Mortgage Foreclosures: Equity Stripping October 2006 Nash & Lodge, PLLP By: Stephen J. Nash   Last month we wrote about mortgage foreclosures. This month we discuss equity stripping. Equity stripping has become so prevalent in Minnesota that the Minnesota legislature enacted a new law (MN Statute Section 325N) in 2004 in direct response to the problem. The statute has two basic targets: one, purchasers who buy property in foreclosure and as a part of the deal promise to sell the property back to the homeowner , and, two, the person who promises to help the homeowner in foreclosure save the property, stop the foreclosure or save the homeowner’s credit rating along with other similar services. It is the second target that will be the focus of this article since many real estate agents unknowingly fall into this part of the statute. The Foreclosure Consultant Under Minnesota Statute Section 325N (the “Equity Stripping” Statute) if a person acts as a Foreclosure Consultant as defined by statute special rules and regulations must be followed. Whenever you or your client are dealing with a homeowner in foreclosure you must look at the statute to determine if you are acting as a Foreclosure Consultant. The Foreclosure Consultant Defined The statute defines Foreclosure Consultant broadly and must be carefully read to see if you or your client falls into it or fits an exclusion. Basically, a Foreclosure Consultant is a person who represents that he/she will: one, stop the foreclosure; or, two, perform any of the following services:      a. obtain a forbearance;      b. help the owner to reinstate;      c. help obtain an extension to reinstate;      d. help obtain a waiver of acceleration clause;      e. help obtain a loan or advance of funds;      f. help owner avoid or repair damage to their credit resulting from the foreclosure; or      g. save the owner’s home from foreclosure. Exceptions to the Foreclosure Consultant Definition There are ten exceptions to the definition. The exception most relevant to real estate agents is for persons who hold a real estate license; however, that exception applies only to acts for which a license is required and does not apply if you are offering services to enable to foreclosed owner to retain possession of his/her home. The Foreclosure Consultant Contract The Foreclosure Consultant must enter into a written contract with the foreclosed owner. The contract must set forth statutorily prescribed information, notices and must contain a three day right to cancel. The Foreclosed Owner Defined The Foreclosed Owner is defined by statute as homeowners who:      a. is or was in foreclosure;      b. owns residential property (including condominiums); and      c. uses the home in foreclosure as his/her primary residence. The Prohibitions The Foreclosure Consultant is prohibited from doing the following:      a. receiving any compensation until he/she completes the contracted for (or represented) services      for the Foreclosed Homeowner;      b. taking any interest in the foreclosed home;      c. obtaining a security interest of any type in the real or personal property of the foreclosed      homeowner;      d. Obtaining a power of attorney from the Foreclosed Homeowner (except to inspect documents);      e. Charging more than 8% interest on any loan (together with all other compensation);      f. Receiving undisclosed compensation from a third party that provides services to the      Foreclosed Homeowner;      g. Inducing the Foreclosed Homeowner to enter into a contract that violates Minnesota Statutes      Sections 325N.02. Enforcement Who Can Enforce? The statute can be enforced by the Attorney General, the Commerce Department or an owner. What Civil Remedies are Available? The statute gives Plaintiffs broad relief including recovery of attorney fees. The homeowner can recover the following in a civil action:      Actual Damages;      Attorney Fees;      Costs; and      Appropriate Equitable Relief. What Criminal Remedies are Available? A violation of this statute also subjects to violator to up to one year in prison and a fine of up to $10,000.00. An Overview The Attorney General’s Office is very active in this area. We have represented many victims of equity stripping and real estate agents or investors who have knowingly or unknowingly violating the law. It is extremely intimidating to have the FBI, the Minnesota Attorney Generals Office and/or the Federal Prosecutors Office talk to you about your client’s alleged role in an equity stripping scheme. While each client reacts differently, they almost always end up cooperating with the authorities because they clearly violated the law, do not have the substantial resources necessary to fight and hope to save their license by cooperating. They almost always have to pay back all of the money paid to them whether labeled commissions or something else. They are almost always terminated by their broker and/or sued for hiding commissions. Of course, being accused of violating the statute doesn’t make you guilty and you have the right to defend yourself. Unfortunately, there are a number of “defenses” that just don’t work. The “I didn’t know it was wrong” defense, the “He/she told me that we were following the law” defense or the “I was just trying to help the homeowner” defense all fail. In many cases the real estate agent does not believe that they violated the statute or were involved in equity stripping. Since you are a professional you must become familiar with the laws that govern your activities or you must seek out competent legal help to make sure that you are complying with all of the statutory requirements. NOTICE: The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2007 Nash & Lodge, PLLP