California SB 94 – A Useful Tool to Combat Unscrupulous Loan Modification Providers

By Styskal, Wiese & Melchione

February 10, 2011

Although not directly applicable to credit unions, and not widely publicized, SB 94 should serve as a useful tool in protecting members from unscrupulous players in the cottage “loan modification” industry.

Advance Fees Prohibited
Generally, no person (including real estate licensees and attorneys) may demand or accept any advance fee for residential real estate loan modifications, forbearances or similar services. The common complaint, of course, has been that loan modification companies make promises, require up front fee payment and then do not deliver what was promised.

Disclosure Required
Many licensees (including real estate licensees and attorneys) must now provide a disclosure to the borrowers before entering into any agreement, which says the following:

“It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.”

Criminal Aspect
Violation of the law is a misdemeanor and could result in disciplinary action by the appropriate licensing entity (i.e., Department of Real Estate, State Bar).

Related Law – “Foreclosure Consultants” and “Loan Auditors”
Pursuant to AB 2325, generally, any person (excludes attorneys) attempting to “audit” a residential mortgage loan must register with the Department of Real Estate. Failure to do so is a crime.

Suggested Uses
If you believe your members may be using a “loan modification specialist,” “foreclosure consultant” or “loan auditor” you may want to educate your members about SB 94 and AB 2325. For members who have been taken advantage of you may also want to point them to the relevant licensing authority (typically the Department of Real Estate or the State Bar). An occasional newsletter article might help your members avoid the use of these unscrupulous types altogether.