The Federal Trade Commission announced on April 6, 2009 a crackdown on fraud and deception by mortgage modification and home foreclosure rescue companies. The FTC is seeking to halt the proliferation of these mortgage relief offers – which target distressed and vulnerable consumers who are delinquent or facing foreclosure.
The FTC has filed numerous criminal and civil cases. In addition, the FTC sent a warning letter out to over 70 companies in the past few weeks who they suspect of engaging in deceptive marketing mortgage loan modification or foreclosure rescue services. A copy of the warning letter can be seen at: http://www.ftc.gov/os/2009/04/090406warningletter.pdf
On February 2, 2009, the California State Bar has also issued an "Ethics Alert" regarding legal services to distressed homeowners and foreclosure consultants on loan modifications.
The State Bar expresses the opinion that there is evidence that some foreclosure consultants may be attempting to avoid the statutory prohibition on collecting a fee before any services have been rendered by having a lawyer work with them in foreclosure consultations. The State Bar opines that many of the proposed relationships between these foreclosure consultants and lawyers could violate the Rules of Professional Conduct and other ethical rules and, therefore, could result in lawyer discipline. The State Bar's stated purpose of the Ethics Alert is to remind California lawyers of several ethics rules that may apply in the event a foreclosure consultant or another non-lawyer requests assistance from a lawyer and/or refers potential distressed homeowner clients to the lawyer.
A copy of this Ethics Alert can be seen at:
California law specifically addresses foreclosure consultants and restricts their activities; among other things, they are prohibited from collecting upfront fees for their work. (See California Civil Code Section 2945 and following). However, because attorneys are permitted to accept advance fees, they are in demand by some loan modification businesses. (Licensed brokers also may accept advance fees under certain circumstances.)
Attorney Commentary: Companies or individuals who are engaged in this business need to be aware of the law and ensure that they are compliant with federal and state law. The FTC is not waiting for consumer complaints and sent the warning letter to companies that were discovered on the Internet by a review of their advertisements or websites. Anyone working in the area of loan modification should be especially careful to be fully compliant with the law. Attorneys working in this area with loan modification consultants should also be mindful of fee splitting issues, referral fee issues and the aiding and abetting of the unlicensed practice of law. Licensed brokers should have similar concerns about being compliant with the law.
Scott Drexel, the State Bar’s chief prosecutor, says that for the last three months, the bar has received 50 complaints each day — about 950 complaints a month — about lawyers involved in some way with the foreclosure crisis. While the complaints are varied, Drexel said the most common concerns lawyers who lend their name to a loan modification operation but non-lawyers do most of the work. The non-lawyers get fees upfront through the lawyer and either do not complete the modification or do it incompetently. As a result, he said, the client loses his or her money.