ABA and More Than a Dozen State Bars Ask Congress for Lawyer Exemption on Loan Modification Rule
Our nationâ€™s economic recession and foreclosure crisis, brought out some of the worst America has to offer.Â People who saw those at risk of losing homes to foreclosure, not as a tragedy, but as an opportunity, seemed to appear out of nowhere, looking to scam those in distress out of the little money they had left.Â Thereâ€™s no way to know how many â€śscammersâ€ť there were, or are, out there, but recognizing that even one is one too many, the call to Congress to act to protect consumers was heard loud and clear.
This has always been an issue that has only one side; thereâ€™s never been a â€śpro-scammerâ€ť movement.Â The question has always been how to protect consumers, without putting the legitimate firms helping consumers out of business at the same time, and this debate intensified when the proposed new rules threatened to take lawyers out of the mix.
In the beginning, back in late February of 2009, when President Obama delivered his speech introducing the Making Home Affordable program, many believed that homeowners wouldnâ€™t need to hire anyone to help them get their loan modified.Â As the President said, you could call your bank directly, or call a HUD counselorâ€¦ simple as that.
By the middle of last summer, however, that notion had long since faded into distant memory for many homeowners.Â After trying what the president had suggested, sometimes for months, many distressed homeowners decided that they either needed or wanted to hire a lawyer to help them persuade their lender or servicer to modify their loan.
Most of the early proposals, at both state and federal levels, focused on eliminating up front fees, and that meant, even if you were a lawyer, you couldnâ€™t be paid for all of the months of work involved when attempting to modify a loan, you could only send your bill once the loan was modified.
Clearly, the unintended consequence of such a rule would be that a distressed homeowner would no longer be able to hire an attorney when at risk of losing his or her home, because no attorney would, or could ever work for 6-12 months, and then hope to be paid once the loan was modified.
The State Bar of California task force has continued to argue that theyâ€™ve been investigating hundreds of lawyers for possible involvement in loan modification scams, and have already suspended some and gotten resignations from others.Â The task force maintains that there is more action to come, but the numbers are certainly not in the hundreds as the State Bar has implied.Â Their latest press release says:
â€śBesides the two involuntary inactive enrollments, the State Barâ€™s Office of Chief Trial Counsel has obtained the resignations of 13 attorneys involved in loan modification misconduct since creation of the Loan Modification Task Force in April 2009. Â Five loan modification trials are pending. Another 2,000 active investigations related to loan modification are being conducted.â€ť
Carol Needham, who teaches professional responsibility at the Saint Louis University School of Law says:
â€śThe question becomes whether such legislation is done with a scalpel, precisely going after the harm, or with the more blunt force of a cudgel.Â The financial reform bill can be like the health care reform bill, with a lot of unintended consequences.â€ť
For a while it really seemed touch and go (you can find my latest article on the FTCâ€™s proposed rule here), but finally it seems that the tides have changed, and cooler heads are prevailing.Â According to the ABA Law Journal:
â€śA growing list of more than a dozen state bars and the ABA have asked for changes in congressional legislation aimed at protecting consumers from financial fraud because it contains language so broad that the everyday work of lawyers in various practice areas would be swept into the web of federal regulators.â€ť
The competing House and Senate bills that are now headed for conference committee both aim to regulate anyone involved in offering a â€śconsumer financial product or service.â€ťÂ The House version exempts lawyers engaged in the practice of law, along with staff directly supervised by them, or â€śin matters incidental to the practice and within the scope of attorney-client relationship.â€ť
The Senate version of the bill, however, provides no such exemption, and the ABA and state bars are now asking the U.S. Senate to add the same â€śpractice of lawâ€ť exemption as found in the House bill.
Thomas Susman, director of the ABAâ€™s Governmental Affairs Office in Washington, D.C. had the following to say:
â€śWeâ€™re not asking them to exempt someone with a JD who sets up some sham-faĂ§ade non-law business where people think theyâ€™re dealing with a lawyer but arenâ€™t being protected by the legal disciplinary arm.Â When we talk to people on the Hill, they say that kind of activity is the problem. The Senate solution as crafted is much too broad and doesnâ€™t address it.â€ť
The House-Senate conference committee is scheduled to begin negotiating changes to the two bills on June 15, and expect to complete their work by the end of the month. The House bill, H.R. 4173 is called the Wall Street Reform and Consumer Protection Act of 2009 (PDF); Senate bill S. 3217 is called the Restoring American Financial Stability Act of 2010 (PDF).
But thatâ€™s not all.Â Whenever you have an issue this politically charged in an election year, youâ€™re going to have more than one federal agency looking to make its mark on protecting the American consumer.
The U.S. Department of Housing and Urban Development, is proposing a rule that would define any lawyer helping clients negotiate loan modifications as a â€śloan originatorâ€ť or â€śthird-party loan modification specialist,â€ť and the result would be newly required federal licensing and registration.Â This proposal, itâ€™s worth noting, may also allow licensed real estate and mortgage professionals to become licensed and registered to assist homeowners with loan modifications.
And the FTC is proposing a rule, under the banner of Mortgage Assistance Relief Services, that would allow lawyers to represent homeowners seeking loan modifications, but would also establish a specific fee structure that lawyers would have to employ whenever helping clients renegotiate mortgages or avoid foreclosure.
And… the ABA says that it has asked both agencies to expand exemptions for lawyers engaged in the practice of law.
So, while itâ€™s not a slam dunk, by any means, it does seem to me that the powers that be have finally come to understand that many homeowners do in fact need help when attempting to avoid foreclosure and obtain a loan modification.
It also seems, as I have always believed in my heart of hearts would be the case, that my country would not take away my ability to hire a lawyer to represent my interests when I feel I need one.Â And thank the good Lord for that. Â (At least not in an election year.)
Stay tuned to Mandelman Matters for updates and insight on the House and Senate Bills, and for updates on both the HUD and FTC proposals.Â Because when the law will have an impact on homeowners, Mandelman Matters will have an impact on the law.