By: Sylvia J. Simmons
The residential mortgage crisis in California created a business opportunity for “foreclosure consultants” to offer assistance to distressed homeowners in evaluating their options regarding their home mortgages and negotiating modifications with their lenders. Many providers of such loan modification services (LM Services) are honest, hardworking real estate professionals who provide a valuable service to consumers. Unfortunately, however, some providers are unethical or even criminal and either provide no valuable services or engage in scamming activities such as charging high fees without providing any real services or obtaining deeds of trust to “save” the home. Homeowners in distress were finding it increasingly impossible to distinguish between legitimate LM Service providers and the “bad guys.”
In the Spring of 2009, the California Legislature stepped in to protect vulnerable homeowners and imposed various restrictions on providers of LM Services which cannot be waived, such as:
- Requiring agreements for LM Services to be in writing and contain specific disclosures;
- Prohibiting collection of a fee for any services until after the services were fully performed;
- Providing homeowners with a right to rescind the LM Services agreement under certain circumstances.
The California Department of Real Estate (DRE) required that all real estate professionals engaged in LM Services submit any advanced fee agreement regarding LM Services for review and issuance of a “no objection” letter.
Some companies restructured their LM Services into specific groupings or phases (such as evaluation, gathering documentation, submitting proposal, negotiating agreement with lender) so that service fees could be collected upon completion of each phase of specified services. Some companies established separate accounting procedures for placing fee “retainers” into a trust account to be distributed with a verified accounting to the client upon completion of the LM Services. Some companies established procedures to treat client costs deposits as separate from fees for LM Services and to deposit costs monies into a trust account to be drawn against periodically upon providing the client with a verified accounting.
Additional restrictions on providers of LM Services were passed in the Fall of 2009. When Senate Bill 94 (SB94) took effect on October 11, 2009, companies that provide LM Services had to make some quick adjustments to stay in business. The new law (Civil Code Section 2944.7(a)(1)) prohibited LM Service providers (except attorneys) from collecting advance fees by making it “unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following: (1) Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.” The prohibition applies only to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units. The good intentions of the Legislature resulted in legitimate companies going out of business while scammers continued to take advantage of distressed homeowners in new ways for similar fees. For example, charging $1,500 to $3,500 or more to provide a “forensic loan audit” or create a “document package” for the borrower himself to present to the lender.
Real estate brokers providing LM Services now must assume the entire risk of a lender’s refusal to modify a loan. LM Service providers front the cost of ongoing business operational expenses and advances on behalf of clients for costs related to LM Services (such as copying charges, long distance telephone charges, courier services, postage). They must also refund fees collected after October 11, 2009, even if the agreement was entered into before SB94 took effect. Another problem arises when lenders pursue foreclosure at the same time they claim to be working with the borrower on a loan modification. Obviously, if the property forecloses, the LM Service provider will not be reimbursed for costs advanced or paid for services rendered.
Both the Department of Real Estate and the California Bar Association have determined the receipt of any monies in advance or providing phased services violates California law. The DRE is no longer reviewing agreements or issuing “no objection” letters and takes the position that absolutely no monies, no matter what the nature or how or when received, maintained, or distributed, may be requested or accepted until all the LM Services are fully completed. This applies to LM Service agreements existing before October 11, 2009 — no further fees may be collected and any fees received after October 11, 2009 must be fully refunded; however, advanced fees paid before October 11, 2009 are not affected. The restrictions are not limited by residency or place of employment, and therefore apply to California borrowers being offered LM Services by an out-of-state provider, or a California provider offering LM Services to a resident of another state.
Adding another blow to legitimate LM Service providers, the Federal Trade Commission (FTC) has thrown its hat into the ring with Title 16 – Code of Federal Regulations, Part 322, Mortgage Assistance Relief Services (“MARS”). The new federal rules meant to protect consumers from fraudulent LM Service and foreclosure rescue providers were finalized in late November 2010 and contain a complete ban on advance fees that will go into effect on January 31, 2011. The FTC rules are much more strict than California law. Attorneys are basically exempt because they can charge a client a retainer in advance for services related to the application for a loan modification, if they meet state law requirements. Generally, the FTC rules prohibit for-profit LM Service providers (i.e. mortgage brokers) from collecting any advance fees at all until the lender or loan servicer has given the homeowners a written offer and the homeowners have accepted the offer. The fine for failing to comply is $11,000 a day! Clearly illegal operations will not be tolerated and the FTC intends to enforce the rules.
Feedback from attorneys and real estate professionals reveals that an impossible standard has been established. The new rules essentially “throw the baby out with the bath water” by requiring legitimate LM Service providers to finance the costs and provide the services for months or even years without any payment. They also run an extremely high risk of never being paid or even recovering actual costs. However, the good news is that the FTC Rules create a clear and bright line that will hopefully eliminate scams and fraud.
In summary, real estate brokers engaged in LM Services need to immediately come into compliance with California law and plan now to be in compliance with the FTC rules before the end of January 2011.