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GUIDANCE FOR INDIVIDUALS PROVIDING SHORT SALE NEGOTIATION SERVICES
Following the housing market downturn and the foreclosure crisis that has followed, short sales have become
increasingly prevalent in Maryland and around the nation. A "short sale" is a real estate transaction where the
proceeds of the sale will not generate sufficient funds to pay the debt(s) secured by the property (and the seller
is unable to pay the difference) and therefore, any creditor(s) with a security interest in the property must consent
to receiving less than they are owed in return for releasing any lien on the property. The fact that a creditor may
release its lien to allow the property to be sold does not mean that the creditor has or will forgive the deficiency.
As short sales have become more prevalent, questions have arisen as to which parties may provide assistance in
executing short sales and how those parties may be compensated. Under current Maryland Law, the negotiation of
short sales generally requires licensing under the Maryland Credit Services Businesses Act (MCSBA).1
During the 2013 legislative session, the Maryland General Assembly passed the Maryland Mortgage Assistance Relief
Services Act (the Md. MARS Act).2 Mortgage Assistance Relief Services is
defined as a service, plan, or program that is represented, expressly or by implication, to help homeowners prevent
or postpone foreclosure or help them get other kinds of relief, like loan modifications, forbearance agreements,
short sales, deeds-in-lieu of foreclosure, or extensions of time to cure defaults or reinstate loans. The
legislation enacting the Md. MARS Act also amended the MCSBA to specifically exclude Mortgage Assistance Relief
Service providers after the Md. MARS Act goes into effect on July 1, 2013.
As such, the providers of these services will no longer require a Credit Services Business License. Instead, the
Commissioner of Financial Regulation and the Office of the Attorney General are authorized to enforce to the Md. MARS
Act, which include disclosure requirements, prohibitions against misrepresentation of services and, as under the MCSBA,
a ban on up-front fees.
In light of these changes, the Commissioner of Financial Regulation is issuing guidance to persons engaged in short
sale activities previously covered by the MCSBA.
Relevant Law
Prior to July 1, 2013
Prior to July 1, 2013, persons engaged in short sale negotiations are subject to the Commissioner's regulatory
authority under the Maryland Credit Services Businesses Act (MCSBA).The MCSBA requires that any person negotiating
a short sale with a lender be licensed as a Credit Services Business unless otherwise exempt. The limited exemption
for a person licensed as a Maryland real estate broker under the MCSBA does not apply in the context of short sale
negotiations. As such, licensed real estate brokers are prohibited from engaging in short sale discussions and negotiations
with lenders unless they are also licensed as Credit Services Businesses under the MCSBA..3
After July 1, 2013
Beginning July 1, 2013, providers of short sale negotiation services and other forms of Mortgage Assistance Relief
Services will be governed by the Md. MARS Act, which incorporates by reference the Federal Mortgage Assistant Relief
Services Rule, originally promulgated by the Federal Trade Commission (FTC) and then issued as an interim final rule,
known as Regulation O, by the Consumer Financial Protection Bureau (CFPB).4
As noted, providers of short sale negotiation services and other forms of Mortgage Assistance Relief Services are
required to comply with all provisions of Regulation O and are subject to the Commissioner's regulatory enforcement
authority. Regulation O prohibits short sale negotiators from making false or misleading representations, requires
specific disclosures to consumers, prohibits upfront fees, and sets forth specific record keeping requirements for
mortgage assistance relief service providers.
For detailed information on the Federal Mortgage Assistance Relief Services Rule and its implications for businesses,
a detailed compliance guide is available
online.
Specific Industries
- Attorneys: Subject to a few specific conditions found at 12
C.F.R. §1015.7 attorneys are exempt from the provisions of Regulation O. However, under the Md. MARS Act, the exemptions
found in Regulation O apply only to attorneys admitted to practice law in Maryland who provide mortgage assistance relief
services as part of their regular practice of law.
Additional information about Regulation O and the implications for attorneys is available from the
FTC online.
- Real Estate Agents and Brokers: Regulation O and the MARS Act do not provide a specific
exemption for real estate licensees. The Commissioner does not intend to enforce the MARS
Act against real estate licensees who are acting within the scope of their license. The Commissioner is working
with the Real Estate Commission to issue joint guidance specific to real estate brokers, associate brokers, and salespeople.
NOTE Mortgage Assistance Relief Service Providers must also comply with the Protection of Homeowners in Foreclosure Act
(PHIFA)5 when dealing with a consumer who is more than 60 days in default on
their residential mortgage loan.
Settlement Procedures and Disclosure of Short Sale Fees
Because both the MCSBA and the Md. MARS Act prohibit up-front fees, short sale negotiators are generally paid at
settlement. Since the vast majority of settlements will require compliance with the Real Estate Settlement Procedures Act
(RESPA)6, short sale negotiators are expected comply with RESPA as well.
Under RESPA, the buyer has the exclusive right to choose the title company that conducts settlement. Short sale
negotiators may not exercise influence over the selection or activities of the title or settlement companies involved
with the closing of a short sale. Further, any fees payable to a short-sale negotiator at settlement must meet the
following criteria:
- The fees must be for services that were actually performed;
- The fees must be ones that short-sale negotiators are legally permitted both to perform and
to report on the HUD-1 based on their business licenses and other considerations;
- The fees must be accurately and clearly reported pursuant to the HUD-1 settlement sheet;
and
- Pursuant to Regulation O, the nomenclature used for the fees should not give the impression
that the short-sale negotiator is "affiliated with, endorsed or approved by, or otherwise
associated with" any "Federal, State, or Local government agency, unit, or
department."7
Failure to properly identify and disclose short sale negotiation fees on a HUD-1 settlement statement or any
preliminary settlement statements produced during the course of
negotiations8, and/or causing such fees to be improperly reported,
constitutes a misleading, unfair, or deceptive practice under the Md. MARS Act. Additionally, such practices
may also constitute a violation of the Maryland Mortgage Fraud Prevention Act (the
MMFPA)9.
1 The MCSBA is codified in the Annotated Code of Maryland, Commercial
Law Article, § 14-1901 et seq.
2 The Md. MARS Act is codified in the Annotated Code of Maryland, Real Property Article, § 7-501
et seq. The General Assembly enacted the Md. MARS Act as part of House Bill 291 in the 2013 Legislative Session. That bill
amended the MCSBA and enacted the Md. MARS Act.
3 The Maryland Real Estate Commission issued an advisory to its licensees in November 2012
explaining that real estate licensees engaged in short sale negotiations with a lender are required to be licensed under the
MCSBA. That advisory can be found on the Maryland
Real Estate Commission web page.
4 The text of Regulation O.
5 PHIFA is codified in the Annotated Code of Maryland, Real Property Article, § 7-301
et seq. Past guidance on the requirements of PHIFA can be found
on our website.
6 RESPA is codified in the United States Code, Title 12, § 2601 et seq.
7 See 12 C.F.R. § 1015.3 governing prohibited representations by Mortgage Assistance
Relief Service Providers.
8 This guidance is not limited to HUD-1 settlement statements. Any document that
purports to disclose or summarized the charges or fees in the transaction that is transmitted to any party to
the transaction must properly disclose the short sale negotiator's fees in a way that is not misleading or deceptive.
Further information on the placement of fees on a HUD-1 can be found in
RESPA's Appendix A
(PDF document,
download Adobe Acrobat for free)
9 The MMFPA is codified in the Annotated Code of Maryland, Real Property Article, § 7-401
et seq.
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