Beware the meltdown's temptations
By Diane Karpman
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Karpman |
It would be difficult not to see
potential opportunities in the sub-prime mortgage meltdown. Gov. Schwarzenegger's
AB 1830 is designed to mandate that lenders wait an additional 90 days
before selling a defaulting borrower's home. President-elect Obama has
proposed a three-month moratorium on foreclosures. Although some may think
this presents boundless business opportunities, wait a minute.
A few months ago, I mentioned
a scenario that is spreading throughout the legal community. Lawyers are
being solicited by brokers and loan modification agents who want to create "new
business models." Remember, lawyers cannot be in business with nonlawyers,
regardless of what creative paradigm a broker presents to avoid the historic
prohibitions on fee splitting.
On Sept. 16, the Ohio Supreme
Court suspended one lawyer, enjoined another from pro hac vice practice
in the state, and reprimanded a third for providing perfunctory legal services
to customers of a high-volume mortgage foreclosure counseling firm that
was engaged in the unauthorized practice of law (Cincinnati Bar Ass'n
v. Mullaney, Ohio, No. 2008-0412).
These types of sham companies
are proliferating throughout California since we are one of the epicenters
for upside down mortgages. The company sells the lawyer "modification services" and
charges the client for referring them to the lawyer. Other creative variations
exist, but they all present the same problems.
The companies exploit the vulnerability
of the clients and advertise their ability to help debtors reinstate or
rework their loans. Typically, the lawyers never meet with the clients.
The companies negotiate directly with lenders, generally following a predetermined
script of stalling with boilerplate correspondence. That cookie-cutter
approach may not be the best procedure for all the debtors and demonstrates
that the lawyers involved with the companies failed to exercise independent
judgment regarding the needs of that particular client.
Conflicts abound in these situations
because lawyers will be reluctant to advise the client to sue the referring
company, fearful of cutting off future referrals. The problem is that a
lawyer's focus must be solely on that particular client's needs and not
on other ongoing business relationships. That is the overarching reason
lawyers can't share fees with nonlawyers.
Other disciplinary allegations
include the possibility that the lawyer is aiding and abetting in the unauthorized
practice of law. In People v. Sipper (1943) 61 Cal. App. 2d Supp.
844, a broker advised the clients on what documents to execute, stepping
beyond merely being a scrivener or clerical service, and was found to have
violated Business and Professions Code §6125.
Clearly, lawyers can employ outside
service providers like accountants, investigators and translators, or they
can hire in-house loan modification agents so that they can be properly
supervised. The cases must be self-generated by the lawyer, because buying
clients or paying referral fees has been prohibited for centuries. It doesn't
matter what type of newfangled business "model" is employed, it is still
capping and running, and can result in significant criminal and disciplinary
penalties.
• Diane Karpman can be reached
at 310/887-3900 or at karpethics@aol.com.
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