Real estate agents (and attorneys) soon will be held legally responsible for reading the corporate mind of Bank of America. Fortunately for everyone else, they will not be allowed to even communicate with Bank of America, much less be required to read its mind. Unfortunately, all of this will further harm distressed borrowers and suffering neighborhoods by discouraging short sales and increasing foreclosures.

This all results from a new “Third Party Authorization” form (TPA) which reportedly is mandatory on all Bank of America short sale files as of April 14, 2012.

It’s also time to add another acronym to your spell checker:  BANA. No, it’s not a miniature version of a yellow tropical fruit. Bank of America N.A. now refers to itself as “BANA” in the new TPA. The TPA is required for anyone (referred to as a “designated representative”) to communicate with BANA in connection with short sales.

In mid-March clients started contacting me about this new form and are wondering if they should stop handling short sales. Frankly, I think so. There’s now too much risk.

New Liability for Mind Reading

The new TPA makes real estate agents, brokers and attorneys (the only people who will be allowed to communicate with BANA, more on that later) personally liable if they “knowingly misrepresent or omit to state, any material fact in order to induce the Borrower(s), BANA, the lender, the investor or the insurer to agree to the terms of a Short Sale that the Borrower(s),  BANA, the lender the investor of the insurer would not have agreed to had all material facts been known” [exact verbiage carefully transcribed to preserve grammatical and punctuation errors].

This unintelligible, overly broad verbiage imposes sweeping, new legal liabilities beyond common law and most, if not all, State and Federal statutes. Ordinarily, one is not liable for failing to omit stating a fact unless there is a legal duty to do so. A legal duty is created by a special relationship (typically, a “fiduciary” relationship), statute (such as in the Transfer Disclosure Statement) or court cases.

A bank and borrower are engaged in a routine debtor-creditor business relationship. Hence, they are potential adversaries, likely with opposing interests. The law usually does not require one adversary to make full disclosure to another in an ordinary commercial transaction. For example, when you are trading in a car for $5,000, the auto dealer is not obligated to tell you they can resell it for $10,000, even if the buyer is the person on the other side of the showroom floor and just told the dealer they want your car for $10,000 if you trade it in. Somehow, some people’s thinking gets all messed up when the object being sold changes from a used car to a house. However, the legal principles don’t get confused by the difference.

Moreover, when a law mandates an obligation of disclosure, it is typically reciprocal: both sides must honor it. However, BANA and all loan servicers have been loathe to disclose truthful, material, relevant information to borrowers and their representatives, such as the true value in the bank’s BPO or appraisal.

A person communicating to BANA in connection with a short sale must now dig into BANA’s mind (whatever and wherever a mega-corporation’s mind is) and not only decide which facts are “material” but how BANA decides to approve or disapprove a short sale. Oh, by the way, it’s not only BANA’s mind one need to read, but the lender, the investor (who BANA typically refuses to identify), or the insurer (who BANA won’t identify and won’t allow to be contacted if they do).

How is the designated representative (“DR”) supposed to know the myriads of factors that come into the decision making process for all these corporations? If you are involved in short sale processing, you know that good, solid deals get denied for no apparent reason, while shaky deals that ultimately fail to close get approved. There is little rhyme or reason to the process, yet the agents and attorneys involved will now be held responsible for knowing the thought process (or lack thereof) in all these minds.

Many of us have often seen short sales denied, or foreclosure sales proceeding, with the minimum bid at the foreclosure sale being less than the proposed net proceeds of a strong short sale that was denied. What is the reasoning in this decision? How is a DR supposed to know there is some reason that one or more of these corporations actually want lower net proceeds? What was the “material fact” in making what appears to be an irrational decision?

On the other hand, I have a client who made a $100,000 offer on a property where all the comparable sales are in the low $100,000 range. Yet, the foreclosure sale lists a minimum bid of $247,500. Nothing nearby sells for more than $200,000, and certainly nothing comparable is even close to that. How is an agent supposed to read a mind that prices a foreclosure like this?

Recap: agents and attorneys acting as a designated representative must decide what is “material” in the mind of corporations who are not identified and do not publish their criteria of what is “material.”

Liability for Omniscience

I apologize for using a 25-cent word — “omniscience” is simply having infinite knowledge (or being omniscient). The TPA requires the DR’s decision to provide or omit information to be based not only on reading the myriad of invisible corporate minds, but knowing how those minds would think “had all material facts been known.”

So now the DR must not only know everything about the property but also everything about the buyer, borrower, AND all information every other person has communicated with BANA. Otherwise, the DR doesn’t know if BANA is missing any of the “material facts” that to contribute to the decision for which the DR is assuming liability.

It should not be difficult to see how impossible it is for a DR to comply with the TPA and how unreasonably broad the risks of engaging in a BANA serviced short sale have dramatically multiplied.

Exclusive Risk for Agents, Brokers and Attorneys

The new TPA requires the DR to represent that he/she is a licensed real estate agent, real estate broker or attorney (“Licensee”) in good standing in the state in which the Property is located and has all licenses, permits and authorizations to perform the duties undertaken by it.

The new Third Party Authorization form has created a special class: far more restricted than required by law or than practical for any real estate transaction. For starters, unless BANA is creating a different authorization form, or is accepting communications without authorization, then title companies, escrow companies and the buyer’s lender’s representatives can no longer communicate with BANA to facilitate short sales.

What disconnected corporate-office type who doesn’t engage in actual short sale transactions come up with that one?

Moreover, several important classes of people will be excluded. For example, borrowers who want their private financial information transmitted through their accountant or bookkeeper must now use an attorney or real estate agent instead. An elderly or disabled person cannot have a family member or caregiver help them communicate with BANA. A member of our armed services serving abroad cannot have a family member or friend authorized communicate for them.

They are many situations when a borrower has executed a legitimate, reasonably needed, legally binding power of attorney. (I add all these qualifiers because sometime there are scammers using powers of attorney.) This is a legal authorization required by law to be recognized. Yet, the BANA TPA appears to be above the law in this regard.

It’s my understanding that I can advise a California client with respect to an out-of-state property. Yes, I may need to consult an out-of-state attorney for local property law issues, but most short sale processing does not necessarily involve local real estate issues. It’s more about financial status, hardship and valuation. However, BANA now prohibits me from communicating with them regarding my California client’s vacation property on the Nevada side of Lake Tahoe; thereby requiring my client to find and retain a Nevada attorney they don’t know or trust.

Many States do not require short sale processors to be licensed, particularly if they are not being compensated. BANA overrules these State laws and policy making decisions.

BANA has created an exclusive, full-employment club for local real estate agents, brokers and attorneys to the exclusion of everyone else.

The reality of short sales is that the buyer is most often the most motivated person to get the deal closed. Many sellers are not making house payments, so why should they be in a rush to close the deal and have to move and start paying rent? In California, most will not be subject to a deficiency liability or cancellation of debt income taxes.

Yet, BANA excludes buyers from short sales communications unless they do so through an agent, broker or attorney. Since when is a person prohibited from communicating on their own behalf? All this does is inject additional people who might misstate information or omit facts they do not know when they are not the principal in a transaction.

Greater Risk In Lower Efficiency

The new TPA also requires every DR to sign this onerous assumption of new duties before BANA will accept communications from them. This further encumbers an already cumbersome process.

As a California attorney, I’m typically called on to intervene when something is going wrong in the short sale processing or closing. Time is always of the essence of my involvement. Those of us in “short sale land” are accustomed to hearing, “we cannot communicate with you until we receive the written authorization from the borrower, which takes 3 to 10 days to enter into our system.” Yeah, right, you’ll ignore my communications until after the foreclosure sale is completed. We have a tough enough time rushing to get the borrower’s signature, now the bank gets to delay by losing the lawyer’s signed acceptance as well. It’s no longer enough for the borrower to authorize the representative; the representative must now accept new liabilities.

In this situation, the lawyer coming in at the last moment suddenly must accept liability for knowing all of the communications that have occurred and make snap decisions about what is material and what may or may not have been omitted somewhere in the process.

Sorry: looks like too much risk to take on at the last minute and the homeowner will effectively be denied legal representation.

It almost looks like a contemplated effort to do so, but who could be so cynical as to think that any bank would want a borrower to lack effective representation? Certainly not I. Banks are benevolent. Aren’t they?

BANA Continues to Legislate

For the last two years, the major short sale lenders and GSE’s have been creating a system of “private law” in short sales that overrides State and Federal laws by imposing new requirements, duties and risks in short sale processing. Although these approaches may be laudable efforts to deter or detect perceived “fraud,” the practical effect is to discourage participation in short sale transactions and push more homes into foreclosure.

Ever increasing loan servicer restrictions run counter to the housing policies established by State and Federal legislatures and agencies to encourage short sales over foreclosures and to strive to more rapidly restore stability to neighborhoods and normalcy to real estate markets.

Masked as an administrative formality, the new Bank of America Third Party Authorization form will likely have more negative impacts counteracting federal housing relief efforts by effectively legislating new liabilities and by restricting existing options for homeowners to use the representatives of their choice.