Foreclosure Consultants

The law relating to loan modifications has changed rapidly in 2009. In July, the legislature required that any real estate brokers providing loan modification services must register with the Department of Justice and obtain a surety bond. On October 11, 2004 SB94 was passed prohibiting attorneys and real estate licensees from collecting advance fees when providing any foreclosure relief services.

The new legislation effectively removed any exemptions to the Mortgage Foreclosure Consultants Act (“Act”) in California Civil Code section 2945, et seq. As a result, any real estate licensee that helps a client avoid foreclosure, obtain a loan modification or provide any similar service must comply with the terms of the Act.

The law used to be that if no notice of default has been filed, then a real estate licensee may conduct a loan modification and collect advance fees. It appears that SB 94 has eliminated that exception.

Under the Act, any person who solicits, represents, or offers to any owner of real property that they will stop or postpone a foreclosure sale, or save the owner’s residence from foreclosure, is considered a “foreclosure consultant.”

According to the Act, and as clarified by SB 94, real estate licensees are exempt from compliance if the broker:

(a) Engages in acts whose performance requires a real estate license,
(b) Is entitled to compensation for the acts performed in connection with (1) the sale of a residence in foreclosure or (2) with the arranging of a loan secured by a lien on a residence in foreclosure,
(c) Does not claim, demand, charge, collect, or receive any compensation until the acts have been performed, and
(d) Does not acquire any interest, either directly or indirectly, in the residence in foreclosure.

Therefore, helping a client obtain an extension of a trustee’s sale or obtain a forbearance agreement with a bank in connection with a listing of a house probably does not fall with in the Act so long as no advance fees are charged.

However, if there is no listing agreement with a homeowner, then providing loan modification services will fall within the Act.

There are several disclosure requirements when performing such services. As a foreclosure consultant, the real estate licensee must provide the owner of a residence in foreclosure with a contract that fully discloses the “exact nature of the foreclosure consultant’s services and the total amount and terms of compensation.” The contract must also include various terms as outlined in the Act, including language regarding the owner’s right to cancel the contract within a specified amount of time. (See Civil Code § 2945.3).

SB 94 also requires that the following written disclosure be provided in at least 14 point bold type:
“It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.”

Again, a real estate licensee acting as a foreclosure consultant must register with, and maintain a certificate of registration from, the Department of Justice. The real estate licensee will also be required to obtain and maintain in force a surety bond in the amount of $100,000.

Violations of these prohibited practices, or any other sections of the Act, are subject to civil and criminal penalties, including a fine up to $10,000 and imprisonment for not more than one year.