Two more loan modification shops are under fire from Florida’s Attorney General Bill McCollum:

The lawsuits were filed against south Florida’s Keep Your Property Inc. and Jacksonville-based National Foreclosure Counseling Services Corp. The attorney general’s office alleges that both companies charged up-front fees to customers facing foreclosure. This is against the law in Florida.

McCollum has said previously that loan modification operations are the number-one consumer complaint his office received in all of 2008.

Why CNN is Wrong About Foreclosure Rescue Scams

If you’re afraid – and you should be afraid – of getting ripped off by foreclosure rescue scams, you might think that CNN’s advice on how to spot foreclosure prevention rip-offs would be a good place to look. Sadly, you’d be wrong. Here’s why.

1. Their advice is focused exclusively on those who are seeking “counseling.”  In Florida, trying to seek counseling after a foreclosure case has been filed – without seeking the advice of a licensed attorney – could be a disaster, and possibly even illegal.  Why?  Because foreclosure cases are lawsuits.  Only a practicing attorney, licensed in the state of Florida, can help you defend a foreclosure case.
2. Their advice steers people exclusively to non-profits.  While non-profit assistance can be a great boon to a homeowner in foreclosure – see, for example, the work of April Charney at Jacksonville Area Legal Aid – many people don’t qualify for free legal help. 
3. Their advice steers people to those with connections, rather than knowledge or skill.  (They even say, “Some foreclosure counselors have a servicer’s VP for mortgage mitigation on speed dial.”)  Having a speed-dial isn’t the same thing as getting the job done.  Why?  The VP for the servicer isn’t the person calling the shots in most cases.  It’s the investors who own the loan who do.  And there’s no one who has those people on speed dial.  The only way to get them to budge is to fight back.

The Helpful Bits

It’s not all bad news over at CNN. Some of the things they say make sense. Two things stood out:

1. Make sure someone is with you every step of the way.  You don’t want to get bounced around from agent to agent, from rep to rep, having to restart the process every time.  When you hire a Florida lawyer to defend your foreclosure, they have to stay on your case until the end, unless you or the judge say otherwise.
2. Find out what you’re paying for, and when.  In Florida, it’s now illegal for most non-lawyers to take any money from you until they have finished providing all services.  And they have to spell it out for you in writing.  So don’t pay any money to anyone until you know exactly what you’re getting, and who you’re getting it from.

There are new scams popping up every day, so be careful out there!

“We are asking the Court to shut them down.”

Another loan-modification shop, this time in conjunction with a law firm, has apparently run afoul of the law. Florida’s Attorney General, Bill McCollum, has sued Florida Foreclosure Law Center LLC and Lincoln Lending Services and said at a press conference:

We are asking the court to shut them down.

“Forensic analysis” fee was a fraud

Florida law bars foreclosure rescue services from charging an advance fee yet Lincoln Lending asked homeowners to pay a $2,700 “forensic analysis” fee up front, claiming that they were reviewing the loan for errors and violations that would help lenders avoid foreclosure. McCollum said the fee was a fraud, designed to skirt the law. They also lied when they told homeowners that a $999 “loan-modification” fee would be paid by President Obama’s stimulus plan. It won’t.

Lincoln Lending Targeted Hispanics

Some of my colleagues have told me they’ve seen Lincoln Lending advertising on South Florida Spanish-language TV stations, calling the ads “outrageous.” The AG’s office apparently agreed. Also, because Lincoln was allegedly feeding clients to a local law firm, it may be “indirectly” involved in the practice of law, violating Florida law regarding unauthorized practice of law.

The lesson?

Be careful who you hire to help you when you’re facing foreclosure.

Since the passage of Florida’s Foreclosure Rescue Fraud Act, § 501.1377, many operations have been trying to get around the new law by teaming up with attorneys to offer services, in hopes that the attorney’s exemption would shield them from liability.

The Florida Bar has called foul. In a just-released Ethics Opinion, the Bar has stated (properly, in my opinion) that fee-splitting arrangements with these operations, along with other types of business deals, violate the attorney’s obligations under the Rules of Professional Conduct.

The Florida Bar’s Ethics Hotline recently has received numerous calls from lawyers who have been contacted by non-lawyers seeking to set up an arrangement in which the lawyers are involved in loan modifications, short sales, and other foreclosure-related rescue services on behalf of distressed homeowners. These non-lawyers include mortgage brokers, financial management advisors, foreclosure “consultants” and others who engage in foreclosure related rescue services or other similar services. Non-lawyers have proposed a variety of agreements, even offering to hire lawyers as “in-house counsel” to provide services to the non-lawyer’s customers. The Foreclosure Rescue Act, Section 501.1377, Florida Statutes, went into effect October 1, 2008 and imposed restrictions on non-lawyer loan modifiers to protect distressed homeowners. The new statute appears to be the impetus for these inquiries.

Lawyers should be wary of these proposals, as many violate the ethics rules and may subject the lawyer to discipline.

(Emphasis added.)

The whole opinion is worth reading: Download the Opinion [pdf]

Florida AG Bill McCollum has set his sights on an Orlando-area firm offering loan modifications:

A local firm offering loan modification services to homeowners facing foreclosure violated a state law that prohibits companies from charging an up-front fee for their services, according a lawsuit filed Feb. 13 by Florida Attorney General Bill McCollum.

Among other things, the lawsuit states that FMA:

…require homeowners to pay an up-front fee before the Defendants will render any loan modification and foreclosure-related rescue services. Upon Plaintiff’s information and belief, the up-front fee charged by Defendants can be as high as $2,500 (Two Thousand, Five Hundred Dollars).

So what do you get for that $2,500.00? Apparently, nothing:

Upon Plaintiff’s information and belief, Defendants are not providing homeowners with the contracted-for services.

FMA also stands accused of false and misleading advertising, including fake testimonials, false claims of affiliation with lending agencies, and false claims to having attorneys on staff.

Download the complaint [PDF]

Florida Attorney General Bill McCollum has shut down HomeKeeper USA, a Florida company, for violating Florida’s Foreclosure Rescue Fraud Prevention Act.

The attorney general’s office said it investigated the company for four weeks and found it violated the state’s newly-enacted Foreclosure Rescue Fraud Prevention Act by accepting upfront cash payments for arranging an alternative payment plan. The law requires services to be completed before payment is rendered.

The company, according to the attorney general’s office, offered to assist financially-strapped homeowners in arranging new payment plans with their lenders.

It appears that a company by the same name is still operating in Florida – so beware.

Imagine facing foreclosure, terrified of losing your home, and then paying hundreds or even thousands of dollars to a company who promised to help you – and then did nothing. Tragically, that scenario is all too real for many Floridians. More and more illegal foreclosure rescue operations are cropping up statewide.

These companies charge fees to negotiate with lenders on behalf of homeowners. The goal is to stop the foreclosure and get the lender to modify the loan so the homeowner can afford to stay.

Unfortunately, many of these companies not only fail to deliver on their promises, they also violate a new state law regulating foreclosure rescue consultants.

The Florida attorney general’s office last year opened more than 50 investigations and sued several foreclosure rescue companies for not making good on promises to consumers. So far, three Tampa Bay area companies, including the one Matlock paid, have gone out of business amid these investigations.

Although the attorney general’s office has been diligently trying to weed out these scam artists from Florida, new ones crop up every day. If you’re in foreclosure, and you are hiring someone to help you, make sure you check them out first.

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.