CA SB 94 on Lawyers & Loan Modifications Passes Assembly… 62-10

The California Assembly has passed Senate Bill 94, a bill that seeks to protect homeowners from loan modification scammers, but could end up having the unintended consequence of eliminating a homeowner’s ability to retain an attorney to help them save their home from foreclosure.

The bill, which has an “urgency clause” attached to it, now must pass the State Senate, and if passed, could be signed by the Governor on October 11th, and go into effect immediately thereafter.

SB 94′s author is California State Senator Ron Calderon, the Chair of the Senate Banking Committee, which shouldn’t come as much of a surprise to anyone familiar with the bigger picture.  Sen. Calderon, while acknowledging that fee-for-service providers can provide valuable services to homeowners at risk of foreclosure, authored SB 94 to ensure that providers of these services are not compensated until the contracted services have been performed.

SB 94 prevents companies, individuals… and even attorneys… from receiving fees or any other form of compensation until after the contracted services have been rendered.  The bill will now go to the Democratic controlled Senate where it is expected to pass.

Supporters of the bill say that the state is literally teeming with con artists who take advantage of homeowners desperate to save their homes from foreclosure by charging hefty fees up front and then failing to deliver anything of value in return.  They say that by making it illegal to charge up front fees, they will be protecting consumers from being scammed.

While there’s no question that there have been some unscrupulous people that have taken advantage of homeowners in distress, the number of these scammers is unclear.  Now that we’ve learned that lenders and servicers have only modified an average of 9% of qualified mortgages under the Obama plan, it’s hard to tell which companies were scamming and which were made to look like scams by the servicers and lenders who failed to live up to their agreement with the federal government.

In fact, ever since it’s come to light that mortgage servicers have been sued hundreds of times, that they continue to violate the HAMP provisions, that they foreclose when they’re not supposed to, charge up front fees for modifications, require homeowners to sign waivers, and so much more, who can be sure who the scammers really are.  Bank of America, for example, got the worst grade of any bank on the President’s report card listing, modifying only 4% of the eligible mortgages since the plan began.  We’ve given B of A something like $200 billion and they still claim that they’re having a hard time answering the phones over there, so who’s scamming who?

To make matters worse, and in the spirit of Y2K, the media has fanned the flames of irrationality with stories of people losing their homes as a result of someone failing to get their loan modified.  The stories go something like this:

We gave them 1,000.  They told us to stop making our mortgage payment.  They promised us a principal reduction.  We didn’t hear from them for months.  And then we lost our house.

I am so sure.  Can that even happen?  I own a house or two.  Walk me through how that happened again, because I absolutely guarantee you… no way could those things happen to me and I end up losing my house over it.  Not a chance in the world.  I’m not saying I couldn’t lose a house, but it sure as heck would take a damn sight more than that to make it happen.

Depending on how you read the language in the bill, it may prevent licensed California attorneys from requiring a retainer in advance of services being rendered, and this could essentially eliminate a homeowner’s ability to hire a lawyer to help save their home.

Supporters, on the other hand, respond that homeowners will still be able to hire attorneys, but that the attorneys will now have to wait until after services have been rendered before being paid for their services.  They say that attorneys, just like real estate agents and mortgage brokers, will now only be able to receive compensation after services have been rendered.

But, assuming they’re talking about at the end of the transaction, there are key differences.  Real estate agents and mortgage brokers are paid OUT OF ESCROW at the end of a transaction.  They don’t send clients a bill for their services after the property is sold.

Homeowners at risk of foreclosure are having trouble paying their bills and for the most part, their credit ratings have suffered as a result.  If an attorney were to represent a homeowner seeking a loan modification, and then bill for his or her services after the loan was modified, the attorney would be nothing more than an unsecured creditor of a homeowner who’s only marginally credit worthy at best.  If the homeowner didn’t pay the bill, the attorney would have no recourse other than to sue the homeowner in Small Claims Court where they would likely receive small payments over time if lucky.

Extending unsecured credit to homeowners that are already struggling to pay their bills, and then having to sue them in order to collect simply isn’t a business model that attorneys, or anyone else for that matter, are likely to embrace.  In fact, the more than 50 California attorneys involved in loan modifications that I contacted to ask about this issue all confirmed that they would not represent homeowners on that basis.

One attorney, who asked not to be identified, said: “Getting a lender or servicer to agree to a loan modification takes months, sometimes six or nine months.  If I worked on behalf of homeowners for six or nine months and then didn’t get paid by a number of them, it wouldn’t be very long before I’d have to close my doors.  No lawyer is going to do that kind of work without any security and anyone who thinks they will, simply isn’t familiar with what’s involved.”

“I don’t think there’s any question that SB 94 will make it almost impossible for a homeowner to obtain legal representation related to loan modifications,” explained another attorney who also asked not to be identified.  “The banks have fought lawyers helping clients through the loan modification process every step of the way, so I’m not surprised they’ve pushed for this legislation to pass.”

Proponents of the legislation recite the all too familiar mantra about there being so many scammers out there that the state has no choice but to move to shut down any one offering to help homeowners secure loan modifications that charges a fee for the services.  They point out that consumers can just call their banks directly, or that there are nonprofit organizations throughout the state that can help homeowners with loan modifications.

While the latter is certainly true, it’s only further evidence that there exists a group of people in positions of influence that are unfamiliar , or at the very least not adequately familiar with obtaining a loan modification through a nonprofit organization, and they’ve certainly never tried calling a bank directly.

The fact that there are nonprofit housing counselors available, and the degree to which they may or may not be able to assist a given homeowner, is irrelevant.  Homeowners are well aware of the nonprofit options available.  They are also aware that they can call their banks directly.  From the President of the United States and and U.S. Attorney General to the community newspapers found in every small town in America, homeowners have heard the fairy tales about about these options, and they’ve tried them… over and over again, often times for many months.  When they didn’t get the desired results, they hired a firm to help them.

Yet, even the State Bar of California is supporting SB 94, and even AB 764, a California Assembly variation on the theme, and one even more draconian because of its requirement that attorneys only be allowed to bill a client after a successful loan modification has been obtained.  That means that an attorney would have to guarantee a homeowner that he or she would obtain a modification agreement from a lender or servicer or not get paid for trying.  Absurd on so many levels.  Frankly, if AB 764 passes, would the last one out of California please turn off the lights and bring the flag.

As of late July, the California State Bar said it was investigating 391 complaints against 141 attorneys, as opposed to nine investigations related to loan modifications in 2008.  The Bar hasn’t read anywhere all of the complaints its received, but you don’t have to be a statistician to figure out that there’s more to the complaints that meets the eye.  So far the State Bar has taken action against three attorneys and the Attorney General another four… so, let’s see… carry the 3… that’s 7 lawyers.  Two or three more and they could have a softball team.

At the federal level they’re still reporting the same numbers they were last spring.  Closed 11… sent 71 letters… blah, blah, blah… we’ve got a country of 300 million and at least 5 million are in trouble on their mortgage.  The simple fact is, they’re going to have to come up with some serious numbers before I’m going to be scared of bumping into a scammer on every corner.

Looking Ahead…

California’s ALT-A and Option ARM mortgages are just beginning to re-set, causing payments to rise, and with almost half of the mortgages in California already underwater, these homeowners will be unable to refinance and foreclosures will increase as a result.  Prime jumbo foreclosure rates are already up a mind blowing 634% as compared with January 2008 levels, according to LPS Applied Analytics.

Clearly, if SB 94 ends up reducing the number of legitimate firms available for homeowners to turn to, everyone involved in its passage is going to be retiring.  While many sub-prime  borrowers have suffered silently through this horror show of a housing crisis, the ALT-A and Option ARM borrowers are highly unlikely to slip quietly into the night.

There are a couple of things about the latest version of SB 94 that I found interesting:

1. It says that a lawyer can’t collect a fee or any other compensation before serivces have been delivered, but it doesn’t make clear whether attorneys can ask the client to deposit funds in the law firm’s trust account and then bill against thsoe funds as amounts are earned.  Funds deposited in a law firm trust account remain the client’s funds, so they’re not a lawyer’s “fees or other compensation”.  Those funds are there so that when the fees have been earned, the lawyer doesn’t have to hope his or her bill gets paid.  Of course, it also says that an attorney can’t hold any security interest, but money in a trust account a client’s money, the attorney has no lien against it.  All of this is a matter of interpretation, of course, so who knows.

2. While there used to be language in both the real estate and lawyer sections that prohibited breaking up services related to a loan modification, in the latest version all of the language related to breaking up services as applied to attorneys has been eliminated.  It still applies to real estate licensed firms, but not to attorneys. This may be a good thing, as at least a lawyer could complete sections of the work involved as opposed to having to wait until the very end, which the way the banks have been handling things, could be nine months away.

3. The bill says nothing about the amounts that may be charged for services in connection with a loan modification.  So, in the case of an attorney, that would seem to mean that… well, you can put one, two and three together from there.

4. Lawyers are not included in definition of foreclosure consultant. And there is a requirement that new language be inserted in contracts, along the lines of “You don’t have to pay anyone to get a loan modification… blah, blah, blah.”  Like that will be news to any homeowner in America.  I’ve spoken with hundreds and never ran across one who didn’t try it themselves before calling a lawyer.  I realize the Attorney General doesn’t seem to know that, but look… he’s been busy.


Will SB 94 actually stop con artists from taking advantage of homeowners in distress?  Or will it end up only stopping reputable lawyers from helping homeowners, while foreclosures increase and our economy continues its deflationary free fall?  Will the California State Bar ever finishing reading the complaints being received, and if they ever do, will they understand what they’ve read.  Or is our destiny that the masses won’t understand what’s happening around them until it sucks them under as well.

I surely hope not.  But for now, I’m just hoping people can still a hire an attorney next week to help save their homes, because if they can’t… the Bar is going to get a lot more letters from unhappy homeowners.


  1. PaulMolinaroEsq says

    My immediate, yet admittedly not well thought out, reaction is to ask our political watchdawgs to add a part two to this law which would prohibit the lenders from paying their attorneys (whether in-house or out-house counsel) until AFTER the homeowner has been thoroughly financially fonged. However, the lenders will always pay their staff of suits, and that is what makes this an unfair law even if part 2 is added.

    Look, it really is an unfair fight... in this corner we have desperate and broke homeowners who have no clue how to tell the hype from fact as to their rights and obligations under the note and deed of trust and without even a trainer or coach and in the that corner we have a huge conglomerate of institutions with strong political ties, teams of ivy league lawyers, MBAs, and greedy CEOs who have the single goal of lining their own pockets with cash.

    But getting back to the point of my post... by destroying the financial ability of law firms to handle non-litigation negotiations with lenders on behalf of borrowers, this law will do nothing positive for homeowners that could not have been done by more reasonable and well-thought-out means.

    As a business model, let’s run through what will happen… a financially strapped borrower goes to a law firm for help, and…

    Successful Outcome – Modification
    Lawyer is successful with the loan modification. Borrower now has to make monthly payments. Lawyer sends client-borrower a bill. Client has barely enough to pay the mortgage and weighs the options of whether to pay lawyer or tell him/her to fly a kite. Lawyer now forced to decide whether to sue client. Most lawyers will not sue and avoid these clients from that point on.

    Unsuccessful Outcome – No Modification
    Client is upset at lawyer. Client needs cash to move and cash to put down on a month’s rent plus security deposit. Lawyer sends very unhappy client-borrower a bill. Client calls lawyers office and uses expletives that were previously reserved for the lender’s customer service reps. Lawyer decides to write off the losses and vows never to help a homeowner again.

    My firm takes money up-front when we litigate. That money is placed into a trust account for monthly payments of our fees. The client then replaces the money billed against the trust at the end of each month. That assures payment for services, and at least a one month warning if a client decides that the lawsuit is no longer worth it. This will likely become the model for non-litigation mortgage modification work, but it would remain to be seen whether it is practical or soon to be outlawed as well.

    Just my opinion, of course…

    - Paul

  2. RandallMcK says

    I feel the same way, my response is just irritation and frustration. I have been working, processing, and negotiating loan modifications for 2 years now. I have helped set up a few companies, and have this thing down to a science. I just got the news, that Oct. 11th, we are done, from my boss. I think of the hundreds of people I have personally helped with modifications, most of whom had tried to do it themselves, and got denied. Hundreds of families were able to stay in thier homes, hundreds of dads, man to man, dad to dad, thanked me that they didnt have to tell thier wife and kids that they failed....Now I'm out of a job, and will have to tell my wife and kids something similiar if i cant find something soon.

    This whole time, I get angry when people act like what we do is illigitimate, or criminal. I have never ripped anyone off, and when we wernt able to complete the job, we gave the money back, and did what we could to ease the frustration. I understand there is alot of people who arnt like that, but like you mentioned, how many THOUSANDS of families got to save thier homes by working with companies like ours? How many millions over the next few years will lose thiers because they wernt able to get help?

    I've been doing this for quite a while, and I still have a hard time on some of these files. Imagine the nightmare of having no clue even where to start. I dont know. Like you said, dont forget to turn out the lights, and hold on to your ass, you thought this mortgage crisis in CA was bad now.....

  3. abosarge says

    I notice that non-profits are exempt and that payments from the gov are not considered violations of the advance payment prohibition. I also notice ACORN supported AB 94. Go figure. Watch for non-profits to align with attorneys to skirt this law.

    I am a small law office and only took in clients that came to me on a referral basis. Now I will not accept any more loan mod clients. I have plenty of other legal business to attend to from paying clients (at least clients that still can legally pay me for my services).

    I expect the scam artists who seemed to have no problem committing fraud will now be scared into being legit by this law. LOL

    In reality, its only those legit services that will probably stop at this point.

    If I could have at least held funds in my trust account pending a successful loan mod, that would have kept me in the game. As much as I would like to help people for free, I have to feed my family and pay my law school loan from 15 years ago. Thanks California legislature!

  4. PaulMolinaroEsq says

    RE: "I expect the scam artists who seemed to have no problem committing fraud will now be scared into being legit by this law. LOL"

    And as we say in the NRA... where guns are outlawed only outlaws have guns.

    My law firm takes cases against loan mod scammers... and the crap they have pulled was already illegal... adding a few more causes of action to the complaints will not hyperscare them into compliance.

    - Paul

  5. Do_the_math says

    PaulMolinaroEsq wrote:
    RE: "I expect the scam artists who seemed to have no problem committing fraud will now be scared into being legit by this law. LOL"

    And as we say in the NRA... where guns are outlawed only outlaws have guns.

    My law firm takes cases against loan mod scammers... and the c**p they have pulled was already illegal... adding a few more causes of action to the complaints will not hyperscare them into compliance.

    - Paul

    So are you saying your firm is a resource for borrowers who have been scammed by illegal mod firms?

    If so, attorneys such as yourself will do more to clean up the industry than all regulators combined.

  6. PaulMolinaroEsq says

    RE: "If so, attorneys such as yourself will do more to clean up the industry than all regulators combined."

    I wish private attorneys could do that... but there are some financial problems with the private attorney general concept here... in a typical loan mod scam, the money each INDIVIDUAL is scammed out of is usually a few grand... filing a case... serving the multiple defendants... some out of state... doing written discovery... deposing the scammers... opposing motions and filing motions... and then the jury trial... that can cost the victims some serious money... which of course they DO NOT HAVE.

    Thus, filing complaints with state and federal agencies, small claims court, pursuing criminal prosecution, etc. can be more appealing. There are already plenty of laws in place for the state and feds to use. More laws will just take the good guys out of the field.

    We get a lot of calls from alleged scam victims, but we select the ones who have the ability to go to the mat and we seriously look at the solvency of the alleged wrongdoers. Collection of judgment money is a major concern… bad guys have a way of changing companies, moving, filing BK, disappearing, and just being plain broke.

    - Paul

  7. Common says

    I believe many questions would be answered if a list was compiled showing out of the maybe thousand loan modification actually completed, how many had third parties involved. The lenders and servicers keep records on every file, require they open the files with approved loan modification applications and see if a third party was involved. Once this percentage is known, an easy decision should result in allowing these companies to exist or not.

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