The National Association of Realtors® (NAR) issued a legal memorandum confirming that all real estate professionals working on short sales are required to make specific disclosures under new federal regulations. NAR’s statement came in response to the Mortgage Assistance Relief Services rule published by the Federal Trade Commission in November 2010. The rule requires any mortgage relief service provider to make certain disclosures to consumers if they negotiate a short sale with a lender on behalf of the homeowner. While the rule specifically exempted attorneys, it failed to provide a similar exception for Realtors. Prior to NAR’s statement, very few Realtor associations commented on the issue, leaving many Realtors to speculate as to whether they needed to comply with the rule when handling short sales. The legal opinion clearly states NAR’s position that any Realtor working on short sale transactions are subject to the rule if they negotiate a short sale with a lender, advertise short sale experience or take any up- front fees from their clients.
WHAT IS THE FTC MARS RULE?
The FTC’s final rule is primarily directed toward loan modification companies, but it also applies to those who negotiate “a short sale of a dwelling on behalf of a consumer.” The FTC began its rule making process in 2009 in response to numerous consumer complaints against fraudulent mortgage relief entities. NAR immediately submitted comments and testimony during the rule making session seeking an exemption for real estate licensees. The FTC addressed NAR’s comments in the following footnote:
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.
The FTC refused to exempt Realtors from the rule, as they did attorneys, because it did not consider ‘customary’ Realtor services to be MARS. Without an explicit exemption, therefore, Realtors were left to speculate as to whether they were subject to the MARS rule when handling short sales. On the one hand, the FTC stated that a Realtor exemption was unnecessary, yet they clearly intended that the rule apply to anyone negotiating the short sale of a dwelling. For the next two months, legal experts and real estate professionals debated whether the MARS rule applied to Realtors working on short sales.
NAR’s BROAD INTERPRETATION OF MARS:
The National Association of Realtors broadly interpreted the MARS rule to conclude that “negotiating a short sale of a dwelling includes any communications with a lender about the possibility of a short sale transaction involving a consumer’s loan.” Thus, “anyone who provides short sale negotiation services is considered a MARS provider and subject to the disclosure requirements”. Based on this interpretation, NAR expressly stated that “the MARS rule can have an impact on real estate professionals who represent short sale clients or markets themselves as a MARS provider or a short sale specialist”. The NAR opinion strongly encouraged all individuals handling short sales, while working under their licensed capacity as a real estate professional, to comply with the new disclosure requirements.
MARS REQUIRED DISCLOSURES:
NAR requires a real estate professional to make three types of disclosures to short sale consumers. Depending on the type of communication, the MARS Rule contains specific requirements as to how the disclosures must be presented to consumers. In all cases, the disclosure must be clear and prominent. For printed materials, the written disclosure must be at least 12-point type, or one-half the size of the largest font used to list the name of the firm providing the disclosures, whichever is larger. Below are examples that could be used in written materials.
1. General Commercial Communications Disclosures: A real estate professional that advertises MARS, not directed at a specific consumer, will need to include in all advertisements a clear and prominent disclosure with the following:
IMPORTANT NOTICE (in two point-type larger than the font size of the disclosure): (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.
2. Consumer-Specific Commercial Communications: The second disclosure is required in all communications that the MARS provider directs to specific ‘prospective’ clients. These communications must be provided by the MARS provider before the provider begins mortgage assistance services on behalf of the consumer. The time when the real estate professional needs to provide this disclosure will vary, as a listing broker may not be aware that the transaction will need to be a short sale until far into the listing process. A listing broker should provide this disclosure to the client in a letter or memorandum once (s)he is aware the transaction may be a short sale, highlighting this fact in the document and prominently displaying the below disclosure statement. The disclosure must provide the following:
IMPORTANT NOTICE (in two point-type larger than the font size of the disclosure): You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us (insert amount or method for calculating the amount) for our services. (Name of company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.
3. Disclosure When Providing an Offer of Mortgage Relief: The third disclosure needs to be provided in a clear and prominent manner at the time the real estate professional presents its client with the lender’s short sale approval letter. The disclosure must be provided on a separate page and state:
IMPORTANT NOTICE: Before agreeing to this service, consider the following information (in two point-type larger than the font size of the disclosure): This is an offer of mortgage assistance we obtained from your lender [or servicer].You may accept or reject the offer. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us [same amount as disclosed previously] for our services. If you stop paying your mortgage, you could lose your home and damage your credit rating.
The real estate professional must also provide the consumer with a notice from the lender or servicer that describing all material differences between the seller’s current loan and the lender’s proposal to modify the loan, or accept a short sale. This information will likely be contained in the lender’s short sale approval letter. If, however, the approval letter lacks this language, the MARS provider’s disclosure should include information regarding the lender’s ability to hold the seller liable for any deficiency amount and encourage them to seek the advice of independent counsel.
NAR unequivocally requires all Realtors working on short sales to provide their customers with clear and prominent disclosures. Depending on the type of communication, the disclosures should contain the language of the above-referenced examples. In addition, NAR expounded upon their interpretation to point out that the MARS Rule not only affects how a real estate professional markets their services, but also applies to those referring a short sale client to an independent third party or collecting any type of up-front fee.
The MARS rule requires any entity specifically marketing MARS to consumers to make certain general disclosures in all advertisements promoting MARS services. As a result, any brokerage that specifically solicits business from short sale sellers will need to include these disclosures in all of its advertisements, including telephone solicitations. A real estate brokerage that isn’t specifically seeking to be a MARS provider, yet wants to mention its short sale experience in its marketing materials, may or may not need to provide the general MARS disclosures and will be judged on a ‘reasonable’ consumer standard.
The FTC’s practice is to review ads on a case-by-case basis, and determine the impression that a particular ad would make upon a ‘reasonable’ consumer. Thus, an advertisement listing the accomplishments of a licensee and the types of services that the licensee provides to his/her clients which mentions short sale experience, among other services, may not need to comply with the MARS advertising rules. On the other hand, an advertisement promoting a real estate professional’s short sale brokerage business will likely need to comply with the rules because the average consumer would have the reasonable impression that these advertisements are from a MARS provider.
NAR warned real estate professionals that MARS disclosures may be required even if you simply refer a short sale client to a third party. The Rule encompasses “any person who arranges for others to provide any mortgage assistance relief service”. Thus, any licensee referring a client to a MARS provider, therefore, should comply with the MARS disclosure requirements. According to NAR, the real estate professional may also need to take steps to ensure that any third party to whom it refers customers is also complying with the MARS rule, as it is a violation of ‘substantial assistance’ to refer someone that you know, or should have known, is not complying with the MARS rule. In short, NAR encourages Realtors to err on the side of caution when referring short sale clients to third party service providers and encourages them to comply with the disclosure requirements.
The MARS rule clearly bars the receipt of up-front fees. Any brokers who collect up-front fees without providing disclosures need to be aware that they will be in violation of the rule, even if they take an up-front fee from a client and later determine that the transaction will be a short sale. Furthermore, if a Realtor collects a separate negotiation fee, in addition to their standard commission, they need to comply with the MARS disclosure requirements.
NAR REQUIRES REALTORS TO COMPLY WITH MARS:
Admittedly, The FTC could have clarified this issue long ago had they simply included a Realtor exemption to the MARS Rule. Fortunately, the National Association of Realtors’ legal memorandum clearly states that all real estate professionals working on short sales are required to make specific disclosures. NAR concludes that all real estate professionals performing services on behalf of their short sale clients are subject to the MARS Ruling if they negotiate a short sale with a lender, advertise short sale experience or take up- front fees from consumers. As short sales continue to account for a large percentage of home sales, it is imperative that all real estate professionals update their advertisements and marketing materials to ensure that they are in compliance with the Mortgage Assistance Relief Services Act.
About the Author: Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists homeowners, Realtors and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.