Cal Foreclosure Consultants Must Now Register & Post $100K Bond

As the mortgage crises began, I received a number of unsolicited inquiries from people who were interested in starting a business to help borrowers in distress by purchasing and leasing back their residence or negotiating a loan modification. I explained to these callers that they would be acting as "foreclosure consultants" and would be subject to statutes in the Civil Code that regulate foreclosure consultants. Invariably, the callers were not aware of these statutes and were not interested in paying a lawyer to advise them how to follow the law. Apparently budding foreclosure consultants fancy the idea of a new business with no start up costs.

As the mortgage crises became worse, there stories in the news about unscrupulous people who would take a fee up-front to negotiate a loan modification (this is illegal unless an exemption applies) and then do nothing for the fee. The California Legislature was apparently moved by these stories to amend Civil Code sections 2945, et seq. effective July 1, 2009 so that "foreclosure consultants" are now require to register with the State and post a $100,000 bond. To learn more about the changes to the laws governing "foreclosure consultants," and the consequences if the laws are violated, click here or here.

LOAN MODIFICATION UPDATE -- Help for Owners Who Are Upside Down?

This Blog began on in late 2006 with the mortgage debacle on the horizon. A number of posts have been devoted to mortgage fraud, foreclosure consultants, home equity purchasers, loan modifications and the like. Recently, the Federal Government has launched new initiatives to promote loan modifications.

Today the Los Angeles Times ran an article on page 1 of the Business Section with a good but very general overview about mortgage modifications. The author advises borrowers to look for free help from federal programs or non-profit legal services. The article is entitled, "IS IT HOPE OR HYPE FOR HOMEOWNERS?"

The advice to look for free loan aid is worth considering. Many "opportunists" have entered the loan modification business as a way to make a quick buck from distressed homeowners. As we have discussed in other posts, it is very difficult to provide mortgage modification assistance for a fee in California under to State laws regulating "foreclosure consultants." In a future post, we will discuss how the laws governing foreclosure consultants will change effective July 1, 2009.

LOAN MODIFICATION SERVICES & ADVANCE FEES -- Foreclosure Consultants Revisited

Millions of homeowners nationwide want to modify the terms of their loans but do not know how to go about it. This has created growing business opportunity for people who want to provide loan modification services for a fee. Many of these people are new to this business and may not be aware of the law in this area. In California, for example, there are rigorous legal requirements for real estate licensees who want to earn fees by helping homeowners modify their loans.

In an earlier post, I discussed the California statutes (California Civil Code sections 2945, et seq.) that regulate foreclosure consultants; these statutes apply when a real estate license attempts to negotiate a loan modification for a homeowner after he or she has received a Notice of Default recorded under Civil Code section 2945. A foreclosure consultant is prohibited from accepting payment in advance, even if the foreclosure consultant is a licensed California real estate broker. (In contrast, licensed California lawyers are exempt from these statutes.)

But what if a real estate licensee agrees to negotiate a loan modification for a homeowner who has not yet received a Notice of Default and the licensee wants to be paid in advance? The California Department of Real Estate has created a procedure for a real estate licensee to accept advance fees for loan modification services when a notice of default has not yet been recorded. First, the licensee must apply to the DRE for its approval of an advance fee agreement. Once this approval is obtained, the broker must enter into the agreement with a borrower/homeowner who retains the broker and pays a fee in advance for loan modification services. It appears that very few California real estate licensees have obtained approval of an advance fee agreement yet.

In summary, a homeowner who has not received a Notice of Default commencing a foreclosure should only pay fees in advance to a broker who presents an agreement that has been approved by the DRE (the homeowner should call the DRE to confirm the agreement has been approved).

If the homeowner has received a Notice of Default, he or she should not pay any fees in advance. The homeowner should confirm that the foreclosure consultant has the bond required under Civil Code section 2945.11. If these requirements are not met, the homeowner has extensive civil remedies under Civil Code section 2945.6, and the foreclosure consultant may be subject to criminal penalties under Civil Code section 2945.7.

Loan Modifications -- The Federal Housing Bill

Congress has passed Federal housing legislation to address the housing downturn, the subprime crises, and the problems confronting Fannie Mae and Freddie Mac. Once signed by the President,this legislation will impact the ability of homeowners to modify or renegotiate their mortgages. Any reader who was interested in the last post about negotiating a loan modification should read the overview of the new legislation in the July 25, 2008 New York Times entitled, "A Housing Bill That Has Something For Everyone." To read the article, click here.

9 Hurdles for a Borrower to Negotiate a Loan Modification

With the increase in pending foreclosures and mortgage defaults, many borrowers are feeling squeezed and are looking for relief from their lenders. The following checklist may be be helpful in approaching a lender about a loan modification:

1. A loan modification is may be available to a borrower who was unable to make regular payments for several months due to exigent circumstances such as an illness, the loss of a job, or a divorce, but who has now solved that problem. The lender will want to see a "hardship letter" and detailed financial information that demonstrates the borrower can resume regular payments on modified terms. The modified terms may include a lower, fixed interest rate with the delinquent amounts added on to the principal of the loan. In a few cases, the borrower may persuade the lender to "write down" (decrease) the principal balance.

2. If a borrower is delinquent, the lender will probably require a "good faith" payment of a substantial part of the delinquency when the loan modification is consummated. A borrower who has put their mortgage payments in the bank while trying to work out a loan modification has a much better chance of success than a borrower with no money to put on the table.

3. The borrower will have to get past the financial institution's collection department and to a person is a position of authority in the loss mitigation department to negotiate a loan modification. This is one area where a lawyer can be helpful.

4. When a borrower is trying to convince the lender that he or she can now make payments on new terms, the lender will want to see historical financial information. If the borrower provides information that contradicts their original loan application, the borrower may be unwittingly creating a record that will give rise to an action for mortgage fraud. (See my January 14, 2007 post.)

5. If a non-lawyer offers to perform the services described above and asks for the payment of their fees in advance completing the services, ask them if they are licensed by the State of California and, if so, how they are licensed. Can the consultant demonstrate to you that they are exempt from the laws regulating "Foreclosure Consultants"? If not, can they demonstrate to you that they are providing the disclosures and documents required of Foreclosure Consultants. (See my January 30, 2007 post.)

6. If the borrower has more than one loan secured by their property, it will probably be necessary for all lenders to agree to the terms of the loan modification before it is finalized. If the modification of the first trust deed loan puts the holder of the second trust deed at greater risk of a default under the first deed of trust, the holder of the first will lose its priority without the consent of the holder of the second to the modification agreement.

7. It will take months, not days, to negotiate a loan modification with a lender, so start as soon as possible after you go into default. Once the borrower is served with a Notice of Default to commence a non-judicial foreclosure, he or she should begin the process of contacting the lender about a loan modification -- do not wait until you receive a Notice of Trustee's Sale.

8. Keep all your loan records well organized, including all communications with the lender about the loan.

9. Consult your CPA or tax adviser to determine if the modified loan will result in any adverse income tax consequences.

BUYERS (AND AGENTS) BEWARE IF THE SELLER IS UPSIDE DOWN

In the January 30th post, I discussed the California statutes that regulate "foreclosure consultants" who seek to "assist" buyers who are in danger of losing their homes to foreclosure. There is an another group of California statutes that may be a trap for the unwary buyer of a house in foreclosure.

When mortgage defaults and foreclosures increase, investors may actively seek out homes owned by a buyer is in default before foreclosure sale takes place. California Civil Code sections 1695-1695.17 were enacted to protect homeowners in that vulnerable situation. In brief, if an owner resides in the home (or up to 4 residential units) and has equity in the property, the owner is in a protected class as an "equity seller." Subject to specific exclusions, if an investor tries to acquire title from an equity seller and does not intend to reside in the property, the investor is an "equity buyer."

When an equity buyer tries to enter into a deal directly or through an agent with an equity seller, there are a number of special requirements. For example, the equity seller has five (5) days to cancel and the equity buyer cannot pay any money to the seller during that time period. Violations of Civil Code sections 1695, et seq. can result in criminal penalties and fines.

There is another interesting protection for equity sellers. If an equity buyer is represented by an agent, the agent must have a bond from an admitted insurer in an amount equal to twice the fair market value of the property. But no insurer admitted in California offers such a bond, so agents should avoid representing equity buyers.

FORECLOSURE CONSULTANTS --The Risks in Bottom Feeding

The Sacramento Delta is known for its fishing... and for tides that can rise and fall as much as six feet. The residential real estate market goes through similar cycles. A rising market can lift all boats, and a declining market can cause some property owners to run aground.
Some people view this as a business opportunity and look for homeowners facing foreclosure who have equity in their homes but lack the ability to refinance. They may offer to rescue the homeowner from foreclosure and salvage their credit in exchange for title to the house. The distressed homeowner may also be granted an option for a fixed time period to re-purchase their home if they have a reversal of fortune.
But dealing with homeowners in foreclosure may be a trap for the unwary if they are ignorant of the Cal statutes that protect homeowners facing foreclosure. This is not a case where ignorance is bliss -- the violation of the statutes carry both civil and criminal penalties. (Civil Code 2945.6 & 2945.7)
The legislative findings in Civil Code 2945 explain why property owners of 1-4 residential units facing foreclosure need special protection. Civil Code 2945.1 broadly defines the term "foreclosure consultant" to include a variety of dealings with distressed property owners. Although the statutes contain specific exemptions, a 1997 California case holds that a licensed broker can be regulated as a foreclosure consultant.
A foreclosure consultant is required to prepare and enter into a written contract with the owner which discloses the nature of the services to be performed, the total amount of compensation and the terms of compensation. (Civil Code 2943) Foreclosure consultants must provide a statutory notice concerning the homeowner's legal rights under Civil Code 2943.5, including the right to terminate the contract within 3 days. An additional notice is required if the foreclosure consultant will assist the property owner in obtaining the release of any surplus funds after a completed foreclosure sale under Civil Code 2945.3(h).
Following the laws to the letter can protect both the foreclosure consultant and the property owner in California.