What Standards Apply to Those Doing Loan Modifications?

February 9, 2009

 

William J. Keyes, Esq.

Nash & Lodge, PLLP

keyes@nashandlodge.com

 

It seems like any time you turn on the TV or listen to the radio nowadays, we are constantly being bombarded by loan modification advertisements by companies promising to save your home.  Who are these companies and what requirements do they need in order to qualify to be such saviors?  The Minnesota Department of Commerce issued a press release stating that only those with a residential mortgage origination license could qualify to negotiate of loan modification.  The Minnesota Attorney General has already brought claims against twelve companies for their loan modification actions applying the “foreclosure consultant” statute passed into law in Minnesota in 2004.

Find out who has been sued by the Minnesota Attorney General and how the foreclosure consultant statute may apply by reading the complete article.

The following companies have all been sued by the Minnesota Attorney General: 

•       IMC Financial Services, LLC (“IMC”); 
•       American Financial Corp. d/b/a National Foreclosure Counseling Services (“NFC”);
•       Law & Associates, LLC, a Florida limited liability company;
•       Davis Mitigation, Inc. (also doing business as Davis Foreclosure Assistance), a New Jersey corporation; National Foreclosure Relief, Inc., a Nevada corporation; 
•       Lewis Loss Mitigation, Inc. of Alabama, which also does business as Stop Foreclosure Center and Lewis and Associates Consulting;
•       D.R. Financial Services Corp. of California, which also does business as D.R. Financial and Superior Home Loans;
•       American Foreclosure Specialists, LLC, an Oklahoma limited liability company;
•       Mortgage Default Assistance, LLC, a Florida limited liability company;  
•       Home Assure, LLC, a Florida limited liability company which has also done business under the names   FAS and Mortgage Second Chance;
•       Foreclosure Assistance Solutions, LLC of Florida;
•       American Housing Authority, Inc. and American Housing Financial, Inc. of Nevada.

 

Although Minnesota currently lacks a law dealing directly with loan modifications, the topic of a “foreclosure consultant” is dealt with in Minnesota Statute Section 325N.  Under 325N.01, a foreclosure consultant is defined as a person or entity that offers or performs services for a fee owner that may stop or postpone a foreclosure sale; obtain any forbearance from a lender; or assist a property owner to reinstate a mortgage.  Since any type of loan modification results in a reinstatement of a mortgage loan and stops a mortgage foreclosure, it seems rather apparent that anyone performing a loan modification service is also a foreclosure consultant.

The statute contains ten exceptions of parties who are exempt from the definition of being a foreclosure consultant, including:  an attorney rendering service in the course of their practice;  a person licensed as a real estate broker or salesperson “unless the person is engaged in offering services designed to, or purportedly designed to, enable the owner to retain possession of the residence in foreclosure”;  and a person licensed as a residential mortgage originator when acting under the authority of that license.

Section 325N.04 (1) of the statute states that it is a violation of Minnesota law for a foreclosure consultant to “claim, demand, charge, collect, or receive any compensation until after the foreclosure consultant has fully performed each and every service the foreclosure consultant contracted to perform or represented he or she would perform.”  This statute can be enforced by the Attorney General’s office, the Department of Commerce, or an aggrieved home owner.

In a civil action, the owner of the foreclosed home may be awarded actual damages, reasonable attorney fees and costs, and appropriate equitable relief.  In addition, the court may also award exemplary damages if the conduct of the foreclosure consultant was deemed to be in bad faith.  If a criminal action is brought, a violator of the statute may be subject, upon conviction, to imprisonment up to one year and a fine of up to $10,000.00 for each violation. 

While the Minnesota Attorney General has brought action against 12 loan modification companies, we are unaware of that any of these cases has reached the courts.  However, a recent decision handed down by the Minnesota Court of Appeals sheds some light on the topic.

In Carter v. Lakanu, (Dakota County) A08-0205, a homeowner who was in foreclosure was approached by an individual who represented himself to be a foreclosure consultant and offered to help the homeowner save her home.  The defendant convinced the owner of the home to deed the property over to the defendant’s wife and a lease back arrangement was then made allowing the prior owner of the home to stay in the home.  A lawsuit was commenced when the monthly lease payments grew to be higher than the original mortgage payments and the former fee owner soon found herself to be in a worse financial situation than she had been before she signed the lease.  The Court held that the defendant had committed a violation of Section 325N.04(5) of the foreclosure consultant statute which prevents a person from acquiring any interest, directly or indirectly, or by means of a subsidiary or an affiliate in a residence in foreclosure from an owner the consultant had contracted with.  The Court also found that the defendant was in violation of Section 325N.04(7) since the defendant failed to provide the homeowner with a contract that complied with the statutory requirements.  Under 325N.03 of the statute, every contract must be in writing and must fully disclose the exact nature of the foreclosure consultant’s services and the total amount and terms of compensation.  The contract must also contain a notice that the consultant cannot take or ask for any money until the consultant has completely finished doing everything promised and must also contain a right of rescission wherein the homeowner may cancel any foreclosure consultant contract within three business days.

While the legislature may have originally been more concerned with equity stripping when they initially passed this law, the focus of the statute is quickly be turning to loan modifications with the huge influx of the different programs we now are seeing in today’s real estate environment.  The Minnesota Attorney General has also asked the legislature to pass legislation that more directly deals with loan modifications