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HUD Postpones Ban On Dual Agency In FHA Short Sales

In what appears to be a coup for the National Association of Realtors, a policy originally slated to take effect on Oct. 1 banning real estate agents and brokers from representing both a buyer and a seller in an FHA short-sale transaction has been postponed.

The U.S. Department of Housing and Urban Development (HUD) issued a letter to mortgage servicers in July outlining a number of new anti-fraud requirements for short sales and deeds-in-lieu of foreclosure, including policies to ensure “arm’s length” transactions.

One of these policies said “brokers and their agents may only represent the buyer or the seller, but not both parties,” effectively prohibiting what industry participants commonly refer to as “dual agency.”

Last week, the NAR sent a letter to HUD urging the federal agency to reconsider implementing the policy, saying it could make it harder for the government to get top dollar on short sales if some brokerages decided not to represent sellers in FHA short sales because they would not want to restrict their agents from representing buyers of those properties.

The trade group also complained that the policy could conflict with some state licensing laws and multiple listing service guidelines.

NAR said HUD had proposed the policy change because HUD’s inspector general had detected fraud and abuse in the preforeclosure sales process.

In a note on its website, NAR reported that HUD officials had told the trade group on Wednesday afternoon that they would reissue the July letter with “all dual agency language” removed.

The dual agency policy will not be implemented on Oct. 1, allowing NAR to continue the dialogue with agency officials on a formal solution to the dual agency issue. — NAR

“The result is that the dual agency policy will not be implemented on Oct. 1, allowing NAR to continue the dialogue with agency officials on a formal solution to the dual agency issue,” NAR said.

A HUD spokesman told Inman News that HUD does intend to lift the restriction on dual agency briefly “in order to provide time to address legitimate concerns and alternative solutions.” The rule’s implementation is delayed until a to-be-determined date, he said.

Douglas Miller, executive director and attorney for nonprofit group Consumer Advocates in American Real Estate (CAARE), said he was “completely disgusted” to hear about the rule change.

“What could have been a wonderful consumer-oriented decision by HUD was unilaterally wiped out by the lobbying power of NAR. To our knowledge, no consumer organizations were given a voice in this decision,” he said.

Before HUD’s decision to postpone the ban on dual agency, Miller had sent FHA Commissioner Carol Galante a letter supporting the agency’s stance against dual agency in short-sale transactions.

“We are appreciative of HUD’s insistence that distressed property owners not be subjected to the insurmountable conflicts of interests and financial risks associated with dual agency,” the letter said.

Although some states prohibit agents from representing both the buyer and seller in the same transaction, some allow the practice with informed consent by the parties in the transaction. Real estate brokers can legally double-end deals in any state, typically by designating agents employed by the same firm to represent the buyer and seller separately (a practice often defined by regulators as “designated agency”) .

Miller said dual agency interferes with consumers’ ability to make informed investment decisions.

“Instead of an arm’s‐length transaction, you end up with a transaction stripped of consumer safeguards that incentivizes the broker with payment of a double commission. Dual agency brokers get paid twice as much for providing a fraction of the service,” he said.

Miller claimed dual agency is “really no representation at all” and illegal in every other profession. He also said designated agency often devolves into undisclosed dual agency, which he called “common-law fraud.”

“Somehow, this broker who is incentivized by the prospect of a double commission and who is prohibited from engaging in negotiations is supposed to supervise these renegade agents who can engage in negotiations. If the broker provides negotiating advice to his agents, he will have engaged in undisclosed dual agency,” Miller said.

“We fail to understand why the National Association of Realtors (NAR) would object to HUD’s requirement that consumers receive meaningful representation from their members. Does the prospect of collecting a double commission outweigh the importance of client representation?” he added.

Miller noted that in NAR’s letter to HUD, Gary Thomas, the trade group’s president, emphasized the rule’s effect on brokerage firms with hundreds of agents across multiple offices. But NAR’s own statistics show that the vast majority of its membership would not be affected by the rule, he said.

In NAR’s recently released 2013 Profile of Real Estate Firms, 8 out of 10 real estate brokerages surveyed operated out of just one office — employing a median of two full-time licensees. Only 8 percent of brokerages had four or more offices.

“Midsize and smaller brokers typically market themselves against the mega brokerages and one of their value propositions is that they can often avoid dual agency,” Miller said.

“It is a market niche that most of NAR’s members enjoy when competing against the mega brokerage firms. We believe that most of NAR’s members will be thrilled with the opportunity to provide a higher and more meaningful level of representation for distressed property owners.”

Moreover, Miller claims NAR’s  comments about HUD’s policy possibly conflicting with state licensing laws and MLS rules are factually incorrect.

“[T]he stated purpose of the MLS is to offer a unilateral offer of compensation to cooperating brokerage firms and the MLS has no authority over internal broker prohibitions on dual agency,” he said.

And just because dual agency is legal, does not mean it is required or encouraged, Miller said.

“The opposite is true. Dual agency is a bad thing that is allowed in limited circumstances, and state licensing laws exist to warn consumers about the dangers of dual agency,” he said.

He added that the formal complaint process through state real estate commissions noted by NAR in its letter ”is meaningless because most dual agency violations are rarely discovered by consumers and difficult to prove.”

Lastly, Miller encouraged HUD to expand the “arm’s-length” restriction to title companies affiliated with real estate brokerages.
“Perhaps the most important safeguard in any residential transaction is the title firm that is in a position to spot illegal monies changing hands (often between Realtors, sellers and buyers), ensure that title defects are properly cleared, and that impartial and meaningful closing procedures are practiced,” Miller said.

“How can a title firm deliver impartial service when it essentially reports to the real estate firm that owns it (or the parent corporation), and a large real estate commission is dependent upon a successful closing?”