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Lawyers Vexed by New Law Barring Up-Front Fees for Mortgage Modification Work
The Recorder
October 19, 2009
Backers of a new law that bars mortgage modification services from charging up-front fees (pdf) say the rules will put scam artists out of business.
But mortgage lawyers like Paul Molinaro wonder whether the new regulations will really just drive honest attorneys out of the practice.
"I think you're going to see a lot of lawyers not doing this anymore," said Molinaro, a founding partner in the Corona, Calif., firm of Fransen & Molinaro. "It's just not worth it."
Gov. Arnold Schwarzenegger this month signed Senate Bill 94, a response to complaints from desperate homeowners who have paid thousands of dollars in fees to mortgage modification services, only to learn later that the business did little or nothing to save their homes from foreclosure.
The new law, which took effect immediately after Schwarzenegger signed the bill, bars anyone from charging fees for trying to modify a residential loan until that work is completed. It also requires those service providers to tell clients, in writing, that nonprofit groups offer free help for troubled mortgage-holders.
Consumer groups, community organizations and the State Bar endorsed the legislation. Even though many lawyers complained that the ban on up-front fees would make loan modification work impractical, Bar leaders said new rules were justified by shady practices that have led consumers to file hundreds of complaints with the Bar.
In some cases, foreclosure relief consultants, who are not allowed to take advance fees, teamed with lawyers who could collect up-front payments. Attorney General Jerry Brown has sued a handful of attorneys for allegedly working with these consultants but never performing any substantive work to lower consumers' mortgage payments. The Bar also took the unusual step last month of naming 16 attorneys under investigation for misconduct related to loan modifications.
"In my 21 years in attorney discipline, I have not seen a crisis of this magnitude. It is truly unprecedented," Interim Chief Trial Counsel Russell Weiner said in a prepared statement.
But real estate attorneys say the new rules have created a host of unanswered questions. Can a firm accept a litigation retainer and later secure an unanticipated loan modification? Can lawyers place fees in a trust and draw on them when they finish the work?
"There is a lot of discussion and concern regarding the application of SB 94," said Scott Rogers, the past chairman of the Real Estate Property Law Section of the State Bar.
Bar spokeswoman Diane Curtis said Bar attorneys are working on a document that will answer members' questions about the new law. The law calls for violators to face Bar discipline.
SB 94 author Sen. Ronald Calderon, D-Montebello, said his legislation shouldn't drive any legitimate attorney out of business.
"It's just a matter of certain attorneys are used to working a certain way in order to provide cash flow," Calderon said. Attorneys who don't think they can deliver better mortgage terms to their clients "shouldn't take the case," he said.
Calderon is chairman of the powerful Senate Banking, Finance and Insurance Committee. Banks, credit unions and lending industry groups have contributed more than $18,000 in contributions to his 2010 re-election campaign.
Critics say Calderon is being unrealistic. Lenders fight many loan modification efforts, they say, and they employ high-priced lawyers of their own. Nonprofit agencies are overwhelmed by homeowners seeking help, and by the time a client approaches a lawyer they've probably already tried that option and left disappointed, they add.
What's more, tough cases can last months -- even a year or more, real estate attorneys say.
"I'm not willing to wait 15 months for my money, and then have to fight my client for it," Molinaro said.
Molinaro said his firm now provides what he calls mortgage counseling. Clients pay a flat fee up front, which he holds in trust. For that, they get advice on their options, including bankruptcy, tax implications and short sales, and help with applications for a loan modification. If they want more help, say, talking to a lender on the phone, they can come into the office and pay his hourly fee for service.
Molinaro and other attorneys would rather see the Legislature, the Bar and the attorney general go after bad apples with laws already on the books.
Attorneys with general questions about retainers and fee agreements should call the Bar's ethics hotline at 1-800-238-4427, Curtis said.
