The State Senate recently passed a bill which will significantly crack down on “fly by night” “loan consultant” operations which promise to modify people’s mortgages for a fee, but could also have the unintended consequence of making it harder for legitimate hardship cases to find a lawyer to represent them.
The bill, which Gov. Schwarzenegger is expected to sign, passed with wide margins in the State Senate, benefiting from the political backlash against loan modification outfits. SB 94 forbids anyone, including attorneys, from taking a retainer for the purpose of negotiating or attempting to negotiate residential loan modifications or for “other forms of mortgage loan forbearance” (presumably this language prevents attorneys from helping borrowers obtain a short sale as well). It also bars persons, including attorneys, from obtaining a power of attorney from a borrower for the purpose of negotiating a loan modification, a document which is often crucial in order to get banks to communicate with the attorney about the borrower. It also prevents these service providers from charging for their services until all services are complete and bars them from taking any lien of any type to guarantee payment.
Any person who does provide loan modification services must provide a large statement regarding loan modification fees prior to obtaining a signed fee agreement which warns the consumer that 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.”
While the Legislature is well intentioned in cracking down on disreputable companies which have taken advantage of homeowners in trouble, the problem with this bill is that it doesn’t recognize legitimate cases of individuals who have lost a job, received a cutback in hours at work, or gotten sick, and who legitimately need help negotiating a workout with their mortgage lenders. Attorneys commonly take a retainer in advance of providing services which must be deposited in the attorney’s client trust account. These retainers ensure the attorney will be paid and, in cases involving debts or a bankruptcy filing, this is often the only way people can obtain legal assistance, as attorneys would otherwise not risk not getting paid for their time and services. Many borrowers don’t have the time or patience to spend months and to follow up dozens of times with banks which have ever-changing requirements for mortgage relief, frequently lose paperwork provided to them, and/or flat-out refuse to help their borrowers out. Nonprofit housing counseling agencies are currently overwhelmed with people who have these kinds of problems and they can’t keep up with the demand. By passing legislation which is over-inclusive, it’s certain that some legitimate cases are going to find it more difficult to get an attorney to represent their interests.
UPDATE 9/19/09: Evidently, federal regulators at the Federal Trade Commission are also considering passing a ban on up-front fees for mortgage modifications. Hopefully the federal action will crack down on fraudulent mortgage modification offers without hurting legitimate situations in which homeowners in trouble desire to hire an attorney to assist them.