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Bar issues foreclosure ethics alert

By Nancy McCarthy
Staff Writer

When San Diego attorney Carol S. was asked recently if she wanted to associate with a firm offering foreclosure modification services, she saw red flags. At a meeting with an intermediary who had approached her firm, she expressed concern about potential ethical constraints, such as splitting fees with non-lawyers and soliciting clients, but “they tried to explain some easy loopholes.”

Just three years out of law school, Carol (not her real name) said she has heavy student loan debt and the risk seemed too great. After consulting with both the Department of Real Estate and the State Bar’s Ethics Hotline, she decided to forget it.

“These places are largely unregulated,” she said. “But I think it would be impossible to live up to your ethical obligations.”

Carol is not the only lawyer who’s worried about working with foreclosure consultants or loan modification operations that have developed in response to the collapse of the housing market. Indeed, so many have contacted the State Bar for ethics advice that its professional responsibility committee issued an alert last month offering guidance to lawyers thinking about signing up. “The most important thing is for lawyers to understand this area is fraught with danger from an ethics point of view,” said Jon Rewinski, a Los Angeles litigator who drafted the ethics alert.

California law specifically addresses foreclosure consultants and restricts their activities; among other things, they are prohibited from collecting upfront fees for their work. However, because attorneys are permitted to accept advance fees, they are in demand by some loan modification businesses. (Licensed brokers also may accept advance fees under certain circumstances.)

According to the alert, posted on the State Bar’s home page (calbar.ca.gov), “There is evidence that foreclosure consultants may be attempting to avoid the statutory prohibition on collecting a fee before any services have been rendered by having a lawyer work with them in foreclosure consultations.”

The alert goes on to list a series of ethics rules prohibiting lawyers from:

  • paying a referral or marketing fee to a foreclosure consultant or other person for referring distressed homeowners to the lawyer;
  • directly or indirectly splitting fees earned from a distressed homeowner client with the foreclosure consultant or any other non-lawyer;
  • aiding a foreclosure consultant or anyone else in the unauthorized practice of law or forming a partnership or joint venture with a foreclosure consultant or other non-lawyer if any of its activities would involve providing legal services;
  • contacting in person or by telephone a distressed homeowner referred by a foreclosure consultant or someone else unless the lawyer has a family or prior professional relationship with the homeowner;
  • filing a lawsuit without good cause or motions in a lawsuit that are simply intended to delay or impede a foreclosure sale; and
  • failing to perform legal services with competence.

The alert also describes a series of scenarios that may land lawyers in legal hot water. For example, a non-lawyer may offer a large number of referrals and a promise of easy money; may request that the lawyer pay a referral or marketing fee; or may ask a lawyer to enter into a joint venture with a distressed homeowner and the consultant. Much of this conduct violates the Rules of Professional Conduct, the alert warns.

The bar’s Ethics Hotline, a free confidential research service for attorneys, has been receiving between one and two dozen calls a day for the last six months dealing with the residential mortgage crisis and loan modification — about 15 to 25 percent of its daily call volume.

Scott Drexel, the bar’s chief prosecutor, says that for the last three months, the bar has received 50 complaints each day — about 950 complaints a month — about lawyers involved in some way with the foreclosure crisis. While the complaints run the gamut, Drexel said the most common concerns lawyers who lend their name to a loan modification operation but non-lawyers do most of the work. The non-lawyers get fees upfront through the lawyer and either do not complete the modification or do it incompetently. As a result, he said, the client loses his or her money.

Calling the number of complaints “shockingly high,” Drexel said his office is “quite concerned. We’re especially concerned with attorneys allowing their names to be used by non-attorneys in some of these loan modification schemes or scams.”

The Department of Real Estate reports complaints about lawyers involved in loan modification programs who act as fronts or work inhouse. “We’re not certain if they are practicing law or just lending their names,” said chief counsel Wayne Bell.

The department has no jurisdiction over lawyers but can issue desist and refrain orders against unlicensed people who operate as real estate licensees and against licensees who violate real estate law.

A licensee can collect advance fees before a notice of default is recorded if he or she has received a “no object” letter from the DRE. Such a letter is issued after a licensee submits an advance fee agreement, accounting format and any advertising or promotional materials for review. But the letter does not mean the department endorses a particular service.

The Department of Real Estate also has posted a consumer alert on its Web site (dre.ca.gov) warning homeowners to beware of individuals or companies that offer to help work out a loan modification with lenders or provide other services that protect against foreclosure. The department is part of task forces operating in northern and southern California with county, state and federal prosecutors looking at loan modification efforts that cross the line into foreclosure scams.

Rewinski said the bar’s alert is not meant to suggest that distressed homeowners are not entitled to legal counsel; on the contrary, they may well need legal help and lawyers should be able to assist them. “Distressed homeowners should seek legal advice as one of their options,” he said. “There are pro bono resources and, of course, lawyers who will help on a paid basis.”

Bell agreed that many lawyers are legitimately helping clients with foreclosure and other credit issues. “If they are helping a client, engaged in providing professional services, that’s within their purview,” he said. “If they’re accepting fees and sharing those moneys with non-lawyers, you have all the problems this ethics alert deals with.” The main questions, he added, are “Is the lawyer really lawyering, is the lawyer bringing his or her professional skills and abilities to assist the client, and are they actually having face-to-face meetings with clients?”

Bell said when consumers who are in desperate financial straits see the word lawyer, “they somehow believe they’re going to get a higher level of care.” For the lawyer, he added, “the question becomes, if I lend my name to loan modification company, am I adding any value?”

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