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California Loan Modification - When are advance fees allowed

Loan Modification advance fees seem to be the subject of a big debate, but, in reality the rules are simple.

Before an NOD - brokers with no action letters from the DRE, and attorneys holding active licenses with the California State Bar can collect advanced fees.

After an NOD - only California lawyers within their own practice may collect advance fees.

In my opinion most of the so called "attorney backed" operations are not law firms. Since they are not law firms they probably are subject to the foreclosure consultant act. (In fact some of these "attorney backed" operations seem to lack a DRE license holder... in which case they may be illegal foreclosure consultants.)

California Civil Code 2945 (the foreclosure consultant Act) prohibits anyone who falls under the broad defintion of foreclosure consultant, including real estate licensees, from taking advanced fees from california real etate owners. This rule appies even if the licensee has submitted a retainer aggreement to the department of real etate and received a no action letter.

California licensed attorneys are exempted from this prohibition if they are rendering services in the course of their practice. (according to the California department of Real Estate) In my opinion, "attorney backed" is turning into a sham or even a scam. Marketeers getting around the restrictions of CC 2945 and the DRE and the lawyers lending their name to many of these operations my be running afoul of ethical and legal standards. (lawyers are not allowed to work for others who peddle their legal services - it is a basic tenant of being a lawyer). There is a legal prohibition against lawyers working for say the Sears legal services department. For the very same reasons lawyers can not be working for All California Federal and International Loan Mods. (hopefully this is not a real name). Law firms are not be be owned or controlled by non lawyers.

Before the Notcie of Default is filed

quote from DRE website:

"If a Notice of Default has not been recorded against your property, it may be permissible for a real estate broker to assist you in working out a loan modification or otherwise negotiate a possible resolution to your problem with your lender or loan servicer and ask you for payment in advance for their services." In order to charge an up fron fee the loan broker must have submitted his agreement to the california department of real estate and received an approval. Here is a list of the brokers who may be allowed to charge up front fees:

Advance Fee Agreement Listing

Please note the DRE says "it may be permissible for a real estate broker to assist you in working out a loan modification." I request the DRE elaoborate on what is permissible and what it not permissible. "it may be" may be very misleading.

Posted by San Diego Short Sales, Orange County Short Sales on 01/04/2009 01:54 PM

Comments (15)

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15 Comments on California Loan Modification - When are advance fees allowed

JAN

Very interesting. They just passed a law like this in Florida and it is very confusing. Some say Realtors(r) can collect an advance fee and some say we can't. I do collect a fee and here's how I justify it. First my fee is only $295 and it is to help offset my costs of processing a short sale that may or may not close. I still charge a sells commission.

In my area we have many limited service brokerages that charge a fee upfront for their services. For example their only compensation may be $500 to place the property in the MLS. Can a homeowner facing foreclosure choose to use one of these services? Of course they can. If that is the case then they should also be able to pay me an advance fee. I believe I could argue this point and win.

Passing laws to tell me how I may or may not charge for my services seems to me to be a violation of Sherman and fair trade laws.

These "foreclosure laws" need to be written to exclude folks that are working in an agency capacity. We are trying to help folks and should be able to charge to do so. Even if some of that is upfront.

Thanks for the link to the new law.

I have no problem with Realtors charging up front for services which Real Estate licensed holders are licensed to do. (My endorsement however, does not mean that the Cal DRE or FREC agree with me.)

You will not get an argument from me on what I think is your core point. If you are going to list a property as a short sale and you wish to get paid up front for it, you should be allowed to collect a fee.

The question to me is when do these licensing bodies have a duty to protect the public from the unauthorized practice of law. At some point people advising, drafting and modifying contracts have gone far beyond filling in lawyer or association approved forms. During my real estate courses in Florida, I remember being told I should not be explaining the legal ramifications of the form contracts.

Additionally, I have always wondered how one can claim to be a transaction broker in Florida and yet represent the seller as the sellers agent when negotiating with the lender during short sale negotiations.

I am sure all you florida license holders would agree, that change from transaction broker to "representative" and back it is quite magical.

By the way, while not readily apparent in my bio, I am licensed as an Attorney in Florida and I sold properties in the Sarasota - Bradenton area as a Realtor. (I lived there for about 3 years).

JAN

this is interesting to note also, the fdic is stepping in to make loan modification easier, i just found this today

http://www.fdic.gov/consumers/loans/loanmod/index.html

JAN

mary anne - I read your post buy I deleted it for a few reasons. While I hope you are correct about what the DRE spokesperson said - it is inconsistent with the DRE letter addressing that subject. (In my opinion) Please give me that persons name and I will contact him or her. Question 28 from the CAR letter on foreclosure scams addresses the exceptions to the foreclosure consultant law. the first example states - an attorney rendering legal services who is licensed to practice law in California. I just doubt the law is as you say. Real Estate Brokers may be licensed to negotiate the terms of a loan, but they are not licensed to review and draft agreements which effect people legal rights. Nor may they get paid up front after an NOD is filed. When lawyers have done loan workouts for decades. In my opinion Real Estate brokers may not advise their "clients" on the rights created under a loan modification or even tell a person to go ahead and sign the agreement - if legal rights were altered. To do so is to practice law without a license. In my opinion this is why the DRE issues no opinion letters to Brokers- instead of approval letters. I suspect it is a beauracratic trick designed to insulate themselves from adverse consequences when and if courts determin that real estate and loan brokers have overstepped their authority. If I were a Real Estate Broker doing loan mods and wanted to avoid law suits and being sued for fraud (breach of fiduciary duty equals fraud) which would cause me to lose my license... I would suggest to CAR they promulgate a loan modification form. CAR should probably get the lenders to use the form as well. This is the model CAR gets uses to get around the practice of law problem for Brokers doing Real Estate Sales.

FEB

I just wanted to comment on your statement about the attorney backed operations. Out here in Santee one has just opened up offering loan modification assistance. The problem I see is no one in the office is an attorney or even holds a real estate license and that is only the begging of it. When looking into who holds the Fictitious business name for the company I came to find out it was someone I went to school with and have first hand knowledge he did time for fraud. I think attorney backed operations are just the beginnings of a new crises.

MAR

I suspect there are many "attorney backed" operations without attorneys. I have already read about a few very large ones.

The other ones I love to read about are the ones that say they have attorneys working for them.

That would seem to disqualify the attorney and hence the operation from the foreclosure consultant act.

MAR

I re read, I should have said exemption from the foreclosure consultant act. Therefore the operations which have attorneys working for them could not take fees up front once an NOD is filed. In my opinion.

APR

How do companies that offer loan modification services nationally collect up front fees? I have a New York based company and have the proper licenes to collect up front fees, but if i want to advertise nationally and take out of state clients, is there a procedure for this? I only seem to see the DRE for California come up every time i search.

Great question....

I know some state have enacted laws designed to protect consumers. The only way I would feel comfortable with a national campaign is if I reviewed the law of each state and territory.

MAY

What I haven't been able to clarify is what exactly is an upfront fee?

As a broker conducting loans, that would mean prior to closing. In modification if someone completes "steps" within the process and then bills, many people are defining that as NOT upfront and as services performed. Some contracts I've see show (rough example):

initial appt, collection of documents, submission of package = $500

Assigned to negotiator, negotiation of terms = $1000

Finalized, client signed paperwork = $1000

They are collecting the amounts above after each phase.

Its good questions like those which get the following response. Absent futher research on your question, I have to respond in a matter similar to the way the DRE is responding. I have no opinion.

The quality of your question seems to manifest your understanding of the issue.

so it's not just me that can't find it clarified? Good for me but disturbing that it isn't clear.

OCT

SB 94 just passed doing away with Advanced Fees 10-11-09. I wonder if this is only for California Properties or does it affect all states a broker does loan mods for. The inquiry is because I was going to join a company doing loan mods but discovered they were still taking fees upfront. Aria and Associates claimed that they are exempt from this law because they are not doing California Properties. Any insight?

I am avoiding my work with them at this time but would like to know.

NOV

How do you accept upfront fees in Calif?

With SB 94 passing, I know even attorneys are concerned about accepting fees into their trust accounts.

I suspect its passage shows you how much the lenders own both the Federal and State legislatures.

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