When House Bill 2791 went into effect June 12, many members of Washington state’s real estate community launched into a furor. Though the Bill’s intentions were to protect struggling homeowners from foreclosure rescue scams, many say its rush through the legislative process left it filled with holes and vague definitions that are more likely to hurt the real estate market than help it. Fuzzy definitions mean that many licensed real estate professionals and legitimate pre-foreclosure investors could end up owing a fiduciary duty to the seller, meaning they will be required to act in the seller’s best interest rather than their own. Many real estate professionals fear inadvertently taking on excessive liability, while many investors feel the law embodies an inherent conflict of interest.
Bearing the brunt of real estate agents’ resentment is state Attorney General Rob McKenna, who originally requested the Bill. But what many may not realize is that the Bill’s final form, including the sections ruffling so many feathers, was not McKenna’s doing at all. Instead it was the result of last-minute changes to which neither the Attorney General’s office nor the Washington Association of Realtors were party.
When HB 2791 was read by the Washington State House of Representatives for the first time Jan. 16, it was eight pages long and included none of the wording causing trouble today. It was sponsored by Reps. Pat Lantz (D-Gig Harbor), Jay Rodne (R-North Bend) and Troy Kelley (D-Tacoma). McKenna requested the Bill because of complaints his office had received regarding foreclosure rescue scams in the state, according to Kristin Alexander, media relations manager for the Washington State Attorney General’s office. The goal of the Bill was to prevent scam artists from taking advantage of homeowners facing foreclosure by creating strict regulations on how such transactions were handled and documented.
“[The legislature] knew and the Attorney General’s office knew from evidence across the country that there were those [foreclosure rescue] scam artists out there just ready to pounce….Consumer protection is a prime concern for the Attorney General’s office and for me, and that’s what this is,” Lantz, prime sponsor of House Bill 2791, said.
In the original Bill, a property was to be considered “distressed” if it was the owner’s primary residence and was in foreclosure, at risk of loss because of nonpayment of taxes or if the owner was more than 90 days delinquent on the mortgage. Distressed home sellers were legally granted five business days following the sale during which they could change their minds and cancel the agreement and the buyer was required to pay a minimum of 82 percent of the distressed property’s fair market value. This version of the Bill passed the state House of Representatives and went to the Senate for review.
HB 2791 was sent to the Senate Rules Committee Feb. 29. This is where the legislative process for HB 2791 starts to get confusing. After the Senate adopted its amendments and passed the Bill, HB 2791 returned to the House for review. The House did not agree with the Senate’s new version of the Bill and sent it back to the Senate. New floor amendments were adopted and the newest version of HB 2791 passed the Washington State Senate with a vote of 46 in favor and three opposed. This version passed the House unanimously March 11. Sen. Brian Weinstein, D-Mercer Island, is credited with the bulk of the changes made. Information following HB 2791’s legislative process can be found on the official Washington State Legislature website.
It is in these later drafts that the portions of the Bill to which many real estate professionals object first appeared. As of March 6, HB 2791 had expanded to 17 pages. In this version of the Bill, homes were to be considered distressed if the homeowner was 30 days or more delinquent on any loan secured by the property, rather than 90 days as in the original version. Additionally, if the homeowner believed that he or she may become delinquent on any of these loans within the next four months, and reported this belief to a designated official, the home was to be considered distressed.
The term “distressed home consultant” was added and defined as any person who contacts a distressed homeowner with an offer to stop or delay a foreclosure sale. This could include actions such as assisting the homeowner to reinstate or refinance the mortgage, obtaining an extension of terms, “saving” the distressed property from foreclosure, purchasing or obtaining an option to purchase the distressed property within 20 days of the foreclosure sale and/or arranging a leaseback to owner situation. The definition also included anyone who “systematically contacted” distressed homeowners. This draft of the Bill exempted financial institutions of which the distressed homeowner was a customer, as well as nonprofit credit counselors and licensed attorneys.
The final version of the Bill largely keeps the definitions described above, but licensed mortgage brokers who procure nonpurchase mortgage loans from financial institutions for distressed homeowners are also exempted from the definition of “distressed home consultant.” It is interesting to note that, though senators thought to add licensed mortgage brokers to the exemption list, licensed real estate professionals remain absent.
“Some of the changes added in the final stages created language around distressed home consultants. And in other states licensed real estate professionals are specifically exempted, and that’s not the case here right now,” Alexander said.
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Jack Burns, president of Estate Rescue, testified against HB 2791. “I’m disappointed in the whole lawmaking system for how this got passed. I would have thought that there would have been more due diligence and more of a public notice would be given,” he said.
Estate Rescue previously worked with pre-foreclosure sales, but in light of HB 2791 the company has closed its doors to new contracts. Burns is starting a new company which will provide hard-money lending for purchasing homes at auction.
Despite the uproar there are many who defend the Bill, or at least defend its intentions.
“We are in full support of the ideal or the goal this bill is trying to accomplish, and that is to protect homeowners from equity skimmers and those criminal practices that are happening out there,” Phil Harlan, 2007 legislative steering chair for Washington Realtors, said.
“Ethical investors should have no concerns about this law at all. All it does is put you on the spot, put you in the spotlight to tell the truth, and if you are an ethical investor you’ve always been doing that. It focuses people back into win-win scenarios where sellers can, in fact, be assisted throughout this time of need and [buyers] can make a reasonable profit doing it,” Dugald Allen, vice president and legislative committee chair for the Real Estate Association of Puget Sound (REAPS), said.
But those with complaints against the Bill are not fighting in favor of foreclosure rescue scam artists—far from it. The primary complaints are that ethical investors and licensed real estate professionals could be labeled as distressed home consultants and end up in a position in which they are forced to act in sellers’ interests rather than their own or their clients’. This arrangement is an “absolute contradiction,” according to Jill Jensen, a designated broker at Keller Williams in Kirkland, Wash.
The main complaints lie in the broad definitions assigned to “distressed home consultants” and “distressed homes.” Sellers are not legally obligated to disclose whether or not they are distressed, but after the transaction has taken place could be proven to have been so. The potential for post-sale lawsuits against real estate professionals who did not realize that, legally, they were distressed home consultants could be great. It’s this potential for unknown liability that is worrying the real estate community and may ultimately hurt distressed homeowners more than it helps them.
“The buyer might walk away because of the unintended liability that’s being placed on the buyer or the buyer’s agent,” Jensen said. New MLS contracts are being drawn up with language trying to prevent this, but it remains a possibility. As a result, distressed homeowners could find themselves with limited options when no one will work with them to sell their homes.
“More homes will now go to foreclosure auction, period,” Burns said.
Proponents of HB 2791 disagree that the Bill will increase the number of foreclosures. “I have a hard time believing that that’s going to occur,” Alexander said.
And increased foreclosures may be preferable to foreclosure rescue, Lantz said.
“Foreclosure would be preferable to the distressed property conveyance. Better that the homeowner receive the equity in the house through foreclosure than lose it all through the scam,” she said when addressing the Senate Consumer Protection and Housing Committee Feb. 29. Unfortunately, it is rare that homeowners get any equity back from homes that go to foreclosure auction once the discounted sale price, fees and other expenses are considered.
But the fact remains that the original intent of HB 2791 was lost during the legislative process. What was once a clear, concise Bill working to legitimize and regulate the foreclosure rescue industry became a complicated and confusing piece of legislation that could cause real estate professionals and investors to abandon pre-foreclosure properties altogether. Several important proponents of HB 2791 admit that the Bill has flaws that need to be addressed, including McKenna, the Bill’s original creator.
“No [the Attorney General’s office is not satisfied with the Bill], in fact we’re going to be going back into legislature to ask for some changes,” Alexander said. “We’re actually meeting with the Realtors next month and we’ll be working with them to hopefully draft an improved piece of legislation. This is a good starting point. Obviously it’s not perfect and we want to go back and make sure that it’s better.”
Even Rodne, one of the sponsors for HB 2791, believes that the Bill has some fundamental problems.
“As the industry and the Attorney General began to implement the provisions of HB 2791, it became clear that HB 2791 was flawed and corrective legislation may be necessary in the 2009 Session,” he said in an e-mail statement. “Please be assured that we are aware of potential problems and are working on a solution.”
With sentiments as they are, it is possible that future legislation could see significant changes in HB 2791, but for now real estate agents and investors may be stepping lightly when it comes to pre-foreclosure sales. Time alone can tell what impact these new regulations will have on the real estate industry in Washington state and across the country, and investors would be wise to study them thoroughly if they intend to get involved with pre-foreclosure properties.
The previously published version of this story contained mistakes regarding Jack Burns and Estate Rescue, LLC. Burns is not a real estate agent, and Estate Rescue, LLC will not lend hard-money at auctions.