For those who have seen the 1996 movie, “Mars Attacks!” there is a certain metaphorical similarity between the movie and the recently enacted federal law. Both the federal law and the Martians initially seemed relatively harmless to law-abiding citizens. But alas, once again, life has imitated art….
Background. The Mortgage Assistance Relief Services Act Final Rule, 16 CFR Part 322 [aka “MARS”], effective January 1, 2011, is a meandering and somewhat “Johnny come lately” federal regulatory effort by the Federal Trade Commission [“FTC”]. When the credit and housing crisis made its first significant appearance in 2008, there also emerged a cottage industry of faux “consultants” who touted their ability to help struggling homeowners with their distressed housing choices. Many carpetbaggers came from out of state, supposedly affiliated with lawyers, real estate agents or mortgage brokers. Their business model included the payment of up-front fees coupled with the promise of assisting homeowners in securing lender consent for loan modifications and short sales. For a year or more there were anecdotal stories of distressed homeowners paying large sums of money but receiving little or no effective assistance.
For a recitation of horror stories and enforcement actions, one can read the first seven pages and 103 footnotes of the Federal Register, which appears intended to explain the immediate need for the massive rulemaking exercise that was to follow. However, nothing in the federal government occurs quickly, and now, in 2011, one must question the need for a broad federal mandate that overlaps pre-existing state laws covering the same activities.
Oregon’s Legislative Approach. In its 2008 in Special Session, Oregon had enacted House Bill 3630, sometimes known as the “Foreclosure Consultant Law,” although it also dealt with an illegal practice called “equity stripping,” which was a scam where grifters “bought” distressed homes on unrecorded deeds, leasing them back to the distressed homeowner with a promise to resell to them at a later date. Oregon’s law requires that persons offering certain foreclosure rescue services provide homeowners with a specific written contract containing certain disclosures and rights of rescission. There were several industry exclusions, including Oregon licensed lawyers and real estate brokers.
In 2009, the Oregon Legislature passed another bill, HB 2191 (the “Debt Management Law”), which appears to have been focused on the debt consolidation industry.[1] Unfortunately, it seems the drafters went a little farther than their original purpose, and added into the definition of “debt management services,” a function that was already covered in the 2008 Foreclosure Consultant Law: “Obtaining or attempting to obtain *** a concession from a creditor including, but not limited to, a reduction in the principal, interest, penalties or fees associated with a debt.” Even though this is precisely what real estate brokers do when they assist homeowners in their short sale discussions with lenders, HB 2191 failed to exempt brokers from this new law. Since lawyers, banks and professions similar to those exempted under the Foreclosure Consultant Law were excluded, it is inexplicable why real estate agents were not. Since there does not appear to be any express legislative history suggesting this was intentional, a not unreasonable conclusion is that it was inadvertent.
The Debt Management Law requires registration with the DCBS together with certain bonding requirements. Fortunately, the Oregon Department of Business and Consumer Services (“DCBS”) promulgated Oregon Administrative Rule 441-910-0000 (3), which specifically excludes real estate brokers when engaged in short sale negotiations. Between this administrative rule and the Frequently Ask Questions link posted on both the DCBS and Oregon Real Estate Agency websites, real estate brokers appear to be permitted to engage in short sale negotiations with sellers’ lenders, without being required to register as debt manager consultants.
However, there are two new requirements found in the FAQs, but not the administrative laws. Together, these new FAQs require – though with no imprimatur of rulemaking:
- The amount charged for the short sale service cannot exceed the commission already agreed upon in the listing contract, and
- The service must be incidental to the transaction.[2]
Assuming that these two new interpretive criteria are not unreasonable or burdensome, and together with the Foreclosure Consultant Law, the Debt Management law, and the laws governing Oregon real estate licensees found in ORS Chapter 696, regulate how real estate brokers are to conduct short sales in Oregon, why do we need a federal law – especially now, three years after the crisis first emerged? Is there some reason to believe that Oregon and other states have been unable to effectively deal with these issues within their own borders?
How Does MARS Apply to Oregon Real Estate Brokers – And Should It? If one reads the congressional record in its entirety, it is clear that the legislative intent was to deal with “bad guys.” That is, those folks who made their initial furtive appearance during the early stages of the foreclosure crisis, seeking to take advantage of the plight of distressed homeowners.
The record is devoid of anecdotal reports of Realtor® abuses. If so, why is there any belief that this law was intended to even apply to them in the first place? My belief is that MARS was never intended to apply to real estate brokerage practices. There certainly was no mystery that short sales were comprising an ever increasing portion of total sales across the country. However, following a sort of Wikipedia logic that if a belief is repeated often enough, it takes on the appearance of unassailable fact. In short, it is “knowledge by repetition.” However, this is a conclusion reached without taking the time to read the federal record, which, after all, is the actual source of the law.
During the rulemaking stages, when MARS was being formulated, the National Association of REALTORS® sought a specific exemption. It should have been granted. However, in a counterintuitive response, the FTC felt it was not necessary, because real estate transactions were precisely what real estate agents did, so there was no need to specifically exclude them from coverage. Following that logic, one might conclude that licensed attorneys, who are typically permitted under state law to perform the equivalent of “professional real estate activity” without meeting the brokers’ licensing requirements, would also not need to be excluded. However, MARS goes to great lengths to grant them a broad exclusion, so long as they are acting on behalf of their clients and conform to state Bar ethical rules.
At footnote No. 126 of the Federal Register, the MARS law notes as follows:
As a general matter, the Final Rule is not intended to apply to the marketing of services to assist consumers in selling their properties to third parties. *** One commenter [i.e. the National Association of REALTORS® (”NAR”) – PCQ] urged the Commission to exempt licensed real estate professionals from the Final Rule. *** The commenter argued the Rule would restrict real estate agents in helping consumers with the process of selling their homes through short sales. Id. The Commission concludes that an exemption for real estate agents is not necessary. Real estate agents customarily assist consumers in selling or buying homes and perform functions such as listing homes for sale, showing homes, and finding desirable homes for consumers. The Commission is aware that real estate agents may perform these functions when properties are bought or sold through a short sale transaction, but does not consider these services to be MARS. [Emphasis and comments mine. – PCQ]
Unfortunately, in the same footnote, the FTC included the following observation:
The Final Rule, however, does specifically cover the marketing of services involving the sale of properties to third parties if those services are designed or intended to assist consumers in averting foreclosure, e.g., through a short sale or deed-in-lieu of foreclosure.
As a standard – and logical – rule of legal interpretation, we must ask, “How can these two statements be reconciled?” If they were included together in the same footnote, we must assume they were not intended to be mutually exclusive.
It is my belief that the statements should be read together, and doing so, permits the following interpretation:
- If a real estate agent is performing a short sale in the ordinary course of their standard real estate practice, the MARS law should not be applied to their activity.
- However, if the real estate agent is holding themselves out as someone who can do a short sale to “avert a foreclosure” – or words to that effect – then MARS applies since it appears that the short sale service is “designed or intended” to avert foreclosure. This seems to be the same interpretation taken by the Federal Trade Commission found at this link.
- Since MARS deals not only with specific [one-on-one] communications, but general non-specific communications as well, it is reasonable to conclude that whenever a real estate broker (or brokerage) advertises their services, they may be subject to the MARS rules if they attempt to combine their short sale services together with the goal of averting foreclosure.
If one reads the NAR pronouncements about MARS, they are tentative. They do not definitively say that MARS applies to all Realtors® in all cases when they are engaged in short sales as a regular part of their professional real estate activity. My take is that in advising Realtors® about the new law, NAR is suggesting compliance out of an abundance of caution – at least until they can convince the FTC to be more specific as to the sale of homes with negative equity, that of necessity, include a short sale. [Footnotes are a nice “tip of the hat” acknowledgment to NAR’s legitimate concern, but it would be much more helpful to have an explicit exception – like the one given to lawyers. – PCQ]
My primary concern with the “Wikipedia approach” to the application of MARS to all real estate agents, is that compliance with an ambiguous law creates the “appearance” that one believes the law applies to them. Pretty soon, someone will actually assert a MARS violation against a Realtor®. The alleged violator (or their attorney) will argue that the law doesn’t really apply to them, so there is no violation. But the complainant (or their attorney) will undoubtedly ask: “So why did you deliver those MARS disclosures and disclaimers to my clients? You apparently thought it applied to you at that time. Were you wrong then, but right now?” Touché.
The Take Away. What is the risk of non-compliance with MARS? I believe it is much greater for those Realtors® whose business model depends upon touting their skills as a “short sale specialist” or words to the effect. This is the unfortunate consequence of the FAQs, discussed above, focusing on a broker’s marketing efforts rather than the substance of a broker’s service.
It is important to know and appreciate that besides MARS, the DCBS also seems to make this distinction – i.e. if your business model focuses on short sales, it is not, by definition, “incidental.” My difficulty with this logic is that short sales are almost the rule today – not the exception. How does one tout their real estate skills without mentioning “short sales” which comprise almost half the market in some areas of Oregon? That would be like telling lawyers they can advertise that they “practice law,” but prohibiting them from saying they’re really great in court. How is the consumer to make an informed decision as to which lawyer to select?
Moreover, almost all homeowners I have spoken with – and there have been many – who are considering short sales, do so because they foresee a possible foreclosure in their future. They believe – correctly – that a short sale may result in less of a negative credit impact than foreclosure. Accordingly, they need to get more information from their Realtor® about the process. In my opinion, an overly restrictive state or federal regulatory scheme based on how Realtors® promote their own skills, potentially constitutes a restraint of commercial free speech. Ah, but I digress….
What will we do in Oregon? Out of an abundance of caution, we will issue MARS-compliant forms. Oregon Real Estate Forms, LLC is drafting them now, and final approval should occur shortly. For those concerned about the application of the law to their short sale transaction, they will be available . But remember that if you deliver them to your seller client, you will likely be held to the rules they are based upon.
[1] HB 2191 replaced both the credit service organization and debt consolidating agency registrations.
[2] To say that the service is “free” or that it is “incidental” to the rest of the transaction (as explained in the FAQs) ignores today’s realities: (a) 40% to 50% of all Oregon transactions are short sales, and (b) Negotiations with the lenders and servicers are the most time consuming and labor intensive part of the entire short sale transaction. Realistically, these negotiations are neither “incidental” or “free.” “Professional real estate activity” as described in ORS 696.010 (15), easily includes within its broad definition, negotiations with sellers’ lenders – it is an essential part of all short sales and serves a seller’s best interest. It is unrealistic and unnecessary to treat these activities as a form of “permitted exception” to professional real estate activity, in light of the frequency and magnitude of this essential component of so many transactions today.
