The State Bar of California has issued an Ethics Alert in response to the sudden wave of companies offering services which include “Loan Modification” and “Foreclosure Consultation.” While the Ethics Alert is intended to give attorneys guidance on how to avoid the ethical traps that exist for attorneys in the field of loan modifications and/or consulting with persons in foreclosure, it contains some great advice for consumers who are in need of assistance with a pending foreclosure or loss of their home due to mortgage default.
On February 2, 2009, the State Bar of California determined that the problem of loan modification and foreclosure consulting companies, who for the most part are operating without oversight or regulation of any sort, posed an ethical dilemma for attorneys who might be tempted to jump into the loan modification business. The State Bar, who oversees more than 220,000 attorneys licensed by the State of California took the extra-ordinary step of issuing an alert to its membership, warning of the mine-field of ethical issues that surround the loan modification business.
As far back as 1979, the California State Legislature was concerned about the activities of individuals and firms who might prey on individual homeowners who were in foreclosure and losing their homes. The Legislature specifically found that homeowners in foreclosure were vulnerable, and could easily be taken advantage of by unscrupulous persons who were then seizing the opportunity created by a large number of foreclosures. The Mortgage Foreclosure Consultants Act (Civil Code § 2945-2945.11) was subsequently amended in 1980 and 2004 in response to new and more elaborate schemes to defraud persons already in financial jeopardy. The Mortgage Foreclosure Consultants Act specifically found that:
- There is a need for protection of homeowners in foreclosure from fraud, deception, harassment and unfair practices of self-proclaimed foreclosure consultants.
- Foreclosure consultants have charged excessive fees and have historically performed little or no services.
- In some instances, homeowners executed an assignment of the surplus of the Trustee’s Sale in favor of the Foreclosure Consultant resulting in excessive fees paid.
- Borrowers frequently lose their homes to Foreclosure Consultants who purchase the homes at a fraction of the cost or value.
The statute, at the time it was written, envisioned a Foreclosure Consultant to be primarily someone who would help the homeowner avoid foreclosure by delaying or stalling it and in some cases attempting to sell the property while the foreclosure was pending. The loan modification aspect of the Foreclosure Consulting business, while not entirely new, has only come into fashion with this recent foreclosure crisis where lenders are actually open to, or in the case of lenders like Countrywide, under pressure to implement a program of voluntary loan modification for distressed homeowners. If you read my article about the 2009 California Foreclosure Prevention Act then you already know that in order to avoid a newly-implemented 90 day delay in foreclosure, lenders must have a program for meaningful loan modification in place and approved by the Commissioner who oversees their licensing. Loan modifications, however, do clearly fall within the sphere of the Mortgage Foreclosure Consultants Act. To protect homeowners, the Act imposes a number of restrictions on persons who approach anyone who is in foreclosure (i.e., a Notice of Default has been recorded against their home), and offers their services to delay or stop a foreclosure. Some of the requirements include:
- All Foreclosure Consultants must have a written contract with their clients which contains specific disclosures.
- Foreclosure Consultants are PROHIBITED from collecting a fee up-front before services are performed and completed.
- Homeowners have certain rights to rescind their contracts with Foreclosure Consultants.
- The rights given to homeowners under the Act cannot be waived as a matter of public policy.
Although currently the Mortgage Foreclosure Consultants Act is only applicable to homeowners once a Notice of Default has been recorded by their lender, I would strongly argue that its requirements should apply to, and you should refuse to do business with anyone who doesn’t follow its requirements, regardless of whether or not your lender has actually started foreclosure. The State Bar of California and the Public Interest Clearinghouse established a website — www.ForeclosureInfoCA.org — to provide accurate information to California homeowners about foreclosure, Foreclosure Consultants and prohibited activity.
The reason for the Ethics Alert to California attorneys is because there are several groups of licensed professionals who are partially or fully exempt from many of the requirements of the Mortgage Foreclosure Consultants Act, including attorneys. As such, attorneys might be tempted to work with non-attorney Foreclosure Consultants to take the consultants out from under the stricture of the Act. Doing so, however, as the State Bar warns is full of ethical and legal traps, and must be avoided. If you are going to retain an attorney to help you with a loan modification, you need to know that an attorney is going to handle the matter, and that it is not being handed off to an “affiliated” company that claims to specialize in foreclosure avoidance. Be wary of any attorney who claims to be “affiliated with” or “associated with” a company in the business of Loan Modifications. Not only is that a red-flag that your matter will be handled by someone who is potentially less-qualified to assist you, it also means your attorney either hasn’t read, or isn’t aware of the ethical prohibitions against doing such things. Your matter should be handled by the attorney, or by his employed staff only. A large number of these new “Loan Modification” companies are the same people were less than two years ago working in the mortgage industry writing bad loans.
In addition to attorneys, certain licensed real estate professionals are exempt from certain provisions of the Mortgage Foreclosure Consultants Act, however, the California Department of Real Estate has implemented its own regulations that govern the activities of real estate licensees who wish to assist homeowners. As with Foreclosure Consultants, if a Notice of Default has been recorded against your home, Do Not Pay An Advanced Fee to anyone, including a real estate salesperson or broker, as it is illegal for them to collect a fee up front. Even if the Notice of Default has not been recorded, the real estate broker or salesperson must have you sign a written agreement, and that agreement must be approved by the State of California, Department of Real Estate. A list of brokers who have had their agreement approved can be found on the DRE’s website here, or you can learn more about what real estate licensees may and may not do here. The only persons who may do so are licensed attorneys, and then only where they are not simply acting as a front for an unlicensed Foreclosure Consultant.
As the saying goes, Caveat Emptor — or “let the buyer beware.” When attempting to save something as important as your home, don’t be tempted by television, radio or print advertising with flashy claims. Be sure that you trust your home to someone fully qualified, and acting within the scope of the law, and be sure that you aren’t simply lining the pockets of the same loan broker who helped get you in trouble in the first place.
David L. Gibbs is an attorney with The Gibbs Law Firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.