In an unprecedented move that can only be described as stunning ignorance, the California State Bar recently released a legal opinion that will effectively deny legal representation to millions of homeowners faced with foreclosure. The controversy is around SB 94, a law put into effect in 2009 that was meant to protect homeowners from predatory loan modification companies.
As with any crisis, when people are in trouble or desperate, other people jump into action to take what little money those desperate people have left. While SB 94 was little more than an imperfect knee-jerk reaction to systemic fraud, it was supposed to protect homeowners from scammers who promised to get loans modified, took hefty upfront fees, and were never heard from again. These scumbags were generally former mortgage brokers, also known as Department of Real Estate Licensees (DRE), looking to make up some of the losses from the meltdown by recycling the suckers they had sold homes to during the drunken housing orgy.
Here's where it gets a little confusing, so stick with me:
SB-94 amended California Business & Professions Code (B&P Code) 10026 for DRE licensees and created Civil Code #2944.7 which applies to attorneys. In both cases the language prohibits the charging of advance fees and says, "fully perform each and every service the licensee contracted to perform or represented they would perform" prior to collecting fees.The legislation also took it up a notch in respect to DRE licensees by prohibiting them from breaking up the services and charging for those. It is explicit:
The term "advance fee" as used in this part is a fee, regardless of the form, claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing each and every service the licensee contracted to perform, or represented would be performed.This next part only appears in the B&P Code:
Neither an advance fee nor the services to be performed shall be separated or divided into components for the purpose of avoiding the application of this section.
It is not in Civil Code 2944.7 that applies to attorneys. In fact there's nothing even close and for over two and half years the California State Bar had no issue with attorneys breaking up services and charging accordingly. In fact according to a lawsuit filed against the Bar in Superior Court in Orange County Ca., in September 2012, a State Bar investigator closed at least three investigations where "phased" payments were used by an attorney, and had no apparent problem with that.
This system protects the consumer and assures the work be done before paying for it. It also allows attorneys to offer these services to struggling homeowners and be compensated, while not charging consumers for unnecessary services. Before anyone goes crazy commenting about scumbag attorneys, for the purposes of this argument, I'm referring to trusted and ethical attorneys and I can prove that they exist.
According to several attorneys I've spoken with on this matter, since 2009 the CA State Bar has inexplicably taken two fundamentally opposing positions regarding fees for pre-negotiation services which are so necessary for a successful loan modification. On one hand, the Bar has successfully argued in court that only the negotiation with the lender is covered by SB-94. Now, they are prosecuting attorney's for accepting fees after providing contracted evaluation services, in a manner they previously found acceptable. One might go so far as to postulate that the Bar is playing a little fast and loose with the facts.
The controversy is so ripe, that attorney Robert Scurrah of CDA Law Center filed a Declaratory Relief lawsuit in Orange County Superior Court this past September asking a judge to determine what the law really says. A Temporary Restraining Order and Order to Show Cause, filed by Bostwick and Jassy LLP and the Law Office of Mark Zanides on Tuesday, points to a case back in March 2010, in which a homeowner, Christopher Duenas, filed suit in U.S. District Court against the Governor of California, the Attorney General, and the State Bar seeking to enjoin enforcement of 2944.7(a) on the grounds that it violated the First Amendment, due process and the equal protection clause of the Constitution because the statute, as applied and in practice, effectively prohibited a homeowner from obtaining legal advice regarding mortgages, since no lawyers would undertake representation if they couldn't get paid.At that time, when they were being accused, the Bar vehemently denied that they were in any way making things difficult for homeowners to get help. According to the document, the Bar asserted:
The plain language of Section 2944.7(a) does not prevent Plaintiff or any homeowner from consulting with an attorney with regard to mortgage issues; rather, the statute merely limits the timing of payments for negotiating, arranging or performing a loan modification or other loan forbearance ... the statute does not prohibit consulting with an attorney.Pretty clear, right? Apparently they didn't even think so, because later in the same motion they write:
Again, a plain reading of section 2944.7(a) does not bar an attorney from consulting with a homeowner about anything, including whether the homeowner should breach his mortgage with his lender. It merely limits the timing of compensation for certain services; namely, negotiating, arranging or performing a loan modification.
The Attorney General and a Superior Court Judge agreed with this interpretation.
And that's precisely how CDA and other ethical attorneys run their business. They break up the lengthy process and individual services into manageable chunks and then charge for them when they're completed, allowing the attorney to get paid and more importantly, the homeowner to bow out of the process at any time for any reason.
In what has been described as a breathtakingly hypocritical stance, last month the state bar's Review Board published a ruling that blatantly contradicts the position that both the Bar and the AG took in 2010. In fact, it's a complete reversal of their position. They now claim that attorneys cannot break up the services and fees and can only charge clients once all the services in the process have been rendered -- a process, as many know, that can drag on for months or even years.The loan modification process is not for the faint of heart and as Moss Sidell, an attorney in Newton, Mass. and a member of HPN's trusted attorney network points out in "Proposed Limits on Legal Representation for Borrowers Facing Foreclosure".
The mortgage modification quagmire that has been created by the banks is extremely discouraging to the average consumer. Banks require that stacks of paperwork be faxed to them which include pay stubs, bank statements, tax returns, utility bills and various other documents. After all of this is sent to the banks, more often than not, the banks claim they never received the documents, or have lost them. Then the cycle begins all over again... Then to add further insult to injury, the banks require constant updating of these documents, which they frequently lose or misplace again. Meanwhile, all of this is being played out while the homeowner is very often under the tremendous financial and emotional strain of potentially losing the roof over their heads. As it can easily be seen, the consumer is at an incredible disadvantage in dealing with banks that are mega institutions with thousands of employees which among them include an army of lawyers, both in-house and outside counsel.
In a nutshell, it's not easy. It's not something any homeowner would willingly venture into and would, in most cases, be better off with the help of an attorney who knows their way around the maze.As Martin Andelman points out in his post:
I can't speak for anyone else, but all of that sounds to me like I could very definitely benefit from being represented by a lawyer when trying to get my loan modified in order to save my home from foreclosure. Getting a loan modified is not a simple or intuitive process. The formulas and financial analyses involved are far beyond the capabilities of most homeowners, and because of the necessity to be precise or risk a denial by the servicer, many recognize that without a lawyer experienced in the loan modification process handling the submission of their application and negotiations with their servicer, their chances of approval are greatly diminished.
The rules governing loan modifications vary depending on the program and on the investor who owns the loan, and in the case of government and programs developed internally by servicers, the rules change. There is no chance that the average homeowner can know what's involved, and certainly not at the level that an attorney specializing in the area would.
But the California State Bar in a complete 180 degree head spin straight out of The Omen now seems to think that the language in SB 94 prohibits lawyers from breaking up services related to a loan modification into component parts, despite there being no language prohibiting lawyers from doing so.
You would think that the Bar would welcome a clear interpretation of the law by a Judge, but instead they've fought CDA at every turn. It's important to note that CDA has successfully assisted more than four thousand homeowners in obtaining loan modifications form their lender or servicer -- in other words $1.5 billion in home loans for homeowners who are now current on their payments and able to keep their home.
California AG Kamala Harris fought hard for the $25 Billion National Mortgage Settlement this year. She went a step further in her efforts to protect California's struggling homeowners. Harris also championed the new Homeowner Bill of Rights, which encourages loan mods. Why the California State Bar would attempt to deny homeowners legal representation in light of the well documented lender abuses is unclear.
The California Bar maintains that consumers are free to hire an attorney to assist them with their foreclosure, but attorneys who can't get paid don't have much incentive to take on a foreclosure case. Basically, and this is isn't a reach, if a homeowner were to approach an attorney needing help with a foreclosure and at any point in the research, conversation, and process a loan modification looked like a viable solution, according to the Bar's new interpretation all business would have to stop and any fees collected up to that point would be considered illegal. Kind of like asking for a mullet when you're half way through getting your head shaved and refusing to pay the hairdresser.
The rest of the country is fine with attorneys representing homeowners. In fact, under the Mortgage Assistance Relief Services ("MARS") Final Rule, which is enforced by the FTC, they're even allowed to collect a retainer in advance providing they place those funds in a trust account.
Up the road from me in New Hampshire homeowners pressured the legislature to pass a law allowing them to hire and, get this: pay an attorney to help them with loan modifications.
"For any entity to prohibit an individual's access to competent legal counsel for any reason is, among other things, asinine. It will definitely be interesting to see to what, if any, length the CA Bar Association's actions are deemed Constitutional violations, said Mike Dillon of Stellionata Consulting, LLC in New Hampshire.
The problem is, and this is where the complete ignorance of the Bar comes in, is that now the door is once again open for scumbags to take advantage of homeowners. Ethical attorneys won't risk disbarment by helping homeowners and the unethical ones will swoop in.Again, from the filing:
The State Bar is far from protecting financially distressed homeowners. It will prevent them from obtaining desperately needed help, since its tortured construction of 2944.7(a) would prevent most ethical lawyers from providing loan modification representation.
As one attorney I spoke with put it, "when loan mods are outlawed, only outlaws do loan mods."