When a San Diego attorney was asked recently if he wanted to associate with a loan modification company offering stop foreclosure and loan modification services, he saw red flags. During a loan mod seminar he was approached by several others, he expressed concern about potential ethical constraints, such as splitting fees with non-lawyers and soliciting clients, but "they tried to explain some easy loopholes. With only being out of Law School a couple of years and trying to pay off student loans as well as other debt the temptation was there but the risk seemed too great. After consulting with both the Department of Real Estate and the State Bar's Ethics Hotline, the decision was made to decline the multiple offers.
"It seems to be the flavor of the month" says Steven C. Feldman with the Feldman Law Center. Attorney based and attorney backed loan modification attorneys are popping up and closing down at a record pace in California. Many ex mortgage brokers want to avoid the DRE's advance fee agreement while still possessing the salability of having an attorney on staff. In most circumstancesit's all smoke and mirrors. Several attorneys have their name attached to multiple loan modification companies and while an attorney can be counsel for several companies this is not what's really happening. The intention is to add credibility to the loan modification company and to collect upfront fees from homeowners facing foreclosure. Since Steven C. Feldman opened the Feldman Law Center over a year ago there have been many been many imitators providing stop foreclosure and loan modification services. Many attorneys have contacted the State Bar for ethics advice that its professional responsibility committee issued an alert last month offering guidance to lawyers thinking about signing up. "The most important thing is for lawyers to understand this area is fraught with danger from an ethics point of view," said Jon Rewinski, a Los Angeles litigator who drafted the ethics alert.
California law specifically addresses foreclosure consultants and restricts their activities; among other things, they are prohibited from collecting upfront fees for their work. 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.) Although the Brokers may collect up front monies with an approved DRE advance fee agreement what happens when the property goes into foreclosure and the client is in REAL jeopardy of losing their home to a trustee sale?. These are the instances where home owners need an attorney that works for them, not a front for a loan modification company. The relationship between Mortgage Brokers and Attorneys can be a lucrative one, with some Brokers paying the attorney as much as 0.00 per file just to use their name. In one instance there was a police report filed against an attorney for destroying a broker's office and attacking the staff for using his name while making false statements." Many of these loan mod companies have a higher turnover in attorneys than they did with loan officers from the subprime lending days" says a Broker that asked to remain anonymous.
According to the alert, posted on the California State Bar's home page (calbar.ca.gov), "There is evidence that 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 alert goes on to list a series of ethics rules prohibiting lawyers from:
paying a referral or marketing fee to a foreclosure consultant or other person for referring distressed homeowners to the lawyer;
directly or indirectly splitting fees earned from a distressed homeowner client with the foreclosure consultant or any other non-lawyer;
aiding a foreclosure consultant or anyone else in the unauthorized practice of law or forming a partnership or joint venture with a foreclosure consultant or other non-lawyer if any of its activities would involve providing legal services;
contacting in person or by telephone a distressed homeowner referred by a foreclosure consultant or someone else unless the lawyer has a family or prior professional relationship with the homeowner;
filing a lawsuit without good cause or motions in a lawsuit that are simply intended to delay or impede a foreclosure sale; and
Failing to perform legal services with competence.
The alert also describes a series of scenarios that may land lawyers in legal hot water. For example, a non-lawyer may offer a large number of referrals and a promise of easy money; may request that the lawyer pay a referral or marketing fee; or may ask a lawyer to enter into a joint venture with a distressed homeowner and the consultant. Much of this conduct violates the Rules of Professional Conduct, the alert warns. Many websites, T.V. and radio commercials by loan modification companies are steering clients to an attorney. This is illegal, but has become a common practice. There is a new website set up to help homeowners get information on loan modification programs and find legitimate sources for loan modifications called www.loanmodificationhelpcenter.org . A home owner facing foreclosure may choose to work directly with their lender but in most cases this fails. Hiring an attorney to stop foreclosure or provide loan modification services will cost ,000 to ,000 but the results may be well worth it. Most home owners are declined when attempting to modify their loan without assistance.
The bar's Ethics Hotline, a free confidential research service for attorneys, has been receiving between one and two dozen calls a day for the last six months dealing with the residential mortgage crisis and loan modification about 15 to 25 percent of its daily call volume.
Scott Drexel, the 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 run the gamut, 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.
Calling the number of complaints "shockingly high," Drexel said his office is "quite concerned. We're especially concerned with attorneys allowing their names to be used by non-attorneys in some of these loan modification schemes or scams." There have been several loan modification scams set up by non attorneys that unknowingly involve a new or retired attorney not knowing any better or worse yet involved with at the highest level. Many of these loan modification companies go to the extreme of using words like legal, law, attorney in their company name and advertising. "We see it all the time" says Feldman, who has suffered from having unscrupulous attorneys and loan mod companies impersonating unhappy clients on the internet claiming they were scammed by the Feldman law Center. Feldman goes on to say "we have had hundreds of clients come to us after they have been scammed by a loan modification or stop foreclosure company. When you hire an attorney you get legal advice and legal representation which this is not the case with these other companies. Home owners stuck in a financial nightmare need good, solid legal advice. They need to know all of their options in avoiding foreclosure and/or what to expect during the foreclosure process.
The Department of Real Estate reports complaints about lawyers involved in loan modification programs who act as fronts or work in-house. "We're not certain if they are practicing law or just lending their names," said chief counsel Wayne Bell.
The department has no jurisdiction over lawyers but can issue cease and desist orders against unlicensed people who operate as real estate licensees who violate real the law.
A licensee can collect advance fees before a notice of default is recorded if he or she has received a "no object" letter from the DRE. Such a letter is issued after a licensee submits an advance fee agreement, accounting format and any advertising or promotional materials for review. But the letter does not mean the department endorses a particular service. In addition, most loan modification scams start with a mail offer or a telemarketer making fraudulent claims or posing as their lender and or stating they were assigned by their lender to provide a loan modification and request all the home owners' personal and financial information.
The Department of Real Estate also has posted a consumer alert on its Web site (dre.ca.gov) warning homeowners to beware of individuals or companies that offer to help work out a loan modification with lenders or provide other services that protect against foreclosure. The department is part of task forces operating in northern and southern California with county, state and federal prosecutors looking at loan modification efforts that cross the line into foreclosure scams. This is a good reason for struggling home owners to hire an attorney that has his name on the door. There are several in California that are reputable and have been providing loan modification services for over a year now. Steven C. Feldman, Timothy Mc Farlin and Greg Pavia were the first on the scene and now attorneys are surfacing on the internet, newspaper and radio at a record pace offering loan modifications.
Rewinski said the bar's alert is not meant to suggest that distressed homeowners are not entitled to legal counsel; on the contrary, they may well need legal help and lawyers should be able to assist them. "Distressed homeowners should seek legal advice as one of their options," he said. "There are pro bono resources and, of course, lawyers who will help on a paid basis."
Bell agreed that many lawyers are legitimately helping clients with foreclosure and other credit issues. "If they are helping a client, engaged in providing professional services, that's within their purview," he said. "If they're accepting fees and sharing those moneys with non-lawyers, you have all the problems this ethics alert deals with." The main questions, he added, are "Is the lawyer really actually performing legal services, is the lawyer bringing his or her professional skills and abilities to assist the client, and are they actually having face-to-face meetings with clients?"
Bell said when consumers who are in desperate financial straits see the word lawyer, "they somehow believe they're going to get a higher level of care." For the lawyer, he added, "the question becomes, if I lend my name to loan modification company, am I adding any value?"
Home owners facing the threat of foreclosure should have the ability to meet or speak directly to the attorney handling their case. If not, then the attorney/law office is no more than a foreclosure consultant and one should consider searching further for a law firm that will offer a face to face meeting with the attorney.