This article is based on information available from various other sites.
In this world of foreclosures and a desperate need for loan modification from the banks, a well meaning effort of the California Legislature to stop exploitation of home owners by unscrupulous professionals who charge in advance yet do nothing has resulted in many of the home owners not being able to locate any attorneys who help at all. See the New York Times article of December 21, 2010 for a discussion of this pressing problem. Senate Bill 94 immediately imposed fines and possible criminal sanctions on any attorney who charged in advance for seeking to modify home loans, as more fully discussed below.
A good idea except that when dealing with people already pressed for funds, Attorneys found themselves taking a huge risk when putting in the tens of hours necessary to modify the loans…with people who may never be able to pay. It is perhaps no coincicidence that the banks were the ones pushing for passage of this Bill.
In any event, both laypersons and lawyers should know well the law described below:
The Basic Law:
On October 11, 2009, SB 94 (Calderon) which prohibits upfront or advance fees for residential loan modifications and mortgage loan forbearance services was chaptered. The legislation took effect immediately. A discussion and answers to frequently asked questions regarding the effect, scope and applicability of Senate Bill 94 follows.
Prohibition against Collection of Advance Fees
The legislation prohibits the collection of advance fees for loan modifications, as specified. Among other provisions, new Civil Code Section 2944.7(a) (1) provides as follows:
“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.”
Civil Code Section 2944.7(d) provides that Section 2944.7 applies only to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units.
Under new Business and Professions Code Section 6106.3(a), it constitutes cause for the imposition of discipline of an attorney for an attorney to engage in any conduct in violation of Civil Code Section 2944.7.
Required Notice to Borrower
The legislation also requires that specified notice be provided to the borrower, as a separate statement, prior to entering into any fee agreement with the borrower. Among other provisions, new Civil Code Section 2944.6(a) provides as follows:
“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.”
Civil Code Section 2944.6(b) provides that if loan modification or other mortgage loan forbearance services are offered or negotiated in one of the languages set forth in Civil Code Section 1632, a translated copy of the required statement must be provided to the borrower in that foreign language. Civil Code Section 2944.6(e) provides that Section 2944.6 applies only to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units.
Under new Business and Professions Code Section 6106.3(a), it constitutes cause for the imposition of discipline of an attorney for an attorney to engage in any conduct in violation of Civil Code Section 2944.6
Frequently Asked Questions of both the State Bar of California and the California Department of Real Estate:
1. Is Civil Code Section 2944.7(a) (1) retroactive?
Agreements entered into and advance fees collected prior to October 11, 2009 are not affected. Advance fees based on agreements entered into prior to October 11, 2009, but collected after October 11, 2009, must be fully refunded.
2. Is it a violation of Civil Code Section 2944.7(a)(1) to collect an advance fee, place that fee into a client trust account, and not draw against that fee until the services have been fully performed?
Yes. The statutory language of the prohibition uses the word “receive” and the plain meaning of that term is broad enough to encompass a lawyer’s receipt of advance fees into a trust account. Civil Code Section 2944.7(a)(1) makes it unlawful to “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,” whether the compensation is placed into the lawyer’s client trust account, general account or any other type of account.
3. Is it a violation of Civil Code Section 2944.7(a) (1) to ask for or collect a “retainer”?
Civil Code Section 2944.7(a)(1) makes it unlawful to “[c]laim, 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,” even if that compensation is called a “retainer.”
4. Does Senate Bill 94 provide a "loophole" for to break down the services of a loan modification so that one can charge after respective services are performed (but before the loan modification services are fully "performed")?
No. Some are attempting to evade the plain intent of the new law by breaking the loan modification process and services into various steps. For instance, step 1 might be meeting with a borrower and completing the necessary paperwork (including a hardship letter). The fee for that step service is quoted as $2500. Step 2 might be to submit the package to the servicer/lender. The fee for that service is listed as $500. Step 3 might be the actual loan modification discussions and negotiations with the servicer/lender. The fee for this step is shown as $100.
The problem with this attempt at creative contractual expression is that it violates the new section 10026 of the California Business and Professions Code embodied in Senate Bill 94 with respect to "advance fees". The new language provides that "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".
It is a clever but unlawful scheme set forth above is an endeavor to avoid and skirt the clear intention and public policy expression of the California Legislature and the Governor in passing and signing Senate Bill 94, to violate the "advance fee" mandates of the California Business and Professions Code, and to obtain for a licensee immediate "upfront" and sizeable payments for services that are of little or no value to the borrower.
Those who communicate regularly with the public regarding loan modifications know the only thing a desperate, vulnerable borrower wants is an affordable, sustainable loan modification or other type of forbearance. He or she does not care about pre-loan modification paperwork processing services.*
The artificial breaking down of residential loan modification services into components or steps (with only vague, ambiguous, or no real value) clearly violates the mandate of Senate Bill 94 that no person can receive any pre-performance compensation from a borrower for residential loan modifications or other forms of mortgage loan forbearance.
5. Does Senate Bill 94 allow lawyers or others to claim, demand, charge, collect or receive compensation for loan modification or forbearance work from borrowers who are not California residents, or who live and/or work outside of California?
No. The language of the new code sections added by the State Senate legislation is broad and the prohibitions are not in any way limited by residency or place of employment. Thus, for example, a California lawyer cannot claim, demand, charge, collect or receive any pre-performance compensation for loan modification or forbearance work from a borrower who lives in Nevada.
Also, and importantly, the plain language of the legislation would forbid any person (whether a real estate licensee, lawyer or company) who or which operates from outside of California from seeking or obtaining any advance or upfront fees from a California borrower for residential loan modifications and mortgage loan forbearance services.
* From Wayne S. Bell, Chief Counsel - California Department of Real Estate