More Loan Modification Rules For Lenders With AB 1588

One year after SB 1137 became effective, lawmakers are taking another opportunity to provide some specific guidelines for lenders on handling loan modifications. It is obvious from reading the thousands of stories about lender run arounds, mistakes, misrepresentations and outright lies, that more stringent rules are necessary for them to do this job. Despite the fact that SB 1137 required that lenders meet in person with homeowners before foreclosing, file a declaration with the NOD documents stating that they had complied with that law, they continued to lie, cheat and steal, and say they tried to meet and confer while proceeding on their merry way to foreclose. The level of incompetence was shocking, or maybe not, for those in the know. In addition to lenders circumventing SB 1137, let's not forget the 90 day moratorium on foreclosures that they immediately danced out of by claiming that they were exempt because they had "effective" loan modification programs in place.

Well, AB 1588 gives us hope. The problem with previous solutions is that they didn't have any accountability for lenders to anyone but the homeowner. No big brother was monitoring their compliance, so they continued to steam roll homeowners with their double talk, lies and incompetence. With AB 1588, there are other parties involved, and the title says it all "Monitored Mortgage Workout". The specific details are:

Lenders are required to notify ALL borrowers that they are eligible for the program and provide forms and envelopes for the borrow to exercise that right.

The California Housing Finance Agency would administer the program and once the borrower elects to participate, NO FURTHER action can be taken on the foreclosure until the COMPLETION of all sessions.

Mediators must have at least 4 years of real estate litigation practice, including experience as a mediator and received formal training or experience in federal loan modification guidelines. The $750 fee shall be paid by the trustee initially, and if the loan is modified, the borrower will reimburse $325.

If the trustee fails to participate in a meaningful mediation, the borrower will be authorized to pursue litigation to enforce the mediators recommended modification.

The borrower would be required to open a trust account and deposit 60% of the mortgage payment monthly during the mediation process.

All things considered, it is a step in the right direction, and strongly supported by consumer groups. Successful foreclosure workout programs in other states and cities are in place. In New Jersey, for example, in more than 50 percent of the completed monitored loan workout cases, families were able to remain in their homes. Connecticut’s mediation program has helped over 2,000 borrowers stay in their homes – a 60 percent success rate – since it began in July 2008 as a voluntary program. Mandatory workout programs have recently begun in other states such as Nevada and Maine. Make your voice heard if you support this bill for a better 2010 for struggling homeowners.

The State Bar Speaks Re: SB 94

Based on the hundreds of calls to the State Bar since SB 94 was enacted, they have issued an Ethics Opinion addressing what appears to be the most frequently asked questions on the subject. In reviewing the opinion, it really isn't an opinion or interpretation at all, but merely a recitation of the language of the new statutes.

Any person performing loan modifications is prohibited from charging or collecting an advance fee until they have performed "each and every service the person contracted to perform". "Each and every service" implies that unbundling loan modification services would not be an acceptable practice to avoid the application of Civil Code section 2944.7, but the opinion fails to clarify this issue. If lawyers were permitted to unbundle services and charge incrementally for the loan modification services, the language of the staute would not read "each and every service", but "each service". "Every service" means if the loan modification required a consultation, review of documents, compilation of loan modifcation package and negotiating, no fee can be accepted until "every" one of those services has been performed. There is no requirement that the loan modification be approved however; diligent performance of the service is all that is required to earn the fee. We are again reminded by the Ethics Alert, that this section specifically applies to lawyers, and lawyers can be subject to discipline by the State Bar for violations.

According to the Bar opinion, the three most frequently asked questions are as follows:

1. Is SB 94 retroactive? No, any retainers charged prior to October 11, 2009 do not have to be refunded.

2. Can lawyers collect advance fees and place them in a trust account until all services have been completed? No, essentially holding on to the fee in a trust account to assure that funds will be available when the loan modification is completed is not permitted.

3. Can lawyers ask for a retainer? Well, that seems obvious, but apparently was frequently asked. A retainer is an advanced fee and prohibited.

The Ethics Opinion further discusses the notice requirement pertaining to advising clients that loan modification services are free and the translation requirement mandating that the loan modification contracts be in the primary language of the client.

Stay tuned...I think we will hear more.

Lawyers Decide SB 94 Doesn't Apply To Them

There appears to be a split of opinion among lawyers about whether or not they can avoid the application of the advance fee prohibition as it is defined by unbundling their services and essentially offering loan modification services a la carte. This would entail breaking down the loan modification into several smaller tasks and charging individually as each task is completed. By using this interpretation, these lawyers are suggesting that SB 94 was intended to have more stringent rules for real estate brokers, and more lenient rules for lawyers performing the exact same loan modification service.

Loan modifications have traditionally been handled as a real estate activity and the DRE opines that one who performs loan modification services must have a DRE license and follow all the rules. Quite frankly, there is nothing about loan modifications that requires a license to practice law, so for lawyers to suggest that they have special rules isn't reasonable. The problem that has arisen is that some lawyers have intruded on the broker's turf, and have started performing loan modification services incompetently. The consequences of that are evidenced by the multitude of complaints filed with the State Bar which has necessitated the formation of a special task force to address the issues. The State Bar isn't just considering advance fee issues, but improper partnering with real estate brokers and splitting fees, paying commission to employees for sales, buying leads from non State Bar referral services, offering services out of state under the guise of their law license in California and more. To address ALL of the problems pertaining to loan modification practices, and ALL persons performing loan modifications, SB 94 was enacted.

The legislative history suggests that no, the law isn't more lenient for lawyers than for brokers. The law is clarified for all, and all is defined as "any person, including a real estate licensee who...offers to perform residential loan modifications". Nothing exempts lawyers from all provisions. In regard to consequences for violations, the history further states that "a real estate licensee who fails to comply with the specified provisions related to mortgages, including the loan modification provisions, would be subject to disciplinary action by the Real Estate Commissioner and provides that a violation of the above by an attorney may subject him or her to disciplinary action."

What applies to everyone is that no fee can be collected, regardless of what it is called, until the person has fully performed each and every service the person contracted to perform or represented that he or she would perform. Lawyers suggesting that the consultation alone has value, or preparing the loan package alone has value, or the "forensic audit" has value is not reasonable. If the negotiation with the lender is not carried out to it's final conclusion, there is nothing beneficial offered to the client.

So those who argue that Business and Professions Code section 10026 "requiring that the licensee fully complete each and every service the licensee contracted to perform, or represented would be performed" doesn't apply to them because they aren't real estate licensees, are stretching beyond reason. It contains precisely the same language that is found in Civil Code section 2944.7 which does apply to lawyers. In a nutshell, SB 94 applies to ALL persons performing loan modifications.

There Is No Way Around SB 94 For Brokers and Lawyers

Since the Governor signed SB 94 into law on Monday, October 12, 2009, google searches for the term "how to get around SB94" have appeared. You can find the answer here...there is no way around it, not for brokers, not for lawyer and not for those who are neither. There is no way around that is, if you want to have a viable business model, one that allows you to enter into an agreement with a client for a service, and collect an advance fee prior to performing the service. What is left for the loan modification business for all is only the fee for service after it is performed, and in this industry, collecting $2,000 to $4,000 from an almost in foreclosure homeowner is not likely to work well for anyone. The DRE confirms the new law, but there are some ads already cropping up on Craig's list offering loan modification services claiming they are in compliance with SB 94. If they are asking for any money before performing all of the services, they are not in compliance, and show lack of understanding and intelligence by making such claims in light of all this intense regulation and scrutiny.

This prohibition on advance fees also includes, specifically and by definition, lawyers. It is curious that the FIRST paragraph of the bill addresses the lawyers:

"The People of the State of California do enact as follows:
SECTION 1: Section 6106.3 of the Business and Professions Code is aded to read as follows:
6106.3 (a) It shall constitute cause for the imposition of discipline of an attorney within the meaning of this chapter for an attorney to engage in any conduct in violation of any conduct in violation of any conduct in violation of any section of 2944.6 or 2944.7 of the Civil Code."

Section 2944.7 addresses the advance fee prohibition for everyone:

SEC. 10. Section 2944.7 is added to the Civil Code, to read: 2944.7. (a) Notwithstanding any other provision of law, it shall be 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. (2) Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.

So, that says it all, no advance fees of any type, and that includes asking for deposits for trust accounts, taking checks that are post dated, taking credit card information for charging at a later date. Breaking down the loan modification into smaller tasks and charging a la carte is prohibited as well:

Business and Professions Code 10026. The term "advance fee" as used in this part is a fee,regardless of the form, claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing eachand every service the licensee contracted to perform, or represented would be performed. Neither an advance fee nor the services to be performed shall be separated or divided into components for the purpose of avoiding the application of this section.

There are some lawyers who claim that SB does not apply to lawyers by virtue of this section:

(5) Any person licensed to practice law in this state, not actively and principally engaged in the business of negotiating loans secured by real property, when that person renders services in the course of his or her practice as an attorney at law, and the disbursements of that person, whether paid by the borrower or other person, are not charges or costs and expenses regulated by or subject to the limitations of Article 7 (commencing with Section 10240), and the fees and disbursements are not shared, directly or indirectly,with the person negotiating the loan or the lender.

Be advised that this exception although contained in the bill, has nothing to do with loan modifications, but rather refers to those excluded from complying with Business and Professions Code 10131 which addresses a completely different issue. Essentially, it doesn't matter if you do one loan modification or all loan modifications, the rules are the same for everyone.


And lawyers, don't expect anything to change. The State Bar approved this bill. There are no advance fees permitted, and if in doubt, contact the State Bar Ethics Hotline at 1-800-238-4427 .

SB 94: The Loan Modification Party Is Over

It has always been about the Benjamins--loan modification companies have routinely collected fees up front, and provided no guarantees. Banks were not very willing to modify loans 2 years ago, so many homeowners were out of luck. To control this practice, sections of the Business and Professions Code were amended to require that loan modification companies collecting up front fees have an "advanced fee" agreement which had been reviewed by the DRE. Some brokers applied, and hundreds were accepted, or received a "no objection" letter ( which is not the same as approved.) Their names were posted on the DRE website, and regardless of the semantics, the impression was that they were legitimate.

Not so much. The advance fee agreement still had no impact on the work ethic or success of the particular loan modification company--it merely addressed the issue of whether clients had a contract that clearly stated what they are paying the money for. There are still many complaints about licensed brokers who have advance fee agreements. Other individuals who were not licensed real estate brokers attempted to partner up with a card carrying member of the California bar, so that they could call themselves "attorney backed" and get around the advance fee rule. This worked for awhile until the State Bar issued two ethics opinions that basically said....no. Lawyers who valued their license to practice disengaged from the partnerships with loan modification companies. Next, came the Attorney General stepping in to require that loan modification companies register with them, and provide evidence of a bond. The DOJ aggresively pursued the most blatant offenders. Finally, the State Bar of California formed a task force to address the multitude of complaints filed against their members in conjunction with loan modification scams. Despite all of this recent regulation and scrutiny, there are still companies who have legitimately done this business from the beginning and many many more, who are still total scammers.

To get the full picture of what is out there, I combed the CraigsList ads for lawyers and real estate brokers, and applied for many of the jobs in the loan modification field. I had many calls, many offers of interviews and jobs. As each company discussed their business model with me, I was amazed at how clueless some of these lawyers and brokers were. They had committed to office space, staffing, advertising and technology to operate these loan modification businesses without any understanding or interest in the actual laws or rules that applied to them. I saw lawyers getting leads from non State Bar approved referral sources, paying commission to non lawyers, splitting fees and offering their services in states where they were not licensed, ie. UPL.

So, for those of you who question why SB 94 was necessary, this is it. It is for the clueless. Essentially, it prohibits advanced fees. Period. No fees until after all the work is finished. Ouch. This really cuts in to the practice of promising the moon and delivering less and seriously affects legitimate businesses who are genuinely offering a service. It is not likely that most can afford to collect after the fact as clients in default on the mortgage don't have a lot of cash, even if the loan was modified as promised. Now that this new law is the law--the whole business model is pretty much up in smoke. So much for the Benjamins....but what about the homeowners? It is just wrong that the banks win-again.

The First Of Many Complaints Under The New Foreclosure Consultant Law

Attorney General Edmund G. Brown Jr. today sued a foreclosure consultant and an attorney -- Paul Noe Jr. and Mitchell Roth - who conned 2,000 desperate homeowners into paying exorbitant fees for "phony lawsuits" to forestall foreclosure proceedings. These lawsuits were filed and abandoned, even though homeowners were charged $1,800 in upfront fees, at least $1,200 per month and contingency fees of up to 80 percent of their home's value.

"Noe and Roth ripped off homeowners desperate for help by charging unconscionable fees for phony lawsuits," Brown said. "Instead of aggressively pursuing the lawsuits, Noe and Roth strung them along so they could continue to rake in fees." Beginning in mid-2008, Noe promised homeowners facing foreclosure or default he could help them lower or eliminate their mortgage debt. He convinced more than 2,000 homeowners to sign "joint venture" agreements with his company, United First, and hire Roth to file suits claiming that the borrower's loan was invalid because the mortgages had been sold so many times on Wall Street that the lender could not demonstrate who owned it. Similar suits in other states have never resulted in the elimination of the borrower's mortgage debt. After filing the lawsuits, Roth did virtually nothing to advance the cases. He often failed to make required court filings, respond to legal motions, comply with court deadlines, or appear at court hearings. Instead, Roth's firm simply tried to extend the lawsuits as long as possible in order to collect additional monthly fees. Under the terms of the agreement, United First charged homeowners approximately $1,800 in upfront fees, plus at least $1,200 per month. If the case was settled, homeowners were required to pay 50 percent of the cash value of the settlement. For example, if United First won a $100,000 reduction of the mortgage debt, the homeowner would have to pay United First a fee of $50,000. If United First completely eliminated the homeowner's debt, the homeowner would be required to pay the company 80 percent of the value of the home.

Brown's lawsuit contends that Noe, Roth and United First: - Violated California's credit counseling and foreclosure consultant laws, Civil Code sections 1789 and 2945; - Inserted unconscionable terms in contracts; - Engaged in improper running and capping, meaning that Roth improperly partnered with United First, Inc. and Noe, who were not lawyers, to generate business for his law firm violating California Business and Professions Code 6150; and - Violated 17500 of the California Business and Professions Code. Brown's office is seeking $2 million in civil penalties, full restitution for victims, and a permanent injunction to keep the company and the defendants from offering foreclosure consultant services. Paul Noe Jr. was convicted of wire fraud in 1989 and the subject of a California Department of Insurance Cease and Desist Order in 2004. Mitchell Roth resigned for the California State Bar in late May 2009, after the State Bar closed his law firm.

More Lenders and Servicers Participating in Obama Mortgage Program

Since the Making Home Affordable Program was rolled out earlier this year, and now several more lenders and servicers have signed on to participate. Whether they are really cooperating and complying with the program remains to be seen. Here is the current list.