California Puts Attorneys Out of the Modification Practice
California State Bar RECENT Decision to Cause More Harm to Homeowners in Foreclosure
Thanks to Martin Andelman
It’s hard to imagine anything gone so totally wrong as the California State Bar’s interpretation and subsequent handling of SB 94, a law passed in 2009 to prohibit the taking of advance fees in conjunction with providing loan modification services by both lawyers and Department of Real Estate licensees.
A few weeks ago the state bar’s Review Board, which functions as the appeals court of the bar’s trial court, published a ruling that effectively prohibits lawyers representing homeowners in the hopes of getting their loan modified from accepting fees AFTER work has been completed. The new ruling will essentially eliminate a homeowner’s ability to consult with an attorney having anything to do with a loan modification, as it will prevent that attorney from being paid for his or her work even after services have been delivered.
So, bravo… and very well done there, I have to say.
Of course, the state bar would likely respond by saying something about protecting the public from scammers, but the bar’s own press release issued on September 27, 2012, stated that since 2009 in California, there have been just 22 lawyers disbarred. How many had anything to do with SB 94? I don’t know… maybe none… maybe a couple… but in a state with 37 million residents, 500,000 foreclosures to-date, and over 200,000 licensed attorneys, whatever the number is… it’s not many.
What SB 94 as interpreted by the state bar has accomplished is to chase virtually all of the legitimate lawyers away from offering to help homeowners at risk of foreclosure get their loans modified, leaving mostly scams, illegal operations, spurious lawsuits and bankruptcy rip-offs from which homeowners in this state are now free to choose. Its gotten so bad that it’s hard to find a homeowner fighting foreclosure who hasn’t been ripped of at least once, and many report having been ripped off two and three times.
Here’s the issue in plain language…
SB 94 was passed into law in response to scammers promising to get loans modified. Its purpose was clear… to prohibit the charging of advance fees by both lawyers and Department of Real Estate (“DRE”) licensees having to do with providing loan modification services.
The recent decision by the state bar court now effectively prohibits the charging of fees by lawyers even AFTER services have been completed. Yes, you read that correctly… lawyers can’t take advance fees, nor can they be paid after services have been delivered. In other words, if you’re a lawyer in California and you talk about loan modifications with homeowners you better plan on doing it for free, or waiting for some indeterminable number of months or even years for a chance to be paid.
SB 94 used identical language to prohibit lawyers and DRE licensees from charging advance fees in conjunction with loan modification services. For lawyers, the new law created new sections of the California Civil Code, and for DRE licensees, the law added sections to the California Business & Professions Code. In either case, whether talking about lawyers or DRE licensees, the language prohibiting the charging of advance fees is IDENTICAL.
In the case of DRE licensees, however, the drafters of the legislation went one step further than they did with lawyers by amending B&P Code section 10026 to prohibit a DRE licensee from breaking up the services related to a loan modification into component parts. The drafters of the legislation did not include any such restriction in the Civil Code, which would have applied to attorneys providing loan modification services, so absent such restrictive language, the law clearly allowed lawyers to break up loan modification services and therefore be paid as they were delivered.
The state bar’s recent decision, however, makes no distinction in the law between DRE licensees and lawyers, ruling that an attorney cannot break up the services related to a loan modification, but just like DRE licensees, must view loan modification services as one service, and not accept payment until the “end of the process.” (What the “end of the process” means is not made clear by the state bar’s ruling, by the way, but more on this ambiguity later.)
So, the California State Bar now seems to think that the language in SB 94 prohibits lawyers from breaking up services related to a loan modification into component parts, even though there is no language prohibiting lawyers from doing so in the Civil Code created by SB 94. Again, the only language that speaks to the issue of breaking up loan modification services is found in B&P Code 10026, which applies only to DRE licensees. It says…
10026. The term “advance fee” as used in this part is a fee, regardless of the form, claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing each and every service the licensee contracted to perform, or represented would be performed. Neither an advance fee nor the services to be performed shall be separated or divided into components for the purpose of avoiding the application of this section.
The obvious question would be… if the language found in Civil Code 2944.7 was intended to prevent lawyers from breaking up such services, then why did the drafters of the legislation bother amending B&P Code 10026 to expressly prohibit only DRE licensees from breaking up loan modification services into component parts?
Remember, other than in B&P Code 10026, which applies ONLY to DRE licensees, the language barring advance fees is IDENTICAL in both the Civil Code, which applies to lawyers, and in the B&P Code, which applies to DRE licensees. If that identical language means what the state bar now says it does, then it would also have to prohibit DRE licensees from breaking up loan modification services into component parts. Since it says the exact same thing, it would have to mean the exact same thing, right?
And were that the case, then the drafters of SB 94 would have had no reason to amend B&P Code 10026 to prohibit DRE licensees from breaking up loan modification services into component parts. And if they had wanted that same restriction to apply to lawyers, they would have added corresponding language to the Civil Code… but they didn’t.
Is any of this the least bit difficult to understand?
Here’s how the advance fee prohibition was described in the legislative notes from the April 1, 2009 hearing held by the the bill’s sponsor, Chair of the Senate Committee on Banking, Finance and Insurance, Senator Ron Calderon…
“This prohibition is intended to prevent persons from charging borrowers an up-front fee, providing limited services that fail to help the borrower, and leaving the borrower worse off than before he or she engaged the services of a loan modification consultant.”
Here’s the exact language found in Business & Professions Code Section 10085.6, which applies to DRE licensees, and duplicated word for word in California Civil Code Section 2944.7 (1), which applies to attorneys licensed to practice law in California.
… 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:
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.
Notice how it doesn’t say, “until the end of the loan modification process.” Rather, it says quite clearly, “until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.”
So, one would think that meant that were a lawyer to contract to provide a consultation, a financial analysis and let’s just say assistance with the preparation of a borrower’s application, that once those services were delivered to the satisfaction of the homeowner, the lawyer could be paid for those services. Nothing more, mind you… just for the services that were contracted for and delivered in full.
The state bar says no, that’s not how they interpret the law. Why? I don’t know, but it seems that what we have here is something terribly corrupt and the state bar is doing the bidding of the senate banking committee and mortgage banking lobby who doesn’t want homeowners to be represented by legal counsel when trying to get their loan modified in order to save their home from foreclosure.
And there’s another glaring problem with the bar’s interpretation of SB 94, and to understand it, you first have to understand how this process works in real life.
A homeowner calls a lawyer and says he wants to get help with a loan modification. At that point, that homeowner doesn’t really know whether he wants a loan modification, he just thinks he does. He doesn’t know for sure because he has questions about loan modifications that must be answered before he could know he wanted to move forward.
The first might be does he qualify for a loan modification? That would depend on the outcome of a financial analysis, which would require the collection and review of various documents, and obtaining certain numbers from the homeowner’s servicer. Another might be, should he consider filing bankruptcy before he applies to have his loan modified? To answer that question would require another financial analysis, in light of the bankruptcy laws as amended in 2005, and other discussions on the ramifications of bankruptcy.
Then there are the other alternatives to foreclosure, such as short sale and Deed in Lieu of Foreclosure. What are the pros and cons of the different paths to avoiding foreclosure, and how do they mesh with the needs of the homeowner seeking advice.
Once all of those questions have been answered and the topics explored, then the documents must be collected and reviewed by the lawyer to ensure that the documents support the case for modification, and a package created that can be submitted to the servicer in conjunction with a loan modification, or when applying for a short sale or Deed in Lieu.
Until that package is submitted to the servicer… or in other words, until the homeowner has actually APPLIED for a loan modification… then SB 94 simply doesn’t apply. SB 94 says…
“… 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…“
Until you’ve applied for a loan modification, how can you be negotiating or attempting to negotiate, arranging or attempting to arrange anything? Those are all things you could contract to do AFTER someone applies for a loan modification, but not before.
As far as the language that follows, which says “otherwise offers to perform a loan modification or other form of mortgage forbearance…” Well, I don’t even know what it means.
And for his next trick, attorney John Smith will perform a loan modification?
How could a lawyer possibly perform a loan modification? Don’t you have to be a bank or servicer to perform a loan modification? If lawyers could perform loan modifications we wouldn’t be talking about any of this. You’d simply visit your lawyer, he or she would perform your loan modification and you’d go home happy every single time.
Isn’t it quite clear, based on a plain reading of the statute that SB 94 doesn’t apply until a homeowner has applied for a loan modification, because until that point, there’s no “negotiating or arranging” of any kind going on, right? The state bar, however, completely ignores this seemingly incontrovertible fact.
Governor Brown signs the Homeowners Bill of Rights…
Loan modification services are not legal services…
In 2012, California’s state legislature recognized the gravity of the foreclosure crisis in this state when, with the full support of Attorney General Kamala Harris, it passed a group of bills known as the Homeowner Bill of Rights, that will go into effect on January 1, 2013. According to the Office of the California Attorney General…
“The Homeowner Bill of Rights prohibits a series of inherently unfair bank practices that have needlessly forced thousands of Californians into foreclosure.”
California’s Homeowner Bill of Rights builds upon and extends reforms first negotiated in the recent National Mortgage Settlement between 49 states and the five largest servicers.
And according to Governor Brown…
“Californians should not have to suffer the abusive tactics of those who would push foreclosure behind the back of an unsuspecting homeowner. These new rules make the foreclosure process more transparent so that loan servicers cannot promise one thing while doing the exact opposite.”
I can’t speak for anyone else, but all of that sounds to me like I could very definitely benefit from being represented by a lawyer when trying to get my loan modified in order to save my home from foreclosure.
Getting a loan modified is not a simple or intuitive process. The formulas and financial analyses involved are far beyond the capabilities of most homeowners, and because of the necessity to be precise or risk a denial by the servicer, many recognize that without a lawyer experienced in the loan modification process handling the submission of their application and negotiations with their servicer, their chances of approval are greatly diminished.
The rules governing loan modifications vary depending on the program and on the investor who owns the loan, and in the case of government and programs developed internally by servicers, the rules change. There is no chance that the average homeowner can know what’s involved, and certainly not at the level that an attorney specializing in the area would.
The larger issue, however, is that there are options for homeowners at risk of foreclosure, loan modification being only one of them. There are short sales, Deeds in Lieu of Foreclosure arrangements, Chapter 13 bankruptcy repayment plans… all have different pros and cons, and different qualifying terms. Before a homeowner can know whether loan modification is the right path, they need legal advice and a financial analysis needs to be conducted to make sure the homeowner potentially qualifies for the different alternatives.
When servicers renege on promises to modify a loan, or when they improperly deny a homeowner for a loan modification, or when servicers fail to follow state laws governing the foreclosure process, or when servicers attempt to foreclose using fraudulent documents or commit any one or more of the countless violations that led to the $25 billion National Mortgage Settlement… or they violate the California Homeowner Bill of Rights, due to go into effect on January 1, 2013… aren’t all of these situations where lawyers come into play?
Already millions of children have been displaced by foreclosure…
We’re talking about someone losing their home to foreclosure… it’s a process that should be done right, and to protect one’s rights, it would seem reasonable to want to be represented by your own attorney, or at least get advice from an attorney before committing to a path without knowing all of the ramifications of doing so. What’s debatable about this line of thinking?
Besides all that, it’s not really a question of whether you think I need a lawyer or not, it’s more a question of whether I want a lawyer representing me or not, right? If I want to hire a lawyer to accompany me to buy a new car, what business is it of yours to say that I should or shouldn’t do so, much less be allowed to do so.
You can hire one, you just can’t pay one? Seriously?
And please… the argument that lawyers will represent homeowners trying to get their loans modified even though they can’t be paid for their services until some unknown point in the distant future is ridiculous. Lawyers want to be paid… just like anyone else. If they can’t be paid they won’t offer to do the work.
Just consider that loan modifications are by definition the first cousin of bankruptcy, and in fact many homeowners who get their loans modified also end up filing bankruptcy at some point in the process. So, should a lawyer represent a homeowner trying to get a loan modification for six months and then when they have to advise their client to file bankruptcy simply tell the client to be sure and include the lawyer’s bill for all work to-date in the bankruptcy filing?
And now the state bar has gone even further. The bar’s latest decision is so broad and sweeping that any lawyer who even mentions loan modification should just plan on not representing the client in anything further. And for heaven’s sake, don’t charge the client a dime or you could be guilty of committing a crime… even though you’ve completed the work you contracted to complete.
Under this latest interpretation by the state bar, if you go see a bankruptcy lawyer, and that lawyer says that maybe you could avoid bankruptcy were you to be able to get your loan modified… something that happens quite often by the way… then that lawyer can’t charge that client unless the bankruptcy is filed, and even then, only for the bankruptcy, not for the loan modification.
The problem with that is that filing a bankruptcy will add six months to a year to the loan modification process, and that additional time will mean that the borrower’s balance will increase by perhaps $30,000 or more. And that will make it that much harder for the borrower to qualify for the loan modification, because the or she will need that much more income to qualify. Roughly speaking, an extra $30,000 added to the principal balance will require approximately $330 more a month in documented income.
Had the bankruptcy lawyer been allowed to assist that homeowner in getting his or her loan modified, bankruptcy could have been avoided, or at least delayed until after the loan modification was approved. Since the state bar’s interpretation wouldn’t allow for that common sense way of doing things, now more homeowners will lose their homes to foreclosure.
Considering California is the hardest hit of all states as far as foreclosures are concerned, the state bar’s interpreting SB 94 in such a way as to actually create additional unnecessary foreclosures is a curious thing, wouldn’t you think? I mean, SB 94 wasn’t passed to accomplish that outcome was it?
No, SB 94 was passed to prohibit the charging of advance fees, whether by lawyers or by DRE licensees. Advance fees… fees charged in advance… not fees charged AFTER contracted services have been delivered. SB 94 was intended to prevent up front fees, not after work is completed fees.
Why does the state bar not see that simple fact?
Thanks to California’s Attorney General, Kamala Harris, California’s Homeowner Bill of Rights will go into effect as of January 1, 2013, and it specifically says that homeowners may hire lawyers to represent them in the loan modification process. The bills even provide for a private right of action for certain violations by servicers, which specifically means that homeowners are permitted to sue for damages in these instances.
The state bar says that’s fine, as long as that lawyer isn’t paid until the end of the process, which is when? No one actually knows for sure. Would that be when the servicer grants a trial modification? Or would that be when the servicer reneges on a prior promise to grant a trial modification. Or maybe it’s when a permanent modification is granted, unless of course, that permanent modification is later rescinded?
And what about when the trial modification is granted by the servicer who then sells the servicing rights to another servicer who claims to have no knowledge of what the last servicer did or didn’t do related to a loan modification… and the borrower has to start all over again? Because that happens all the time. When can a lawyer be paid when that happens?
The whole subject has gone from being stupid and unnecessary to entirely idiotic and harmful. But since I can’t imagine that the state bar is staffed with morons, I can only assume that they either are entirely unqualified to be making such determinations or they are simply corrupt.
There have been thousands of California homeowners who have saved their homes by hiring lawyers to help them get their loans modified. Thousands that I’ve seen personally, but it’s likely that the number is more like tens of thousands. Most tried it on their own and failed. They hired a lawyer and succeeded.
Of course, we don’t hear much from them. They’re at home thankful that the ordeal is over and they didn’t lose their homes to foreclosure.
The Rest of the Country is Doing Just Fine on MARS…
It’s interesting to note that in the other 49 states, under the Mortgage Assistance Relief Services (“MARS”) Final Rule, which was developed by, and is enforced by the FTC, lawyers are allowed to represent homeowners attempting to get loan modifications, they’re even allowed to collect a retainer in advance of services being provided as long as they place the funds collected in advance into their trust accounts and follow the rules of trust accounting. As services are delivered they “earn” their fees out of the amounts held in trust. Under MARS, non-lawyers are not permitted to accept fees in advance when helping with a loan modification.
And in New Hampshire this past year, under pressure from the state’s homeowners, the legislature passed a law specifically allowing homeowners to hire AND pay a lawyer help them get their loans modified.
An Inescapable Conclusion…
For over two years after the passage of SB 94 the state bar said nothing about lawyers not being able to break up services into component parts and be paid once services contracted for were delivered. They’ve known about the issue since the day SB 94 was signed into law by the governor on October 12, 2009… and yet they’ve said nothing at all on the subject… until three years later.
Now, all of a sudden, under pressure by the state’s legislature to clean up their backlog of disciplinary proceedings, the bar has taken this indefensible position, and now it’s been published in the equivalent of an appeals court decision. As of today, it’s the law.
So, if you’re a homeowner at risk of foreclosure and you want legal representation in conjunction with applying for a loan modification, the only way you’ll be able to obtain such representation is if you file bankruptcy, which will reduce your chances of being approved for a modification… or, if you file a lawsuit of some kind against your bank.
Only, now I hear from inside the state bar that the plan is to go after litigators and bankruptcy lawyers too. If the lawsuit or the bankruptcy filed is determined by the bar to be filed for the purposes of obtaining a loan modification, then you can’t be paid either… ONCE AGAIN UNDER THEIR INTERPRETATION OF SB 94.
Since 2009, how many lawyers have been disbarred related to loan modifications in California? According to the state bar’s most recent press release… 22. Not that the 22 were disbarred having anything to do with SB 94, but in this bizarro world of the state bar’s interpretation why should that matter? So, 22 lawyers were somehow bad related to foreclosures so now I can’t hire one to help me save my home? That’s just terrific.
By the way, there were about 700 lawyers disbarred and disciplined last year having nothing to do with loan modifications. So, which other types of legal services aren’t I allowed to pay for as a result?
Oh, of course… I’m only NOT allowed to pay a lawyer when I’m negotiating with a bank. Gotcha’. Now I understand. Why didn’t you just say that in the first place?
P.S. I NEED YOUR HELP TO FIGHT THIS… This is both scandalous and monumentally unfair. If I want a lawyer, I don’t need the state bar to prevent me from paying one.
Please care and support this fight. Write to me at email@example.com.
AND… I urge homeowners in California to write to your elected representatives, and lawyers everywhere to contact the California State Bar and California Attorney General’s Office to let them know that depriving homeowners at risk of foreclosure from legal counsel is not acceptable and that you are paying attention. Remember… it won’t matter to you… UNTIL IT DOES… and then it will be too late.
TELL THEM: YOU DON’T STOP SCAMMERS BY MAKING LEGITIMATE LEGAL ASSISTANCE UNAVAILABLE. HOMEOWNERS NEED HELP, DON’T TAKE THEIR RIGHT TO AN ATTORNEY AWAY.
P.S. I’ve covered this madness many times before, HERE and HERE and HERE and HERE and HERE… if you want additional detail. And don’t stop there, here’s a link to my podcast interview with former state bar prosecutor and bar defense and ethics attorney, David Cameron Carr. It’s positively scandalous, if you ask me, and definitely worth listening to.