New law restricting advanced fee loan modification services signed by Governor Schwarzenegger
Effective October 11, 2009, California Senate Bill SB 94 became law. The law imposes new restrictions on lawyers, real estate agents and others who offer loan modification and forbearance services. See http://leginfo.ca.gov/pub/09-10/bill/sen/sb_0051-0100/sb_94_bill_20091011_chaptered.pdf.
The new law will change how attorneys will perform loan modification services and will likely eliminate the willingness of attorneys to accept these cases. Most lawyers will not risk the chance of not getting paid after providing months of loan modification services. This will leave borrowers at the mercy of the lenders whose primary concern is profit and the wealth of shareholders. California Civil Code 2944.7 reads as follows:
2944.7. (a) Notwithstanding any other provision of law, it
shall be unlawful for any person who negotiates, attempts to
negotiate, arranges, attempts to arrange, or otherwise offers to
perform a mortgage loan
modification or other form of mortgageloan forbearance for a fee or other compensation paid by the
borrower, to do any of the following:
(1) Claim, demand, charge, collect, or receive any compensation
until after the person has fully performed each and every service
the person contracted to perform or represented that he or she
would perform.
(2) Take any wage assignment, any lien of any type on real or
personal property, or other security to secure the payment of
compensation.
(3) Take any power of attorney from the borrower for any
purpose.
(b) A violation of this section by a natural person is a public
offense punishable by a
fine not exceeding ten thousand dollars($10,000), by imprisonment in the county jail for a term not to
exceed one year, or by both that
fine and imprisonment, or if bya business entity, the violation is punishable by a
fine not exceedingfifty thousand dollars ($50,000). These penalties are cumulative
to any other remedies or penalties provided by law.
Attorneys are also subject to the imposition of discipline by the State Bar of California for violations of the new law. This creates further disincentive for legitimate law firms to assist borrowers in obtaining a loan modification.
The law applies to "loan modification" and "loan forbearance" services only. It seemingly does not apply to mortgage dispute representation by an attorney where violations of a borrower's rights have occurred. Seemingly, advance fees can still be accepted for loan audits, litigation, and bankruptcy.
The law applies to loan modification services for a fee paid by the borrower. Seemingly, the law does not apply when an advance fee is paid by a person other than the borrower such as a co-owner who is not liable for the note, a friend or family member of the borrower or a corporation controlled by the borrower.
The law seemingly prevents an attorney from claiming, demanding, collecting or receiving any compensation until after the person the attorney has fully performed each and every service the attorney is contracted to perform. However, there is no restriction on an attorney's ability to separate or divide the services or fees into components for the purpose of avoiding the application of the law. Real estate brokers and agents who are specifically prevented from engaging in this division practice by Business Code 10026.
Finally, the law would seemingly allow an attorney to accept the funds from a client and place them in the attorney's client trust account pending the full completion of each and every services contracted to be performed. Placing client trust funds arguably would not constitute receiving compensation. The money would remain the property of the client. The law prevents the attorney from placing a lien on the trust funds.
The bottom line is that the cost of loan modification services will increase. The additional risks and work now imposed on legitimate attorneys will add to the cost of represenation. More bankruptcies will occur. Law firms will be more apt to sue over lender violations rather than pursue the loan modification remedies. It is a sad day for consumers.
