BREAKING NEWS! CA STATE BAR PUBLISHES GUIDANCE FOR LAW FIRMS ON SB 94
Wading through ambiguities in language in order to interpret the legislative intent of a new law isn’t easy, but the moral of the story is that it can be done, and thanks to the combined efforts of the attorneys and other great minds that make up the Commission on Homeowner Representation, it can be done successfully. Reading the California State Bar’s written guidance related to law firms representing homeowners seeking loan modifications, which was published online by the Bar today, provides proof that this statement is true.
The State Bar’s WRITTEN GUIDANCE DOES NOT PROHIBIT LAWYERS FROM BREAKING UP SERVICES RELATED TO A LOAN MODIFICATION INTO CONTRACTUAL SEGMENTS, PAID FOR AS THOSE SERVICES ARE COMPLETED.
HOWEVER, the Bar’s interpretation of the new law DOES NOT allow attorneys to accept funds in advance into a trust account and be paid from that trust account. The Bar focused on the word “receive” in the language contained in the statute as the basis for their interpretation, stating:
The legislation prohibits the collection of advance fees for loan modifications, as specified. Among other provisions, new Civil Code Section 2944.7(a)(1) provides as follows:
“Notwithstanding any other provision of law, it shall be unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following: (1) Claim, demand, charge, collect, or RECEIVE any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.”
Here’s a link to the Bar’s written guidance on SB 94:
http://calbar.ca.gov/calbar/pdfs/ethics/Ethics-SB94-FAQs.pdf
Whether the Bar’s interpretation of the trust account issue would be upheld by the courts is unknown, however, I think the salient point is clearly that the manner in which most if not all of the law firms that make up the Commission on Homeowner Representation have chosen to operate under SB 94 can now be assumed to be State Bar compliant under the new law.
And that’s a good thing. A very good thing. Because lawyers who help homeowners avoid foreclosure have a tough enough job these days fighting the banks and servicers who continue to refuse to follow rules and even laws… and they certainly don’t need to fight the State of California or State Bar as well.
Congratulations to all involved and thank you to the California State Bar for providing the written guidance as soon as was possible.
After reading SB 94 3 times I came to the same conclusion as the California State Bar, however, after discussing the SB 94 with the CA Department of Real Estate, they clearly had the idea that SB 94 meant NO ONE, Attorneys or Real Estate Brokers could not collect a PENNY until a loan mod was completed, no trail period, but a permanent loan mod would allow compensation.
I argued that SB 94 said services rendered and as long as you didn't break up the fees and completed the "Services Rendered" you would be compliant but he argued that because the new law required a 14 pt disclosure that the intent was to prohibit any fee paid until the loan mod was permanent. I wish the Department of Real Estate for California had people willing to explore the true intent of the law and it was clear by his comments that they believe ALL loan modification entities are a SCAM. The CA DRE needs to do their homework and clearly define SB 94.
I believe that a GOOD BROKERS and GOOD ATTORNEYS should be able to help homeowners! I have no problem with getting paid as we complete services, but SB 94 did not state a PERMANENT LOAN MOD meant "Services Rendered." In the immediate comments from our Governor after he signed the law on October 11th, 2009, he immediately made the comment that he wanted to allow the modification industry to help homeowners, not shut them down by only approving SB 94, he should make a call to the CA DRE!!!!!!!!!
There are still major problems with this interpretation.
What about litigating?
Is it going to be considered a loan modification if an attorney charges a retainer for litigating and the servicer at first contact offers a loan mod? I can see where that might pose a problem for attorneys.
This bill was pushed by the lenders and servicers, who have no desire to actually conduct loan modifications. They have gotten their wish, no advance fees for mods.
But, they just invoked the Law of Intended Consequences. That is because of the way the law was written, there will be many more lawsuits filed.
Two other points:
Attorneys are already preparing to challenge SB-94.
CA DRE has no control over attorneys, no matter what they want to think.
Couldn't the attorneys just sue lenders for fraud, concealment, or other various applicable violations of law, etc., charge their normal fees to the trust account, and use the leverage to accept modification if the lender/servicer feels that it is in their best interest not to pursue further scrutiny by the court with discovery?
In other words, don't hire the attorney to modify, hire the attorney to sue and see where the lender's cards fly? Is this breaking the new law?
In response to the comment made by momo777:
I want to be very clear here, because there is too much imprecise language floating around and the various state departments are dealing with training issues as related to the new law, which certainly doesn't help the situation. Every time someone speaks with someone new I end up going around the same issues again, so let me respond to your comment point by point:
1. I don't know when or with whom you spoke with at DRE, but either they or you are confused. AB 764, a bill introduced in the CA Assembly would have required both DRE and Bar licensed providers to wait until a loan modification was granted to be compensated for services, BUT SB 94 CLEARLY DOES NOT IMPOSE SUCH A REQUIREMENT.
2. As it pertains to DRE LICENSED PROVIDERS, SB 94 created one new section of the B&P Code (10085) and amended one existing section (10026).
3. In B&P Code 10026 is language that applies ONLY TO DRE LICENSED PROVIDERS and prohibits them from breaking up the services related to a loan modification into component parts.
4. The language in B&P Code 10085 applies ONLY TO DRE LICENSED PROVIDERS, although it is identical to the language contained in Civil Code 2944.7, WHICH APPLIES ONLY TO ATTORNEYS. It is the language that basically says that you cannot collect your fee until you've completed each and every service you've contracted for.
5. THERE IS NO LANGUAGE IN THE NEW LAW THAT PROHIBITS ATTORNEYS FROM BREAKING UP THE SERVICES RELATED TO A LOAN MODIFICATION INTO COMPONENT PARTS. THIS RESTRICTION ONLY APPLIES TO DRE LICENSED PROVIDERS.
6. Neither DRE licensed providers, nor Bar licensed providers are required to wait until after a permanent loan modification has been entered into by the borrower to collect their fee.
7. The new law simply states that you can't collect a fee until you've completed each and every service for which you've contracted, and in the case of DRE LICENSED PROVIDERS ONLY, because they cannot break up services into component parts, that means waiting until ALL of the contracted services have been delivered.
What follows was written by Senator Ron S. Calderon, the author/sponsor of SB 94 a couple of weeks before the Governor signed the legislation into law on October 11th. It should clear up the intent behind the legislation, as it discusses Sen. Calderon's rationale for the approach in SB 94, as opposed to the one used by the vetoed bill, AB 764.
I considered the approach in AB 764 when drafting SB 94, but ultimately rejected it for three reasons. First, preventing fee-for-service providers from charging their clients, unless they obtain a modification, will almost certainly increase the fees that fee-for-service providers charge their clients. If fee-for-service providers can only charge certain clients, they will need to increase the fees they charge those clients, to make up for their inability to charge other clients.
Second, the approach in AB 764 is likely to cause fee-for-service providers to cherry-pick their clients. If a provider knows he or she can only get paid if a modification is offered to a borrower, that provider is unlikely to take on the difficult cases, leaving borrowers most in need of help with fewer options for assistance.
Third, AB 764 is likely to force many fee-for-service providers out of business, which is likely to reduce the options for troubled borrowers even further.
I hope that helps, and feel free to write to me via email if you have any further questions... mandelman@mac.com.
In other words, don't hire the attorney to modify, hire the attorney to sue and see where the lender's cards fly? Is this breaking the new law?
ROCKETROB... Well, I don't think it would be breaking the law, as long as it wasn't a consistent practice. In other words, if every client you take on is to be litigated, and every one ends up applying for modification, and you never file and follow up on a lawsuit, then it's likely that it would be seen as being a transparent way to circumvent the intent of the new law. Mandelman
What about litigating?
Is it going to be considered a loan modification if an attorney charges a retainer for litigating and the servicer at first contact offers a loan mod? I can see where that might pose a problem for attorneys.
This bill was pushed by the lenders and servicers, who have no desire to actually conduct loan modifications. They have gotten their wish, no advance fees for mods.
But, they just invoked the Law of Intended Consequences. That is because of the way the law was written, there will be many more lawsuits filed.
Two other points:
Attorneys are already preparing to challenge SB-94.
CA DRE has no control over attorneys, no matter what they want to think.
Hey Pat...
Call me to discuss this further, but SB 94 should not materially inhibit a law firm's ability to represent clients in need of loan modifications or other foreclosure avoidance solutions. See my responses to the other comments for answers to your question about litigation.
Martin