With Delaware and Hawaii joining Minnesota, Colorado, Illinois, Indiana, Massachusetts, Maryland, Nebraska, New Hampshire, New York, Nevada, Oregon, Washington, and other states in regulating foreclosure consultants, companies assisting consumers in financial distress have one more new regulatory regime to consider when providing services related to mortgage assistance: "Mortgage Rescue Fraud Protection Acts" (sometimes referred to as "Mortgage Rescue Fraud Prevention Acts").
The good news for those providing foreclosure housing counseling services, debt relief assistance, and social services is that these statutes create a set of definitive requirements that must be followed in certain states, particularly for those counseling agencies not approved by the U.S. Department of Housing and Urban Development ("HUD"). The statutes aim to protect homeowners who are susceptible to predatory abuses. In addition, they have often been paired with state legislative efforts to boost available foreclosure counseling for troubled homeowners, so that the affected homeowner might better understand his options in order to take the proper action to save his home.
The bad news is that these statutes do not all cover the same persons or activities. While the Acts are intended to help prevent cases in which a homeowner seeking help to avoid foreclosure loses his home to his supposed "rescuer," in some states, anyone who offers to assist him with such foreclosure issues could come under the statute.
As a result, an entity - be it a counseling agency or an individual - seeking to provide 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.).
These laws add an additional, and sometimes inconsistent, level of regulation to the practice of foreclosure counseling. If applicable, the Acts 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, they open up the provider to additional liability, including private litigation and potential criminal sanctions for non-compliance.
In assessing the applicability of the statutes, setting policies and procedures to ensure compliance may further complicate the act of providing such services by the counseling agencies. Nevertheless, counseling agencies cannot afford to ignore these statutes - the risk of class action lawsuits, state enforcement actions, and the negative effects on the agencies' reputations, are simply too great.
A state's typical Mortgage Rescue Fraud Protection Act generally includes provisions pertaining to foreclosure consultants and foreclosure reconveyances. Summarized below - and of particular interest to the credit counseling community - are key provisions applicable to foreclosure consultants:
The breadth and scope of a particular state's Mortgage Rescue Fraud Protection Act differ based on the particular attributes of that state. Many 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 an individual who makes a representation or offer to perform any service that he represents will:
- Stop, enjoin, delay, void, set aside, annul, stay, or postpone a foreclosure sale;
- Obtain forbearance from any mortgage servicer, mortgagee or mortgage assignee;
- 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;
- 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;
- 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;
- Assist the homeowner to obtain a loan or advance of funds;
- 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;
- Save the homeowner's residence from foreclosure;
- 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;
- Arrange for the homeowner to become a lessee or renter entitled to continue to reside in the homeowner's residence in foreclosure;
- Arrange for the homeowner to have an option to repurchase the homeowner's residence in foreclosure; or
- 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.
Other states' Acts, such as Hawaii, may use the term "distressed property consultant." The HI Mortgage Rescue Fraud Act defines a "Distressed property consultant" as
any person who performs or makes any solicitation, representation, or offer to perform any of the following relating to a distressed property: (1) 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; (2) 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; (3) Obtain any forbearance from any beneficiary or mortgagee, or relief with respect to a tax sale of the property; (4) Assist the owner to exercise any cure of default arising under Hawaii law; (5) Obtain any extension of the period within which the owner may reinstate the owner's rights with respect to the property; (6) 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; (7) Assist the owner in foreclosure loan default, or post-tax sale redemption period to obtain a loan or advance of funds; (8) 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 (9) Save the owner's residence from foreclosure or loss of home due to nonpayment of taxes.
Other states use similar terms with narrower definitions.
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 agreements or persons include governmental entities, persons acting under authority or approval of HUD, 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 did result 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. Notably, however, oftentimes these statutes do not exempt all nonprofit organizations based solely on their tax status (e.g., some organizations are tax-exempt under Section 501(c)(3) of the Internal Revenue Code). Sometimes the statute will require that the organization is both a nonprofit organization and operates pursuant to the state debt-adjusting statute, rather than just one or the other.
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 the attached Notice of Cancellation immediately upon execution of the 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, the contract often must meet certain requirements: it must conform to a particular font size, a disclosure of the nature of the services must be provided, the total time must be estimated, and the terms of any compensation to be received by the foreclosure consultant must be disclosed. The statutes also may require the signatures of both the provider and homeowner(s), as well as the homeowner(s)'s initials on each page.
Under the state statutes, foreclosure consulting contracts generally are required to include a statutory notice, printed in a specified font and type (e.g., bold-face), including the name of the foreclosure consultant, and located in immediate proximity to the space reserved for the homeowner's signature. The specific text of the disclosure differs by state. 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 sometimes 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 form specified.
Waiver of Rights
These statues typically prohibit, as 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.
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:
- 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;
- claiming any interest or any other compensation for any loan that the foreclosure consultant makes to the homeowner that exceeds 8% per year;
- taking any wage assignment, any lien, or any type of real or personal property, or other security, to secure the payment of compensation;
- 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;
- 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;
- 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
- facilitating or engaging in any transaction that is unconscionable under the terms and circumstances of the transaction.
Enforcement and Penalties
The statutes generally 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 typically 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 more, per violation, as well as possible jail time.
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, these statutes can be easily utilized by state regulators and private plaintiffs in their pursuit of non-fraudulent counseling activity that has not been in full compliance with the requirements under the statutes. Moreover, the interaction of state laws targeted to curb mortgage fraud with existing state debt adjusting statutes and credit repair laws may produce unanticipated compliance requirements. Therefore, in order to ensure compliance and minimize legal risk, it is absolutely critical for those providing debt and credit counseling to understand and carefully consider these state Mortgage Fraud Prevention Acts - and their interrelationship with other federal and state laws regulating the industry - before marketing to or providing any counseling or other services to homeowners in financial distress.