Published in the March 2009 issue of the United States Organizations for Bankruptcy Alternative's (USOBA) The Bottom Line
Mortgage Fraud Prevention Acts allow law enforcement officials to protect consumers against all types of mortgage fraud, and also provide a private right of action to homeowners.
Anyone advertising and marketing assistance to consumers in financial distress now has one more new regulatory regime to consider when promoting services related to mortgage assistance: "Mortgage Rescue Fraud Protection Acts" (sometimes referred to as "Mortgage Rescue Fraud Prevention Acts"). With foreclosure rates rising, these statutes have been enacted in a number of states including Colorado, Delaware, Hawaii, Illinois, Indiana, Massachusetts, Maryland, Minnesota, Nebraska, New Hampshire, New York, Nevada, Oregon, and Washington.
These statutes aim to protect homeowners susceptible to predatory abuses. The goal is to help prevent cases in which a homeowner seeking help to avoid foreclosure loses his home to his supposed "rescuer." In some states, the statute applies to anyone who offers to assist a homeowner with such foreclosure issues. In addition, they have often been paired with state legislative efforts to boost available foreclosure counseling for troubled homeowners, so that affected homeowners might better understand their options in order to take the proper action to save their homes.
However, these statutes, which contain varying triggering definitions and requirements, do not all cover the same persons or activities. As a result, an entity - be it a lead marketer, counseling agency, a debt settlement company, or foreclosure assistant - seeking to promote assistance to homeowners in more than one state faces the potentially daunting task of not only having to comply with multiple state statutes targeted only at foreclosure assistance, but also with existing requirements that may apply to these and other activities (e.g., state debt adjusting laws, federal and state credit repair laws, etc.) and advertising and marketing in general.
The Acts add an additional, and sometimes inconsistent, level of regulation to the practice of foreclosure counseling. If applicable, they may require specific information and disclosures, written contracts, notices, and plain language disclosures. They also impose specific prohibitions which could impact the ability of service providers to provide counseling otherwise viewed as beneficial to the homeowner. Moreover, the Acts expose the provider to additional liability, including private litigation and potential criminal sanctions for non-compliance.
In assessing the applicability of the statutes, it is critical to consider not only the services provided, but also the advertising and marketing messages that are presented. Debt settlement companies, along with those companies marketing on their behalf, cannot afford to ignore these statutes - the risk of class action lawsuits, state enforcement actions, and the significant negative effects on the companies' reputations, are simply too great.
A state's typical Mortgage Rescue Fraud Protection Act generally includes provisions pertaining to foreclosure consultants and foreclosure reconveyances. Of particular interest to the debt settlement community - and summarized below -are key provisions applicable to foreclosure consultants:
Triggering Definition
The breadth and scope of a particular state's Mortgage Rescue Fraud Protection Act differ based on the particular attributes of that state. Many of these Acts use the term "foreclosure consultant" as a trigger.
For example, the Delaware Mortgage Rescue Fraud Protection Act, one of the broader statutes, defines a "foreclosure consultant" as an individual who solicits or contacts a homebuyer and systematically, either directly or indirectly, contacts owners of property which court records or newspaper advertisements reflect are in foreclosure or are in danger of foreclosure, or as someone who makes a representation or offer to perform any service that he represents will:
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Stop, enjoin, delay, void, set aside, annul, stay, or postpone a foreclosure sale;
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Obtain forbearance from any mortgage servicer, mortgagee or mortgage assignee;
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Assist the homeowner to exercise a right of reinstatement provided in the mortgage loan documents or to refinance a mortgage loan that is in foreclosure and for which an action to foreclose the mortgage has been filed;
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Obtain an extension of the period within which the homeowner may reinstate the homeowner's obligation or extend the deadline to object to a ratification;
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Obtain a waiver of an acceleration clause contained in any promissory note or contract secured by a mortgage on a residence in foreclosure or contained in the mortgage;
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Assist the homeowner to obtain a loan or advance of funds;
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Avoid or ameliorate the impairment of the homeowner's credit resulting from an action to foreclose the mortgage or the conduct of a foreclosure sale;
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Save the homeowner's residence from foreclosure;
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Purchase or obtain an option to purchase the homeowner's residence in foreclosure within twenty days prior to the date advertised for a foreclosure sale;
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Arrange for the homeowner to become a lessee or renter entitled to continue to reside in the homeowner's residence in foreclosure;
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Arrange for the homeowner to have an option to repurchase the homeowner's residence in foreclosure; or
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Engage in any documentation, grant, conveyance, sale, lease, trust, or gift by which the homeowner limits or impairs the homeowner's equity of redemption in the homeowner's residence in foreclosure.1
Other states' Acts may use different terms. For example, in Hawaii, the Mortgage Rescue Fraud Protection Act covers "distressed property consultants." That term is defined as any person who performs or makes any solicitation, representation, or offer to perform any of the following relating to a distressed property:
- Stop or postpone the foreclosure sale or loss of any distressed property due to the nonpayment of any loan that is secured by the distressed property;
- Stop or postpone the charging of any lien or encumbrance against any distressed property or eliminate any lien or encumbrance charged against any distressed property for the nonpayment of any taxes, lease assessments, association fees, or maintenance fees;
- Obtain any forbearance from any beneficiary or mortgagee, or relief with respect to a tax sale of the property;
- Assist the owner to exercise any cure of default arising under Hawaii law;
- Obtain any extension of the period within which the owner may reinstate the owner's rights with respect to the property;
- Obtain any waiver of an acceleration clause contained in any promissory note or contract secured by a mortgage on a distressed property or contained in the mortgage;
- Assist the owner in foreclosure loan default, or post-tax sale redemption period to obtain a loan or advance of funds;
- Avoid or ameliorate the impairment of the owner's credit resulting from the recording or filing of a notice of default or the conduct of a foreclosure sale or tax sale; or
- Save the owner's residence from foreclosure or loss of home due to nonpayment of taxes.2
Other states use similar terms with narrower or slightly different definitions.
Available Exemptions
While Mortgage Rescue Fraud Protection Acts exempt certain persons and agreements, the available list of exemptions varies on a state by state basis. Common exempt persons or agreements often include governmental entities, persons acting under authority or approval of the U.S. Department of Housing and Urban Development, individuals admitted to practice law while performing any activity related to that individual's regular practice of law in a particular state, an individual who holds a lien against any residence in foreclosure so long as the lien resulted from a foreclosure reconveyance, regulated financial institutions, originators of loans subject to RESPA, judgment creditors, licensed title insurers, and licensed mortgage brokers or lenders.
In addition, many Mortgage Rescue Fraud Protection Acts exempt nonprofit organizations that offer counseling or advice to homeowners in foreclosure or loan default if the organization is not directly or indirectly related to, and does not contract for services with, for-profit lenders or foreclosure purchasers, and organizations that are licensed to practice debt adjusting services under state law.
Organizations that choose to rely on one or more available exemption should review the language in each relevant statute and its operations before relying upon a particular exemption.
Foreclosure Consulting Contracts
Mortgage Rescue Fraud Protection Acts require foreclosure consultants to provide to the homeowner a signed, dated, and acknowledged copy of the foreclosure consulting contract and an attached Notice of Cancellation immediately upon execution of the contract.
Written Contract
Mortgage Rescue Fraud Protection Acts require that foreclosure consulting contracts be in writing and be provided to the homeowner in advance such that the contract is in the homeowner's possession for some specified time period before the homeowner signs it. In addition, typically the contract must meet certain requirements: it must conform to a particular font size, it must contain a disclosure of the nature of the services to be provided, it must provide an estimate of the total time, and it must disclose the terms of any compensation to be received by the foreclosure consultant. The statutes also may require the signatures of the provider and the homeowner(s), as well as the homeowner(s)'s initials on each page.
Disclosures
Under the state statutes, foreclosure consulting contracts generally are required to include a statutory notice, which is printed in a specified font and type (e.g., bold-face), includes the name of the foreclosure consultant, and is located in immediate proximity to the space reserved for the homeowner's signature. The specific text of the disclosure differs on a state-by-state basis. In some states, the disclosure is very short, while in others, it may contain several paragraphs.
For example, the Delaware Mortgage Rescue Fraud Protection Act requires the following:
NOTICE REQUIRED BY DELAWARE LAW
[Name of foreclosure consultant] or anyone working for that company or individual CANNOT ask you to sign or have you sign any lien, mortgage or deed as part of signing this agreement unless the terms of the transfer or encumbrance are specified in this document and you are given a separate explanation of the precise nature of the transaction.
[Name of foreclosure consultant] or anyone working for that company or individual CANNOT guarantee you that they will be able to refinance your home or arrange for you to keep your home. Continue making mortgage payments until a refinancing, if applicable, is approved.
You may at any time cancel this contract, without penalty of any kind. If you want to cancel this contract, mail or deliver a signed and dated copy of the Notice of Cancellation, or any other written notice indicating your intent to cancel, to [name and address of the foreclosure consultant].
As part of any cancellation, you, the homeowner, must repay any money actually spent on your behalf by [name of foreclosure consultant] prior to receipt of this notice and as a result of this agreement, within sixty days, along with interest at the primary credit rate established by the United States Federal Reserve Board plus 2 percentage points, with the total interest rate not to exceed 8% per year.
THIS IS AN IMPORTANT LEGAL CONTRACT AND COULD RESULT IN THE LOSS OF YOUR HOME. CONTACT AN ATTORNEY FOR LEGAL ADVICE OR A HOUSING COUNSELOR APPROVED BY THE FEDERAL DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT FOR OTHER OPTIONS WITH YOUR LENDER BEFORE SIGNING.
Notice of Cancellation
Foreclosure consultants are required to include a completed form in duplicate, entitled "NOTICE OF CANCELLATION," which must accompany the foreclosure consulting contract. The provisions requiring a Notice of Cancellation often will specify that homeowners have three or more days in which to cancel the foreclosure consulting contract.
If a foreclosure reconveyance is included in a foreclosure consulting contract or arranged after the execution of a foreclosure consulting contract, the foreclosure purchaser may be statutorily required to provide the homeowner with a document entitled, "NOTICE OF RIGHT TO RESCIND TRANSFER OF DEED OR TITLE," in a specified format.
Waiver of Rights
These Acts typically prohibit, and declare void, any provisions which attempt to waive or purport to waive the homeowner's rights under the statute, his consent to jurisdiction for litigation or the choice of law in a state other than in that state, his consent to a venue in a county other than the county in which the property is located, or any provisions which impose costs or filing fees greater than the actual costs and fees.
Prohibited Acts
The statutes generally list a number of prohibited acts and practices that are considered violations of the law. For example, some statutes contain provisions prohibiting foreclosure consultants from doing the following:
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charging fees above a certain amount or when such a fee may be collected, such as limiting the received of compensation until after services have been full performed;
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claiming any interest or any other compensation for any loan that the foreclosure consultant makes to the homeowner that exceeds __% per year;
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taking any wage assignment, any lien, or any type of real or personal property, or other security, to secure the payment of compensation;
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receiving any consideration from any third party in connection with foreclosure consulting services provided to a homeowner unless the consideration is first fully disclosed in writing to the homeowner;
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acquiring any interest, directly or indirectly, or by means of a related person, in a residence in foreclosure from a homeowner with whom the foreclosure consultant has contracted;
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taking any power of attorney from a homeowner to enter into a foreclosure consulting contract that does not comply in all respects with this subchapter; or
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facilitating or engaging in any transaction that is unconscionable under the terms and circumstances of the transaction.
Enforcement and Penalties
The statutes typically provide for enforcement by the state attorney general and allow for private actions for damages by homeowners, including a right to attorney's fees and treble damages. In addition, the statutes impose civil and criminal penalties for violations of the law's provisions. Violators face fines (or lawsuits initiated by homeowners) for amounts as much as $10,000 or higher per violation, as well as possible jail time.
Conclusion
As the summary above makes clear, the various state Mortgage Fraud Prevention Acts allow law enforcement officials to protect consumers against all types of mortgage fraud, and also provide a private right of action to homeowners. As a result, state regulators and private plaintiffs can utilize these statutes to assist them in their pursuit of both non-fraudulent counseling activity, which has not fully complied with the statutes' requirements, and their intended targets of mortgage rescue consultants.
Moreover, the interaction of state laws targeted to curb mortgage fraud with existing state debt adjusting statutes, credit repair laws, and others may produce unanticipated compliance requirements. Therefore, in order to ensure compliance and minimize legal risk, it is absolutely critical for those promoting or providing debt and mortgage related services to understand and carefully consider the various state Mortgage Fraud Prevention Acts - and their interrelationship with other federal and state laws regulating business - before marketing to, counseling, or offering other services to homeowners in financial distress.
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For more information on housing counseling and related topics, contact Jonathan L. Pompan at 202/344-4383 or jlpompan@venable.com, or Jeffrey S. Tenenbaum at 202/344-8138 or jstenenbaum@venable.com.
To view Venable's index of articles and PowerPoint presentations on credit counseling, housing counseling, debt settlement and related legal topics, please see the Credit Counseling page.
This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to specific fact situations.
1Mortgage Rescue Fraud Protection Act, DE SB 252 (2008), effective January 1, 2009.
2Mortgage Rescue Fraud Act, HI H.B. 2326, § 2 (2008), effective Oct. 1, 2008.