Jeana Morrissey, Arizona Real Estate Lawyer
I am an Arizona real estate lawyer who meets with and talks to many people each month who want to know the legal consequences of defaulting on a loan secured by a lien on Arizona real property. I offer a loan review and one hour consultation during which I explain Arizona’s foreclosure laws and answer questions.
A frequent question people ask of me is “can you negotiate a favorable loan modification with my lender?” The answer is maybe, but I do not represent people who seek to modify their home loans. I know from having worked with lenders in trying to modify my clients’ home loans that: (1) the paperwork involved is massive, (2) I cannot be adequately compensated for the my time to review and analyze the loan documents, write letters, talk to my client, and negotiate with the lender’s representatives, (3) the chance of success is small. It’s just not the type of legal matter that I will accept.
For people who do seek to modify a home loan, the likelihood of success depends on the facts and circumstances of each borrower. Some people have a good chance of convincing a lender to modify a loan favorably, but other people do not. Some important facts that can make a difference in modifying a loan are:
- Violations of the federal Truth in Lending Act (TILA), also known as Regulation Z.
- Violations of a federal law known as RESPA, the Real Estate Settlement Procedures Act.
- Violations of the Home Owner Equity Protection Act (HOEPA).
- Financial hardship coupled with devaluation of the real property that is security for the loan.
Loan Modifications and Credit Ratings
Whether a loan modification will affect the borrower’s credit rating depends on the lender. When an attorney represents the borrower, it is possible to negotiate with the lender and get a written agreement from the lender that it will not file a negative credit report as a result of the loan modification.
The Homeowner Affordability and Stability Plan – President Obama’s Foreclosure Prevention Program
On March 4, 2009, the U.S. foreclosure prevention program began. The program is called the “Homeowner Affordability and Stability Plan.” It is intended to assist home owners refinancing existing loans at a lower interest rate. The plan will attempt to provide an incentive to home mortgage lenders to modify existing home loans so the home owner can afford the payments.
The HASP may help two types of home owners:
- Home owners who are current on their loans, but who are “under water,” i.e., home owners who owe more on their home loan that the home is worth. The loan must be owned by Fannie Mae or Freddie Mac. This program ends June 2010. You are ineligible for this program if you are underwater by more than 5% or if you have a “jumbo” loan, which in Arizona means a loan that exceeds $417,000. A condition to the refi is that the borrower must show that the borrower has sufficient income to make the payments. More about this type of loan modification.
- Home owners who defaulted on their home loan or who are at risk of defaulting. The debt cannot exceed $729,750 for a single family home and the loan must have funded before 2009. Borrowers who qualify will have their monthly loan payments reduced to 31% of their gross income. The interest rate may be reduced to as low as 2% or the term of the loan may increase to as long as 40 years. It is also possible to reduce the principal amount. The lower payment will be fixed for five years then increase by not more then 1% a year to conforming loan rates as of the date of the loan modification. Borrowers who make the payments on time could get their loan principal reduced by as much as $1,000 a year over five years. This program ends December 31, 2012. Only loans on owner-occupied homes may be refinanced under this program. Lenders must examine borrowers closely and reject a refi application if the borrower was irresponsible in borrowing or misrepresented material facts (such as income or expenses) on the loan application. The lender must apply a “net present value test” if the borrower is at risk of an immediate default or more than 60 days in arrears and conclude that a refi makes economic sense. A borrower who cannot make the post refi monthly payment will not qualify. More about this type of loan modification.
See the U.S. Department of Housing & Urban Development’s (HUD) borrower’s self-assessment tool to see if you qualify for one of the above HASP loan modification programs.
Unfortunately, there will many millions of borrowers, including speculators and real estate investors, who are not eligible for either HASP program.
One result of HASP will be that unstaffed lenders will now truly be inundated with loan refinance requests with the result that the refi time period from start to finish will probably go from intolerable as it is now to just before Cinderella’s carriage turns into a pumpkin.
Beware of Unlicensed Loan Modification Services
If you are considering using the services of a loan modification service for a loan secured by Arizona real property, make sure that the service is licensed by the Arizona Department of Financial Institutions as a mortgage broker. A loan modification company that is compensated for providing loan modification services in connection with Arizona real estate secured loans must be licensed as a mortgage broker with the Arizona DFI or it is violating Arizona law. An attorney licensed to practice law in Arizona is exempt from this requirement. ARS § 6-902.5.
To determine if a loan modification service is licensed by the Arizona Department of Financial Institutions See the list of licensed mortgage brokers maintained on the DFI website.
Arizona Revised Statutes Section 6-903.A states “A person shall not act as a mortgage broker if the person is not licensed under this article.” Section 6-901.8 states “‘Mortgage broker’ means a person who is not exempt under section 6-902 and who for compensation or in the expectation of compensation either directly or indirectly makes, negotiates or offers to make or negotiate a mortgage loan.” A mortgage loan is “a loan secured by a mortgage or deed of trust or any lien interest on real estate located [Arizona] created with the consent of the owner of the real estate.” ARS § 6-901.9. Compensation means if you pay compensation for Arizona loan modification services to a person or entity that is not licensed by the Arizona Department of Financial Institutions as a mortgage broker, you should send a written demand for a refund. Arizona law provides:
“A person is not entitled to receive compensation in connection with arranging for or negotiating a mortgage loan if such person is not licensed pursuant to this article.”
ARS § 6-909.B. You should also be wary of any loan modification service that claims to be “affiliated” with a licensed mortgage broker. Arizona law also provides that “A mortgage broker shall not pay compensation to, contract with or employ as an independent contractor a person who is acting as a mortgage broker or mortgage banker but who is not licensed under this chapter. ARS § 6-909.B
How to File a Complaint with the Arizona Department of Financial Institutions
If you have been the victim of an unlicensed Arizona mortgage broker, you can file a complaint with the Arizona Department of Financial Institutions. You may also email the DFI at email@example.com if you are a victim of mortgage fraud or know somebody who is a victim. The ADFI is located at:
Arizona Department of Financial Institutions
2910 N. 44th Street, Suite 310
Phoenix, AZ 85018
Arizona Attorney General License Enforcement Action
On March 3, 2009, the Arizona Department of Financial Institutions and Arizona Attorney General Terry Goddard notified all people and companies acting as a mortgage broker in Arizona without a license that the State of Arizona will sue to enforce Arizona’s mortgage broker law. The Attorney General filed Arizona vs. Winer, a lawsuit against Richard Winer and Colleen Winer, Taken Care of Investments, LLC, Homeowner Solutions, LLC, Bourbon Street Property Management, LLC, and Filibuster, LLC., in which he alleged that one or more defendants violated:
- Arizona’s Consumer Fraud Act (ARS § 44-1521 et. seq),
- Arizona’s Debt Management Companies Act (ARS § 6-701 et. seq),
- Arizona’s Mortgage Broker Act (ARS § 6-901 et. seq) by acting as a mortgage broker without being licensed as a mortgage broker, and
- Arizona’s Mortgage Banker Act (ARS 941 et. seq).
The State of Arizona is seeking the following from the defendants:
- An injunction prohibiting further violations of the laws that were violated.
- Refund to ALL victims ALL money and property paid to the defendants.
- A fine of $10,000 for each violation of the Consumer Fraud Act.
- A fine of $5,000 for each violation of the Debt Management Companies Act, the Mortgage Broker Act and the Mortgage Banker Act AND EACH DAY OF VIOLATION IS A SEPARATE OFFENSE.
- Reimburse the Attorney General and Department of Financial Institutions for their costs of investigation and attorneys’ fees for the lawsuit.
Arizona Consumer Fraud Act
Arizona’s Consumer Fraud Act prohibits “the act, use or employment by any person of any deception, deceptive act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise . . . .” ARS § 44-1522. This is another Arizona law that many loan modification services are violating.
Beware of Loan Modification Services Without an Office
Maybe I am too cautious, but I personally would not use the services of a loan modification company that only has a presence on the internet. Do you really want to do business with a company that does not list its office address on its website? If the company does display its address on its website, it means it either does not have an office or it does not want the public to know where it is located. In either case, it is a red flag and I would never do business with the company.
Beware of Firms with “Lawyer on Staff”
Watch out for loan mod companies that say they have a “lawyer on staff” or are affiliated with an attorney. If you do not sign an engagement agreement with an attorney, you are not being represented by an attorney and the attorney client privilege does not apply. You can check to see if an attorney is licensed to practice law in Arizona by going to the Arizona State Bar’s website and using it’s “Find a Lawyer” feature. All licensed Arizona lawyers are listed on the State Bar’s website.
Beware of Non-lawyers Who Claim to Be Affiliated with an Arizona Attorney
Patricia A. Sallen, Ethics Counsel for the State Bar of Arizona, and Lynda Shely, an Arizona attorney whose practice involves advising Arizona attorneys on the rules of ethics wrote an article called “Loan modification: The not-so-golden business opportunity for lawyers.” The article states:
“Non-lawyers are soliciting lawyers with business opportunities to provide help to distressed homeowners. This “help” can be in the form of renegotiating loans, documenting short sales or filing actions to stave off foreclosure.”
“While these business opportunities may be a good deal from the non-lawyer’s perspective, lawyers need to remember that the ethical rules generally dictate otherwise for lawyers. In short, going into business with a non-lawyer or going to work for a nonlawyer to provide these kinds of services is ethically dangerous.”
“If you’re thinking about the loan-modification business, keep these ethics tips in mind:
- Lawyers may not form a business with a non-lawyer if any part of the business will include the practice of law . . .
- Lawyers may not split or share fees with non-lawyers . . .
- Lawyers cannot pay ANYTHING OF VALUE for referrals . . .
- Lawyers who employ non-lawyers or otherwise affiliate with non-lawyers must supervise the non-lawyers and all of their advertising . . .
- Lawyers cannot provide legal services to a business that then conveys the advice to the business’ customers . . .”
These two experts on Arizona’s lawyer ethics rule believe that Arizona lawyers who affiliate with non-attorneys to work together on or to refer loan modification work must navigate an ethical minefield.
A February 2, 2009, California State Bar ethics opinion warns California lawyers about ethics violations arising from lawyers working with non-lawyer foreclose consultants. The opinion states:
“Distressed homeowners may need legal assistance. California lawyers should be wary, however, of non-lawyers – such as foreclosure consultants – who, seeking to capitalize on the vulnerability of distressed homeowners, offer to provide distressed homeowners assistance in renegotiating their loans and/or assessing and protecting their legal rights. These non-lawyers may propose arrangements that would violate one or more of a lawyer’s ethical obligations. They may attempt to loop California lawyers into their businesses with promises of large numbers of referrals and/or “easy money,” that is, fees for the lawyer for little or no work. They may request that a lawyer pay them a referral or marketing fee. They may propose an agreement to split legal fees obtained from the distressed homeowners. They may request that the lawyer enter into a joint venture with them and a distressed homeowner. They may request that a lawyer approve loan modification documentation. They may request that a lawyer serve as the general counsel to their business in order to provide legal advice to homeowners. They may ask that the lawyer file a frivolous lawsuit on behalf of a homeowner with whom the lawyer has had little or no contact in order to buy time so that the foreclosure consultant will have more time to negotiate a loan modification directly with a homeowner’s lender. As noted above, much of this conduct – accepting referral fees, fee splitting, forming a business with a non-lawyer that performs legal services, helping a non-lawyer engage in the unauthorized practice of law, filing frivolous lawsuits – violates the Rules of Professional Conduct and/or ethics rules set forth in the Business and Professions Code. A California lawyer should consider carefully the applicable ethical rules before agreeing to participate in any such venture involving people acting as foreclosure consultants or in a similar capacity. Failure to do so may result in lawyer discipline.”
The Arizona State Bar has not issued a similar opinion, but the issues discussed and the conclusions contained in the California ethics opinion would probably apply to Arizona lawyers because the underlying applicable lawyer ethics rules for Arizona lawyers are similar to the rules for California lawyers.
Beware of Loan Modification Scammers
Because of the large number of foreclosures and the depressed values of real estate, loan modifications and short sales are hot. It seems likes everybody and his or her brother is offering loan modification, short sales and foreclosure rescue services. Don’t sign an agreement or pay any money to anybody without having an experienced real estate attorney review the contract. Unfortunately, there are too many unscrupulous people and businesses whose main objective is to take advantage of people while they are desperate. You must always perform appropriate due diligence to determine that person or business who promises wonderful things is on the up and up.
I am prejudiced, but I believe you should never hire anybody to negotiate a loan modification for you unless he or she is an attorney licensed in the state in which the real property is located. An important reason to hire an attorney is because of the attorney – client privilege. This privilege provides that information you give and statements you make to your attorney in confidence is protected from disclosure. This is not true when you are dealing with a non-lawyer. Anything you say or give to a non-lawyer can be discovered and offered into evidence in a court of law and used against you.
The Denver Post newspaper reported on December 18, 2008, that the Colorado Division of Real Estate subpoenaed thirteen home loan modification companies operating in Colorado, California and Arizona. The director of the Colorado Division of Real Estate said it is illegal to “solicit Colorado residents for loan modifications without being a state-licensed mortgage broker.”
If you’re looking for foreclosure prevention or loan modification help, avoid any business that:
- guarantees to stop the foreclosure process – no matter what your circumstances
- instructs you not to contact your lender, lawyer, or credit or housing counselor
- collects a fee before providing you with any services accepts payment only by cashier’s check or wire transfer
- encourages you to lease your home so you can buy it back over time
- tells you to make your mortgage payments directly to it, rather than your lender
- tells you to transfer your property deed or title to it
- offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale
- offers to fill out paperwork for you
- pressures you to sign paperwork you haven’t had a chance to read thoroughly or that you don’t understand.
Links Related to Loan Modifications & Foreclosures
- PMI – HomeSafePMI answers questions about alternatives to foreclosure. It can help you reach the right people and programs to help you save your home, or sell it – even at a loss – in order to minimize the risks to your credit profile and potential tax or legal liabilities.
- January 14, 2009, New York Times story called “Swindlers Find Growing Market in Foreclosures“