his new job description involves asking “do you want fries with that?”).  Bob is 4 months behind on his mortgage and has received several letters from his lender threatening foreclosure.  Bob has not been able to get in touch with his lender and called you because he saw your web-site in which you claim to be a “short-sale specialist”.

Bob has not heard back from his lender’s “work-out” group and his current job forces him to be away from the phone most of the day.  Can you, or your assistant, contact his lender for him?  Probably not, at least not in any meaningful way.  It may be okay for you to call Bob’s lender’s main number to get a name and direct phone number of someone in the work-out department or to ask what information the lender needs as part of a short-sale application package.  However, it is seemingly not permissible for you to get into any of the specifics related to Bob’s loan.

You conduct your market analysis and suggest a list price of $275,000 to allow some room for negotiation.  Can you provide this information to Bob’s lender?  The answer appears to be yes.  This is merely providing information and not negotiation.

The property sits on the market for a few months with no nibbles.  Bob is worried that his lender will move forward with foreclosure.  Can you contact the lender and tell it that you think offers will be coming in as spring approaches ask it to hold off on foreclosing for a few more months?  This is a bit more tricky.  It is likely okay to let the lender know that you hope to get some offers soon.  However, requesting the lender to hold off foreclosure may possibly cross the line into negotiations.

Fast forward a while and you now have an offer on Bob’s house.  The offer is for $225,000 “as-is”.  Can you forward the offer to Bob’s lender?  Yes.  Again, this is merely the providing of information. 

Can you include a letter to the lender, saying that you believe this is the best price obtainable for Bob’s property and that you urge the lender to approve it quickly before the buyer moves on to another property?  It is probably okay for you to let the lender know that you think this is a good offer.  However, have you crossed the line between providing information and stepped into negotiation when you urge the lender to accept the offer?  Probably.

Bob’s lender has approved the $225,000 offer.  However, Bob’s lender says it will not allow Bob to pay you the 6% commission you negotiated with Bob.  Rather, it will only allow a 4% broker’s commission.  Can you call Bob’s lender and try to explain why the 6% commission is more than reasonable considering all the effort you put in to the deal?  You might argue that you are merely negotiating on behalf of yourself, not Bob, so this should be okay.  However, this could well be seen as an attempt to negotiate the overall terms of the short-sale approval, which is not permissible. 

Since Mr. Blumenthal will almost certainly be reading your responses fire away. Keep in mind we are talking about Georgia law. However the laws in Georgia and, in fact, the laws and regulations governing the mortgage banking industry are becoming more standardized every day. Seth is also admitted in Florida and Maryland.

Do you listen to REtechRadio ever Thursday at Noon Eastern? You should! We want to hear from you.

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I started writing on Active Rain in 2006 when I was representing the mortgage industry. I am no longer in that industry and many of the older posts contain outdated information. Please do not contact me for LENDING or MORTGAGE questions but rather contact a licensed mortgage professional from your area. I have always been in marketing and branding and that is still what I do. Thanks for reading!

Comments (8)

Jenna Dixon
Momentum Real Estate Group LLC - Marietta, GA
55 & Over | New Constructions | Horse Farms

Thanks for the reminder, Ken. 

Jun 09, 2010 03:38 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Ken the law in Florida is similar. BUT what makes the providing of thise services illegal without a license is being compensated for those services. In Florida when I list a property for sale as a short sale the service I am being paid for is listing and selling the property. The short sale negotiations are being thrown in at no charge. Meaning I don't charge extra if I have to negpotiate the short sale. And since I am not being compensated for this service I am not breaking the law.

Now having said all that..I take my Florida mortgage broker licensing test on Saturday. Better safe than sorry :)

*** And of course I am NOT an Attorney nor do I play one on TV. This response is my opinion only.

Jun 09, 2010 07:17 AM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

LOL Bryant - I don't even want to BE an attorney. I believe, from what I understand from people who are attorneys and enforce the law, here in Georgia you're okay until you start negotiating with the lender about how much the payoff is going to be or other terms of the existing loan. In other words if you're just negotiating the listing and the sale you're fine. It's when you start talking about payoff reductions, promissory notes and the like you're getting into dangerous territory regardless of whether or not you are being compensated for the service. Maybe Mr. Blumenthal will respond. Good luck on that test. Watch for the tricky questions.

Jun 09, 2010 08:42 AM
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

That commission part is tricky...  How CAN we press banks to pay the contracted commission? 

Jun 09, 2010 01:58 PM
Cameron Wilson
Labrum Real Estate - Murrieta, CA
The Short Guy - Murrieta,Temecula,Menifee Californ

I can understand the intent of the law but what is he suggesting agents do to negotiate with the lender? I do it myself as I am representing the seller in a sale of real property and the more folks involved the more likely things will go south. As far as my commission if the lender mentions it they have just violated real estate law as the contract is between the seller and myself. They try and circumvent that by saying we will accept such and such for the payoff and do the math. If they say the word commission pertaining to mine they blew it.

We did shorts in the 90s in my area with no repercussions but what about the requirements for the lender side of the equation? afterall they have hired folks to simply negotiate shorts but they are not licensed. Violation?

Jun 09, 2010 02:58 PM
Cameron Wilson
Labrum Real Estate - Murrieta, CA
The Short Guy - Murrieta,Temecula,Menifee Californ

Great post for discussion so I'm gonna push the new AR button.

Jun 09, 2010 02:59 PM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Ken you do know that attorneys always err on the side of caution. That's OK. But sometimes they are just wrong.

Jun 10, 2010 10:24 AM
Richard Byron Smith, NMLS #184479
Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289 - Chattanooga, TN
Mortgage Loan Officer

Short sales are tough. People do not realize how long they can take. But must be done with sound advice and with caution. As more foreclosure losses build up with lenders, more former home owners can end up on the short end of a deficiency judgement.

Jun 15, 2010 07:44 AM