Loan Modifiers Beware You Just Got a Whole Lot More

Regulated
July 12, 2009

Do you assist clients in modifying their home loans? If so, the way you do business is about
to change. New restrictive laws went into effect on July 1st of this year and there are more
coming soon. To better understand and interpret these laws you must first understand the
perspective of the legislature. To understand where the legislature is coming from you need
only look to Civil Code §2945 which states in pertinent part:

The Legislature finds and declares that homeowners whose

residences are in foreclosure are subject to fraud, deception,
harassment, and unfair dealing by foreclosure consultants from
the time a Notice of Default is recorded . . . Foreclosure
consultants represent that they can assist homeowners who have
defaulted on obligations secured by their residences. These
foreclosure consultants, however, often charge high fees . . . and
perform no service or essentially a worthless service.
Homeowners, relying on the foreclosure consultants' promises of
help, take no other action, are diverted from lawful businesses
which could render beneficial services, and often lose their
homes. . . . The Legislature further finds and declares that
foreclosure consultants have a significant impact on the economy
of this state and on the welfare of its citizens. . . . The provisions
of this article shall be liberally construed to effectuate this intent
and to achieve these purposes.

The next question becomes: Is a loan modifier a foreclosure consultant? A “foreclosure

consultant” is a person who solicits or represents, or offers to perform, or does perform, for
compensation, services relating to: stopping or postponing a foreclosure sale; assisting a
homeowner to reinstate, or to extend the period of reinstatement, of a loan in foreclosure;
obtaining a waiver of acceleration; obtaining a loan; ameliorating impairment of the
homeowner’s credit because of foreclosure; or saving the owner’s residence from
foreclosure. Civil Code §2945.1 subd. (a). If your business involves providing loan
modification assistance to clients then you are likely a “foreclosure consultant” and subject to
regulation and these new laws.

Some of you may say that you are not a “foreclosure consultant” because you are a real
estate broker. Albeit there is an exception to the application of “foreclosure consultant”
regulation to real estate brokers, this exception is a very narrowly drawn. The exception for
real estate licensees is set forth in Civil Code §2945.1 subd. (b)(3) which provides in pertinent
part:

A real estate broker is exempt if he or she: is acting under a real

estate license and is entitled to compensation for acts performed
 in relation to the sale of the home in foreclosure or in arranging a
loan for the home; does not claim, demand, charge, collect, or
receive compensation until the acts are performed . . .

So, if a real estate licensee is acting as a loan modifier then they are considered a
“foreclosure consultant” and subject to regulation.

<b>New rules to follow as of July 1, 2009</b>

Civil Code §2945.45 went into effect on July 1, 2009. It essentially provides that a
foreclosure consultant must be issued and maintain a certificate of registration from the
Department of Justice. In order to obtain a certificate of registration from the Department of
Justice a foreclosure consultant must do the following:

Complete a registration form

The foreclosure consultant must submit a completed registration

form, along with applicable fees, to the Department of Justice. The
registration form shall include the name, address, and telephone
number of the foreclosure consultant, all of the names, addresses,
telephone numbers, Internet Web sites, and e-mail addresses
used or proposed to be used in connection with acting as a
foreclosure consultant, a statement that the person has not been
convicted of, or pled nolo contendere to, any crime involving
fraud, misrepresentation, dishonesty, or a violation of this article, a
statement that the person has not been liable under any civil
judgment for fraud, misrepresentation, or violations of this article
or of Section 17200 or 17500 of the Business and Professions
Code, and any additional information required by the department.

Civil Code §2945.45(a)(1)(A)

Provide copies of the foreclosure consultant’s promotional material and

advertising

The registration form shall be accompanied by a copy of all print

or electronic advertising and other promotional material, and
scripts of all telephonic or broadcast advertising and other
statements used or proposed to be used in connection with acting
as a foreclosure consultant.

Civil Code §2945.45(a)(1)(B)

Post a $100,000.00 Bond

The registration form shall be accompanied by a copy of a surety

bond in the amount of $100,000.00.
 Civil Code §2945.45(a)(1)(C)

The most onerous requirement is that a foreclosure consultant must obtain and maintain a
surety bond in the amount of $100,000.00. A surety bond is not the same thing as an
insurance policy. Usually with a surety bond you are required to pledge security in the form
of assets to securitize the bond. If a claim is made to the bond by a client and the surety
company pays on the claim then the surety company will take the property that was pledged
as security for the bond.

What happens if a foreclosure consultant does not comply with these new requirements?
First, they will be fined somewhere between $1,000.00 and $25,000.00. Second, they are
subject to imprisonment in the county jail for up to one year. Third, they will be liable for the
homeowner’s damages, as well as his attorneys’ fees and costs. Civil Code §§2945.45(d)
and 2945.6.

Keep in mind that Civil Code §2945.45 is a new requirement and it is in addition to all the
other regulation set forth in Civil Code §§2945 et seq.

<b>Lawyers remain exempt from regulation as a foreclosure consultant; but not for
long</b>
Senate Bill 94 is presently before the State Assembly awaiting a vote. Among other things,
Senate Bill 94 does the following: (i) It ends the exemption for attorneys thereby subjecting
attorneys to regulation as a foreclosure consultant; (ii) it ends the fee schedule approval
process by the Department of Real Estate; (iii) it removes the exemption for real estate
licensees thereby making them a “foreclosure consultant”; (iv) it provides homeowners a
private right of redress against the foreclosure consultant inclusive of attorneys’ fees and
costs; and (v) it requires the Department of Real Estate to report back to the legislature every
three months on the number of real estate licensees that have violated the new laws under
this regulation and the enforcement action taken.

Senate Bill 94 has not yet become law. However, I believe that it will. It was approved in the
Senate on May 21, 2009, by a vote of 21 to 14. It is very likely to pass in the assembly and to
be signed by the Governor.

<b>For profit loan modification companies may become a business of the past</b>
The $100,000.00 bonding requirement alone will put many loan modification businesses out
of business. Many loan modifiers will not have the assets to pledge as security for the surety
bond. Moreover, the bonding requirement and the private right of redress (which allows
homeowners to recover their attorneys’ fees and costs) make loan modification companies
attractive targets for lawyers. There are many non-profit HUD approved loan modification
companies that provide loan modification services to homeowners free of charge. It seems
clear that the legislature is making every effort to steer homeowners away from for profit loan
modification companies and steer them toward these non-profit HUD approved loan
modification organizations. In light of the foregoing, one must ask himself/herself the
question:
If you are in the loan modification business and you remain determined to remain in the loan
modification business then take measures to protect yourself. Make sure that you obtain the
certificate of registration and make sure that you have adequate errors and omissions
insurance coverage. Do not mistakenly believe that the surety bond acts as an insurance
policy.

Attorney Jon Alan Enochs is an attorney that has practiced in the area of real estate for ten
years. His practice areas include real estate, bankruptcy and business litigation. He can be
reached at 619-421-3956 should you have any questions for him. Please also visit his
website at http://www.enochslaw.com for additional information.

<a href="http://www.enochslaw.com/">www.enochslaw.com</a>

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