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Loan-Modification Work May Flout Ethics Rules, N.J. Panels Warn
New Jersey Law Journal
July 07, 2009
Attorneys who represent customers of mortgage-modification companies -- increasingly attractive work these days -- are at risk of losing their law licenses if they split fees with the financiers, two New Jersey Supreme Court committees say.
In a joint opinion issued June 26, the Advisory Committee on Professional Ethics and the Committee on the Unauthorized Practice of Law state that acceptance of legal fees from such a company, or dividing with the company a fee paid by a homeowner, constitutes impermissible fee-sharing, and an attorney who engages in such a practice "imperils his or her license to practice law."
However, the opinion does not rule out use of financial or mortgage analysts by lawyers providing mortgage-modification services for clients who directly retain an attorney. An attorney may hire such an analyst as an employee or consultant, so long as the analyst's compensation is not based on the number of clients the analyst brings in, the committees say.
The ruling, ACPE Opinion 716/UPLC Opinion 45, stems from a growing number of inquiries to the ACPE's ethics hotline about the propriety of performing loan-modification services under the auspices of such companies, some of which are aggressively courting lawyers.
"Like the distressed homeowners who may be tempted by a fraudulent scam that guarantees to 'save their homes,' New Jersey lawyers are also being tempted with a seemingly lucrative business opportunity that could adversely affect their licenses to practice law," the opinion says. "Most of the business models raised by attorneys for review ... entail serious attorney ethics violations."
Inquiries to the ethics hotline generally related three scenarios, the committees say:
In one, a for-profit, mortgage-modification company approaches homeowners and indicates it is working with an attorney. The homeowner pays a fee to the company or the attorney -- which splits it with the other -- or pays separate fees to the attorney and company.
Paying fees to a loan-modification company that refers or recommends clients to, or shares fees with, an attorney is no different from using a "runner" who signs up clients for an attorney and is paid for doing so, the opinion says.
A lawyer who gives "anything of value" to any person who recommends the lawyer's employment violates Rule of Professional Conduct 7.3(d), and is impermissibly sharing fees in violation of RPC 5.4(a) if he or she accepts money for legal services from the mortgage-modification company or if the client pays separate fees to the company and attorney.
In another variation, an attorney works as in-house counsel for the mortgage-modification company and provides legal services to its clients, solicited by the company. That runs contrary to the definition of in-house counsel in Rule 1:27-2 as a lawyer employed for an enterprise that is not itself engaged in the practice of law or the rendering of legal services, the committees say. However, staff attorneys of nonprofit groups structured under R.1:21-1(e), such as Legal Services of New Jersey, are exempt from the prohibition.
In the third scenario, a mortgage analyst works for and is supervised by the attorney, processing paperwork and taking initial steps to renegotiate the loan, and the attorney solicits clients. This practice is permissible so long as the attorney is responsible for the analyst's work, the client-homeowner hires the attorney directly and the attorney's solicitation of clients complies with attorney-advertising rules, the committees say. The analyst's compensation also must not be based on the number of clients he or she brings in.
The joint opinion states that negotiating a mortgage as an advocate for another person constitutes the practice of law, but it makes limited exceptions for debt adjusters licensed by the Department of Banking and Insurance. DOBI regulations only allow representatives of nonprofit agencies to be licensed as debt adjusters.
In addition, a nonlawyer licensed by a government agency to renegotiate a mortgage for another person is not engaged in the unauthorized practice of law, the opinion says.
Working with a loan-modification company has spelled trouble for one New Jersey firm, Kwasnik, Rodio, Kanowitz & Buckley of Cherry Hill, now a third-party defendant in a suit by the Federal Trade Commission in federal court in Camden, N.J.
The FTC charges that Hope Now Modifications instructed struggling homeowners to pay an up-front fee, usually the amount of their monthly mortgage, allegedly in violation of the Federal Trade Commission Act. On May 13, Hope Now impleaded Kwasnik Rodio, alleging malpractice and claiming that partner Michael Kwasnik represented to the company that following the business model he proposed would comply with state and federal regulations.
Kwasnik Rodio did not answer the third-party complaint and was found in default on June 4, but the firm filed an answer the same day denying the charges. On June 5, it filed a motion, now pending, to vacate the default.
Kwasnik and his lawyer, Marlton, N.J., solo Robert Cusick, could not be reached for comment.
