Podcast: What is a Short Sale?
Photo credit: ddpavumba
Photo credit: ddpavumba
Late last year, the Department of Financial Institutions published a helpful guide regarding short sales and loan modifications. In particular, the DFI intended to provide clarification in plain terms to the RCW 31.04 (Consumer Loan Act or “CLA”) and RCW 19.146 (Mortgage Broker Practices Act or “MBPA”).
Because short sales deal with two specific areas of expertise, in particular real estate transactions and negotiation with creditors (for forgiveness of debt), the regulations outlined in the MBPA and CLA are relevant. This is because the DFI monitors and regulates loan modification and short sale negotiation services. Simultaneously, the Department of Licensing regulates the real estate brokerage services that pertain to the actual short sale transactions.
Put simply: because short sales involve both a (1) transaction of real estate and (2) a negotiation with creditors regarding loans (and usually, deficiencies), the DFI and the Dept. of Licensing have an interest. So, the broader question is “who can get compensated for short sale negotiation services?” The short answer is “it depends.”
The DFI’s December 2010 bulletin on the subject states the following:
Entities engaging in short sale negotiations for compensation must obtain a license under the CLA or the MBPA, and the individuals who conduct loan modification activities on behalf of such entities must obtain a mortgage loan originator license under one of those two acts. Short sales conducted as part of the negotiation of a real estate transaction by a licensed real estate broker do not require licensure under the CLA or the MBPA, unless the real estate broker is paid separately for the short sale negotiation, in addition to receiving a commission for the real estate transaction. However, this does not extend to unlicensed assistants.
The MBPA and the CLA licensing exclusions for real estate brokers do not apply to real estate brokers who act solely as third-party short sale negotiators or loan modification services providers.Negotiating short sales for a fee is not an activity that requires a real estate license; therefore, a loan originator license from DFI is required if that is the only service the real estate licensee provides.
Real Estate licensees must be providing real estate brokerage services for the transaction in order to negotiate a short sale on behalf of either party to the transaction. Real Estate licensees may not charge any additional fee above the normal and customary commission to provide short sale negotiation services.
In plain English, the following may receive compensation for negotiating a short sale:
1. Real estate broker — A broker can get paid for a short sale, BUT only if the fee is not in addition to the commission. The broker cannot be paid anything above the commission, regardless of how much effort was expended in facilitating the short sale.
2. Loan originator licensee OR Attorney — This individual can get paid for the actual short sale negotiations, even if he is a third-party to the transaction, however, he cannot be paid commission from a sale in the same fashion as a real estate broker. If short sale negotiations is the only service provided, a loan originator’s license is required.
3. Real estate broker with a loan originator OR law license — If someone has both their real estate broker’s license AND a loan originator or law license, he is eligible for both the commission and a separate fee for negotiating the short sale. Think of this as the best of both worlds.
The above regulations can be summed up the following way — if you are hoping to get a fee for a short sale, you have to be a lawyer or a loan originator. You cannot only be a real estate broker and expect to receive payment beyond the commission you would otherwise be entitled to in a normal real estate transaction. For those of you reading this article who are homeowners or prospective short sale buyers, do not be fooled. If someone is asking for payment beyond the commission for short sale negotiation services, make sure they have the proper licensing.
For more information on this subject, please visit http://www.dfi.wa.gov or http://www.dol.wa.gov, or review RCWs 31.04 and 19.146. If you wish to search someone’s licensing status, you can also find that information at the DFI and DOL websites. For attorney’s, you can search for that individual’s status at pro.wsba.org.