The Crisis Within The Crisis; Non-Attorneys and Out-Of-State Attorneys Making a Mess Of Loan Modifications (Why Homeowners Need Local Attorneys)

There is only one way that a loan modification should be handled – by a local attorney licensed in the state where the real estate is. In the midst of the worst foreclosure crisis in history, there seems to be a subcrisis developing. An entire market of loan mod scammers has risen to the surface.

These people include non-attorneys who are practicing law without a license and out-of-state attorneys practicing law beyond the jurisdictional reach of their licenses. Some might suggest that a loan mod is not legal work. I think that argument fails for a number of reasons. First, it presumes that just because a client walks into someone’s office or connects with someone online to seek a loan mod, that a loan mod is actually the best course of action. Do patients walk into the doctor’s office and specify what medication or course of treatment they want? It is the lawyer’s job to determine whether a loan mod is feasible and how it should be handled or whether other alternatives offer better or more realistic options. So what other options are there?

Well, in some cases a loan mod won’t be feasible for a number of reasons. Maybe the lender won’t do it at all. Or, maybe the lender won’t reduce the payments enough. Maybe other unsecured debts are too high – and a loan mod does nothing to help with that. Sometimes, a Chapter 13 bankruptcy might make more sense because a debtor with limited disposable income and limited equity may be able to reinstate a mortgage over 5 years and pay only a small fraction (perhaps 10%) of the unsecured debts such as credit cards. In other words, even without a mortgage payment modification, the homeowner may find another source of funds to help save the home – i.e, the funds saved on unsecured debts in a 10% Chapter 13 case.

Others may be better off discussing short sales. Yet others may need to be told that under no circumstance does their budget permit them to keep their home and that they’d be much better off renting for a while and saving money. Sometimes, this might mean trying to negotiate a deed in lieu of foreclosure with the lender.

And, of course, last but not least, there is the biggest reason of all why a non-attorney should never handle loan modifications -this person cannot understand any of the potential litigation defenses the borrower may have. There are many such defenses that can be raised in a foreclosure. Many homeowners are not even aware that they had a defense due to a lender’s violation of a Federal Law (i.e. RESPA or TILA) or State Law (i.e., Banking Law). Even an out-of-state attorney who may understand these legal defenses and counterclaims in a general sense, but who is probably unfamiliar with New York law, can not actually assert the defenses and counterclaims in the New York courts because they are not licensed in New York to do that.

Others may be aware of a defense or predatory lending counterclaim based on fraud or misrepresentation by the lender or agents who created the loan but the non-attorney Loan Mod “specialist” will not be able to help with this. It is distressing to see how many “specialists” there are now. They are dangerous and will cost people their homes. Many laypeople find out the hard way and realize too late that they made a mistake hiring a non-attorney or out-of-state attorney. Without the ability to assert litigation defenses and counterclaims, they lose their leverage to negotiate. Many of these loan mods appear to fail because there is a lack of follow-up by a legitimate local attorney.

Of course, not every loan mod will succeed or can be guaranteed. But those that hire a non-attorney or out-of-state attorney are almost always guaranteeing failure and the loss of their home. Or, they will find themselves contacting a new local attorney to clean up the mess that the out-of-state one created.

I am getting more and more calls from homeowners who hired companies in California and then found themselves stranded after they paid a fee and cannot get anyone on the phone. Based on empirical data so far, it actually seems that many of these loan mod companies are charging far more than a local attorney would charge for this work and providing far less. If the loan mod does not work out, they simply dump the “client” and then the client must go and seek out real help from a local lawyer. In the end, many of these homeowners are left having to pay twice to try to save their home. They are told by out-of-state attorneys that these attorneys cannot handle a bankruptcy or litigate in the homeowner’s state. Yet, these same attorneys seem to think it’s ok to take a client’s money to do the loan modification work in the homeowner’s state, often relying on the lender’s out-of-state location to justify this. This is misleading and creates a false premise for the entire attorney-client relationship. It should only matter where the real estate is located as that is what determines what state law applies and what venue the foreclosure action is brought in. To make matters worse, these “dumped” clients often lose precious months of time while the foreclosure clock keeps ticking away and their reinstatement figure grows.

It seems that there is rampant unlicensed practice of law going on now in the loan modification area in New York. Is the law being violated? Practicing law in New York without a license is a misdemeanor under the Judiciary Law. In other states, I believe it is a felony. Those who are profitting from this crisis would obviously disagree. But they are creating a new crisis (unlicensed and unregulated loan mod servicing) within the crisis (foreclosures).

To me, negotiating a mortgage transaction that must be in writing (to satisfy the Statute of Frauds) and offering legal analysis of litigation defenses, bankruptcy and other options, is something that only a local licensed lawyer should be doing. The stakes are too high. There is no good reason why this scamming should be allowed. I have seen news stories reported about other states beginning to crack down on this. New York should do the same.