In the wake of one of the biggest real estate disasters in U.S. history, companies are springing up across the country claiming to help consumers refinance their mortgages and avoid foreclosure. While some of these companies are legitimate and genuinely use their best efforts to help consumers who have fallen on hard times, other companies are seeking to profit off of vulnerable people caught in the midst of the mortgage crisis.
In California alone, the Department of Real Estate has received more than 1000 complaints about such fraudulent schemes since October 2008. Fed up with the individuals and companies preying on desperate homeowners, the State Attorney General's office is taking action to prosecute those found in violation of California law.
Faced with numerous complaints of fraud and the theft of innocent homeowners' hard earned dollars, the California Legislature recently passed and Governor Schwarzenegger signed into law SB 94, effective October 11, 2009. SB 94 does many things, but most importantly it outlaws any company or person from accepting money up front for assisting a homeowner in the loan modification process.
This marks a major departure from the previously enacted foreclosure consultant law, Civil Code Section 2945. Under this law, certain professionals were explicitly excluded from the definition of foreclosure consultants, including attorneys, licensed real estate agents, brokers, mortgage lenders and servicers. Accordingly, they were not required to laws established for foreclosure consultants in Civil Code Section 2945.
Now, regardless of whether an individual has to comply with the provisions of Civil Code Section 2945, he or she cannot charge a homeowner any fees for assisting in and/or obtaining a loan modification prior to its completion.
Of course, this new legislation is just the latest attempt to further protect homeowners in distress from predatory practices; foreclosure consultants have long been governed by strict rules. For legitimate foreclosure consultant businesses and innocent consumers to protect themselves from the prospect of prosecution and penalties, they must understand California law and fully comply with its requirements.
What is a Foreclosure Consultant?
California Civil Code Section 2945 establishes the rules that foreclosure consultants must follow. Foreclosure consults are defined quite broadly under the civil code and include those who help residential homeowners:
- Avoid, stop or postpone foreclosure
- Restructure their mortgage loans
- Recover any remaining proceeds from a foreclosure sale
- Obtain a new loan or advance on a loan
- Exercise reinstatement rights, including getting an extension on the amount of time homeowners have to exercise these rights
- Avoid or ameliorate their credit rating due to a foreclosure sale or mortgage loan default
- Obtain a forbearance from the bank or other mortgage loan holder
- Obtain a waiver on an acceleration clause
What are the Restrictions on Foreclosure Consultants?
Some of the most important requirements under Civil Code Section 2945 include:
No advance fees: The foreclosure consultant must perform all of the services he or she contracted to complete before the homeowner is required to pay for the services. This includes a prohibition on accepting any kind of property interest, lien or other security in order to ensure the homeowner pays for the services.
Written contract: The contract for services must be in writing, must include the name and address of the foreclosure consultant and must be signed and dated by the homeowner. The contract also must include the nature of the consultant's services, outline the costs of the services, detail the homeowner's rights to terminate the contract, incorporate a pre-printed notice of cancellation form, and explain the prohibition on up-front fees.
Cancellation rights: Homeowners have the right to cancel the contract with the foreclosure consultant up to midnight on the third day after the contract was signed. If cancelled during this time period, the foreclosure consultant cannot assess a fee or other penalty for the cancellation.
Waiting period on release of funds: Foreclosure consultants must wait 65 days after the foreclosure sale before they may enter into a new contract to help homeowners release any funds remaining from the sale. They also must notify homeowners that they can seek the release of the funds without paying a fee by contacting the party who conducted the sale.
Interest in foreclosed property: Foreclosure consultants are prohibited from acquiring any interest in the homeowner's residential property that is in foreclosure.
Amount of fees: Foreclosure consultants cannot accept any type of compensation or fee that is more than 10 percent per annum of the amount of any loan the consultant may make to the owner.
New Registration and Bond Requirements
As of July 1, 2009, all foreclosure consultants operating in California are required to register their businesses with the State Attorney General's office. Before the foreclosure consultant can be registered, the business must obtain a $100,000 bond and file a copy of the bond with the California Secretary of State. The current cost of Certificate of Registration as a Mortgage Foreclosure Consultant is $850.
Penalties for Violating California Law
Homeowners who have been defrauded by foreclosure consultants can bring a civil claim against the foreclosure consultant up to four years from the date of the alleged incident. The court can award the following civil penalties against consultants who violate Civil Code Section 2945:
- Actual damages
- Equitable relief
- Attorney fees and costs
- Exemplary (punitive) damages
Additionally, foreclosure consultants may be subject to criminal penalties including:
- Up to a $10,000 fine per violation
- Up to one year imprisonment per violation
Conclusion
California is taking serious steps to crackdown on foreclosure consultants who fail to meet the requirements set out in Civil Code Section 2945. If you have questions about whether your service agreements comply with the laws or you are under investigation for a violation of Section 2945, contact an experienced attorney today.
