Carrying Debt vs. Bankruptcy.... Would you rather save your behind or save your face?

BANKRUPTCY STIGMA

Bankruptcy can seem so scary or humiliating that lots of folks resolve to just keep paying the minimums on their debts.

You know what it feels like to have more bills than you can pay.  You don’t know how bankruptcy will affect you.

It seems easier to stay the course, pay the minimums, and plod along.

It may be sort of comfortable, and knowable, but it may be a  life sentence of being in debt.

You won’t get ahead, for sure, but you  don’t have to face the uncomfortable fact  that you can’t really ever pay off  your debts.

On the surface, it seems like a rational choice.

• It’s allowed by the terms of the credit card agreement.
• It saves you from looking at the big picture of your finances.
• You still have plastic in your wallet.

But what’s the real and total cost to you of paying forever?

The non monetary cost

If you decide to live with overwhelming debt  you’ll encounter  costs  that don’t  appear on your balance sheet.

Being in debt is stressful.

One of the old surveys  measuring stress listed financial problems as a major cause of stress, along with death in the family, divorce, birth of a child, and serious illness.  Having a mortgage of more than $150,000 was deemed to be a serious source of stress.  These days,  I regularly deal with Californians whose mortgage debt is $500,000 to $900,000.  By that definition, everyone I see is stressed.

Health professionals have long cataloged the bodily consequences of stress.  It is not just something you live with and tough it out.  It shortens life as well as detracts from the quality of  life.  I worry about the life expectancy of some of my clients.

However, new academic studies have expanded our understanding of stress.

They found something absolutely new.

Stress makes you stupid

That’s right: financial stress causes a loss of IQ.

And it’s not that it is the stupid who get into debt.  It’s not that getting into debt was necessarily stupid.

The stress caused by debt reduces your ability to perform intellectually.  You make new, bad decisions because of stress.

The researchers from Harvard tested IQ’s in a controlled setting in a shopping mall in New Jersey and in the field in a farming community in India.

Constant worry about paying bills intrudes on your thinking, and diminishes the mental resources you have to apply to all of life’s decisions.

In the American  lab setting, financially worried subjects lost 13 IQ points.  In the field, Indian farmers who got paid just once a year improved their IQ by 25%  after the harvest when they had money in their pockets and no immediate money troubles.

Wherever it’s found, stress over money  makes you less intellectually capable.  No matter how you got into debt, being in debt reduces your ability to make good decisions about anything.

Challenging myths

So, the challenge for those stressed by debt is to make good decisions about the alternatives to being in debt.  That can be a tall order when you aren’t thinking well.

Get good information.  There’s lots of it here on this site, from highly experienced bankruptcy lawyers.

Good financial counselors can assess whether you have a realistic chance to become debt-free in a reasonable time outside of bankruptcy.

Confront the myths about bankruptcy.  Many are just that:  myths.  Fanciful tales unconnected to reality.

Recognize that lots of the “avoid bankruptcy at all costs” hype comes from people who profit by your continuing to pay on impossible debt, or people who want to sell you an alternative solution.

Get smart

A first step is to recognize  that your debts may be impairing your thinking.

Get the facts, enlist some help, and consider whether the alternatives to living in debt are viable for you.

Just hunkering down and  paying the minimums, and remaining impaired may be stupid.

WRONGFUL FORECLOSURE SUCCESS!!! YOU DON"T HAVE TO FULLY TENDER BALANCE DUE TO CHALLENGE FORECLOSURE

Cheung v. Wells Fargo Bank, N.A., 2013 Westlaw 6017497 (N.D. Cal.).

Facts:  Following a nonjudicial foreclosure, the defaulting borrower brought suit against the foreclosing creditor, claiming that the foreclosure itself had been wrongful because the original lender had improperly transferred the mortgage to a securitization trust after the deadline contained in the securitization agreement itself. As a result, the mortgage was never owned by the party that conducted the foreclosure sale.  The creditor moved to dismiss the action on the ground that the borrower had not tendered the balance due.

            Reasoning:  Citing Fleming vs. Kagan, 189 Cal.App.2d 791, 11 Cal. Rptr. 737 (1961), the court held that tender is not required when the transaction itself is void due to fraud. Therefore, the wrongful foreclosure cause of action was properly brought. For the same reason, the court held that the mortgagor could seek cancellation of the written instruments, since the title documents themselves were void.

            Author’s Comment:  I think that Fleming is distinguishable.  In that case, the underlying debt had already been paid off, and there was evidence of fraudulent behavior.  Here, the underlying debt was never paid, and there is no evidence that the borrower in this case was defrauded by anyone.

            But the larger issue – the tardy assignment of the mortgage to the trust after the deadline – is terribly troubling because there are thousands of mortgages that fall into the same category. A few other courts have validated the theory that a borrower can challenge a completed foreclosure on the ground that the mortgage securitization trust had no standing to foreclose. See, e.g., Glaski v. Bank of America, N.A., 218 Cal.App.4th 1079, 160 Cal.Rptr.3d 449 (2013).  Surprisingly, the court in Cheung did not cite Glaski, a California state court decision, even though the result in Cheung was purportedly governed by California law.

            For a complete discussion of Glaski, see 2013-32 Comm. Fin. News. NL 66, Commercial Finance Newsletter Borrower May Sue for Wrongful Foreclosure When Assignment of Mortgage to Securitized Trust Occurs After Trust's Closing Date.

NACA's FREE LOAN MODIFICATION ASSISTANCE..... COMES TO LA!!! October 31 - Nov 4 & Nov. 14-18, 2013

https://www.naca.com/nacaWeb/index_main.aspx

ONTARIO

Flyer

Oct 24-28

LOS ANGELES

Flyer

Oct 31-Nov 4

SACRAMENTO

Flyer

Nov 7-11

LOS ANGELES

Flyer

Nov 14-18

The Neighborhood Assistance Corporation of America ("NACA") is a non-profit, community advocacy and homeownership organization. NACA’s primary goal is to build strong, healthy neighborhoods in urban and rural areas nationwide through affordable homeownership. NACA has made the dream of homeownership a reality for thousands of working people by counseling them honestly and effectively, enabling even those with poor credit to purchase a home or refinance a predatory loan with far better terms than those provided even in the prime market. 

SAVE THESE DATES FOR OCTOBER AND NOVEMBER

Investing in working people
The NACA homeownership program is our answer to the huge subprime and predatory lending industry. NACA has conclusively shown that when working people get the benefit of a prime rate loan, they can resolve their financial problems, make their mortgage payments and become prime borrowers. NACA’s track record of helping people who have credit problems become homeowners or refinance out of a predatory loan debunks the myth that high rates and fees are necessary to compensate for their "credit risk." 

Started in 1988, NACA has a tremendous track record of successful advocacy against predatory and discriminatory lenders as well as providing the best mortgage program in America with $10 billion in funding commitments. NACA is the largest housing services organization in the country and is rapidly expanding by growing its existing 30+ offices, headquartered in Boston, MA, opening many new offices nationwide, and expanding the services it offers its membership. NACA’s confrontational community organizing and unprecedented mortgage program have set the national standard for assisting low- and moderate-income people to achieve the dream of homeownership. 

NACA – America’s Best Mortgage Program
The incredible NACA mortgage allows NACA Members to purchase or refinance homes with:

• no down payment,
• no closing costs,
• no fees,
• no requirement for perfect credit,
• and at a below-market interest rate.

Everyone gets the same incredible terms, including the below-market interest rate, regardless of their credit score or other factors. NACA also provides free, comprehensive housing services. NACA counsels Members into the extraordinary NACA mortgage using character-based lending criteria that takes each Member’s circumstances into account to determine whether they are ready for homeownership and what they can afford. This is in contrast to risk-based pricing where people are often given loans they cannot afford while brokers and others make tremendous fees and profits. 

"Liking" something on Facebook and being Fired for it..... NOT SO FAST!

"Bland et al. v. Roberts, 2013 U.S. App. LEXIS 19268 (4th Circuit, September 18, 2013), Daniel Ray Carter, Jr., was employed as a deputy sheriff in Hampton, Virginia. During the election season when his boss, Sheriff B.J. Roberts, was running for reelection, Carter (and some of his co-workers) expressed support for Robert's political opponent by "liking" his campaign Facebook page. Upon learning of this, Roberts terminated the employees who had "liked" his opponent's page claiming the terminations were based on budget cuts and disruption of office dynamics."

Sheriff Roberts believed that his firing was in retaliation for supporting his boss' rival.  Roberts and his co-workers sued stating that they were being fired for expressing their free speech rights under the First Amended.  Well the district court did find that "Liking" something on Facebook could be protected speech, but merely liking something didn't make it "protected speech" warranting constitutional protection.  Roberts appealed and the 4th Circuit reversed this determination.  

The Appellate Court held that on a "most basic level, clicking on the 'Like' button literally causes to be published the statement that the user 'likes' something, which is itself a substantive statement," of approval or support.  Because this was a political campaign, the "like" button became like a campaign sign in front of a person's front lawn which is purely political speech.  This sort of speech has always been protected by the first amendment.

The importance of this decision is significant because it creates First Amendment protections for employees who use social media and their use of "likes" and "emoticons."  This means employers need to be very careful when investigating or taking disciplinary action against employees who exercise their First Amendment rights in this fashion.  If you fired an employee for this sort of use of social medium you could find yourself sued.

Good luck out there!

PS:  I know this doesn't have as much to do with bankruptcy and loan modification.  However, I did find it interesting.

Common Law Fraud as a class action may be the answer to Negative Amortization Loans

Note that Dan Schecter from Loyola Law School's commentary.

Jordan v. Paul Financial, LLC, 2012 Westlaw 3647759 (N.D. Cal.):

            Facts:  Various residential borrowers executed notes secured by mortgages.  Under the terms of the documents, the borrowers were permitted to make very low initial payments.  The Truth in Lending Disclosure Statement ("TILDS”) given to each borrower failed to state that if the borrowers made payments pursuant to the payment schedule set out in the documentation, the principal on the loan would increase over time and that the borrowers would lose equity in their homes with each payment, a process sometimes called "negative amortization."  After the origination of the transactions, the originating lender would sell the loans to an assignee, pursuant to a pre-existing master purchase agreement.

            Eventually, the borrowers brought a class action against the originating lender and its assignee, claiming that the lender and the assignee had committed fraud by failing to tell the borrowers about the negative amortization.  The assignee brought a motion for summary judgment, arguing that the documents were not misleading and that it could not be held liable for the conduct of the originator.  The borrowers cross-moved for class certification.   

            Reasoning: The court denied the assignee's motion for summary judgment:

[S]imply providing technically accurate disclosure does not excuse the potentially inadequate or misleading character of other disclosures, or lessen the resulting potential for confusion . . . .  It is of course possible that a buyer would pay more each month than the schedule provided for in the TILDS, thus avoiding negative amortization. But the Court will not turn a blind eye to the fact that the document at issue here is, as far as the Court can tell, designed to mislead. Nowhere in the TILDS, or the Note for that matter, is there any revelation of the fact that the interest rate is certain to sharply increase after just 30 days. Nor does the TILDS contain any indication that following the payment schedule provided will unquestionably lead to negative amortization . . . . [W]ere one to follow the TILDS payment schedule, after 59 months of payment, the borrower would owe 110% of the original principal.

            The court went on to hold that the assignee could be held liable for "aiding and abetting" the loan originator's fraudulent conduct because the assignee knowingly rendered "substantial assistance" to the originator.  The assignee argued that it did not have actual knowledge of the fraud, but the court disagreed:

[The assignee] argues that in reviewing the loan documents it was simply engaged in typical due diligence. However, . . . [the assignee's] due diligence may well have imparted the knowledge required to establish aiding and abetting.

            Finally, the court held that because the assignee's funding was critical to the loan originator, the assignee could be held liable for having provided "substantial assistance" to the originator:

[The assignee] was one of [the originator's] major secondary market purchasers, as well as the affiliate to a major warehouse lender. Hundreds of millions of dollars, if not billions, flowed through [the originator] because of [the assignee's] involvement.

            The court went on to certify the class.

            Author’s Comment:  Note that this is not simply a Truth in Lending Act case; instead, the borrowers (acting as a class) assert that the loan originators committed common law fraud and that the mortgage purchasers are liable as aiders and abettors.  Naturally, one's sympathy is with the borrowers, who were undoubtedly defrauded by loan originators who concealed the inevitable negative amortization of these mortgages.  But to extend fraud liability to the purchasers on the secondary market would greatly expand the scope of potential defendants, making these "toxic assets" doubly dangerous.

            On one hand, this decision might be worrisome to anyone holding interests in bundles of residential mortgages.  On the other hand, though, perhaps this decision can be restricted to its facts: it might only affect assignees with direct contact with the loan originator, rather than those who purchase residential mortgages through intermediaries.  In that case, although many large institutions could face fraud liability, tertiary or remote investors in mortgage-backed obligations should not be too concerned.

Dear Readers:  This is an important case with commentary by Professor Dan Schechter, Loyola School of Law.  Note his commentary about how the courts may be angry with the banks for their faux pas, but they are also growing weary of homeowners who are unwilling to pay.  Keep this in mind.

Best to you all:

Shuster vs. BAC Home Loans Servicing, LP, 2012 Westlaw – – (Cal.App.):

            Facts:  Two individuals borrowed $670,000 to purchase a home.  The deed of trust named Mortgage Electronic Registration Systems, Inc. ("MERS") as the beneficiary, but the deed of trust failed to name a trustee.

            Four years later, the borrowers defaulted.  MERS named a substituted trustee, which recorded a notice of default.  Following a nonjudicial foreclosure, the borrowers filed a complaint for quiet title, arguing that the deed of trust was a "mortgage" requiring judicial foreclosure, rather than nonjudicial foreclosure, since it failed to name a trustee.  The trial court ruled in favor of the lender, and the appellate court affirmed.    

            Reasoning:  The court noted that although this was an issue of first impression in California, courts in other states have uniformly held that the omission of a trustee does not preclude nonjudicial foreclosure.  On appeal, the borrowers argued that a conveyance that fails to name the grantee is void.  But the court rejected that argument:

A grantee is not the same as a trustee.  The character of "title" provided by a grant deed differs substantially from that provided by a deed of trust.  A grant deed conveys a fee simple title to the grantee for all purposes . . . . In contrast, a trustee under a deed of trust "carries none of the incidents of ownership of the property, other than the right to convey upon default . . . ."

            The court went on to hold that the foreclosing party did not have to produce the original promissory note and that the borrowers' failure to tender the balance due stripped them of standing to challenge the foreclosure sale.  The court concluded with the following observation:

We are mindful that foreclosures are a far too frequent occurrence in today's difficult financial times.  But the hardship must not become a haven for those who, as here, do not appear to make any good faith effort to resolve the issue but, instead, seek shelter in minor ministerial omissions or speculative acts that neither misled nor prejudiced them.

            Author’s Comment: This is almost certainly the right result.  If the deed of trust had utterly failed to name a beneficiary, that would have been more analogous to a grant deed that names no grantee.  But a trustee under a deed of trust is nothing like a grantee under a grant deed.  In fact, a trustee under a deed of trust is something less than a true trustee.  See Stephens, Partain & Cunningham v. Hollis, 196 Cal.App.3d 948, 955, 955 242 Cal.Rptr. 251, 255 (1987):  "Just as a panda is not an ordinary bear, a trustee of a deed of trust is not an ordinary trustee." The Stephens court in footnote 4 speculated: "With luck, this passage will end up as the following headnote in some legal digest: 'Trustee under deed of trust held to be panda bear.'”  Although I can't quite fulfill the court's prediction, it seems that a trustee under a deed of trust is an odd creature, one that (in this case) magically arose like a Phoenix from the empty ashes of the blank trust deed.

            Taking a step back, however, one has to ask: how could any lender ever draft and record a deed of trust without naming any trustee?  Admittedly, it is very easy to change trustees and to substitute one for another.  But it would seem obvious that the transaction should begin with someone nominally occupying that role.  The court rescued the transaction from this defect, but it should never have happened in the first place.

            The court's world-weary observation about borrowers who "seek shelter in minor ministerial omissions" is telling:  although the courts are disgusted with the financial industry's shoddy practices, they are also losing patience with borrowers who cannot pay and who simply seek to delay the inevitable.

WAKE UP LA - NACA BACK IN TOWN OCTOBER 5, 2012. TIME TO GET READY!!!!

The Nails are in the Coffin When it Comes to Wrongful Foreclosure.

Dear Readers:

Resent research has shown that the typical wrongful foreclosure case involving big lenders such as Bank of America, Wells Fargo, Chase, Citibank, Deutche Bank, and Mortgage Electronic Registration Services (aka MERS) have all the rulings going in their favor.    It doesn't seem to matter if you pay attorneys $10,000 or more for litigation to stop or enjoin a foreclosure, the courts are ultimately not ruling in our favor.  This case embodies every last theory I had in my bag of tricks to go after a wrongful foreclosure case.  All wiped out.

HERRERA v. FANNIE MAE (Federal National Mortgage Association) 

No. E052943.

May 17, 2012.

Borrowers under deed of trust brought action against Federal National Mortgage Association (Fannie Mae) to set aside the trustee's sale of their home, to void or cancel the trustee's deed upon sale, and for violation of the statute governing assignment of power of sale.

Court of Appeal 4th District Affirmed the trial court's rulings which held that:

1.  MERS had authority to assign deed of trust;

2.  The assignee of deed of trust had authority to execute substitution of trustee;

3.  Civil Code § 2932.5, the statute governing assignment of encumbrancer's power of sale did not apply to power of sale under a deed of trust; and

4.  That Fannie Mae was authorized to initiate foreclosure before assignment of deed of trust was recorded.

Readers it is crystal clear.  You are going to have to reconcile with your lender or try to get them to give you a loan modification, or get out using short-sale transactions, or simply walk way in foreclosure.  NOW more than ever you need the qualify services of the Law offices of R. Grace Rodriguez, to help go over your strategy for dealing with the mortgage nightmare that America's leading lenders handed you to deal with.  You must speak with competent bankruptcy attorneys who can help you with all different types of bankruptcies if they are necessary to help you achieve your goal of saving your home.  Alternatively you can benefit from our extensive skills in helping you maximize the benefits of surrendering your home and achieving the greatest cost savings, potentially leaving you with the ability to purchase a new home with the savings you have achieved.

Call us today for help.  The consultation is free!

Dear Readers:  I was researching Civil Code Sec. 1788.10  

known as the ROSENTHAL FAIR DEBT COLLECTION ACT:

No debt collector shall collect or attempt to collect a
consumer debt by means of the following conduct:
   (a) The use, or threat of use, of physical force or violence or
any criminal means to cause harm to the person, or the reputation, or
the property of any person;
   (b) The threat that the failure to pay a consumer debt will result
in an accusation that the debtor has committed a crime where such
accusation, if made, would be false;
   (c) The communication of, or threat to communicate to any person
the fact that a debtor has engaged in conduct, other than the failure
to pay a consumer debt, which the debt collector knows or has reason
to believe will defame the debtor;
   (d) The threat to the debtor to sell or assign to another person
the obligation of the debtor to pay a consumer debt, with an
accompanying false representation that the result of such sale or
assignment would be that the debtor would lose any defense to the
consumer debt;
   (e) The threat to any person that nonpayment of the consumer debt
may result in the arrest of the debtor or the seizure, garnishment,
attachment or sale of any property or the garnishment or attachment
of wages of the debtor, unless such action is in fact contemplated by
the debt collector and permitted by the law; or
   (f) The threat to take any action against the debtor which is
prohibited by this title.

Wells Fargo Convenes Home Preservation Workshop in Ontario, California

Dear Readers:

TODAY WELLS FARGO BANK is continuing their home preservation workshop at the Ontario Convention Center.  Unfortunately they don't pubically announce these events always in advance.  But I heard about it today.  SOOOOO

Gather up the following:

1.   3 months of Paystubs
2.   6 months of bank statements
3.  2011 tax return if you have it, if not 2010
4.   bring any rental agreements you have to prove people inside your house are giving you money to rent a room    
      if you are doing that.
5.   Bring a utility bill so that you can prove you are living at the house.
7.   Prepare a hardship letter.  TO WHOM IT MAY CONCERN:   Explain why you need a loan modification
       and what has happened to your income. If someone died who brought income into the house bring the death
       certificate.  If you got sick bring something to document your illness.
8.  If you are self-employed bring 6 months of business bank statements and print out a PROFIT LOSS statement from your accounting software. If you don't have this, make one on an excel spreadsheet.

With all of this documentation be prepared to show that at the very least if the balance of your loan was stretched out to 40 years at 2 percent, the payment plus taxes and insurance would not be greater than 31 percent of your income.  If that is the case you will improve your chances of obtaining a permanent loan modification.

There is no mystery to loan modification.  Loan modification should not cost you thousands of dollars by the real estate fraudsters out there who want to charge you by the month for each month they keep you in your home.  That will be my next article.

So if you have a Wells Fargo Loan.... please go there today if you need help!

Best to all of
Grace

Fair Debt Collection Practices Part I of V

Its 7 am on a Sunday morning..... you are lying cozily in your bed when the cell phone next to your pillow starts its annoying ringing and vibration.....  Your bleary eyes pick it up to look and its the dreaded unknown 800-NUMBER.  You groan with disgust, turn off the phone roll over hoping they won't call back.  But they do.  Again, and again..... and again.....

Stay tuned readers as I take you through the myriad of tactics used by Debt Collectors to revive debts which are older than four years old for which they no longer have a right to sue you to recover..... the illegal phone calls threatening arrests, the lies..... the fake lawsuits..... 

Stay tuned to find out legally what they can do and what rights you have to stop harassment so you can answer your phone again!

Have a great weekend friends......

Renay

WHERE IS THE ASSIGNMENT!!!!!! (the California Equivalent of WHERE'S THE NOTE?!?!?)

Hey gang....  Civil code section 2932.5  Check your Trustee's Deed upon Sale.  Who was foreclosing beneficiary?  Is there an assignment recorded to that Beneficiary?  If not your foreclosure sale might have been  VOID!!!!

SHORT SALE FRAUD - BE C.A.R.-EFUL! in parts published by the California Association of Realtors Legal Department

Dear Readers:


Right now the economy is so bad that many of you couldn't or even wouldn't want to in a bankruptcy.  So dump the house you live in you are contemplating doing a short-sale transaction.  There is a right way to do it and a wrong way to do it.  If you do it the wrong way, when it comes time to do your bankruptcy (if needed) you could be facing a lawsuit for fraud by your lender.  It won't matter that your potentially unscrupulous broker PROMISED you that it was perfectly legal to do what you are doing.  If you get busted by your lender, chances are you won't be able to find that broker any more easily than you could find the mortgage broker who may have given you your bad loan.  So please read this information so you can educate yourself and help yourself understand when a broker is scamming you.  


For my broker friends, I post this because it is educational to help you understand where the line is between a good short-sale transaction and a bad one.  Nothing is worth putting your license at risk.  


Thanks for reading!

Q1.  What is short sale fraud?

A   Short sale fraud is a loose term for describing fraud, deceit, or trickery in connection with a short sale transaction.  As background, a short sale is a sales transaction where: (1) the sales price is less than the seller’s existing mortgage loan balance, other liens, and costs; and (2)  the existing creditors agree to a payoff of less than what’s owed.  Short sales help homeowners to avoid the stress and stigma of foreclosure.  Short sales also help mortgage lenders by avoiding the costs of foreclosure, including the burden of maintaining and reselling properties acquired through the foreclosure process.

Q 2.  What are some examples of short sale scams?

A   Like other types of scams, short sale fraud can take many forms.  At one end of the spectrum, a short sale scam can be part of large, well-organized fraud ring, and at the other end, it can be one isolated incident.

Examples of short sale fraud include, but are not limited to, the following:

• Fraudulent short sale flips (see Questions 9 to 13);
• Short sale negotiator scams (see Questions 14 to 19);
• Short sale package scams (see Questions 20 and 21); and
• Improper payments (see Questions 22 to 25).

Q 3.  How could a homeowner fall victim to a short sale scam?

A  Short sale transactions are highly susceptible to scams.  A typical short sale is complicated, difficult, and can drag on for many months.  Yet, short sale sellers are often too financially strained to hire experts to advise them on the complicated financial, legal, tax, credit, and other issues raised by their situations.  Sellers are also likely to be anxious to finalize their short sales quickly to avoid the possibility of losing their homes through foreclosure.  On top of the stress and stigma of a looming foreclosure, short sale sellers may be dealing with other financial and emotional hardships, such as job loss, death of a loved one, divorce, or illness.  Given these circumstances, the sellers can easily succumb to a scam artist’s lure of a guaranteed quick fix.  As one victim of a foreclosure rescue scam said, “When you’re down and out you’ll believe anything.”

Q 5.  Is there an easy way to detect a short sale scam?

A  No.  Short sale scams may not be easy to detect, but see Questions 6 and 7 for helpful guidelines.  Outwardly, scam artists do not act or appear dastardly.  On the contrary, the typical scam artists look nice and clean-cut, and they seem kind, helpful, patient, and trustworthy.  Their purported companies are likely to appear well-established, reputable, and qualified to do the tasks at hand.  The companies may even have names that sound altruistic, such as Community Short Sale Services or Short Sale Advocates.  Some outfits may appear to be related to the government, such as administered by or an agency of the government.  For instance, a scammer may pretend to offer a short sale under the U.S. Treasury’s Home Affordable Foreclosure Alternatives (HAFA) program, knowing that most people are unfamiliar with the details of this new government-subsidized program.

Scammers come from all walks of life, including, but not limited to, appraisers, accountants, attorneys, bank officers, landlords, tenants, friends, and colleagues.  Scam artists may engage in "affinity marketing" tactics to attempt to lure people into their fraudulent schemes.  Affinity marketing tactics involve scam artists who are, or pretend to be, members of the same racial, religious, social, or other group as their victims.  For example, a scam artist may claim to be in the military, and use military terms and mannerisms, in an attempt to befriend someone in the military.  Or a scammer may join a church to gain the trust of other members of that church before attempting to defraud them.

Q 6.  What are the red flags for detecting a short sale scam?

A  REALTORS® and their clients contemplating or engaging in short sale transactions should be aware of the different types of scams (see Questions 9 to 25).  In addition, they should be wary when dealing with someone who does any of the following:

• Makes an offer that sounds too good to be true;
• Gives an unqualified promise, such as to obtain short sale approval, stop foreclosure, or other assurances;
• Is unconcerned about the sales price, possession of the property, and other significant terms of sale;
• Is unconcerned about the short sale seller’s financial situation;
• Is involved in a sales transaction where the seller is not the current owner of the property;
• Is involved in a sales transaction where a notice of default has been filed against the property;
• Is involved in a sales transaction under the Home Equity Sales Contract law (see C.A.R.’s legal article athttp://www.car.org/legal/2008articles/home-equity-sales-contracts/);
• Is involved in a sales transaction where the property owner has purportedly given someone an option to purchase;
• Represents that the buyer is an entity (such as a trust or LLC), rather than an individual person;
• Creates more than one sales contract for the same property;
• Asks for the payment of money upfront before providing any service;
• Asks for payment only in the form of cash, cashier’s check, or wire transfer;
• Asks for something to be done immediately without delay;
• Asks for a power of attorney;
• Asks for a transfer of title or an interest in the property outside of escrow;
• Asks for signatures on a grant deed or deed of trust;
• Asks for signatures without giving a lot of time to review the documents;
• Asks for signatures on a document that has lines left blank;
• Fails to provide copies of documents signed;
• Refuses or fails to provide written confirmation of an oral promise;
• Instructs the seller, listing agent, escrow officer, or someone else not to contact the short sale lender;
• Instructs a client not to discuss his or her situation with a housing counselor, banker, accountant, attorney, family, friends, or others;
• Has an answer for everything; and
• Engages in “shop talk” that sounds glib, but doesn’t in fact make sense.

Q 7.  What should sellers, buyers, agents, and others do to protect themselves against short sale scams?

A  The basic rule is "if it sounds too good to be true, it probably is."  In addition to watching out for the red flags in Question 6, affirmative measure to take to protect against scams include, but are not limited to, the following:

• Before doing business with someone, check the legitimacy and qualifications of both the individual person and business entity.  Check whether the individual person and business entity are properly licensed (see Questions 26 to 38).  Ask for references and check out those references.  Also check someone's background, credentials, and reputation.  Search the Internet and check public records and trade group memberships.  Remember, however, that even if someone has the proper credentials or comes highly recommended, the risk of a scam is less, but is not eliminated entirely.


• Do not panic.  Do not make any rash decisions.  It’s precisely when your chips are down that you must keep a clear head.


• Before entering into an agreement or arrangement, understand every aspect of what it entails.  Read documents carefully and thoroughly before signing.  If you do not understand a document or the consequences of a document, seek the advice of an attorney, accountant, or other professional as appropriate.  If you do not speak the same language as the person you’re negotiating with, don’t use that person’s interpreter or translator -- bring your own instead.


• Do not sign your name to any false statements or documents with spaces left blank, especially if you’re told that signing will be harmless or inconsequential.


• Get as much information as you possibly can before making a decision.  Ask questions.  Conduct as much research and investigation as you can upfront.  Look into different options and their financial, legal, tax, and other ramifications.  Ask for advice and help from trusted family, friends, and professionals if appropriate.


• Always try to stay a step ahead of scam artists.  As society comes to know one type of scam, con artists will attempt to catch their victims off guard by devising new schemes.  For example, with greater public awareness not to pay upfront for a short sale negotiator’s fee, scam artists may shift to structuring a short sale to include a buyer’s credit to pay the fee.

Q 11.  What are the legal problems with a fraudulent short sale flip?

A  Depending on the specific circumstances, the legal claims that may be raised a fraudulent short sale flip include, but are not limited to, the following:

• Mortgage Fraud: Sellers, buyers, agents, and others who misrepresent or actively conceal a short sale flip may be liable for, among other things, mortgage fraud, common law fraud, misrepresentation, and unlawful business practices.  Under federal law, mortgage fraud includes anyone who knowingly makes a false statement for the purpose of influencing a federally-insured mortgage lender or other financial institution as specified (18 U.S.C. § 1014).  A violation of federal mortgage fraud law is punishable by 30 years imprisonment, plus a $1 million fine (18 U.S.C. § 1014).  For example, concealing the BC transaction from Seller A’s short sale lender or concealing the AB transaction from Buyer C’s mortgage lender may constitute mortgage fraud, among other things.
• Breach of contract: Sellers, buyers, and agents who make false statements in lenders’ short sale agreements may be liable for breach of contract.  For example, in a lender’s short sale agreement, Seller A may falsely certify that the sales transaction is for fair market value, no other offers have been received, and the seller has no hidden understandings or secret proceeds.  Those types of false assertions could be grounds for a breach of contract claim against the seller in a civil lawsuit seeking monetary damages or rescission.
• Breach of fiduciary duty: Agents involved in fraudulent short sale flips who fail to exercise due care may be liable to their clients for monetary damages suffered.  If, for example, a listing agent both convinces Seller A to sell to Buyer B for $300,000, and facilitates Buyer B’s simultaneous resale to Buyer C for $350,000, the listing agent may have serious difficulty explaining why the seller only deserved the $300,000 Buyer B, not the $350,000 Buyer C procured during the listing agent’s listing period (see also Question 12).
• Licensing Violation: Agents involved in a fraudulent scheme could also face license revocation or other disciplinary action taken by the DRE (Cal. Bus. & Prof. Code §§ 10176 and 10177).
• Other Criminal Violations: In addition to mortgage fraud, illicit short sale flips may expose sellers, buyers, and their agents to other criminal claims, such as perjury (Cal. Penal Code § 118), conspiracy, and aiding and abetting a criminal scheme.

Q 13.  How do I do a legitimate short sale flip?

A  Legitimate short sale flips may be structured in many different ways.  Some factors to consider to help ensure that an AB-BC short sale flip passes legal muster through the judicial process include, but are not limited to, the following:

• How close the sales price for the AB transaction is to fair market value.


• How well the property is listed and marketed to find prospective buyers.


• Whether Seller A and Buyer C are well represented by their own real estate agents, attorneys, accountants, and other professionals as appropriate.


• Whether the parties negotiated an arms-length transaction.


• Whether the different aspects of the transaction, including the profit to be made, are fully disclosed in a meaningful manner to, and approved by, the parties and lenders involved.


• How much time lapses between the close of escrow of the AB transaction and the close of escrow of the BC transaction.


• The extent of repairs, renovations, and improvements that Buyer B makes to the property.


• How much money Buyer B invests to purchase, maintain, repair, renovate, improve, and resell the property.


• Whether the profit Buyer B makes is reasonable under the circumstances, including existing housing market conditions.


• Whether the parties comply with licensing, agency, RESPA, and other laws.


• Whether compliance with these factors is in writing and well-documented.

The above list is an illustrative, not exhaustive list of factors to consider for a legitimate short sale flip.  Compliance with all these factors does not guarantee that a short sale flip is legitimate.  Similarly, not complying with one or more factor does not necessarily mean, depending on the specific circumstances, that a short sale flip is illegal, as ultimately decided by a judge, jury, arbitrator, or DRE Commissioner.

B. SHORT SALE NEGOTIATOR SCAMS

Q 14.  What is a short sale negotiator?

A  A short sale negotiator is generally someone who negotiates and facilitates a short payoff with a seller’s mortgage lender.  Because short sales often involve very thick short sale packages and frequent attempts to contact the short sale lender, a legitimate short sale negotiator can facilitate and expedite the short sale process.  A short sale negotiator can be the listing agent, someone else in the listing office, or someone in another office.

With full disclosure, among other things, hiring and paying for a short sale negotiator is not an illegal activity.  However, certain scam artists impersonate or use short sale negotiators in furtherance of their improper and illegal schemes.

Q 15.  What are some examples of short sale negotiator scams?

A  As with any profession, some short sale negotiators are reputable, legitimate, and qualified to negotiate and facilitate short sales, whereas others are not.  Scammers may lure homeowners and their agents into their schemes by promising to expedite the short sale process and obtain approval from the short sale lender.  What scammers in fact do include putting together and submitting bogus short sale packages to the short sale lenders (see Questions 20 and 21), performing little or no service (see Questions 24 and 25), or engaging in other wrongdoing.

Some scams revolve around the payment of the short sale negotiator’s fee.  A seller’s short sale lender may disapprove payment to a third-party short sale negotiator, so the scammer makes a secret agreement for the seller, buyer, agent, or someone else to pay that fee, usually outside of escrow.  As one variation of the scheme, the purchase agreement may indicate that the seller will give the buyer a credit, but a secret agreement is made for the buyer to use that credit to surreptitiously pay the short sale negotiator fee.

For legal claims that may be raised in a fraudulent scheme involving a short sale negotiator, see Question 16.

Q 16.  What are the legal problems with unscrupulous short sale negotiator?

A  Depending on the specific circumstances, the legal claims that can be asserted against a short sale negotiator scam include, but are not limited to, the following:

• Licensing Violation: Short sale negotiator, short sale facilitators, and other individuals negotiating the short sale with the seller’s lender should generally be licensed by the DRE (see Questions 26 to 33).  Furthermore, agents involved in a scam could face license revocation or other disciplinary action taken by the DRE (Cal. Bus. & Prof. Code §§ 10176 and 10177).
• Mortgage Fraud: Sellers, buyers, agents, and others who misrepresent or actively conceal a short sale negotiator fee from a seller’s short sale lender may be liable for, among other things, mortgage fraud, common law fraud, misrepresentation, and unlawful business practices.  Under federal law, mortgage fraud broadly includes anyone who knowingly makes a false statement for the purpose of influencing a federally-insured mortgage lender or other financial institution as specified (18 U.S.C. § 1014).  A violation of federal mortgage fraud law is punishable by 30 years imprisonment, plus a $1 million fine (18 U.S.C. § 1014).  As an example, deliberately waiting until the last minute to insert the short sale negotiator fee into the final HUD-1 Statement may not suffice as a meaningful disclosure to the short sale lender.
• Breach of contract: Sellers, buyers, and agents who make false statements about short sale negotiators in the lenders’ short sale agreement may be liable for breach of contract.  For example, if a seller certifies in a lender’s short sale agreement that there are no hidden terms, a secret agreement to pay a short sale negotiator may constitute a breach of contract.
• Breach of fiduciary duty: A short sale negotiator who creates an agency relationship with a seller or buyer and fails to exercise due care may breach his or her fiduciary duty to do what is in the client’s best interest.  Additionally, the listing agent or buyer’s agent in a transaction who fail to exercise due care with respect to a third-party short sale negotiator may also be liable to their clients.  For example, a listing brokerage attempting to collect short sale negotiation fees to pad its own pocket with no regard for the seller’s best interest may be in breach of its fiduciary duty to the seller.  Also, absent the seller’s consent, a listing agent’s refusal to present a buyer’s offer to the seller unless the buyer agrees to pay the short sale negotiator fee may also constitute a breach of the fiduciary duty the listing agent owes to the seller.
• RESPA Violation (HUD-1 Statement): Omitting from a HUD-1 Statement any short sale negotiator charges paid at settlement by either a buyer or seller may violate the Real Estate Settlement Procedures Act (RESPA) (Appendix A to 24 C.F.R. Part 3500).  RESPA generally pertains to transactions of one-to-four residential units with a federally-related mortgage loan (12 U.S.C. § 2602(1)).
• RESPA Violation (Unearned Fee): Charging or accepting a short sale negotiator fee without performing any actual service may violate RESPA (12 U.S.C. § 2607(b); see also Martinez v. Wells Fargo Home Mortgage, Inc., 598 F.3d 549, 554 (9th Cir. 2010) (holding that RESPA’s prohibition against unearned fees does not extend to overcharges)).  RESPA generally pertains to transactions of one-to-four residential units with a federally-related mortgage loan (12 U.S.C. § 2602(1)).
• Other Criminal Violations: Depending on the circumstances, improper short sale negotiator activities may expose sellers, buyers, and their agents to other criminal claims, such as perjury (Cal. Penal Code § 118), conspiracy, and aiding and abetting in a criminal scheme.  Additionally, anyone who pays an unlicensed person for performing licensed activities is guilty of a misdemeanor punishable by a $100 fine (Cal. Bus. & Prof. Code § 10138).

Q 17.  How do I check whether a short sale negotiator is legitimate?

A  Factors to consider to help ensure that a short sale negotiator is legitimate include, but are not limited to, the following:

• Whether the negotiator and the negotiator’s employing broker if any are both properly licensed with the DRE or registered and bonded as a  foreclosure consultant (see Questions 26 to 38).


• Whether the negotiator is qualified to perform short sale negotiation services.


• Whether the negotiator actually performs services to facilitate and expedite the short sale process.


• Whether the negotiator’s fee is fully disclosed in a meaningful manner to, and approved by, the parties and lenders involved.


• Whether the negotiator’s fee is reasonable, based upon, among other things, the negotiator’s qualifications to conduct short sale negotiations and the fee charged by other negotiators.


• Whether the individual paying for the negotiator’s services voluntarily agrees to pay for those services, and is given an opportunity to consult with a real estate agent, attorney, accountant, or other professional as deemed appropriate.


• Whether the negotiator does not get paid until after the negotiator fully completes each and every service the negotiator promises to perform.


• Whether the negotiator complies with agency laws, RESPA, laws against fraud, and other laws and MLS rules.

The above list is an illustrative, not exhaustive list of factors to consider for a legitimate short sale negotiator.  Compliance with all these factors does not guarantee that a short sale negotiator is legitimate or qualified.  Similarly, not complying with one or more factor does not necessarily mean, depending on the specific circumstances, that a short sale negotiator is a scam artist, as ultimately decided by a judge, jury, arbitrator, or DRE Commissioner.

Q 20.  What is a scam involving a short sale package?

A  A short sale package scam generally involves intentional misrepresentations made in a short sale package for the purpose of obtaining a short sale lender’s approval.  These misrepresentations may be made in the original short sale package submitted to the lender or in subsequent dealings with the lender.  Knowing a short sale lender’s general requirements, a scam artist will manipulate the truth to improve the chances that a short sale package will be approved by the lender and the deal will close escrow.

Some of the improper tactics that may be used include, but are not limited to, misstating the truth, making up stories, concealing pertinent facts, submitting false documents, and forging signatures.  More specifically, examples of improper tactics involving short sale packages include, without limitation, the following:

• Fabricating a seller hardship and creating bogus supporting documentation, when in fact the seller does not have a hardship that satisfies the short sale lender’s requirements.
• Making a sales transaction appear to be an arms-length transaction, such as using a straw buyer (e.g., a relative with a different last name), when in fact the seller is selling the property to a related person in contradiction of the short sale lender’s requirements.
• Making a property appear to be owner-occupied to improve the chances of a short sale approval, when in fact the property is being rented out to, and occupied by, a tenant.
• Making it appear as if a property has been actively listed for sale in an open market for many months and sold for fair market value, when in fact the sale is a prearranged sale to a straw buyer for a price below fair market value to effectuate the AB sale in an AB-BC short sale flip.
• Making it appear as if the property has been sold in good faith to a buyer for fair market value, when in fact the scammer used improper means to ascertain the lowest price the short sale lender would approve and simply wrote that price into the sales contract.
• Making it appear to the short sale lender that the sales documents are the sum total of the agreement between the seller, buyer, and others, when in fact other arrangements have been secretly made for money to exchange hands (see also Questions 22 and 23).

For a discussion of the legal claims that may be asserted against fraud in short sale packages, see Question 21.

Q 21.  What are the legal problems with fraudulent short sale packages?

A  Illegal or improper tactics used in a short sale package may give rise to a host of legal claims.  Most notably, submitting false information in a short sale package to a short sale lender may constitute mortgage fraud.  As discussed above, mortgage fraud is broadly defined to include anyone who knowingly makes a false statement for the purpose of influencing a federally-insured mortgage lender or other financial institution as specified (18 U.S.C. § 1014).  A violation of federal mortgage fraud law is punishable by 30 years imprisonment, plus a $1 million fine (18 U.S.C. § 1014).

Depending on the specific circumstances, other legal claims that may be asserted against submitting false information in short sale packages includes, without limitation, breach of contract, common law fraud, RESPA, and perjury.  Depending on the extent of a real estate agent’s participation in a scheme, these civil and criminal claims may be raised against the agent, who may also be subject to license revocation or other disciplinary action taken by the DRE.

D. IMPROPER PAYMENTS

Short sale scams often involve the improper payment of money, such as undisclosed payments (see Question 22 and 23) and upfront fees (see Questions 24 and 25).

Q 22.  What is a scam involving undisclosed payments in a short sale transaction?

A  An undisclosed payment in a short sale transaction involves the payment of money or other things of value without the knowledge of an interested party, such as the seller’s short sale lender or buyer’s lender.  The undisclosed payment is typically paid outside of escrow in an attempt to escape the purview of interested parties.

One common scenario is when a short sale seller's senior lender authorizes a payment of, for example, $3,000 to extinguish a junior lien, but the junior lender demands that the buyer or someone else pays an additional $9,000 outside of escrow.  Concealing this additional payment from the senior lender may constitute mortgage fraud as discussed above (18 U.S.C. § 1014).  Furthermore, omitting from the HUD-1 Statement any charges paid at settlement by either a buyer or seller may violate RESPA (Appendix A to 24 C.F.R. Part 3500).

Another common scenario is when a scam artist uses monetary incentives to lure a seller into participating in a fraudulent scheme.  A scam artist may arrange for money to be paid to the seller by the scam artist, buyer, buyer’s agent, listing agent, or someone else.  Sometimes the arrangement is simply for the payment of money, whereas other times the payment is presumably for the purchase of the seller’s furniture, for the seller’s moving expenses, or for other reasons.  Oftentimes, the payment is made outside of escrow to escape the purview of the short sale lender.  Again, this type of undisclosed payment may constitute, among other things, mortgage fraud and a violation of RESPA.

Undisclosed payments may also violate other laws and regulations, and depending on a real estate agent's participation in the scheme, these civil and criminal claims may be raised against the agent, who may also be subject to a breach of fiduciary duty claim, as well as license revocation or other disciplinary action taken by the DRE.
Payments made outside of escrow have other risks and consequences as well.  For example, absent the safeguards provided by escrow as a neutral third-party, someone who receives cash outside of escrow could abscond with the money without performing on the sales contract.

Q 23.  Why is it problematic for the buyer of a short sale property to pay cash for the seller’s furniture outside of escrow?

A  In a short sale scam situation, funds are paid to the seller outside of escrow to conceal that arrangement from the short sale lender.  Oftentimes, a scam artist will urge others into a fraudulent scheme by claiming that a payment for the seller’s furniture or similar arrangement need not be disclose to the short sale lender because it is unrelated to the real estate transaction, when in fact it is related.  Additionally, such payment directly contradicts a short sale lender’s requirement, if any, for the seller to certify the absence of any hidden arrangements or receipt of funds.  If the short sale lender knew that the buyer had, for example, $5,000 for the seller’s furniture, the lender would likely want that money for itself to lessen its own loss.

Q 24.  What is a short sale scam involving an upfront fee?

A  In this type of scam, the scam artist offers to negotiate with the short sale lender or perform other short sale services in exchange for an upfront fee.  Also known as phantom help, the scammer will in reality perform little or no service at all and eventually absconds with the money.  Whatever services the scam artist does provide, the scam victim typically could have done on his or her own.  The victim ends up not only losing the money, but often loses valuable time to make other short sale arrangements before foreclosure.

To dupe unsuspecting victims out of their money, a phantom help scam artist usually knows exactly what to offer, how to pitch the offer, and what twists to add to lend credibility to the scheme.  For example, a scammer posing as a short sale negotiator may guarantee a short sale lender’s approval in two weeks, which may be precisely what a homeowner facing foreclosure wants to hear.  To bolster the claim, the scammer may explain that, as a close relative of the loan officer or loss mitigator, the negotiator has special access to an inside track at the bank.

Q 25.  What are the legal problems with an upfront fee in a short sale situation?

A  The law generally prohibits anyone who negotiates, attempts to negotiate, arranges, attempts to arrange, or offers to perform a loan modification or other form of mortgage loan forbearance, from claiming or demanding any upfront compensation (Cal. Civil Code § 2944.7(a)).  This rule, which is likely to encompass short sale negotiations, pertains to loans secured by one-to-four residential units (Cal. Civil Code § 2944.7(d)).  This rule will remain in effect until January 1, 2013 (Cal. Civil Code § 2944.7(e)).

The statutory prohibition against upfront fees applies to both real estate licensees and attorneys, among others.  Advance fees for real estate licensees are further regulated under Cal. Bus. & Prof. Code § 10026.

III. LICENSING GUIDELINES

In the subprime aftermath, legislative authorities have beefed up regulations protecting consumers against unscrupulous practices.  Checking someone’s legitimacy and qualifications to conduct short sale activities should include looking up real estate licenses, and foreclosure consultant registrations if applicable.

Q 32. How do unlicensed scam artists get around the licensing requirements?

A  A common tactic used by unlicensed scam artists is to make bogus excuses as to why they do not need a real estate license.  Some of the false claims that may be made to justify the lack of a real estate license when conducting short sale negotiation are as follows:

• “I don’t need to be licensed to help the seller negotiate debt forgiveness.”


• “We have an in-house attorney who will negotiate the short sale” (see Question 35).


• “We’re merely processing the paperwork.”


• “I’m negotiating the short sale on my own behalf as the buyer of the property.”


• “Everyone else is doing it.”

Another common tactic is for unlicensed individuals to work for a licensed company.  For example, let’s say an unscrupulous and unlicensed individual, John Doe, purports to work for Short Sale Advocates, Inc. doing short sale negotiations.  If the client asks for licensing information, John Doe would just show the client that Short Sale Advocates, Inc. is properly licensed, and not reveal to the client that John Doe himself is not but should also be licensed to conduct short sale negotiations through Short Sale Advocates, Inc.  John Doe may also not reveal to the client that Short Sale Advocates, Inc. is just a shell company that could be here today and gone tomorrow.

Q 33. What are the penalties for real estate license violations?

A  Any person acting as a real estate broker or salesperson without a license is guilty of a crime punishable by six months imprisonment in the county jail, plus a fine up to $20,000 (Cal. Bus. & Prof. Code § 10139).  Anyone who pays an unlicensed person for performing real estate licensed activities is guilty of a misdemeanor punishable by a fine up to $100 for each offense (Cal. Bus. & Prof. Code § 10138).  Additionally, if a real estate licensee engages in misrepresentations, fraud, dishonest dealings, or improperly pays an unlicensed person, the licensee may be subjected to license revocation or other disciplinary action taken by the DRE (Cal. Bus. & Prof. Code §§ 10138, 10176 and 10177).

B. ATTORNEYS

Q 34.  Is an attorney engaged in short sale activities exempt from the real estate licensing requirements?

A  It depends.  An attorney rendering legal services to a client is exempt from licensing requirements if the attorney is not using or attempting to use the exemption for the purpose of evading the licensing laws (Cal. Bus. & Prof. Code § 10133(a)(3)).  Furthermore, when negotiating loans, the attorney exception only applies if all of the following conditions are met:

• The attorney is licensed to practice law in California;


• The attorney renders services in the course of his or her practice as an attorney;


• The attorney is not actively and principally engaged in the business of negotiating loans secured by real property;


• The attorney’s disbursements are not charges or costs and expenses regulated by or subject to the limitations for Article 7 loans (commencing with Cal. Bus. & Prof. Code § 10240); and


• The attorney’s fees and disbursements are not shared, directly or indirectly, with the person negotiating the loan or the lender.

(Cal. Bus. & Prof. Code § 10133.1(a)(5).)  As an example, a law firm called Short Sale Legal Services could be a group of attorneys properly licensed by the State Bar of California, but if the firm principally engages in short sale negotiations, a DRE license may also be required.

Q 35. Can someone circumvent the licensing requirements by affiliating or associating with an attorney?

A  No, in most cases.  REALTORS® and their clients should be wary of people who claim that their affiliation or association with an attorney enables them to practice real estate without a license.

One common scenario is someone working for a short sale business enterprise who claims that neither the individual nor the company need to be real estate licensees because they have an in-house attorney or an affiliation with an attorney or law firm for negotiating short sales with the sellers’ lenders.  In truth, however, an individual person or short sale business is not exempt from the real estate licensing requirements merely because that person or business is affiliated or associated with an attorney or law firm.  Furthermore, attorneys and law firms are not exempt from the real estate licensing requirements unless certain parameters are met (see Question 34).  Another common problem with these types of arrangements is, among other things, attorneys and law firms are generally prohibited from “fee splitting” or sharing legal fees with non-attorneys (Cal. Rules of Prof. Conduct Rule 1 320(A)).

C. FORECLOSURE CONSULTANTS

Q 37. What is a foreclosure consultant?

A  A foreclosure consultant is an individual who provides, or offer to provide, foreclosure-related consultation services, such as helping certain homeowners stop or postpone a foreclosure sale, or obtain any forbearance from a lender (Cal. Civil Code § 2945.1(a)).  The foreclosure consultant law generally pertains to properties that are owner-occupied with one-to-four residential units and an outstanding notice of default recorded (Cal. Civil Code § 2945.1(f)).

Foreclosure consultants are strictly regulated under California law.  They must be bonded and registered with the California Department of Justice (Cal. Civil Code § 2945.45).  They must have written service contracts (Cal. Civil Code § 2945.3).  They cannot, among other things, collect an upfront fee, take a power of attorney, or take a lien on real property (Cal. Civil Code § 2945.4).

Real estate agents are generally exempt from the foreclosure consultant law (Cal. Civil Code § 2945.1(b)(3)).

For more information about Foreclosure Consultants, C.A.R. has a legal article entitled Foreclosure Scams and the Foreclosure Consultant Law, available for members at http://www.car.org/legal/2008articles/foreclosure-scams/.

Q 38. How do I determine whether a foreclosure consultant is properly registered with the California Department of Justice?

A  To check whether a foreclosure consultant is properly registered with the California Department of Justice, look up the person’s name at http://ag.ca.gov/loanmod/index.php.

IV. ADDITIONAL INFORMATION

Q 39.  To whom should a short sale scam be reported?

A  The following is a list of government enforcement agencies and other organizations for reporting fraud activities.  Some of these agencies and organizations are also excellent resources for obtaining more information about short sale fraud.

Office of the Attorney General
California Department of Justice
Attn. Public Inquiry Unit
P. O. Box 944255
Sacramento, California 94244-2550
(916) 322-3360
(800) 952-5225 (in California only)
http://ag.ca.gov/consumers/general.php (For filing consumer complaints)

California Department of Real Estate
P. O. Box 187000
Sacramento, California 95818-7000
(916) 227-0864
http://www.dre.ca.gov/cons_complaint.html (For filing consumer complaints)
http://www.dre.ca.gov/cons_alerts.html (Consumer alerts)

State Bar of California
180 Howard Street
San Francisco, California 94105
(800) 843-9053 (Attorney Complaint Hotline)
http://www.calbar.ca.gov/Attorneys/LawyerRegulation.aspx (For filing complaint)

Federal Bureau of Investigation (FBI) Headquarters
J. Edgar Hoover Building
935 Pennsylvania Avenue, NW
Washington, D.C. 20535-0001
(202) 324-3000
Or contact your local FBI field office
https://tips.fbi.gov/ (FBI tips and public leads)

Department of Housing and Urban Development (HUD) Headquarters
HUD Office of Inspector General Hotline (GFI)
451 7th Street, SW
Washington, D.C. 20410
(800) 347-3735
Or contact your local HUD field office
http://www.hud.gov/offices/oig/hotline/ (Office of Inspector General hotline)

Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, D.C. 20580
(877) 382-4357
http://www.ftc.gov/ftc/contact.shtm

Better Business Bureau
The Council of Better Business Bureaus
4200 Wilson Boulevard, Suite 800
Arlington, Virginia 22203-1838
Contact your local bureau
http://www.bbb.org/

Q 40. Where can I obtain more information about short sale scams?

A  Some of the agencies and organizations listed in Question 39 are good resources of short sale scams.  Additional resources are available as follows:

• DRE’s Consumer Alert: Warning Regarding Residential Short Sales, available athttp://www.dre.ca.gov/pdf_docs/ca/ConsumerAlert_ShortSales.pdf.


• DRE’s Short Sales – An Overview and Warning to Real Estate Licensees Re: Fraud, and Legal and Ethical Minefields, available at http://www.dre.ca.gov/pdf_docs/Article_ShortSales03_2010.pdf.


• DRE’s Update to DRE Issued Consumer and Industry Alert(s) Regarding Short Sales Fraud, and Related Issues (September 2010), available at http://www.dre.ca.gov/pdf_docs/Article_ShortSales03_2010.pdf.


• Fannie Mae’s Mortgage Fraud Program, available at https://www.efanniemae.com/utility/legal/antifraud.jsp.


• Freddie Mac’s Mortgage Fraud Prevention is at http://www.freddiemac.com/singlefamily/preventfraud/ 


• Freddie Mac’s Emerging Fraud Trends: Short Payoff Fraud available athttp://www.freddiemac.com/singlefamily/news/2010/0412_payoff_fraud.html