The Florida Foreclosure Fraud Weblog

If you want stricter laws protecting homewoners from predators looking to scam foreclosure victims, then Florida has some good news for you.

The state has enacted a new law, effective on October 1, 2008, aimed at equity-skimming and advance-fee fraud schemes designed to steal from Florida homeowners what little money or equity they may have left.

The law doesn’t apply to everyone - lawyers, for example, are already regulated by the Florida Bar and are exempt from the new law - but anyone who’s not exempt and offers services to foreclosure homeowners has to comply with strict new requirements, including written disclosure requirements, a cooling-off period, and a prohibition from taking fees before all services are complete. The law also makes it easier for homeowners to cancel any transaction where a foreclosure “consultant” tricks the homeowner into singing over a deed to their home.

Perhaps most important, for homeowners who have fallen victim to foreclosure predators, anyone who violates the new law may have to pay penalties of up to $15,000. Anyone who thinks they’ve been a victim of foreclosure rescue scams after October 1 should contact a lawyer to find out if they have any claims against a scammer.

The Florida Bar News reports on Florida AG Bill McCollum’s action exempting Florida attorneys from portions of the Foreclosure Rescue Act. Florida Bar News editor Gary Blankenship has been following this story for some time, and has written a nice piece explaining both the problem and the solution. As an added bonus, he quotes me at some length on the AG’s action.

I have just learned that the Attorney General’s office has taken action today to fix one of the largest flaws in the Foreclosure Rescue Act.  I don’t have the exact language, from from what I’ve been told, it uses the “express authority” provision in 501.1377 (2)(b) 2. to authorize certain Florida attorneys to provide foreclosure-related rescue services… thereby excepting those attorneys from the definition of “foreclosure resuce consultants.”

More on this as I get details.

UPDATE: Here’s the Letter from Attorney General Bill McCollum to Florida Bar President Jay White.

Dear Mr. White:

It has come to the attention of the Department of Legal Affairs that there is some question about whether attorneys providing legal counsel to homeowners facing foreclosure, most particularly when such persons are in bankruptcy, are subject to the provisions of the Foreclosure Rescue Act, Section 501.1377, Florida Statutes (2008) effective October 1, 2008. In order to ensure that the attorney/client relationship is not adversely affected by this new provision, the Office of the Florida Attorney General, Department of Legal Affairs, provides as follows:

Pursuant to its authority under Section 501.1377(2)(b)2, Florida Statutes (2008), the Office of the Florida Attorney General, Department of Legal Affairs, hereby approves for exclusion from the definition in this provision of a foreclosure rescue consultant, a person licensed to practice law in this state, when such person provides legal representation to a client with respect to a foreclosure.

Please disseminate this information to members of the Florida Bar by any method you deem appropriate.

Sincerely,
Bill McCollum

This solution is so simple, elegant, and effective I’m a bit chagrined I didn’t think of it myself.

Ever since word got out about Florida’s new foreclosure rescue fraud law, I’ve gotten feedback from lawyers all over the state. Many agree with me that the new law is a serious problem for homeowners and their attorneys. Others are not so sure.

Here are some of the responses I’ve gotten from the “I’m not worried” crowd, along with my replies.

This new bill doesn’t apply to lawyers because we’re officers of the court / exempt from Chapter 501 / not the intended targets of the bill.

This is the way it should be, but it’s not. I contacted some members of the state legislature to discuss my concerns about the bill. In turn, they contacted the state Attorney General’s office. Asked whether lawyers were exempt from the bill, AG staff responded:

There is no Florida case law on point regarding the issue of whether Section 501.212, Florida Statutes, would exempt an attorney engaging in the practice of law. However, an attorney general opinion and other related cases suggest that the practice of law is not entirely exempt from the definition of “trade or commerce” in the state unfair and deceptive and antitrust acts.

In other words, the law applies to lawyers, at least sometimes.

The legislature cannot regulate the lawyer-client relationship because only the Florida Bar (the judicial branch) can do that.

Tell that to the lawyers who used to represent workers’ compensation claimants in Florida. They raised the same argument when state capped their fees a few years back. The cap is still in place, and most of those lawyers have moved on to personal injury practice. Workers’ compensation claimants now have a much harder time finding lawyers - just like homeowners soon will unless the law changes.

The state can’t regulate attorneys practicing in federal areas like bankruptcy, Truth In Lending Act, and RESPA.

I think this is a strong argument, and I hope it prevails. But until then, the new state law, on its face, applies to us. The federal preemption argument, endorsed by many respected attorneys and even discussed in this context by some federal judges, at this time serves only as a hypothetical defense if someone happens to get sued under the law.

The Attorney General isn’t going to come after lawyers who represent their clients in court.

Again, a strong argument, and I hope it’s true. But the way this new law is written, even a single disgruntled client - perhaps acting pro se - could decide to come after his former lawyer. Even though the lawyer is likely to successfully defend such a case, that takes time and money away from the lawyer’s practice that could be spent helping people.

Let them come after me. I’ve got some great argument why this law doesn’t apply.

I hope your malpractice premiums are paid up. That lawsuit will cost you more than you ever collected from that client.

Many lawyers, with whom I agree, believe that it is wrong for this new law to apply to them. But even so, every indication I have says that the law poses a real danger to any lawyer who represents a foreclosure homeowner. That danger will not be dispelled until we get clear guidance from the legislature or from the courts.

ADDENDUM: Rob Arnold adds a Realtor’s perspective.

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.

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.

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.