Illegal Loan Modification Schemes?

Apparently, California is now the hotbed for foreclosure rescue and loan modification scams. Clients and new callers tell me often how they were contacted by various scammers, or, worse yet, how they sent money to retain a scammer, only to find out later that calls are not returned and the loan modifcation is not processed. If there is any lesson to be learned out there in the new wild west of loan mods, it’s that homeowners should hire an experienced lawyer. At least lawyers are regulated and licensed. And even some of them appear IMHO to have crossed the line, going well beyond what is allowed or beneficial to the client.

Here are some of the laws, ethical concerns, and compliance issues that may be implicated by the new schemes that are popping up:

Attorney-client privilege – is the data and information still confidential if multiple non-attorneys have access to it?

Rules of Professional Responsibility – are the ethical prohibitions against fee splitting or illegal attorney referral services being violated?

Fraud and misrepresentation – is the modification guaranteed? If so, how is this possible, since the lender has the ultimate right to approve or deny the application?

Unauthorized practice of law – is an attorney or law firm practicing law in states where they are not licensed? Some firms appear to be marketing a national loan modification practice without being licensed in every jurisdiction. Only local attorneys should handle loan modifications – those that are licensed in the state where the client and property is located.

Unauthorized practice of law – Are clients being given faulty advice by non-attorneys?

Delegating or Outsourcing – are loan applications being processed by non-attorneys with little or no training and no understanding of the process?

Malpractice/Negligence – Are lawyers with little or no experience directing clients toward a particular legal remedy without considering the risks, benefits, and costs all of the available alternatives? For example, some lawyers may push a loan modification (which allows a foreclosure to continue while the process is pending) because they do not know how to do a Chapter 13 case (which can stay foreclosure) or because they do not want to refer the client to an attorney who could handle a Chapter 13 filing. Did the attorney explain to the client that some debtors may qualify to discharge up to 90% of their unsecured debts in Chapter 13 while curing a mortgage default and repaying arrears over 5 years? Unless an attorney is well-versed in all of the related areas that affect a client, or is at least willing to seek out assistance from attorneys who are, the lawyer does a great diservice to the client. Now, imagine the same problem, only put a non-attorney in place of the attorney. You can imagine the risk to the client and their home.

Advance Payments – Has the loan mod company taken a payment in advance of rendering services in violation of New York law?

FTC – is the television advertising for loan modifications in compliance with federal regs?

RESPA – is anyone getting an illegal kickback in the “food chain”?

There are multiple compliance and regulatory concerns in the new hot area of loan modifications. Not every company or law firm has it wrong. But there are many that appear to have a total disregard of the laws and rules. Let the client beware.