MANAGEMENT SERVICE PROVIDERS – A SLIPPERY AND MISUNDERSTOOD SLOPE
[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.
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
1 Department of Consumer and Business Services.
2 This appears more the result of oversight than design.
3 The December 2009 Agency’s state-wide publication, the Oregon Real Estate News Journal (“OREN-J”) discussed short sales in the context of HB 3630, which clearly exempts real estate licensees. It did not mention the Debt Management law (HB 2919) although it became law on June 26, 2009. The symposium co-sponsored by the Agency on March 10, 2010 did address both House Bills in the context of short sales, but gave no direction to licensees under the new administrative rules, saying in its April 2010 OREN-J article about the symposium that the opinions expressed there “…were not necessarily those of the Real Estate Agency or Agency staff.” However, in that April 2010 article, the Agency did promise to add some frequently asked questions (“FAQs”) on the topic to its website. As of the date of this article, no FAQs have been added on short sales, HB 2191, the administrative rules, or their impact on licensees engaged in short sales. Given the state of confusion created by HB 2191, one must ask why there has been no real direction for licensees by now. It would be a shame to wait until an Agency investigation against a licensee to decide upon interpretive guidance for the industry. The Administrative Actions section of the OREN-J is the wrong forum to first introduce interpretive guidance.
4 Presumably, the reference to an executed “real estate contract” means a listing agreement or some other form of service agreement with the home seller. I assume it does not mean a real estate sale agreement, i.e. an earnest money agreement. ORS 697.602 defines “debt management service” as an activity for which a person receives money or other valuable consideration, or expects to receive money or other valuable consideration, free work does not appear to be regulated or prohibited. All real estate licensees know that under the Oregon Statute of Frauds [ORS 41.580(1)(g)], they have no right of compensation for their professional real estate activity without a written and signed listing or service agreement. Thus, “free work” preliminary to the listing of a short sale does not appear to be subject to the debt management law, since there can be no expectation of compensation. However, a written statement or disclaimer to that effect might be useful where the licensee’s pre- listing activity is designed solely to determine whether a short sale is even feasible.
5 Since ORS 697.602 defines “debt management service” as an activity for which a person receives money or other valuable consideration, or expects to receive money or other valuable consideration, free work does not appear to be regulated or prohibited. All real estate licensees know that under the Oregon Statute of Frauds [ORS 41.580(1)(g)], they have no right of compensation for their professional real estate activity without a written and signed listing or service agreement. Thus, “free work” preliminary to the listing of a short sale does not appear to be subject to the debt management law, since there can be no expectation of compensation. However, a written statement or disclaimer to that effect might be useful where the licensee’s pre- listing activity is designed solely to determine whether a short sale is even feasible.
6 This should be verified with your principal broker and/or legal counsel.
7 Due to today’s heavy regulation in this area of real estate practice, it might be advisable for brokers and principal brokers to consider including an addendum with their short sale listings, identifying the broadened scope of services they intend to provide (and those not provided) in short sale transactions.