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.