County of Los Angeles Department of Consumer Affairs New Consumer Laws 2010

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LOAN MODIFICATION ADVANCE FEES

SB 94 (Chap. 630); amends B&P sections 10026, 10085, 10133.1, and 10177; adds B&P section 10147.6; repeals B&P sections 6106.3 and 10085.6; amends CC section 2945.1; adds CC section 2944.6; repeals CC section 2944.7 and amends Fin section 22161.

Emergency bill - Effective October 11, 2009. Sunsets Jan. 1, 2013

Background: This statute was enacted in response to many scams targeting homeowners in foreclosure. Here are two recent examples:

1. A company solicited homeowners with mail flyers offering to help them stop the foreclosure process on their homes. Homeowners were told the company would renegotiate their mortgages, reduce monthly payments, and transfer any delinquent loan amounts to the renegotiated principal. The company demanded a substantial up-front fee. The victims were told to stop any mortgage payments or communications with their lender, claiming they would interfere with the company's effort to negotiate the loan modification. When victims complained that they were still receiving delinquency or foreclosure notices from their lenders, they were told that the mortgage loans had been renegotiated, but the lenders needed a "good faith" payment to secure the non-existent new accounts. No services were rendered.
2. A company sent out flyers to homeowners with the headline, "FINAL NOTICE - Respond to this notice immediately." Homeowners who called the number on the flyer were told their mortgages could be renegotiated to lower payments, but they had to pay thousands of dollars in up-front fees. The victims were instructed not to contact their lenders, and were assured the company had private lenders and exclusive specialists experienced in renegotiating home loans. The perpetrators had no real estate licenses, legal training, or any experience in the home mortgage market. Investigators found no evidence of any successful loan modifications. Most of the victims were either forced into bankruptcy or lost their homes to foreclosure.

The new law: Prohibits advance-fees for loan modifications, and provides other consumer protections, including:

Fees for loan modification assistance

• The law used to allow real estate licensees to charge borrowers an advance fee for negotiating a loan modification, as long as the broker's fee agreement (generally the licensee’s standard contract) had been reviewed by the Department of Real Estate (DRE), and DRE had no objections to it. Under the new statute, such advance fees are prohibited.
• Attorneys and accountants were also generally exempt from the advance fee regulation. The new law applies to them too.
• The law does not prohibit or limit fees to be paid after service has been completed, but such fees are allowed only if the consumer is provided with the following notice in 24 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.”

• The contract and notice must be translated into Spanish, Korean, Vietnamese, Tagalog, or Chinese if the negotiation is in one of those languages).
• No wage assignments, liens of any type on real or personal property, or any other security can be taken.

Foreclosure consulting

Existing law defines and regulates foreclosure consultants as those who offer, for compensation, to perform various services for a homeowner facing a foreclosure sale. The law used to exempt licensed real estate or finance lenders from the definition of foreclosure consultant. The new statute allows this exemption only when the licensees are acting under the authority of their license.

HUD-approved loan modification services

The new law clarifies that organizations approved by HUD to provide free loan modification services are exempt from the foreclosure consultant law.

For more information:
County of Los Angeles Department of Consumer Affairs
B-96 Kenneth Hahn Hall of Administration
500 W. Temple Street * Los Angeles, CA 90012-2706
Telephone (800) 593-8222 (within the County) * (213) 974-1452
Web site: dca.lacounty.gov