We have talked so many times about California homeowners needing to be careful before parting with their hard earned money and paying it to a company that promises a loan modification, principle loan balance reduction, or other form of mortgage relief to distressed homeowners.
There are basically three classes of persons that will engage in loan modification activities: (1) California licensed real estate brokers and licensees, (2) Non-brokers (treated as “foreclosure consultants” if performing certain foreclosure related activities), and (3) Attorneys who perform loan modification services.
Here are some of the types of claims that may be made by any of these three types of persons:
We can save your home from foreclosure
We can stop or postpone the trustee sale (stop the non-judicial foreclosure sale)
The lenders cannot prove they own your loan and we can help you get your house for free or reduce the loan to market value
We can get your loan adjusted or modified on terms and conditions that are favorable to you
We can perform a forensic loan audit that you can use to leverage a loan modification with your lender or loan servicer
We can perform a securitized loan audit to see who owns your promissory note
We have a strategy to help you quiet title to your property
We are loan modification experts with over “50 years of combined loss mitigation experience”
We have contacts with all the major lenders and loan services and we have a 95% success rate
If you are not fully satisfied you get a 100% refund.
THESE ARE THE TOP 10 LOAN MODIFICATION STATEMENTS A BROKER, ATTORNEY, OR FORECLOSURE CONSULTANT MAY USE ON YOU TO TEMPT YOU INTO HANDING OVER ADVANCE FEES (FEES IN ADVANCE OF ALL CONTRACTED SERVICES BEING PROVIDED) FOR THE PURPOSES OF SUBMITTING YOU FOR LOAN MODIFICATION CONSIDERATION.
Frequently asked questions about loan modifications and advance fees
<!--[if !supportLists]-->1. <!--[endif]-->What is prohibited under California SB 94? Basically TWO THINGS – (1) collecting advance fees for loan modification or loan forbearance services under Civil Code Section 2944.7 and (2) failing to provide the homeowner the required disclosure under Civil Code Section 2944.6. A violation of either of these sections by a California lawyer is grounds for discipline under California Business and Professions Code Section 6106.3.
Civil Code Section 2944.7 states (relevant portion):
(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…
(b) A violation of this section by a natural person is a public offense punishable by a fine not exceeding ten thousand dollars ($10,000), by imprisonment in the county jail for a term not to exceed one year, or by both that fine and imprisonment, or if by a business entity, the violation is punishable by a fine not exceeding fifty thousand dollars ($50,000). These penalties are cumulative to any other remedies or penalties provided by law…
(d) This section shall apply only to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units.
“ANY PERSON” means attorneys, brokers, foreclosure consultants, etc.
“MORTGAGE LOAN MODIFICATION” AND “MORTGAGE LOAN FOREBEARANCE IS NOT DEFINED” but these terms have common industry meanings.
Here are some definitions for loan modification found via a quick search on the web:
Investopedia Definition of a Loan Modification
Loan Modification
What Does Loan Modification Mean?
A modification to an existing loan made by a lender in response to a borrower's long-term inability to repay the loan. Loan modifications typically involve a reduction in the interest rate on the loan, an extension of the length of the term of the loan, a different type of loan or any combination of the three. A lender might be open to modifying a loan because the cost of doing so is less than the cost of default.
Investopedia further explains Loan Modification vs. Forbearance
A loan modification agreement is different from a forbearance agreement. A forbearance agreement provides short-term relief for borrowers who have temporary financial problems, while a loan modification agreement is a long-term solution for borrowers who will never be able to repay an existing loan.
Wells Fargo Definition of a Loan Modification
If you can’t afford your current mortgage, it may be possible to change certain terms of the loan to make it more affordable. For example, changing the interest rate or the time allowed for repayment may lower your monthly payments to an amount that works for you. Any change to the original terms is a loan modification.
Chase Definition of a Loan Modification
What is a Loan Modification?
A Loan Modification is a permanent change to the terms of a mortgage to make it more affordable for borrowers with a financial hardship.
Bank of America Definition of a Loan Modification
Loan Modification
A loan modification is a change to the original terms of your loan. Loan modifications could include lowering your interest rate, extending the term or maturity date of the loan, moving from an adjustable to a fixed-rate loan, deferring some portion of the unpaid principal balance to the end of the loan, and/or forgiving some portion of the unpaid principal balance.
HAMP definition of a Loan Modification
Under HAMP, servicers apply a uniform loan modification process to provide eligible borrowers with affordable and sustainable monthly payments for their first lien mortgage loans. Affordability is achieved through the application of interest rate reduction, term extension, principal forbearance and principal forgiveness.
FANNIE MAE definition of a Loan Modification
Modification: Any permanent modification to the terms of a mortgage loan that make it more affordable, including changes to the interest rate, loan balance or loan term.
Fannie Mae also defines the term “Forbearance:”
Forbearance
Forbearance is a temporary reduction or suspension of payments which must be immediately followed by an arrangement to cure the delinquency
HUD definition of a Loan Modification
Loan Modification Frequently Asked Questions
A Loan Modification is a permanent change in one or more of the terms of a Mortgagor's loan, allows the loan to be reinstated, and results in a payment the Mortgagor can afford.
It is clear that helping a California homeowner get a change to the terms of their note (including a change to the interest rate, term, balance etc.) is a effort to obtain a loan modification. Forbearance was also discussed above but not focused on for this article.
The other thing prohibited by California SB 94 is the Notice requirement. Basically the notice to your client that your services are not required. The notice requirement is found in Civil Code Section 2944.6 which states:
(a) Notwithstanding any other provision of law, 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, shall provide the following to the borrower, as a separate statement, in not less than 14-point bold type, prior to entering into any fee agreement with the borrower:
It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.
(b) If loan modification or other mortgage loan forbearance services are offered or negotiated in one of the languages set forth in Section 1632, a translated copy of the statement in subdivision (a) shall be provided to the borrower in that foreign language.
(c) A violation of this section by a natural person is a public offense punishable by a fine not exceeding ten thousand dollars ($10,000), by imprisonment in the county jail for a term not to exceed one year, or by both that fine and imprisonment, or if by a business entity, the violation is punishable by a fine not exceeding fifty thousand dollars ($50,000). These penalties are cumulative to any other remedies or penalties provided by law.
Again, a violation of either of these sections is a serious offense and carries potential criminal penalties.
Here is a FAQ from the California State bar regarding SB 94. Note that the Bar talks about the putting money into a trust account, and breaking the loan modification services into separate contracts and states that neither is acceptable.
Here is another FAX sheet put out by the California Department of Real Estate in regard to SB 94 and the prohibition on collecting advance fees for loan modifications.
<!--[if !supportLists]-->2. <!--[endif]-->What is the Federal MARS Rule?
The MARS Rule (Mortgage Assistance Relief Act) is basically the federal version of SB94 with a few different twists. The final rule was put out by the FTC (Federal Trade Commission).
Here is language pulled from their press release:
The FTC is issuing the Mortgage Assistance Relief Services (MARS) Rule to protect distressed homeowners from mortgage relief scams that have sprung up during the mortgage crisis. Bogus operations falsely claim that, for a fee, they will negotiate with the consumer’s mortgage lender or servicer to obtain a loan modification, a short sale, or other relief from foreclosure. Many of these operations pretend to be affiliated with the government and government housing assistance programs. The FTC has brought more than 30 cases against operations like these, and state and federal law enforcement partners have brought hundreds more.
Advance fee ban
The most significant consumer protection under the FTC’s new rule is the advance fee ban. Under this provision, mortgage relief companies may not collect any fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable, and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer. The companies also must remind consumers of their right to reject the offer without any charge.
Disclosures
The Rule requires mortgage relief companies to disclose key information to consumers to protect them from being misled and to help them make better informed purchasing decisions. In their advertising and in communications directed at individual consumers (such as telemarketing calls), the companies must disclose that:
(1) they are not associated with the government, and their services have not been approved by the government or the consumer’s lender;
(2) the lender may not agree to change the consumer’s loan; and
(3) if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.
Companies also must explain in their communications to consumers that they can stop doing business with the company at any time, can accept or reject any offer the company obtains from the lender or servicer, and, if they reject the offer, they don’t have to pay the company’s fee. The companies also must disclose the amount of the fee.
Prohibited claims
The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:
(1) the likelihood of consumers getting the results they seek;
(2) the company’s affiliation with government or private entities;
(3) the consumer’s payment and other mortgage obligations;
(4) the company’s refund and cancellation policies;
(5) whether the company has performed the services it promised;
(6) whether the company will provide legal representation to consumers;
(7) the availability or cost of any alternative to for-profit mortgage assistance relief services;
(8) the amount of money a consumer will save by using their services; or
(9)the cost of the services.
In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers. Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide. There are also record keeping requirements (24 months) and a requirement to monitor employees and independent contractors. You can learn more from this website about the MARS Rule as it applies to real estate and short sale brokers in California.
Attorney exemption
Attorneys are generally exempt from the rule if they meet three conditions: they are engaged in the practice of law, they are licensed in the state where the consumer or the dwelling is located, and they are complying with state laws and regulations governing attorney conduct related to the rule. To be exempt from the advance fee ban, attorneys must meet a fourth requirement – they must place any fees they collect in a client trust account and abide by state laws and regulations covering such accounts.
All provisions of the rule except the advance-fee ban will become effective December 29, 2010. The advance-fee ban provisions will become effective January 31, 2011.
NOTE: As this rule points out, a California attorney would only be exempt from the MARS rule if they are complying with State Laws (like SB 94 discussed above). California law does not allow the collection of the advance fee even with a trust account. If an attorney is not complying with SB 94 then they are arguably violating the MARS rule. At current, there is no private right of action under MARS, but a violation of MARS may support the filing of a violation of California Business & Professions Code Section 17200.
QUERY: Is it legal in California to collect advance fees for a forensic loan audit? What about collecting advance fees for a securitization loan audit? Under the rule, if these services are being marketing or represented as being able to assist the borrower in obtaining mortgage relief, it would appear the MARS rule would apply.
The California Foreclosure Consultant Act
As mentioned above, there is another class of persons seeking to profit from the mortgage crisis. These are the individuals that are neither California licensed attorneys or real estate brokers. The so-called “foreclosure consultants.” To these people, they must comply with the California Foreclosure consultant act. The law can be found in the California Civil Code Section 2924 et seq.
A foreclosure consultant, generally speaking, is an individual who provides, or offer to provide, foreclosure-related consultation services, such as helping certain homeowners stop or postpone a foreclosure sale, or obtain any type of mortgage forbearance from a lender (See Cal. Civil Code § 2945.1(a)). The foreclosure consultant law generally applies to residential properties that are owner-occupied with one-to-four residential units (See Cal. Civil Code § 2945.1(f)).
Foreclosure consultants are highly regulated under California law and must be bonded and registered with the California Department of Justice (See Cal. Civil Code § 2945.45). They must have written service agreements (See Cal. Civil Code § 2945.3) and they are prohibited from collect an upfront advance fee, taking a power of attorney, or taking a lien on real property (See Cal. Civil Code § 2945.4).
California lawyers and real estate agents are generally exempt from the provisions of the California foreclosure consultant law (See Cal. Civil Code § 2945.1(b)(3)).
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What to do if you believe someone has violated California SB 94 or the Mars Rule, or the Foreclosure Consultant Act? You may want to contact an attorney and investigate whether or not you have legal rights, such as a right to a full refund of any advances fees paid. Our office handles DRE accusations and desist and refrain letters. This is an advertisement and communication. We have offices in San Francisco, Fresno, Beverly Hills, Newport Beach, and Phoenix, Arizona.
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