HAS DODD-FRANK MOVED MY CHEESE?BY KEVIN W. HARDIN - Page 14

A R I Z O N A R E A L T O R ® M A G A Z I N E 1

4 Legal Hotline

8 REALTORS® “Ring” in $200,000 for Charity

9 Dynamics in Housing Demand: A Look at Gen X and Gen Y Buyers

14 Has Dodd-Frank Moved My Cheese?

18 Homeowners Protection Signed Into Law

19 LoriDoerflerElectedTreasurer

A A R U P D A T E S

11 President Obama Signs Flood Insurance Bill Into Law

11 RAPAC Major Investors Spend One-On-One Time with Legislators

I N T H I S I S S U E

Questions or Comments: [email protected]

Excluding author photos (or if otherwise indicated),images are © iStockphoto LP.

A P R I L 2 0 1 4 V O L U M E 3 6 | I S S U E 4

RememberingJames “Jim” Brodie

Page 12

Page 6

H E A R T B L E E D

AAR MembersEncouraged toChange Passwords

A P R I L 2 0 1 42

APRIL IS FAIR HOUSING MONTH

THE REALTOR® COMMITMENT TO A MARKET FREE OF DISCRIMINATION

Over 100 years ago, in furtherance of its commitment to

business integrity and fair dealing, the National Association

of REALTORS® (NAR) adopted its Code of Ethics. The Code

of Ethics defines, guides, and regulates the professional

conduct of REALTORS® and demonstrates REALTORS’® level

of commitment, emphasis on education and dedication to

their profession. The Arizona Association of REALTORS®

(AAR) is responsible for enforcing the Code of Ethics.

Among the core principles of the code is a promise

to provide equal professional service to all clients

and customers. Article 10 of the Code of Ethics

therefore prohibits REALTORS® from discriminating

practices and requires that equal professional

services be provided to all individuals as part of

a REALTOR’S® commitment to fair housing.

Because NAR firmly believes in equal opportunities in

housing, in November 2010, NAR’s Board of Directors

passed an amendment to Article 10 of the Code of

Ethics prohibiting members from discriminating on

the basis of sexual orientation. While the inclusion of

sexual orientation was intended to be all-encompassing,

NAR ultimately decided to add “gender identity” as a

definitional clarification. Effective January 2014, Article

10 of the Code of Ethics therefore reads as follows:

REALTORS® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. REALTORS® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation or gender identity. (Amended 1/14)

REALTORS®, in their real estate employment practices, shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. (Amended 1/14)


Moreover, Standard of Practice 10-3

was amended as follows:

REALTORS® shall not print, display or circulate any statement or advertisement with respect to selling or renting of a property that indicates any preference, limitations or discrimination based on race, color, religion, sex, handicap, familial status, national origin sexual orientation, or gender identity. (Adopted 1/94,

Renumbered 1/05 and 1/06, Amended 1/14)

The 2014 amendment to Article 10 therefore not

only reaffirms NAR’s and AAR’s commitment to

fair housing, it is also a reflection of our collective

commitment to a market free of discrimination. i

Visit this article on AARonline.com — comment with your thoughts & share to your social networks.

Fair Housing Resources from NAR

April 2014 marks the 46th anniversary of

the 1968 landmark Fair Housing Act. Each

year REALTORS® recognize the significance

of this event and reconfirm our commitment

to upholding fair housing law as well as our

commitment to offering equal professional

service to all in their search for real property.

View Resources Online http://www.realtor.org/programs/fair-housing-program

http://www.realtor.org/programs/fair-housing-program

A P R I L 2 0 1 44

BY MACK, WATSON & STRATMANCopyright © 2014, all rights reserved.

The following is for informational purposes only and is not intended as definitive legal or tax advice. You should not act upon this information without seeking independent legal counsel. If you desire legal, tax or other professional advice, please contact your attorney, tax advisor or other professional consultant.

Q&As are not “black and white,” so experienced attorneys and brokers may disagree. Agents are advised to talk to their brokers/managers when they have questions.

Licensee Must Disclose Felony

I S S UE:

Is a real estate licensee required to disclose to the Arizona

Department of Real Estate (ADRE) a felony guilty plea?

A N S W E R :

Yes. Pursuant to A.R.S. § 32-2153, the ADRE may

sanction a licensee, deny a license renewal or deny an

original license application if, among many others, the

licensee or applicant has been convicted of a felony or

of any crime of forgery, theft, extortion, conspiracy to

defraud, a crime of moral turpitude, or any other like

offense, been guilty of fraud or dishonest dealings or

not shown that the licensee or applicant is a person

of honesty, truthfulness and good character.

The disciplinary actions disclosure is required by the

ADRE to determine qualifications and suitability of the

licensee to hold an Arizona Real Estate License. Under

A.A.C. R4-28-301(F), a licensee, including the broker,

must report to the ADRE within 10 days any convictions,

judgments or adverse actions relating to, among others:

(1) misdemeanor or felony conviction, deferral of judgment

or sentencing; and (2) order, judgment or adverse decision

involving fraud or dishonesty or involving a real estate

transaction. A plea of guilty with regard to a felony is

a deferral of judgment. Here, the real estate licensee

pled guilty to a felony. As such, the real estate licensee

(and his or her broker) is required to make a disciplinary

action disclosure within 10 days of such guilty plea. i

Arizona REALTOR® Magazine — April 2014 Brokeragehttp://www.aaronline.com/legal-hotline-q-a-brokerage

A Title Company May Pay Commission Directly To An Agent With Proper Assignment From The Brokerage

I S S UE:

Can a broker instruct the escrow company to pay the

commission directly to the buyer, who is also a licensed real

estate agent, or alternatively, instruct that the commission

be applied toward the buyer/agent’s down payment?

A N S W E R :

Probably. A.R.S. § 32-2155(A), among other things, requires

a licensee to receive commissions only from their broker

and also requires a broker to pay commissions only to real

estate licensees. However, there are a limited number of

exceptions to A.R.S. § 32-2155(A). For instance, if the broker

is entitled to the commission, the broker is allowed to assign

the commission directly to the agent, and the commission

can be paid by the escrow company to the agent at closing.

See ADRE Substantive Policy Statement 2005.08. i

Arizona REALTOR® Magazine — April 2014 Commissionshttp://www.aaronline.com/legal-hotline-q-a-commissions

Dodd-Frank Financing Restrictions Do Not Apply To Investors Who Do Not Reside At The Property

I S S UE:

Do the seller financing provisions of the Dodd Frank

Act apply to transactions in which the purchaser is an

investor and will not be residing at the property?

A N S W E R :

No. The seller financing provisions of the Dodd Frank Act

apply to “consumer credit transactions,” not business credit


A B O U T T H E AU T H O R

Richard V. MackRichard V. Mack is a shareholder at Mack, Watson & Stratman, which provides the AAR Legal Hotline service. He is a State Bar of Arizona Board Certified Real Estate Specialist and AV rated by Martindale Hubbell. He has also been designated as a Southwest Super Lawyer. Mr. Mack practices commercial litigation with an emphasis on real estate litigation. He is admitted to practice in the state and federal courts of Arizona and before the 9th Circuit Court of Appeals. Mr. Mack graduated Magna Cum Laude from Southwestern College in Winfield, Kansas with a Bachelor of Business Administration, with an emphasis in economics, and received his Juris Doctor from the University of Arizona.

http://www.mackwatsonstratman.com

transactions. Comment four to 12 CFR § 1026.3(a) states

that “credit extended to acquire, improve, or maintain

rental property (regardless of the number of housing units)

that is not owner-occupied is deemed to be for business

purposes. This includes, for example, a single-family house

that will be rented to another person to live in.” Note: If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied. i

Arizona REALTOR® Magazine — April 2014 Financinghttp://www.aaronline.com/legal-hotline-q-a-financing

Professional Office Building Owner and Tenant Are Obligated To Make Public Restrooms Wheelchair Accessible

FAC T S :

The commercial office building was constructed in 1960. The

building has multiple offices and rents office space to various

types of business. The owner/landlord (Landlord) recently

rented office space to a tenant who operates a professional

services business (Tenant) and who happens to have a disabled

employee that requires the use of a wheelchair (Employee).

The door to the office bathroom is only 24-inches wide. In

this regard, the Employee’s wheelchair will not fit through the

bathroom door and the Employee cannot access the bathroom.

I S S UE:

Must the Landlord and/or Tenant alter the bathroom so

that it is accessible to a disabled person in a wheelchair?

A N S W E R :

Yes. Title III of the Americans with Disabilities Act

(ADA) covers, in pertinent part, “places of public

accommodation” and “commercial facilities” and

extends to private entities. See 28 CFR § 36.101, et al.

Pertinent here, places of public accommodation are

facilities whose operations affect commerce and include

various categories enumerated under the ADA. Of

these categories, service establishments such as offices

of accountants and lawyers, insurance offices, and

professional offices of health care providers are included.

According to the ADA, both the Landlord and the Tenant

have full responsibility for complying with all of the

Title III requirements applicable to that place of public

accommodation, i.e., the Tenant’s office. The Title III

regulation permits the Landlord and the Tenant to allocate

responsibility in the lease for complying with particular

provisions of the regulation. However, any allocation made

in a lease or other contract is only effective as between the

parties, and both the Landlord and the Tenant remain fully

liable for compliance with all provisions of the ADA relating to

that place of public accommodation.

Read More Legal Hotline Q&As on AARonline:www.aaronline.com/manage-risk/legal-hotline

Have you signed up for the Legal Hotline?

The Legal Hotline provides all AAR broker members(designated REALTORS®) free access to a qualifiedattorney who can provide information on real estatelaw and related matters.

FIND OUT HOW BROKERS CAN ACCESS THE LEGAL HOTLINEwww.aaronline.com/wp-content/uploads/2013/08/3-Legal-Hotline-Access-Process-fillable.pdf

BROWSE MORE LEGAL HOTLINE TOPICS ONLINEwww.aaronline.com/manage-risk/legal-hotline

WANT MORE Q&A?

A P R I L 2 0 1 46

LEGAL HOTLINE | CONTINUED

Title III of the ADA prohibits discrimination against any

individual with a disability. Accordingly, individuals with

disabilities may not be denied full and equal enjoyment

of the goods, services, facilities, privileges, advantages,

or accommodations offered by a place of public

accommodation.

Under Title III, architectural barriers must be removed when

it is “readily achievable” to do so. According to the ADA,

architectural barriers are physical elements of a facility that

impede access by people with disabilities. Determining if

barrier removal is readily achievable is necessarily a case-by-

case judgment under Title III. However, the ADA presumes

that “widening doors” is readily achievable. That being

said, in this case, it would likely be found that widening the

bathroom door to accommodate the Employee’s wheelchair

would be readily achievable. Therefore, the Landlord and the

Tenant are responsible for accommodating the Employee by

widening the bathroom door for wheelchair accessibility.

Note: This does not address Title I of the ADA dealing with an

employer’s obligations to a disabled employee with respect to

making accommodations, as this would be outside the scope of

the AAR Legal Hotline. i

Arizona REALTOR® Magazine — April 2014 Fair Housinghttp://www.aaronline.com/legal-hotline-q-a-fair-housing

Seller Bears Risk of Loss During Escrow

FAC T S :

The brokerage represents both the buyer and seller. The parties’

contract provides that $15,000 of earnest money becomes non-

refundable after the acceptance of the Buyer’s Inspection Notice

and Seller’s Response, which has already occurred.

I S S UE:

If the property experiences a complete loss (i.e., is destroyed

by fire) prior to the close of escrow, will the buyer be entitled

to a return of the non-refundable earnest money deposit?

A N S W E R :

Probably. Under the terms of the AAR’s Residential Resale Real

Estate Purchase Contract (the Contract), the risk of loss during

the escrow period is on the seller, and either party may elect

to cancel the Contract if the cost to repair the damage exceeds

10 percent of the purchase price. While this provision does

not speak directly to the return of earnest money (particularly

when it is deemed non-refundable), the fact that the risk of loss

is placed on the seller is significant. Under general equitable

principles, it is likely that a court would hold that rescission is

appropriate and that the parties should be returned to the

status quo ante, meaning that the earnest money deposit

would likely be refunded to the buyer. i

Arizona REALTOR® Magazine — April 2014 Contracts (General)http://www.aaronline.com/legal-hotline-q-a-contracts-general/

AAR MEMBERS ENCOURAGED TO CHANGE PASSWORDS

AAR members may have heard of a recently discovered

Internet security issue — called Heartbleed – that impacted

many websites on the internet, including AAR’s websites

www.aaronline.com, blog.aaronline.com, azgri.com and

reteach.us. Rest assured, AAR was quick to fix the issue on

all of our sites and no passwords were compromised.

http://heartbleed.com/?e_t=1811b06c187243db8787de3ac5282701&utm_medium=2000&utm_source=31&e_t_s=body

To be extra careful, we’re strongly encouraging you to reset

your password, not only on AAR’s website, but also on any of

these sites you may have accounts with.

RESET PASSWORDhttp://www.aaronline.com/login/forgot-password/

When you pick a new password remember to make it complex

(by adding special characters and/or numbers) and unique

(don’t use it on any other sites). i


http://heartbleed.com/?e_t=1811b06c187243db8787de3ac5282701&utm_medium=2000&utm_source=31&e_t_s=body

http://www.aaronline.com/login/forgot-password/


LEGAL HOTLINE | CONTINUED

Property Manager Is Not Required To Hold Pre-Paid Rent

FAC T S :

The brokerage represents the landlord. The

tenant has requested to pre-pay all rents

at the beginning of the lease term.

I S S UE:

Can the brokerage deliver the pre-paid rent to the landlord,

or must the brokerage hold the money in trust in the

event the landlord breaches its obligations under the lease

(i.e., the property is foreclosed during the lease term)?

A N S W E R :

A property manager does not have an obligation to

hold pre-paid rent in trust in the event the landlord

breaches the lease. A landlord is entitled to demand the

rental funds when they are received (less any property

management fees), regardless of whether the tenant

pays on a monthly basis or in advance. Lines 63-64 of

the AAR Property Management Agreement provide,

for example, that “Broker shall not disburse tenant’s

refundable security deposits, prepaid rent or other prepaid

funds to Owner until earned, unless instructed otherwise

by Owner.” If, however, the broker retains the pre-paid

rent, it must be held in the broker’s trust account. i

Arizona REALTOR® Magazine — April 2014 Landlord/Tenanthttp://www.aaronline.com/legal-hotline-q-a-landlordtenant

AAR Delivers Important Resources to Help Our Members Succeed

As a member of the Arizona Association of REALTORS®,

you have many resources available to you to help

you grow your business and manage your risk. Take

a look at all the resources provided to you by AAR.

Read it now online!http://aar.uberflip.com/i/291717

THE NEW MEMBER RESOURCES GUIDE

http://aar.uberflip.com/i/291717

A P R I L 2 0 1 48

REALTORS® “RING” IN $200,000 FOR CHARITY

Editor’s Note: In 2014, AAR will be featuring

Arizona REALTORS® who rock – specifically

when it comes to serving their

community! These REALTORS®

have thrown caution and

selfishness to the wind – and their

communities are better because of it.

Do you know a REALTOR® that rocks? Let us

know. Send us an email at [email protected].

According to the Salvation Army, Wednesday is the most

difficult day to find volunteers to help collect donations

during the holidays. It’s so hard, in fact, that The Salvation

Army actually pays people to man the red kettles, taking

money away from those that need it most. When JoAnn

and Joseph Callaway learned this, they did something

about it. Last year, the Callaways assembled 1,096 of

their closest real estate industry friends, along with local

Salvation Army volunteer coordinators, to ring the

bells at red kettle locations every Wednesday

during December. REALTORS®, loan

officers, escrow offices and

title companies came together

and kept the bells ringing for more

than 180 kettles during December.

These volunteers raised more than $117,000

and saved the Salvation Army $85,000 in

expenses – an impact totaling more than $200,000.

A big thank you to all who volunteered!

If you’d like to get involved with The Salvation Army, visit http://www.salvationarmyusa.org/usn/volunteer i


Joseph and JoAnn Callaway(“Those Callaways”)


Continued

DYNAMICS IN HOUSING DEMAND:A Look at Gen X and Gen Y Buyers

BY RON LAMEE, SVP RESEARCH AND MEMBER VALUE ARIZONA ASSOCIATION OF REALTORS®

Slow demand continues to keep Maricopa County real estate

in a buyer’s market, with the Cromford Market Index holding

around 84. Stories of lower-than-normal demand are coming

in from other parts of the state as well. This month, we

look for clues about reasons for low demand in NAR’s 2014

Home Buyer and Seller Generational Trends. U.S. consumers in

their mid-30s and younger historically make up the largest

group of first-time home buyers; consumers in their 40s

and 50s tend to be repeat buyers. But, lately these two

groups have been shying away from homeownership. In

a weak jobs market, strapped with hefty financial loans,

some Gen X and Gen Y buyers simply can’t afford to buy.

According to NAR’s generational study, 56 percent

of Gen Y homebuyers (under 34 years) stated that

student loans delayed saving for their purchase.

Forty-six percent of Gen X (age 34-54 years) cited

large credit card debt as the barrier to saving.

To give you an indication of how serious student

loan and credit card debt is in the U.S., the New York

Federal Reserve recently released these figures for

outstanding U.S. consumer debt for Q4 2013:

NAR, 2014 Home Buyer and Seller Generational Trends

TOP 3 FACTORS DELAYING SAVING FOR A HOME PURCHASE

http://www.newyorkfed.org/newsevents/news/research/2014/rp140218.html


A P R I L 2 0 1 410

MORTGAGE DEBT $8.05 TRILLION

STUDENT LOAN DEBT $1.08 TRILLION

AUTO LOAN DEBT $863 BILLION

CREDIT CARD DEBT $683 BILLION

HELOC $529BILLION

NY Federal Reserve Report, 2/18/14


While debt has been growing, real income has been

dropping—major declines can be seen across all age

groups under age 65 since the late 90s. With higher down

payment requirements, the ability to save has impacted

first-time homebuyers and also repeat homebuyers.

To add to their woes, many repeat homebuyers must

contend with having homes underwater. According to

NAR’s study, one in five Gen X had a previous home that

was financially underwater and they couldn’t sell when

they wanted to. This all supports what numerous analysts

are saying: the combination of debt, flat wages and low

credit scores are impacting demand for housing.

While this sounds a little pessimistic, it’s not all doom and

gloom. Affordability remains positive at 122.8, meaning a

U.S. family with median income buying a median-priced

home has 122.8 percent of the income needed. After rising

quickly in 2011, home prices have been fairly flat for nearly

a year as have mortgage rates. Affordability for first-time

homebuyers is a dozen points lower but still above 100.

In addition, the “desire to own a home of my own” is

especially strong among Gen Y. In fact, 49 percent gave

that as their primary reason for buying a home. That said,

it’s important to note that desiring a home is different

from taking necessary steps to buy one—NAR’s study only

considers those who made the commitment, not those

on the sidelines. Of those who have purchased a home,

91 percent of Gen Ys purchased their home through a

real estate agent, slightly more than buyers as a whole.

Gen Y tends to be very satisfied with their agent with 88

percent valuing their agent’s honesty and integrity and 88

percent valuing their agent’s knowledge of the process.

Debt and low credit scores seem to be negative influences

on home purchase among Gen Y and Gen X. While

flat or declining real income is a concern, stable home

prices and mortgage rates are positive influences. i


Sources/additional reading:

NAR, 2014 Home Buyer and Seller Generational Trends.

Doug Short, Real Income Decreaseshttp://www.advisorperspectives.com/dshort/updates/Household-Incomes-by-Age-Brackets.php

NAR, Monthly Housing Affordability Indexhttp://www.realtor.org/topics/housing-affordability-index/data

Cromford Reporthttp://cromfordreport.com/

DYNAMICS IN HOUSING DEMAND | CONTINUED

A B O U T T H E AU T H O R

Ron LaMeeRon is the Senior Vice President of Research and Member Value for the Arizona Association of REALTORS(R).

http://www.advisorperspectives.com/dshort/updates/Household-Incomes-by-Age-Brackets.php

http://www.realtor.org/topics/housing-affordability-index/data

http://cromfordreport.com/


AAR UPDATES

PRESIDENT OBAMA SIGNS FLOOD INSURANCE BILL INTO LAW

On March 21, 2014, President Obama signed the

“Homeowner Flood Insurance Affordability Act” into

law. This law repeals FEMA’s authority to increase

premium rates at time of sale or new flood map,

and refunds the excessive premium to those who

bought a property before FEMA warned them of

the rate increase. The bill limits premium increases

to 18 percent annually on newer properties and

25 percent for some older ones. Additionally,

the bill adds a small assessment on policies until

everyone is paying full cost for flood insurance. i

For more information, watch this video from NAR:

RAPAC MAJOR INVESTORS SPENDONE-ON-ONE TIME WITH LEGISLATORS

http://www.realtor.org/videos/help-passed-on-flood-insurance-ratesVisit this article on AARonline.com — comment with your thoughts & share to your social networks.


Recently, AAR members attended several events where they had one-on-

one time with legislators. On Monday, March 17, RAPAC Major Investors

and members of the associations Legislative Committees spent an

intimate evening at the Phoenix Art Museum with members of the Arizona

Senate and House of Representatives. Legislators in attendance included

Senators Andrea Dalessandro and Barbara McGuire and Representatives

John Kavanagh, Jeff Dial, and Warren Petersen, among others.

On Friday, March 21, AAR joined the Arizona Multihousing Association,

Arizona Rock Products Association, Home Builders Association of

Central Arizona, NAIOP, Rose Law Group and SAHBA, in hosting a

Republican Gubernatorial Candidate forum. This event featured

Republican Gubernatorial primary candidates: Ken Bennett, Doug

Ducey, Christine Jones, Scott Smith, Al Melvin and Frank Riggs. i

See all the photos here: https://www.flickr.com/photos/aar_eventrewind/sets/72157640074671176/

A P R I L 2 0 1 412

REMEMBERING JAMES “JIM” BRODIEJames “Jim” Brodie, 84, of Green Valley, died Tuesday, March 11, 2014.

Jim, also known as “Sarge”, was an active member

of the REALTOR® family, joining in 1991. In 1999, Jim

served as the AAR president – the same year that AAR

CEO Michelle Lind joined the organization as general

counsel. He was a master jeweler and handcrafted

thousands of RAPAC pins over the years.

Jim is survived by his wife and business partner, Sandy

Brodie. A memorial is planned for later this year.

Dave Hollingsworth, who served as AAR president in 2000,

said, “I, after being ‘gently’ prodded by Sarge, agreed to

follow him from our two years of service as RVPs through

the chairs at AAR. His vision was clear then, and even more

so today, that the members in Arizona deserved to have

the leadership of AAR come to them at least annually to ask

how we could better improve the state association. Address

their local association needs and listen to their requests

to improve their individual businesses. We all learned

volumes from Jim Brodie, and he will be sorely missed.”

John Foltz, who preceded Jim in 1998 as president of

AAR said, “Jim Brodie had a way of grounding all of us in

the absolute patriotism of supporting home ownership.

His service to our country was carried directly over

to his service to the homeowners and REALTORS®

he touched. Simplicity and honor in ideas that made

a contribution to us all and to me, personally.”

AAR Senior Vice President of Research and Member Value

Ron LaMee said, “Jim initiated the use of customized, Arizona

RAPAC pins to reward donors at various levels. His efforts

put a new emphasis and energy in RAPAC that continues

today. He was also dedicated to improving agents’ skills and

frequently taught classes in Green Valley and Tucson.”

Craig Sanford, a long-time friend, said, “Jim taught me

that the value of leadership was not only what you

did today but what you did today for tomorrow.”

AAR Manager, Risk Management Jan Steward said, “The

year Jim was president of AAR, I was President of Northern

Arizona Association of REALTORS®. Early in his Presidency,

Jim came by to visit with me and needless to say, I was very

impressed that he was visiting local associations throughout

Arizona. Jim said he was reaching out to AAR’s members

to see how leadership could better improve the state

association. In addition to Jim’s questions the day we met, he

presented me with my RAPAC pin, which he created himself,

and an authentic Indian Head penny. Jim gave me the penny

and told a story about his friend who had cancer. His friend

went to the reservation and asked to have the pennies

blessed. Jim was given the pennies by his friend to pass-on

to others, to help them as well. To this day, I still have the

Indian Head penny and RAPAC pin Jim presented me with

as well as my memories of an impressive AAR leader.” i


Major AAR Accomplishments During Jim Brodie’s Presidency

• Purchased and moved into 28,000 square foot headquarters

• Added full-time lobbyist, Governmental Programs Director and General Counsel (attorney) positions.

• Attained the highest membership total ever: 22,948

• Increased participation in the pressXpress™ (400 document fax-on-demand service) by 26 percent

• Partnered with the Mortgage Lenders Association and the Arizona Escrow Association for successful “Partners In Profit” conference.

• REALTORS® of Arizona Political Action Committee (RAPAC) raised highest-ever total contributions of $79,340.

• Developed and implemented REALTORS of Arizona Legislative Link (RALLi™) through the Association’s web site (AARonline.com).

• Developed and implemented a local lobbying training program called “Silver Bullet Session”

• Developed and made available a Buyer/Seller Inspection Form through the standard forms inventory.

• The Association had legislative successes by: 1) defeating a bill that would have expanded new ordinance and regulatory authority governing land transactions in unincorporated areas; 2) supported bill that granted licensing exemptions for corporations selling their own property and closes any window for non-licensed marketplace activity; 3) passed statute change to protect registered professionals (including real estate licensees) from claims related to expert testimony; 4) passed provision that closed a loop that would allow buyer or renter to rescind transaction if certain exempted disclosures were not made; 5) making several changes to “Slumlord” Bill to make passage more palatable for real estate community.

• Developed first online, email-based education course (AAR Contract).

• Partnered with Timeless Technology to offer hands-on computer training programs through local associations.

• Coordinated 74 Graduate REALTORS® Institute modules statewide with 211 members receiving their GRI designation and 569 new members entering the program.

Feel free to share your memories of Jim in the comment area online.Visit this article on AARonline.com — comment with your thoughts & share to your social networks.

TK

A P R I L 2 0 1 414

HAS DODD-FRANK MOVED MY CHEESE?BY KEVIN W. HARDIN, JD, CMB, CMC, CMPS & KEVIN FALLON MCCARTHY, ESQ.

OVERVIEWThis article is an in-depth look at the Seller Carryback

Financing components of the Dodd-Frank Wall Street Reform

and Consumer Protection Act (Dodd-Frank Act). In it, the

authors detail the issues a seller must be aware of before

completing a carryback financing transaction. These include:

• Understanding what properties are covered

by the Secure and Fair Enforcement for

Mortgage Licensing Act (SAFE);

• The two exemptions available for sellers and real estate

agents: the One in One Year Rule, wherein financing

is provided for one property in a 12-month period and

the Three in One Year Rule wherein the seller finances

three or fewer properties in any 12-month period.

• The role of licensed real estate agents and

brokers in these transactions. Specifically, what

actions cross the line between performing

a sale and becoming a loan originator.

ARTICLEFor the last year, the real estate industry has been up in arms

over the new Consumer Financial Protection Bureau (CFPB)

rules that took effect on January 10, 2014. As a law firm

representing homeowners, we often become involved in real

estate transactions when the borrower has ceased making

payments on his or her mortgage, either due to their inability

to pay or a reasoned decision to not pay the debt. The seller/

lender has exercised its remedies under the default language

in the Deed of Trust or other consensual security instrument

and has filed a Notice of Sale / Default. Often, the borrower

will walk into our offices enraged. “They are taking my home

away!” The borrower wants to know his or her rights and

what can be done to keep the home. Typically, the first thing a

borrower wants to know is if the borrower can sue the seller/

lender? It is through this filter that we begin our discussion.

RESIDENTIAL MORTGAGE TRANSACTIONWhen a seller lends money to a buyer for the purchase

of real property, it becomes a residential mortgage

transaction. “Residential mortgage loan” means “any

loan primarily for personal, family, or household use

that is secured by a mortgage, deed of trust, or other

equivalent consensual security interest on a dwelling

(as defined in section 103(v) of the Truth in Lending Act)

or residential real estate upon which is constructed or

intended to be constructed a dwelling (as so defined).” 1

The first step is to identify what kind of buyer/borrower the

rule applies to. The relevant sections of the rules are for

a consumer credit transaction. “Consumer credit means

credit offered or extended to a consumer primarily for

personal, family, or household purposes.” 2 This definition

certainly means a property that the buyer or family of

buyer is going to occupy in whole or in part, now or later.

Recently, we have heard stories of some real estate

professionals encouraging sellers to instruct the buyer/

borrower to form a limited liability corporation (LLC) or some

other entity and then lend to them to avoid the definition

of a consumer. The first thing out of a buyer/borrower’s

mouth is going to be “They told me to form an LLC to buy

the home so they could avoid the rule.” It will not be difficult

to show this particular type of possible fraud. What if the

buyer/borrower lies before the transaction closes? He says,

“I am buying this property as an investment,” but moves

into the home as his primary residence on Day One? Would

some covenant against occupancy become necessary?

These are among the issues a seller must be aware of

before completing a carryback financing transaction.

What kind of property is covered by the Secure and Fair

Enforcement for Mortgage Licensing Act (SAFE)? SAFE

covers a one- to four-family dwelling. Financing for business,

for property for investment purposes, or an extension of

credit to other than a natural person are not covered by

this rule. There are also many other exemptions including,

without limitation, agricultural, foreign property, commercial

property, lots and raw land. It is wise to seek legal counsel in

situations in which the property is not easily categorized.


WHO IS A LOAN ORIGINATOR? “(a) Definitions. (1) Loan originator. (i) For purposes of this

section, the term “loan originator” means a person who,

in expectation of direct or indirect compensation or other

monetary gain or for direct or indirect compensation

or other monetary gain, performs any of the following

activities: takes an application, offers, arranges, assists a

consumer in obtaining or applying to obtain, negotiates,

or otherwise obtains or makes an extension of consumer

credit for another person; or through advertising or other

means of communication represents to the public that

such person can or will perform any of these activities…” 3

SELLER EXEMPTIONIf a seller issues a residential mortgage to a buyer, they

may be considered a loan originator. If they are considered

a loan originator, they will be required to be licensed

under SAFE. If they are licensed under SAFE, they must

make a good faith effort to verify the borrowers’ ability to

repay the loan. In addition to the seller, certain activities

of a licensed Arizona real estate agent may also subject

him or her to being considered a mortgage originator.

When the rule first appeared in January of 2013, it

essentially took seller financing out of the market. By

November of 2013, the final revisions to the rule were

made that resulted in clear exemptions for sellers and

real estate agents in a seller carryback transaction. First,

sellers can take advantage of either of two exemptions.

One is the so-called “One in One Year Rule” and the

other is known as the “Three in One Year Rule”. 4

One in One Year Rule. The seller must be a natural person,

estate or trust and provides financing for only one property

in any 12-month period. This does not mean a land trust

with 20 investors; it means a trust for family tax planning.

The seller will not be considered a loan originator if:

• You provide seller financing for only one

property in any 12-month period

• You owned the property securing the financing

• You did not construct, or act as a contractor

for the construction of, a residence on the

property in your ordinary course of business.

• The financing must meet the following requirements:

• Have a repayment schedule that does

not result in negative amortization

• Have a fixed rate or an adjustable rate

that resets after five or more years. These

rate adjustments may be subject to

reasonable annual and lifetime limits. 5

One of the drawbacks of this exemption is the one-

year look back. If the seller has done a carryback in

the prior 12 months, the seller must wait until it has

been 12 months from recording date to recording date.

Otherwise, the seller will inadvertently violate the rule.

Was the owner of the property the same party that made

the loan? If not, no exemption exists. A seller could assume

that they are covered by the exemption as they personally

discussed the financing options and assisted the buyer

in obtaining the financing of the property, however if the

Deed of Trust or other equivalent consensual security

interest is in the name of another entity, this will result

in a violation of the exemption. To avail themselves of

the exemption, the seller must be named as the lender

or party on the deed of trust or other instrument.

The seller cannot have constructed the home or acted as

the contractor for the subject property as their ordinary

course of business. A seller’s tax return is going to be

a very clear way for a buyer to determine in a lawsuit

if the seller violated this rule if the seller treated the

construction as part of their business. Many home builders

in the last decade completed a home on spec and then,

due to the collapse of the housing market, moved into

it. This fact pattern would be an issue for the seller.

The financing cannot result in negative amortization but

can include a balloon payment. However, the seller must

A P R I L 2 0 1 416

be aware that certain prohibitions exist with loans having

terms that adjust in the first five years of the loan.

The financing can be either fixed rate or adjustable

but must not reset before five years. The index

and margins are discussed in the comments

to the regulations. See footnote 9.

Because transactions that fall into this exemption do not

require the seller to verify the buyer’s ability to repay, this

type of financing may be one of the rare types still available

to buyers who cannot show, by tax returns and other

documentation, that their income is sufficient, but otherwise

has sufficient assets and cash flow to make the payments.

Three in One Year Rule. The seller is any type of financing

entity, including a natural person, estate, trust, LLC,

partnership, or corporation and the seller finances the

sales of three or fewer properties in any 12-month period.

This seller will not be considered a loan originator if:

• You provide seller financing for three or fewer

properties in any 12-month period.

• You owned the properties securing the financing.

• You did not construct, or act as a contractor

for the construction of, a residence on the

property in your ordinary course of business.

• The financing must meet the following requirements:

• The financing must be fully amortizing.

• Have a fixed rate or an adjustable rate

that resets after five or more years. These

rate adjustments may be subject to

reasonable annual and lifetime limits. 6

• The seller must determine in good faith that the

consumer has a reasonable ability to repay the loan.

The Three in One Year Rule has the same one-year look

back aspect as the prior exemption. In addition, a one-

year look forward aspect applies to both exemptions.

If the seller finances property No.1 under the One Year

exemption and then decides to finance property No. 2

under the Three Year exemption, property No. 1 will not

be in compliance and the financing on property No. 1

will be subject to rescission. If a seller has more than one

property to sell on seller financing, the seller is going to

have follow the Three in One Year exemption on property

No.1 if they plan to sell property No. 2 within 12 months.

The rules for ownership, construction and adjustable

rates are the same as the One in One Year Rule.

The financing must be fully amortizing. This rule means

no interest-only loans and no balloon payments. In

addition, the amortization cannot be longer than 30 years

but it can be as short as the buyer can afford under the

ability to repay rule (ATR). 7 This is where things get very

difficult for the seller. How is the seller going to perform

this task without a mortgage loan originator? ATR involves

analyzing the buyer’s ability to repay in eight categories,

including, income, assets, employment, mortgage

payment, payments on loans associated with the property,

mortgage related obligations i.e. property taxes, insurance,

other debt obligations and monthly debt-to-income

ratio or residual income. Very clearly, the seller cannot

offer stated income financing under this exemption.

Although the rules do not require the seller to maintain

documentation, what seller would offer seller financing

without looking at the buyer’s financial information? Use

of third party information providers is acceptable. If the

time comes when a buyer takes their seller to court, the

burden is going to be on the seller to show that they made

a good faith effort to review the buyer’s ability to repay.

Specifically, the buyer is going to allege the loan is predatory

because it violates the rule: the buyer did not have enough

residual income left to meet living expenses after paying

their mortgage and other debts. How is the seller to do this?

More pointedly, how is the seller going to do this without

an attorney or a mortgage loan officer? Seeing the need

for assistance, a few law firms and mortgage companies

have begun to offer seller carryback services to protect

the seller from the issues surrounding the ATR rule.

INTEREST RATE How does the seller determine the interest rate? If the

interest rate on the seller financing exceeds the limits as

set forth under the Home Ownership Equity Protection

Act (HOEPA), the seller will lose the protection of the

exemptions described above. HOEPA sets those limits at

an APR of 6.5 percent above average prime offered rate for

first mortgages and an APR of 8.5 percent above average

prime offered rate for subordinate mortgages. 8 Therefore,

HAS DODD-FRANK MOVED MY CHEESE? | CONTINUED


the seller must verify the average prime offered rate at

the time of funding of the seller financing transaction.

REAL ESTATE AGENT EXEMPTIONThe term loan originator does not include “A person

that performs only real estate brokerage activities and

is licensed or registered in accordance with applicable

State law, unless such person is compensated by a

creditor or loan originator or by any agent of such

creditor or loan originator for a particular consumer

credit transaction subject to this section.” 9

The question becomes: is the licensed real estate agent or

broker performing only real estate or brokerage activities in

accordance with Arizona law? How does Arizona define this?

One of those definitions of allowable activity are: “incident

to the sale of real estate, businesses and business

opportunities negotiates or offers, attempts or agrees

to negotiate a loan secured or to be secured by any

mortgage or other encumbrance upon or transfer of

real estate, businesses and business opportunities or

timeshare interests subject to section 32-2155, subsection

C. This subdivision does not apply to mortgage brokers as

defined in and subject to title 6, chapter 9, article 1.” 10

Does this mean that a licensed real estate agent can draft

or prepare seller-financing documents? No. Does this

mean the licensed real estate agent can assist in collecting

documents required to perform the analysis of ATR? No.

It means the agent can attempt or agree to negotiate

the loan only. If the agent is compensated beyond their

commission for performing any activity by a creditor or

seller, the agent will be considered a loan originator.

What if the seller of the property is also a licensed real

estate agent? This will not turn the agent into a loan

originator, unless they are compensated by a creditor.

The agent/seller will be able to sell the property under the

exemption. What if the licensed real estate agent is also

a licensed mortgage loan originator? The agent will then

have to comply with the relevant regulations under the

federal and state laws as required for a loan originator.

Finally, questions will arise concerning the servicing

of the loan. On January 10, 2014, the CFPB made

effective additional final rules on mortgage servicing.

This article will not go into detail on these rules,

but suffice it to say, they are complicated enough

that seller should be wary of any attempt to service

their seller-financing arrangement personally.

These new rules, while being very detailed and complicated,

are designed to protect the consumer. It is not CFPB’s goal

to limit lending and real estate sales opportunities. It is the

goal to protect consumers and ensure that all parties to a

real estate transaction are properly licensed and regulated

to accomplish this. If at any time any party is in doubt

as to the applicability of the regulations to a particular

transaction, they should seek appropriate legal counsel. i

No content provided in this article should be taken as

legal opinion or advice for an individual situation or case.

By viewing the information in this article, you are not

creating an attorney-client relationship and while we make

every effort to make sure the information in this article is

accurate, we cannot guarantee the accuracy and are not

responsible for any errors or omissions or inaccuracies.

A B O U T T H E AU T H O R S

Kevin HardinKevin W. Hardin is the director of the Mortgage Mediation Group at the law firm of McCarthy Law PLC. He holds the Certified Mortgage Banker (CMB) designation from the Mortgage Bankers Association and the Certified Mortgage Consultant Designation (CMC) from the National Association of Mortgage Brokers. Both designations are the highest academic designations of both associations. He has a Bachelors of Science from New Mexico State University and a Juris Doctor from Concord School of Law. [email protected] 888-909-1030

Kevin McCarthyKevin Fallon McCarthy Esq. is the Managing Partner of McCarthy Law PLC. Mr. McCarthy graduated magna cum laude from the Sandra Day O’Connor College of Law in 1986 and received his B.S.B.A. with an emphasis in Accounting from Creighton University.

McCarthy Law PLC is an Arizona-based law firm focused negotiating large reductions in their clients’ debts without the need for bankruptcy. The firm helps families who are struggling with debt, including credit card debt, medical debt and student loan debt. The Mortgage Mediation Group at McCarthy Law PLC is a practice group within the firm focused on mortgage regulatory and statutory issues. This practice group assists homeowners with California Homeowner Bill of Rights claims, wrongful foreclosure, foreclosure defense, short sale, loan modification, mortgage deficiency defense, mortgage settlement and seller carryback services.

HAS DODD-FRANK MOVED MY CHEESE? | CONTINUED

FOOTNOTES:

1 Title 24 Part 3400 Sub Part A, §3400.23

2 12 CFR § 1026.2 (12)

3 12 CFR § 1026.36 (a)

4 12 CFR § 1026.36 (a)(4) and (5)

5 see comments 36(a)(4)-2 and 36(a)(5)-1

6 see comments 36(a)(4)-2 and 36(a)(5)-1

7 12 CFR § 1026.43(c)

8 12 CFR §§ 1026.31, 1026.32 and 1026.34

9 12 CFR § 1026.36 (a) (C)

10 A.R.S. 32-2101 (48)(k)


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www.aaronline.com/azre-book

HOMEOWNER PROTECTIONS SIGNED INTO LAW

A major victory for the Arizona Association of REALTORS® (AAR) was achieved on April 17, 2014, when Governor Jan Brewer signed SB 1482 homeowners’ association amendments omnibus into law. This bill reintroduced protections

for homeowners and tenants against homeowners

associations which was passed by the legislature and

signed by the governor last year, but ultimately challenged

in court based on the “single subject rule” of the

constitution. As a result of the constitutional challenge,

HOAs were left with no restrictions on what documents

they could require of a tenant and no limit on what could

be charged for the collection of these documents.

Over the course of the last year, AAR continued to hear

from our membership and the public on the escalating

efforts by HOAs to interfere in private contracts and

profit off these efforts. Some community associations

sought to obtain inappropriate information from tenants,

such as a copy of the tenant’s rental application, credit

report, lease agreement, and social security number.

To make matters worse, these associations charged the

tenants unreasonable fees to process this information.

As a result, the association actively pursued the

establishment of restrictions on the information that can

be requested and the amount that can be charged.

Pursuant to SB1482, homeowners associations will now be

limited as to what information they can seek to obtain from

tenants. Additionally, the association will be precluded from

charging more than $25 to process this documentation.

After many attempts to get this legislation to the finish line,

Governor Brewer’s signature solidified the multi-year effort

to establish protections for homeowners and tenants. SB

1482 contained a general effective date and will become

effective 90-days after the legislature adjourns. i

For more information on the bill, please visit: http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=1482&Session_Id=112



LORI DOERFLER ELECTED 2015 AAR TREASURER

Lori Doerfler, ABR CRS GRI, was elected 2015 AAR Treasurer at

LORI WILL BE SERVING AS TREASURER IN 2015 WITH LINE OFFICERS:President – Jim Sexton | President-Elect – Paula Serven | Vice President – Paula Monthofer

the Board of Director’s meeting on Friday, April 18. Lori

has been serving on AAR committees since 2006 and has

been involved in the association in the following roles:

2010 – Present Executive Committee

2010 – Present Finance Committee

2010 - 2013 Region 1 Vice President

2007 - Present Director

2013 Chair, Professional Business Development Committee

2013 Chair, RAPAC Trustees

2012 Chair, REALTOR® Issues and Mobilization Committee

2007 - Present Professional Standards Committee

2011 Member, Risk Management Committee

2010 Member, Statewide MLS Task Force

2008-2009 Member,Businessand Information Technology Committee

2005 - 2006 Member, GRI Workgroup

2006 Graduate, Leadership Training Academy


Congratulations, Lori!