Undisclosed Short Sale Payments May Be Illegal

The following information comes from the California Association of REALTORS® (CAR) legal e-newsletter, Realegal. CAR has given AAR permission to share the information with our members here in Arizona:

Undisclosed payments in short sale transactions, especially those paid outside of escrow, may violate the law, including RESPA, laws against loan fraud, and licensing laws. Short sale agents have increasingly reported to C.A.R. about requests for agents and their clients to pay junior lienholders and others, oftentimes outside of escrow.

One common scenario is when a short sale seller’s senior lender authorizes a payment of $3,000, for example, to extinguish a junior lien, but the junior lender demands that the buyer pays an additional $9,000 outside of escrow. Not only would it be risky for a buyer to pay outside of escrow, but concealing this additional payment from a federally-insured senior lender may constitute loan fraud, which is a crime punishable by 30 years imprisonment plus a $1 million fine (18 U.S.C. section 1014). Furthermore, omitting from the HUD-1 Statement any charges paid at settlement by either a buyer or seller may violate the Real Estate Settlement Procedures Act (RESPA) (Appendix A to 24 C.F.R. Part 3500). Depending on the specific circumstances, carrying out these payment requests may also violate other laws and regulations, and an agent’s participation in the scheme may be subject to license revocation by the Department of Real Estate or other disciplinary action.

Agents and their clients are encouraged to file any complaints regarding fraudulent activities to the proper authorities, including the following agencies:

*Arizona Attorney General’s Office
Maricopa Co. 602-542-5025 | Pima Co. 520-628-6504 | Other Areas 800-352-8431 http://www.azag.gov/consumer/MailInInstructionsEng.html

Department of Housing and Urban Development (HUD)
HUD Office of Inspector General Hotline (GFI)
800-347-3735
http://www.hud.gov/offices/oig/hotline

Federal Bureau of Investigation (FBI)
202-324-3000
https://tips.fbi.gov

This information was reprinted with permission from CAR. (* The California Attorney General’s contact information was replaced with Arizona’s.) It was originally published in CAR’s Realegal email on March 16, 2010. All rights reserved.

Tags: loan fraud, RESPA, short sales