MANAGEMENT SERVICE PROVIDERS – A SLIPPERY AND MISUNDERSTOOD SLOPE

(PART TWO)

By Phillip C. Querin

[Note: This is the second of a two-part article on the foreclosure consultant law (HB 3630) and the debt management services law (HB 2191). It addresses the issues real estate licensees need to watch for in short sales and other distressed sale situations.]

The Issue. The Foreclosure Consultant Law (HB 3630) and the Debt Management Services Law (HB 2191) overlap in the regulation of services provided to owners of distressed properties. That is, both laws impose regulations for the same or similar activities – negotiating with lenders in short sale transactions. However, they both go about it in different ways: (a) The Foreclosure Consultant law requires the use of a specific contract containing many consumer-oriented disclosures together with a right of rescission; (b) The Debt Management law requires that those providing the service be bonded and registered with the DCBS.¹ Although both laws regulate activity that many Realtors® engage in–short sale transactions – one, the Foreclosure Consultant law, expressly exempts Oregon real estate licensees, but the other, the Debt Management law, does not.² This has created much concern within the brokerage community, since it appeared that in order to legally conduct short sale transactions involving lender communications, licensees might have to be registered and bonded under the Debt Management law, even though they were already exempted under the Foreclosure Consultant law.

The Solution. This overlapping regulatory scheme has not gone unnoticed by one Oregon agency, the Department of Consumer and Business Services (“DCBS”). Interestingly, how it occurred in the first place is not clear. Perhaps it was a “right-hand – left-hand” problem. In any event, it has been quickly resolved by the DCBS, though news of the solution has not been well publicized – even by the Oregon Real Estate Agency. ³

Effective January 1, 2010, the DCBS enacted a series of administrative regulations that appear to resolve the problem. Here is a summary of the relevant regulations:

Oregon Administrative Rule 441-910-000 (3) exempts real estate licensees from the debt management law when engaged in the following activities: The negotiation, offer, attempt or agreement to negotiate the sale, exchange, purchase, rental or leasing of real estate if:

(a)The real estate transaction is a short sale;

(b)The real estate broker receives compensation that is usual and customary for the broker; and

(c)The activity is under the terms of an executed real estate contract with the debtor as a real estate seller.⁴

This exemption is repeated in Oregon Administrative Rule 441-910-0005, but specifically cites ORS 696.020, the real estate licensing statute.

Discussion. What does all this mean for Oregon real estate licensees? First, it means that now there is a certain measure of protection under both the Foreclosure Consultant law and the Debt Management law. In other words, both the written contract requirements for foreclosure consultants under HB 3630, and the registration and bonding requirements for debt management service providers under HB 2191, do not apply to licensees engaged in short sales. And significantly, the provisions of the Unlawful Trade Practices Act contained in both House Bills, do not apply to exempted licensees.

• However, this is a limited form of protection; it is only good if all of the following conditions are met:
• The broker must be licensed in Oregon. This means that an out-of-state broker or agent is not exempted if involved in short sales or similar transactions.
• The licensee must be operating under a fully executed listing agreement. That is, the broker doing any work on the short sale must be acting under a fully signed listing or service agreement with the seller. This means that licensees should be careful about doing too much pre-short sale work (such as contacting the lender or reviewing seller finances, etc.) before the listing is signed. ⁵
• The licensee must be involved in a short sale transaction. That is, the broker must be handling a certain type of transaction – a “short sale.” The administrative rule defines the short sale as one in which “(t)he sale price of the real estate is for an amount that is less than the amount of the seller’s outstanding obligation on the home loan….” If a licensee provides any other debt management service for or in the expectation of compensation, it is not exempted.
• The licensee’s compensation must be “usual and customary.” That is, the moneys paid to the licensee should be part of their commission arrangement with the seller. It should not be a sum that is separate or distinct from the commission, such as a “bonus, salary, referral fee, or other compensation tied to debt management or foreclosure consultant services.”

Since the laws and rules do not place any express limit on licensee activities when involved in short sales, I believe it is fair to assume that there is no regulatory restriction against having contact with the seller’s creditors, so long as it is part of the short sale effort to obtain the necessary approvals. However, what is clear is the fact that receiving compensation for the referral of third party advisors or consultants is not excluded under the two laws (HB 3630 and HB 2191). In other words, a business model that involves a real estate broker and an advisor or consultant, working in tandem with customers, could create a problem for the licensee in the following instances: (a) Where the consultant or provider is not exempted under the two laws (i.e. he or she is subject to the law) but does not use the required contract under HB 3630 or is not registered or bonded under HB 2191 (Compliance with just one probably suffices for the consultant or provider.6); (b) Despite their best efforts, a liability claim against the advisor or consultant would likely include the licensee anyway; (c) A claim against the licensee might not be covered under his or her E&O coverage – unless the licensee’s professional real estate activity portion was clearly defined (preferably in writing) and separated from the consulting or advising functions.⁷

Conclusion. So what is the best solution? First, if you are skilled enough to do it – or another broker in your office is – you are permitted to perform all of the activities incident to short sale transactions

-so long as (a) they are a necessary part of that transaction; and (b) there is no extra compensation paid beyond the ordinary commission set out in the listing or service agreement. Secondly, if a third party consultant or debt management provider is going to be working with the seller or buyer, you should (a) be completely independent from him or her; and (b) avoid any sharing of compensation– that is, when, where, or how, the consultant or provider is paid should not be based on any of the services you provide; (c) don’t let your services overlap! If the consultant or advisor is negotiating with the lender, let him or her do it exclusively; don’t become involved. Lastly, this article is not intended to supersede your company attorney’s opinion or company policy. Always check with your principal broker.

© 2010 QUERIN LAW, LLC