House Bill 361/Senate Bill 218 – Effective Now
(By Carolyn Cook and Chuck Kasky)
In general, the Protection of Homeowners in Foreclosure Act (PHFA) regulates those who specifically target homeowners in default or foreclosure to provide services and/or to purchase their home. Under PHFA, persons engaging in these activities are generally called “foreclosure consultants” and must comply with very lengthy and complicated requirements – you should seek competent legal advice if you plan to engage in this sort of activity. PHFA also potentially has an impact on the typical real estate transaction involving a licensed real estate professional, but only under quite narrow circumstances. The questions below are designed to provide guidance in those instances. All references to Maryland Code sections can be found in the Real Property Article of the Annotated Code of Maryland.
Q. Is a licensed real estate professional working with a seller in default under a valid listing agreement exempt from PHFA?
A. Yes. Under §7-302(6) of the Real Property Article, an exemption from PHFA is provided in cases where the homeowner in default is represented by a licensed real estate professional, the property is listed on the local MLS, and the licensee otherwise does not violate any provision of the Real Estate Broker’s Act. Additionally, the new law requires that the property be sold or transferred through a settlement. A “settlement” is defined as an “in-person, face-to-face meeting with the homeowner to complete the final documents incident to the sale or transfer of real property or the creation of an equitable interest in real property, conducted by a settlement agent, during which the homeowner must be presented with a completed copy of the HUD-1 settlement form.” [§7-301(L)]
Q. Is a licensed real estate agent, who represents a homebuyer under a buyer agency agreement, considered a foreclosure consultant if he contacts, on behalf of his buyer-client, an unrepresented homeowner in default who has his property advertised in the local paper (i.e., a “for sale by owner” situation)?
A. No. In order to be considered a foreclosure consultant under PHFA, the REALTOR® must engage in specific activity, including “systematically contacting owners of residences in default to offer foreclosure consulting services.” §7-301(C)(2). “Foreclosure consulting services” include “arranging or facilitating the sale of a homeowner’s residence or the transfer of legal title, in any form, to another party as an alternative to foreclosure.” §7-301(E)(7).
Q. I have a buyer-client who wants to purchase a property that is “for sale by the owner” (FSBO). What do I have to do in order to comply with PHFA?
A. First, you need to determine if PHFA applies. You will need to ask the seller if he is more than 60 days in default of his mortgage or if an order to docket or a petition to foreclose has been filed. Obviously, the buyer would want to know this information anyway because it helps him to gauge whether the seller will need bank approval to transfer title or even if he will still have title to transfer by the time the transaction gets to settlement. In any event, if the seller is more than 60 days in default or the property has moved into foreclosure, that seller “has the right to rescind the contract for the sale or transfer of the residence in default within 5 days after the execution of the contract.” [§7-310(a)] If the seller is not in default or not in foreclosure, or doesn’t tell you that he is, then PHFA would not apply.
Second, If PHFA does apply, you and the buyer will also need to know that the contract may not contain a provision that requires the homeowner to “waive the homeowner’s rights under PHFA, require the seller to consent to a jurisdiction for litigation or choice of law in a state other than Maryland, require the seller to consent to venue in a county other than the county in which the property is located, or impose any costs or filing fees, greater than the fees required to file an action in a circuit court.” §7-311(b). Additionally, the sale or transfer of the residence in default may not be executed using a quit claim deed. §7-311(c).
If the seller elects to rescind the contract of sale within the 5-day period, the homeowner’s notice of rescission must be in writing but need not take any particular form and is effective, however, expressed, if it indicates the intention of the homeowner to rescind the contract. Additionally, the right to rescind may not be conditioned on the repayment of any funds, provided however that any debt existing prior to a rescission shall continue to exist. §7-311(d) and (e). Therefore, buyer agents should hold the buyer’s earnest money deposit in their broker’s escrow account rather than giving the deposit directly to the seller. Finally, during the 5-day rescission period, a deed or other document affecting title to the homeowner’s residence in default may not be recorded [§7-311(g)] and the purchaser may not transfer or encumber or purport to transfer or encumber any interest in the residence in default to any third party [§7-312(3)(ii)].
If the homeowner exercises his right to rescind the contract of sale, the purchaser must, within 10 days after receipt of a notice of rescission, return, without condition, any original deed, title, contract, and any other document signed by the homeowner. §7-311(f). Agents will want to keep non-original copies for their files for Real Estate Commission auditing purposes.
PHFA is very clear that purchasers of property in default must be very careful in what they say to the homeowner because they can be held liable under the law if they make inappropriate statements. For example, a purchaser may not represent directly or indirectly that:
i) The purchaser is acting as an advisor or a consultant, or in any other manner represent that the purchaser is acting on behalf of the homeowner;
ii) The purchaser has certification or licensure that the purchaser does not have;
iii) The purchaser is assisting the homeowner to “save the house” or use a substantially similar phrase; or
iv) The purchaser is assisting the homeowner in preventing a foreclosure if the result of the transaction is that the homeowner will no longer own the property. §7-312(1)
Additionally, the purchaser may not make any other statements, directly or by implication, or engage in any other conduct that is false, deceptive, or misleading, or that has the likelihood to cause confusion or misunderstanding, including statements regarding the value of the residence in default, the amount of proceeds the homeowner will receive after a sale or transfer, any contract term, or the homeowner’s rights or obligations incident to or arising out of the sale or transfer. §7-312(3) In short, the less said by the buyer, the better.
Q. A buyer is purchasing property from an unrepresented FSBO seller who is either in default or in foreclosure and the seller needs to do a lease-back for a couple of days. What do I need to know?
A. PHFA does impose several requirements on purchasers of property in default or foreclosure where the parties, at the outset, plan on leasing the property back to the original homeowner. PHFA is silent on typical lease-back scenario REALTORS® typically encounter, whereby the seller needs a few more days in the property before he can move into the next home.
Nevertheless, if the seller anticipates, at the time that the contract of sale is signed, that he will need to lease back the premises for a few days after settlement and the tenancy agreement is included as part of the contract of sale, then the buyer must provide the seller with a separate piece of paper that is attached to the contract of sale, signed and dated by both the seller and buyer and witnessed and acknowledged by a notary public called “Statement About Tenancy” immediately upon execution of the contract of sale. §7-313 The language for the “Statement About Tenancy,” which must be in at least 15-point type, can be found in §7-313(D)(iv).
Q. Does a licensed real estate professional become a foreclosure consultant when a past client, who is a homeowner in default or foreclosure, contacts the agent and asks for assistance in contacting the current mortgage lender or refinancing the property if it is in default or foreclosure, even if the licensee is not paid for this service?
A. Yes. At the outset, helping a past client who is currently in trouble with his mortgage to refinance or restructure the loan is more than likely going to be beyond the scope of the licensee’s practice area and could subject you to disciplinary proceedings before the Real Estate Commission. The best practice would be to refer the past client to a reputable and competent counseling agency that has staff trained in working with folks who are in trouble with their mortgage.
With the passage of PHFA, licensees will almost certainly become “foreclosure consultants” if they engage in this kind of activity. §7-301(C)(1) Once you have been defined as a foreclosure consultant, you now have a whole host of obligations and prohibitions to that homeowner in default, including:
* Providing the homeowner with a foreclosure consultant agreement with the required disclosures. [§7-306]
* Refraining from engaging in the prohibited activity listed under [§7-307].
* Presenting to the homeowner a copy of the licensee’s real estate license no later than when the foreclosure consulting contract is executed. [§7-308]
* Providing the homeowner with written copies of any research done by the consultant regarding the value of the residence in default, including any information on sales of comparable properties or any appraisals. [§7-309(a)]
* Providing to the homeowner in default the same duties that you would owe an actual client under §17-532 of the broker’s licensing law. [§7-309(b)]
* Give the homeowner the 5-day right of rescission on the contract of sale. [§7-310]
* Making sure that the purchaser provides the required disclosure to the homeowner if you arranged for the sale or transfer of the residence in default as part of the foreclosure consulting contract. [§7-311]
Q. Can an unrepresented buyer purchase a residence in default for himself or for a family member?
A. It depends. If the unrepresented buyer is acting as a foreclosure consultant, he is prohibited from acquiring an interest in a residence in default with whom the foreclosure consultant has contracted. §7-307(8)
If the unrepresented buyer is not acting as a foreclosure consultant, then he may, provided he gives the homeowner the required 5-day right of contract rescission, and does not represent directly or indirectly that:
* The purchaser is acting as an advisor or a consultant, or in any other manner represent that the purchaser is acting on behalf of the homeowner;
* The purchaser has certification or licensure that the purchaser does not have;
* The purchaser is assisting the homeowner to “save the house” or use a substantially similar phrase; or
* The purchaser is assisting the homeowner in preventing a foreclosure if the result of the transaction is that the homeowner will no longer own the property. §7-312(1)
Additionally, the purchaser may not make any other statements, directly or by implication, or engage in any other conduct that is false, deceptive, or misleading, or that has the likelihood to cause confusion or misunderstanding, including statements regarding the value of the residence in default, the amount of proceeds the homeowner will receive after a sale or transfer, any contract term, or the homeowner’s rights or obligations incident to or arising out of the sale or transfer. §7-312(3)
New Recording Requirements
House Bill 365/Senate Bill 216 Effective Now
As part of the Governor’s Foreclosure Protection legislative package, legislation went into effect that requires the Maryland license number of both the mortgage originator and the mortgage lender on the mortgage, deed of trust or any other instrument securing a mortgage loan on residential property when it is recorded. If the lender and/or originator are exempt from Maryland’s licensing requirement, then an affidavit must accompany the documents when documents securing the mortgage loan are recorded. The Commissioner of Financial Regulation is currently working on drafting regulations to implement and the title industry is still in the process of analyzing this new requirement. Members should be aware that this new requirement may affect the recordation process, particularly if the documents securing the mortgage fail to comply with this new requirement.