The Florida Foreclosure Fraud Weblog

For the person who has an interest in foreclosure fraud, mortgage fraud, and rescue scams, there are a lot of resources out there on the web.  One of my favorites is the Home Equity Theft Reporter.  It has a national scope, and every day it’s packed with stories from across the country telling of all kinds of different ways the bad guys are looking to part homeowners and banks from their money.

I refer to it often, and you’ll sometimes see stories here that I first learned about on that site.  Also, if you’re lloking for background on some of the specific legal issues that come up in these tpyes of cases, the Reporter is a god place to start, no matter what state you’re in.

I’ve added a link in my “Blogroll” on the sidebar so you can always get to it.

Even though I’m not a member, I’ve been invited to attend the OCBA committee meeting mentioned in Lori Patton’s e-mail. I won’t be speaking but I will be meeting with Orlando-area attorneys to help plan a response to the “Foreclosure Glitch” law.

The meeting is tomorrow at noon, so if you’re able to attend (I’m not sure what the policy is for non-members)  I’d be delighted to meet readers of FFF and anyone interested in the effects of Florida’s new foreclosure rescue fraud law.

Federal officials in South Florida have announced numerous arrests and indictments as part of “Operation Malicious Mortgage“, a nationwide sweep aimed at various kinds of mortgage-related fraud, including foreclosure rescue scams, which “involve criminals who target legitimate homeowners in dire financial circumstances and fraudulently collect fees for foreclosure prevention services or obtain ownership interests in residential properties.”

United States Attorney Acosta stated, “Although the number of federal mortgage fraud prosecutions is on the rise, the battle against mortgage fraud is far from over. It is evident that more is needed. We are designating additional attorneys in the Economic Crimes Section to devote their talent and time exclusively to the investigation and prosecution of mortgage fraud. Many of our federal and local law enforcement partners are taking similar steps. Together, we will make criminal mortgage fraud prosecutions a top priority.”

Well, that’s good to hear.

Some of you who have been following the issue know that I have mixed feelings about Florida’s new foreclosure rescue fraud law. Although it comes from good intentions, and does some good things, it could have potentially disastrous consequences on homeowners who need lawyers to help them defend foreclosures. Other lawyers are taking notice.

Here’s a report from Lori Patton, a bankruptcy attorney in Orlando, regarding the new foreclosure rescue fraud bill.

So Rep. Simmons (don’t know if I spelled that correctly) at the CFBLA lunch basically just apologized for the law, said it was one of those that was voted through like a cattle call, the impact on us was unforeseen, very unfortunate, etc… and his recommendation was, in a nutshell, for us to adjust our practices accordingly and deal with it until someone could put a “glitch fix” through next year. Ummm… NO. He did say that he would be happy to sponsor and push through a “glitch fix” if there happened to maybe be a special session this year, but the chances of that happening are slim to none.

The OCBA lunch meeting (on June 27 at noon) topic will be a discussion of options and remedies the consumer attorneys may have to deal with FS 501.1277. [Should be 501.1377 - Ed.]  There is already talk of maybe filing some kind of lawsuit for injunctive relief in the federal court.

This is an issue that’s starting to get some traction, at least in the bankruptcy community. I hope the suggested federal injunction avenue also raises the issue of foreclosure defense, not just federal bankruptcy preemption - since many attorneys practice both. I can see three issues to raise for state-law foreclosure defenses:

1. Florida’s litigation privilege. Services in connection with appearance in a court proceeding may fall within this protection.
2. Noerr-Pennington doctrine (1st Amendment right to petition the government applies to litigation)
3. Due process rights of litigants to have access to counsel of their choice.

I can also see the question of raising whether the law unduly chills the civil remedies in federal laws like TILA, HOEPA, RESPA, and FDCPA actions.

Here at FFF we’re normally very sympathetic to the homeowner caught up in Florida’s foreclosure crisis. But every once in a while, someone comes along and works the system in a way that threatens everyone else who plays by the rules of the game.

The St. Petersburg Times reports that Rose King of St. Pete has thwarted the efforts of lenders to foreclosure on her defaulted loan for nearly nine years. Her first filing came in 1999.

In 1998, she got a $63,325 loan from Advanta National Bank, but quickly went into default. A year later, Advanta foreclosed and the house was due to be auctioned July 12, 1999. King filed her first Chapter 13 petition, automatically stopping the sale.

The court dismissed her case for failure to keep up with the court-ordered payments, but soon, she was in bankruptcy again. And again. And again.

“She lived two years for free, I can tell you that,” says Kelly Goff, who held the most recent mortgage and had to schedule foreclosure sales four times.

Ultimately, Goff, holding a note for $170,000, got a judge to allow him to go forward with the foreclosure sale.

Goff says he spent more than $20,000 in legal costs before the foreclosure auction was finally held on March 14. As typically happens when property is mortgaged for more than it’s worth, he bought the house with a $100 bid. And was appalled by what he found.

She had stripped the house bare - even the sinks and toilets were gone.

One part of me admires Ms. King’s refusal to back down from a fight.

The attorneys at Jacksonville Area Legal Aid have an outstanding record of defending foreclosure cases - and winning them:

“They have won every case when a house is up for foreclosure,” said McCormick, explaining that every mortgage leaves a paper trail, though often it isn’t easy to track. “If you can’t prove the paper trail, you can’t foreclose.”

Winning every case is a very impressive record - so impressive that JALA is swamped with foreclosure cases.  That’s why they are on a fundraising drive right now.  There are a lot of worthy causes out there, but few of them are as effective as the foreclosure team at JALA.

Link via the Home Equity Theft Reporter.

On May 28, 2008, Florida Governor Charlie Crist signed into law House Bill 643, meant to protect homeowners in foreclosure from falling prey to foreclosure rescue scammers. The law addresses two of the most common type of foreclosure rescue scams in Florida: foreclosure consultant fraud, and foreclosure transaction fraud.

Foreclosure consultant fraud

The typical foreclosure consultant fraud scheme is a simple one: out of the blue, the “consultant” calls up the homeowner in foreclosure, and promises to help negotiate a workout with the lender. This consultant usually has no credentials whatsoever, or possibly fake credentials, but they ask for a fat payment up front and then promise to help. After getting the cash, the scammers disappear, providing no help at all.

The new law imposes two requirements on “foreclosure rescue consultants” - which the law defines as anyone offering to help stop, delay, or avoid foreclosure. First, a disclosure requirement. The consultant must provide a written agreement, give the homeowner a full day to review it before signing it, and then allow the homeowner three days to cancel after signing. The written agreement must fully describe all services to be provided, disclose the right to cancel the arrangement, and also disclose the second restriction, regarding fees.

The second requirement is that the foreclosure consultant cannot ask for or accept any fees for services until the consultant has provided all services listed in the agreement.  This takes aim at the “pocket the cash and run” crowd.

Of course, someone who wants to steal your money by charging false fees probably won’t obey the law anyway - and this type of scheme was already illegal as a form of theft - but the new law imposes additional penalties (up to $15,000 in addition to other damages) and gives law enforcement another tool to use against fraudulent consultants.

Foreclosure rescue transaction fraud

The second area the new law aims to fix is the fraudulent foreclosure rescue transaction. Fraudulent foreclosure rescue transactions work in one of two ways: by getting title to the house, or by draining the equity from the house.  In one common form of this fraud, the scammer will offer to make a loan to the homeowner, either as an outright loan, or set up with a different legal structure.  Often, they use “sale-leaseback options” or they set up a “trust” that the homeowner signs their house over to as the new owner.  The scammers use these tools to transfer ownership of the house away from the original homeowner, and set up impossible conditions the homeowner has to meet before getting it back.  When the homeowner can’t meet those conditions, they lose the house for good.

The new law restricts these foreclosure rescue transactions in a several ways.  First, the written agreement requirements.  Any foreclosure rescue transaction must come with a written agreement disclosing specific details of the transaction, such as the identity of the purchaser and the legal description of the property; a clear notice stating “I UNDERSTAND THAT UNDER THIS AGREEMENT I AM SELLING MY HOME TO THE OTHER UNDERSIGNED PARTY;” and details of the right ot repurchase the property.  The law also requires that the homeowner receive a notice of their right to cancel the deal within three days, and provides the specific language and form of that notice.  The homeowner also has a 30-day right to cure any default of the agreement, to give them a better chance of meeting the terms of the deal, and that must be disclosed as well.

Assumption or discharge of prior liens

There are two additional rights which are very important for the homeowner.  First, the the purchaser of the property must assume (take over) or discharge (pay off) the lien in foreclosure, along with any prior liens on the property.  This prevents one common scam, in which the homeowner effectively sells his house to the supposed rescuer, but gets left holding the bag on all the debt.  Also, this ensures that the transaction actually helps the homeowner get out of the debt that was in default when the foreclosure happens.  Of course, this debt will almost certainly get rolled up in the cost of the transaction, but at least the purchaser can no longer double-dip on the homeowner’s equity.

Rebuttable presumption of mortgage

A second important right created in the statute is the way the law effectively defines mortgages.  It creates a “rebuttable presumption” that any foreclosure rescue transaction involving a lease option or repurchase is really a mortgage in substance, and gives the homeowner all the rights they would have in a foreclosure if they default on the lease or repurchase.  Effectively, this means the purchaser cannot evict the homeowner without first filing a brand new foreclosure proceeding, which the homeowner would have the right to defend.  Because of the substantial additional rights this law gives homeowners elsewhere, a homeowner defending a foreclosure in this situation would almost certainly be able to raise multiple defenses unless the transaction was performed exactly to the letter of the law, and even then, might have other ways to beat the foreclosure suit in court.  This “rebuttable presumption” - effectively, it means the court assumes it’s a mortgage unless the purchaser proves otherwise - may actually be one of the most important beneifts to homeowners in this new law because it gives them such powerful defenses if the foreclosure rescue scammer tries to throw them out of their home.

Penalty for violation

Anyone violating the provisions of the new law commits an “unfair and deceptive trade practice,” and could be sued by victims or by the state for those violations.  Violators could be liable for damages, attorney’s fees, and civil penalties of up to $15,000 per violation.  This could be a significant deterrent, especially for serial violators.

Concerns and potential drawbacks for homeowners

I’ve written elsewhere about my concerns with the new law, mainly that it defines “foreclosure rescue consultants” in such a broad way, that it may encompass lawyers who represent homeowners in foreclosure lawsuits or bankruptcy cases, and bring with it restrictions on those services that could severely limit the ability of lawyers to represent homeowners in foreclosure cases.  I don’t think this was the intent of the law, but until the state clarifies how the law applies to homeowners’ lawyers in bankruptcy and foreclosure defense cases, we may see a temporary shortage of lawyers willing to work in this field.  I hope that clarification will come soon.

Important steps forward for homeowners

Even with those concerns, Florida has passed a law that ought to take a real bite out of this state’s foreclosure rescue fraud crisis.  It will make the scammers easier to identify and prosecute .  It provides additional penalties to deter scammers and additional tools for law enforcement to bring the scammers to justice and obtain compensation for vicitms.  Even with the potential drawbacks - which may include fewer legitimate operations willing to help in foreclosure cases - this bill may go a long way to curbing Florida’s foreclosure rescue fraud crisis.