Loan Modifiers Beware You Just Got a Whole Lot More Regulated
July 12, 2009
Do you assist clients in modifying their home loans? If so, the way you do business is about to change. New restrictive laws went into effect on July 1st of this year and there are more coming soon. To better understand and interpret these laws you must first understand the perspective of the legislature. To understand where the legislature is coming from you need only look to Civil Code 2945 which states in pertinent part:
"The Legislature finds and declares that homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a Notice of Default is recorded . . . Foreclosure consultants represent that they can assist homeowners who have defaulted on obligations secured by their residences. These foreclosure consultants, however, often charge high fees . . . and perform no service or essentially a worthless service. Homeowners, relying on the foreclosure consultants' promises of help, take no other action, are diverted from lawful businesses which could render beneficial services, and often lose their homes. . . . The Legislature further finds and declares that foreclosure consultants have a significant impact on the economy of this state and on the welfare of its citizens. . . . The provisions of this article shall be liberally construed to effectuate this intent and to achieve these purposes."
The next question becomes: Is a loan modifier a foreclosure consultant? A "foreclosure consultant" is a person who solicits or represents, or offers to perform, or does perform, for compensation, services relating to: stopping or postponing a foreclosure sale; assisting a homeowner to reinstate, or to extend the period of reinstatement, of a loan in foreclosure; obtaining a waiver of acceleration; obtaining a loan; ameliorating impairment of the homeowner's credit because of foreclosure; or saving the owner's residence from foreclosure. Civil Code 2945.1 subd. (a). If your business involves providing loan modification assistance to clients then you are likely a "foreclosure consultant" and subject to regulation and these new laws.
Some of you may say that you are not a "foreclosure consultant" because you are a real estate broker. Albeit there is an exception to the application of "foreclosure consultant" regulation to real estate brokers, this exception is a very narrowly drawn. The exception for real estate licensees is set forth in Civil Code 2945.1 subd. (b)(3) which provides in pertinent part:
"A real estate broker is exempt if he or she: is acting under a real estate license and is entitled to compensation for acts performed in relation to the sale of the home in foreclosure or in arranging a loan for the home; does not claim, demand, charge, collect, or receive compensation until the acts are performed . . ."
So, if a real estate licensee is acting as a loan modifier then they are considered a "foreclosure consultant" and subject to regulation.
New rules to follow as of July 1, 2009
Civil Code 2945.45 went into effect on July 1, 2009. It essentially provides that a foreclosure consultant must be issued and maintain a certificate of registration from the Department of Justice. In order to obtain a certificate of registration from the Department of Justice a foreclosure consultant must do the following:
Complete a registration form
"The foreclosure consultant must submit a completed registration form, along with applicable fees, to the Department of Justice. The registration form shall include the name, address, and telephone number of the foreclosure consultant, all of the names, addresses, telephone numbers, Internet Web sites, and e-mail addresses used or proposed to be used in connection with acting as a foreclosure consultant, a statement that the person has not been convicted of, or pled nolo contendere to, any crime involving fraud, misrepresentation, dishonesty, or a violation of this article, a statement that the person has not been liable under any civil judgment for fraud, misrepresentation, or violations of this article or of Section 17200 or 17500 of the Business and Professions Code, and any additional information required by the department."
Civil Code 2945.45(a)(1)(A)
Provide copies of the foreclosure consultant's promotional material and advertising
"The registration form shall be accompanied by a copy of all print or electronic advertising and other promotional material, and scripts of all telephonic or broadcast advertising and other statements used or proposed to be used in connection with acting as a foreclosure consultant."
Civil Code 2945.45(a)(1)(B)
Post a $100,000.00 Bond
"The registration form shall be accompanied by a copy of a surety bond in the amount of $100,000.00."
Civil Code 2945.45(a)(1)(C)
The most onerous requirement is that a foreclosure consultant must obtain and maintain a surety bond in the amount of $100,000.00. A surety bond is not the same thing as an insurance policy. Usually with a surety bond you are required to pledge security in the form of assets to securitize the bond. If a claim is made to the bond by a client and the surety company pays on the claim then the surety company will take the property that was pledged as security for the bond.
What happens if a foreclosure consultant does not comply with these new requirements? First, they will be fined somewhere between $1,000.00 and $25,000.00. Second, they are subject to imprisonment in the county jail for up to one year. Third, they will be liable for the homeowner's damages, as well as his attorneys' fees and costs. Civil Code 2945.45(d) and 2945.6.
Keep in mind that Civil Code 2945.45 is a new requirement and it is in addition to all the other regulation set forth in Civil Code 2945 et seq.
Lawyers remain exempt from regulation as a foreclosure consultant; but not for long
Senate Bill 94 is presently before the State Assembly awaiting a vote. Among other things, Senate Bill 94 does the following: (i) It ends the exemption for attorneys thereby subjecting attorneys to regulation as a foreclosure consultant; (ii) it ends the fee schedule approval process by the Department of Real Estate; (iii) it removes the exemption for real estate licensees thereby making them a "foreclosure consultant"; (iv) it provides homeowners a private right of redress against the foreclosure consultant inclusive of attorneys' fees and costs; and (v) it requires the Department of Real Estate to report back to the legislature every three months on the number of real estate licensees that have violated the new laws under this regulation and the enforcement action taken.
Senate Bill 94 has not yet become law. However, I believe that it will. It was approved in the Senate on May 21, 2009, by a vote of 21 to 14. It is very likely to pass in the assembly and to be signed by the Governor.
For profit loan modification companies may become a business of the past
The $100,000.00 bonding requirement alone will put many loan modification businesses out of business. Many loan modifiers will not have the assets to pledge as security for the surety bond. Moreover, the bonding requirement and the private right of redress (which allows homeowners to recover their attorneys' fees and costs) make loan modification companies attractive targets for lawyers. There are many non-profit HUD approved loan modification companies that provide loan modification services to homeowners free of charge. It seems clear that the legislature is making every effort to steer homeowners away from for profit loan modification companies and steer them toward these non-profit HUD approved loan modification organizations. In light of the foregoing, one must ask himself/herself the question:
If you are in the loan modification business and you remain determined to remain in the loan modification business then take measures to protect yourself. Make sure that you obtain the certificate of registration and make sure that you have adequate errors and omissions insurance coverage. Do not mistakenly believe that the surety bond acts as an insurance policy.
Loan Modifiers Beware You Just Got a Whole Lot More Regulated
By: Jon Alan Enochs
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