PREVENTING FORECLOSURE ABUSES

PREVENTING FORECLOSURE ABUSES

Brief Overview

Since 1979, corrective legislation has been passed and subsequently amended aimed at home-equity purchasers
and mortgage foreclosure consultants. These laws are found in Civil Code Sections 1695 et seq. and 2945 et
seq. The purpose of the laws is to provide protection for and to prevent foreclosure abuse of homeowners
whose residences are encumbered by deeds of trust or mortgages subject to an outstanding Notice of Default.
The term residential real property as used in these laws means a security property consisting of 1 to 4 family
dwelling units, one of which the owner occupies as his or her principal place of residence.

Home Equity Sales Contracts Law

Should a homeowner sell a residential property that he or she occupies (as defined) to an equity purchaser and
the property is the security for a loan subject to an outstanding Notice of Default, the provisions of Civil Code
Section 1695 et seq. (Home Equity Sales Contracts Law) would apply. An equity purchaser is defined to be a
person who acquires title to the residence of the seller subject to an outstanding Notice of Default, unless the
person acquires the title as follows:

1. For the purpose of using such property as a personal residence;

2. By deed in lieu of foreclosure of any voluntary lien or encumbrance of record (including deeds of trust
or mortgages);

3. By a deed from a trustee acting under the power of sale contained in a deed of trust or mortgage in a
non-judicial foreclosure sale conducted pursuant to Civil Code Section 2924 et seq.;

4. At a sale of the security property as otherwise authorized by statute;

5. By order or judgment of any court; or,

6. From a spouse, a blood relative, or a blood relative of a spouse.

If an equity purchaser intends to acquire a property subject to this law, the contents of the contract to effect
such a transaction are mandated by Civil Code Section 1695.3. Included among the required contract terms are:

1. The name, business address and telephone number of the equity purchaser;

2. The address of the residence in foreclosure;

3. The total consideration to be given by the equity purchaser in connection with or incident to the sale;

4. A complete description of the terms of payment or other consideration including, but not limited to,
any services of any nature which the equity purchaser represents he or she will perform for the equity
seller before or after the sale;

5. The time at which possession is to be transferred to the equity purchaser;

6. The terms of any rental agreement;

7. A Notice Of Cancellation (in at least 12 pt bold face type if the contract is printed, or in capital letters
if the contract is typed) as provided for in Civil Code Section 1695.5 setting forth the seller’s right to
cancel; and,

8. And a Notice Required By California law (in at least 14 pt bold face type if the contract is printed, or
in capital letters if the contract is typed) informing the equity seller that until the seller’s right to cancel
has ended, the equity purchaser or anyone working for the equity purchaser cannot ask the seller or
have the seller sign any deed or any other document related to the property or transaction. The name of
the equity purchaser must be included in this notice and the notice must immediately precede the
notice required in Civil Code Section 1695.5(a) and (b), i.e., the Notice of Cancellation.

The right to cancel any contract with an equity purchaser continues until midnight of the fifth business day (as
defined) following the day on which the equity seller signs a contract that complies with the Home Equity Sales
Contracts Law, or until 8:00AM on the day scheduled for the sale of the residential property pursuant to a
power of sale conferred in a deed of trust or mortgage, whichever occurs first. This law allows rescission of
such contracts under specified conditions (Civil Code Sections 1695.4, 1695.6, 1695.13, 1695.14, 1685.15,
1685.16 and 1695.17, or pursuant to any other applicable law).

Further, an equity purchaser who violates Section 1695.6 or Section 1695.13 may be liable for actual damages,
exemplary damages in an amount not less than three times the equity seller’s actual damages, attorney’s fees
and costs, and may be subject to an action for equitable relief. In addition, the court may award a civil penalty
of up to $2,500 under certain fact situations.

A criminal conviction for violation of Section 1695.6 (or for any practice which operates as fraud or deceit
upon the equity seller, including taking unconscionable advantage of the equity seller) may result in a fine of
not more than $25,000 or by imprisonment in the county jail, or in a state prison for a period of not more than
one year (or both the fine and the imprisonment) for each violation of this law.

The Home Equity Sales Contracts Law establishes a presumption that a grant to an equity purchaser with an
option for the equity seller to repurchase is a loan rather than a sale transaction (i.e., a hidden security device).

Any representative of a home equity purchaser as defined in Section 1695.15 deemed to be the agent or
employee of the equity purchaser is required to provide written proof to the equity seller that the representative
has a valid and current California real estate license and that the representative is bonded by an admitted surety
insurer in an amount equal to twice the amount of the fair market value of the property which is the subject of
the contract. However, a holding in a recent California case on this issue has made unenforceable the
requirement to obtain the bond as a predicate to representing the equity purchaser. As of this writing, the
requirement to obtain a bond to represent an equity purchaser is in doubt.

Because of the specific requirements of the Home Equity Sales Contracts Law, the standard real estate purchase
contracts and receipts for deposits (residential purchase agreements) customarily used in real estate brokerage
are not acceptable for use in home equity sales when the residential real property is subject to an outstanding
Notice of Default. Accordingly, a real estate licensee should seek the prior advice of legal counsel for
preparation of the proper contract forms and for advice regarding the manner in which such sales must be
conducted.

Mortgage Foreclosure Consultants Law

Civil Code Sections 2945 et seq. (Mortgage Foreclosure Consultants Law) addresses the problem of consultants
who represent that they can assist homeowners who are in foreclosure (their residence is subject to an
outstanding Notice of Default), often charge high fees, frequently secure the payment of their fees by a deed of
trust or mortgage on the residential property in foreclosure, and have been known to perform no service or
essentially a worthless service for the homeowner.

Foreclosure consultant means any person who makes any solicitation, representation, or an offer to any owner
to perform for compensation, or who for compensation, performs any service the person in any manner
represents he or she will do including any of the following:

1. Stop or postpone the foreclosure sale;

2. Obtain any forbearance from any beneficiary/lender/mortgagee;

3. Assist the owner in the right of reinstatement as provided for in Civil Code Section 2924c;

4. Obtain any extension of the period within which the owner may reinstate his or her debt/loan or
obligations;

5. Obtain any waiver of an acceleration clause contained in the promissory note or in a deed of trust or
mortgage on a residence in foreclosure (or in both the evidence of debt/loan and the security
instrument);

6. Assist the owner to obtain a loan or advance of funds;

7. Avoid or ameliorate the impairment of the owner’s credit rating resulting from the recording of a
Notice of Default or through the conduct of a foreclosure sale;

8. Save the owners residence from foreclosure; or,

9. Assist the owner in obtaining from the beneficiary/lender/mortgagee or trustee acting under a power of
sale or from a counsel acting for the beneficiary/lender/trustee the remaining proceeds from the
foreclosure sale of the owner’s residence (surpluses due to the owner as the borrower upon whom the
foreclosure was conducted).

Excluded from the definition of a foreclosure consultant are the following:

1. A person licensed to practice law in this state when the person renders services in the course and the
scope of the license;

2. A person licensed under Division 3 (commencing with section 12000) of the Financial Code when the
person is acting as a prorater as defined in the law;

3. A person licensed under the Real Estate Law when the person is acting under the authority of that
license as described in Sections 10131 or 10131.1 of the Business and Professions Code;

4. A person licensed under Chapter 1 of the Business and Professions Code (commencing with Section
5000 of Division 3) when the person is acting in any capacity under that license and under the
provisions of that law (as an accountant);

5. A person or his or her authorized agent acting under the express authority or with the written approval
of HUD or other department or agency of the United States or of this state to provide such services;

6. A person who holds or is owed an obligation secured by a lien on the residence in foreclosure
(including deeds of trust or mortgages) when the person performs services in connection with the
debt/loan and obligation or lien;

7. Any person acting under the California Finance Lender Law when the person is acting under the
authority of that license;

8. Any person acting under the Residential Mortgage Lending Act when the person is acting under the
authority of that license; or,

9. Any person or entity doing business under any law of this state, or the United States relating to banks,
trust companies, savings and loans, savings banks, industrial loan companies, pension trusts, credit
unions, insurance companies or any person or entity authorized under the law of this state to conduct a
title or escrow business, or a mortgagee which is a HUD approved mortgagee and any subsidiary or
affiliate of any of the above, or any agent or employee of any of the above while engaged in the
business of these persons or entities.

Service Means

“Service” means and includes, but is not limited to, any of the following:

1. Debt, budget, or financial counseling of any type.

2. Receiving money for the purpose of distributing it to creditors in payment or partial payment of any
obligation secured by a lien on a residence in foreclosure.

3. Contacting creditors on behalf of an owner of a residence in foreclosure.

4. Arranging or attempting to arrange for an extension of the period within which the owner of a
residence in foreclosure may cure his or her default and reinstate his or her obligation pursuant to
Section 2924c.

5. Arranging or attempting to arrange for any delay or postponement of the time of sale of the residence
in foreclosure.

6. Advising the filing of any document or assisting in any manner in the preparation of any document for
filing with any bankruptcy court.

7. Giving any advice, explanation, or instruction to an owner of a residence in foreclosure which in any
manner relates to the cure of a default in or the reinstatement of an obligation secured by a lien on the
residence in foreclosure, the full satisfaction of that obligation, or the postponement or avoidance of a
sale of a residence in foreclosure pursuant to a power of sale contained in any deed of trust.

8. Arranging or attempting to arrange for the payment by the beneficiary, mortgagee, trustee under a
power of sale, or counsel for the beneficiary, mortgagee, or trustee, of the remaining proceeds to
which the owner is entitled from a foreclosure sale of the owner's residence in foreclosure. Arranging
or attempting to arrange for the payment shall include any arrangement where the owner transfers or
assigns the right to the remaining proceeds of a foreclosure sale to the foreclosure consultant or any
person designated by the foreclosure consultant, whether that transfer is effected by agreement,
assignment, deed, power of attorney, or assignment of claim.

9. Arranging or attempting to arrange an audit of any obligation secured by a lien on a residence in
foreclosure, sometimes referred to as a “forensic loan audit”.

Notwithstanding the foregoing list of exemptions from the status of a foreclosure consultant, if the activity is to
assist the owner in obtaining surplus funds (if any) from the foreclosure sale of the owner’s residence, the

person is a foreclosure consultant (unless the person is the owner’s attorney). No exemption from the
foreclosure consultant’s law applies to a person except a licensed attorney when the foregoing service is being
offered or provided.

It is important to note the term “person” means for this purpose any individual, partnership, corporation, limited
liability company, association, or other group no matter how organized. The question of services that come
within the activities controlled by this law should be reviewed with knowledgeable legal counsel in advance of
performing any services or activities that may be subject to this law. They are broad and encompass most any
service, advice or activity offered or provided to a homeowner regarding the credit of the homeowner/borrower,
the ownership of the property, and concerning the security instruments of record when the residential property
is subject to an outstanding Notice of Default.

This law requires that contracts for services of foreclosure consultants contain specified provisions. The law
allows cancellation or rescission of such contracts under certain prescribed conditions (as well as the violation
of any applicable law that would result in cancellation or rescission of contracts). This law makes it a crime to
violate the provisions relating to such foreclosure consultant contracts.

Among the requirements for the contract for foreclosure consultants is a Notice Required by California Law
(printed in at least 14 pt bold face type) and the notice must be completed with the name of the foreclosure
consultant. The notice must immediately precede a second notice, a Notice of Cancellation. The purpose of the
notices is to ensure the homeowner is informed that no money may be paid to or received by the foreclosure
consultant until the foreclosure consultant has completely finished what the foreclosure consultant contracted to
do; that the homeowner may not be asked to sign or to sign any lien, deed of trust or mortgage, or execute a
deed that relates to the property or to the services being provided by the foreclosure consultant; and that the
homeowner may cancel the contract with the foreclosure consultant within five business days (as defined) from
the date of the transaction (i.e., entering into the contract). These notices are required pursuant to applicable law
(Civil Code Sections 2945.2 and 2945.3).

The foreclosure consultant’s fees are statutorily limited as well as the manner via which payment of the fees
may be obtained. The foreclosure consultant may not take a power of attorney from the homeowner for any
purpose and may not induce or attempt to induce a homeowner to enter into any contract that does not comply
in all respects with Civil Code Sections 2945.2 and 2945.3. Needless to say, foreclosure consultants may not act
in any manner that is deceptive, fraudulent, misleading or unconscionable.

Unless specifically exempt by this law, foreclosure consultants must register with the California Department of
Justice and must maintain in force a surety bond in the amount of $100,000 executed by a surety admitted to do
business in this state. As in the Home Equity Sales Contracts Law, the foreclosure consultant who commits any
violation described in Civil Code Section 2945.4 may be punished by a fine of not more than $10,000 or
imprisoned in the county jail or state prison for not more than one year, or both. Finally, any provision in a
contract with a foreclosure consultant that purports to limit the liability of the foreclosure consultant under Civil
Code Section 2949.9 is void and, at the option of the homeowner, would render the contract void.

Loan Modifications, Forbearances or Extensions, and Advance Fees

Background

The “Mortgage Meltdown” discussed earlier in this Chapter has resulted in significant problems for the
California housing market. Many borrowers are struggling or unable to make their mortgage loan payments.
Other borrowers are concerned about adjustable rate mortgages that have or are expected to reset to higher
interest rates producing increased monthly payments. Often these increased monthly payments are beyond the
capacity of many borrowers to pay. This is particularly true for those borrowers who obtained loan products by
qualifying at an initial “teaser” rate to achieve monthly payments that were affordable even for a short time.
Other borrowers qualified for their mortgage loans based on a represented stated income that was substantially
greater than the actual income earned.

Unable to make these increased mortgage loan payments, many of these borrowers turned to real estate brokers
(MLBs) to assist them with loan modifications or forbearances to prevent or delay foreclosure by the lenders or
the current holders of these mortgage loans. Real estate brokers (MLBs) can lawfully perform such services
pursuant to Section 10131(d) of the Business and Professions Code. Further, real estate brokers (MLBs) are

specifically exempt (with a notable exclusion regarding surplus funds) from the strict requirements of the
Mortgage Foreclosure Consultants Law that is discussed in this Chapter (Civil Code Section 2945.1).

Some borrowers sought the services of attorneys to obtain modifications of their mortgage loan terms,
including a reduction in the monthly payments. Under applicable law, California licensed attorneys may render
loan modification and/or forbearance services within the course and scope of their law practice. Attorneys who
are members of the California State Bar can lawfully perform such services. If not actively and principally
involved in the practice of negotiating loans secured by real property and when rendering services in the course
and scope of a law practice, attorneys are exempt from the Real Estate Law (Business and Professions Code
Sections 10133(a)(3) and 10133.1(a)(5)).

The DRE has reported “…financially distressed borrowers have fallen and continue to fall prey to pervasive
unlicensed loan modification and foreclosure rescue companies/entities, including natural persons offering such
services. In many cases, these companies are unlicensed entities that are nothing more than perpetrators of
fraud. They promise timely and helpful loan modification services, ask for and collect monies up front,
perform no valuable services, and simply pocket the monies paid in advance leaving borrowers exposed to
foreclosure of the mortgage loans secured by their homes.”

Evidence indicates persons or entities that are unlicensed have been involved in more “…monstrous and
unconscionable foreclosure rescue frauds, including ones where the unsophisticated homeowners surrender the
home title to the unlicensed scam artist or to an accomplice”.

California Legislation to Prevent Mortgage Loan Modification Abuses

Legislation was introduced, passed and signed by the Governor, which became effective October 11th, 2009
(Civil Code Sections 2944.6 and 2944.7). This law prohibits any person or entity that negotiates, attempts to
negotiate, arranges or attempts to arrange, or otherwise offers to perform for a fee or other compensation paid
by a borrower, a mortgage loan modification or other form of loan forbearance without first providing the
borrower with a notice prescribed by statute. The notice (statutory statement) is to be printed or word processed
in not less than 14pt bold type and provided to the borrower prior to entering into any fee agreement regarding
loan modification or loan forbearance services. This section shall remain in effect only until January 1, 2013,
and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2013, deletes or
extends that date.

The obligation to provide the notice (statutory statement) in advance includes a contemplated loan modification
(as authorized by federal or state regulators) which proposes an extension of the amortization period for the
loan term to no more than 40 years from the original date of the loan. The specific content of the notice
(statutory statement) is set forth in Civil Code Section 2944.6(a).

In the notice, the borrower is referred to non-profit housing counseling agencies approved by HUD and a list of
these agencies is available by visiting a local HUD office or www.hud.gov. The borrower is to be informed of
the free services available through HUD approved non-profit counseling agencies (Business and Professions
Code Section 10147.6 and Civil Code Section 2944.6(a)).

This notice provision does not apply to a person or entity or an agent acting on behalf of the foregoing when the
loan modification or loan forbearance services are in connection with a mortgage loan owned (held) or serviced
by such persons or entities. If the loan modification or forbearance service is offered to the borrower in a
language specified in Civil Code Section 1632, the notices, documents and instruments (including the
agreement to provide such services) are to be translated into the language used. These languages include
Spanish, Vietnamese, Tagalog, Chinese, and Korean (Civil Code Sections 1632 and 2944.6(a)).

This recent legislation prohibits any person or entity who offers to negotiate or attempts to negotiate, or offers
to arrange or attempts to arrange, or offers to otherwise perform any loan modification or forbearance service
from claiming, demanding, charging, collecting, or receiving any compensation, until the person or entity
performs every service contracted for or represented to be performed. The purpose of this prohibition is to
prevent any form of advance fees in connection with loan modification or other loan forbearance services
(Business and Professions Code Sections 10026, 10085, 10085.5, 10085.6, 10131.2, 10146, and 10147.6; and
10CCR, Chapter 6, 2970 and 2972; and Civil Code Section 2944.7).

Prior to proceeding with the use of any advance fee agreement for the performance of any services for which a
real estate broker’s license is required, these agreements and materials used to obtain advance fees (including
contract forms, letters or cards used to solicit the public, radio and television ads, among other advertisements)
must be submitted to and requires the prior approval of the DRE. The DRE may elect to issue a no objection
statement. Either way, real estate brokers (MLBs) may not proceed until the DRE authorizes the advance fee
agreements and materials the licensee intends to use.

When advance fees are collected they are to be handled as trust funds and deposited into the trust account of the
real estate broker (MLB) and must be accounted for and disbursed in the manner authorized by the DRE
(Business and Professions Code Sections 10085 and 10146, and 10CCR, Chapter 6, 2970 and 2972). The
failure to comply with the advance fee requirements as described in this Chapter and in accordance with
applicable law is a presumptive violation of 506 and 506(a) of the Penal Code (conversion and embezzlement).

In addition, any person or entity contracting or representing to perform such services is prohibited from
receiving any wage assignment or any lien of any type on real or personal property to secure the payment of
compensation. Also, such persons are prohibited from accepting a power of attorney from the borrower for any
reason whatsoever. The prohibition of the payment of advance fees (as defined) does not preclude the lender or
the holder of the loan or its servicing agent from collecting principal, interest, or other charges under the terms
of the mortgage loan before the loan is modified (including charges to establish a new payment or amortization
schedule, or for structuring the modification providing for a reduction in the unpaid principal balance for the
express purpose of reducing the monthly payment under the terms of the loan).

The lender or holder of the mortgage loan and its servicing agent are not precluded for collecting interest, or
other charges under the terms of the loan after the loan is modified, or from accepting payments by a federal
agency in connection the “Making Home Affordable Plan” or other federal plan to help borrowers refinance or
modify their residential mortgage loans, as well as otherwise avoiding foreclosure. Each of these codified
sections are intended to apply to residential real property containing four or fewer units (Civil Code Sections
2944.6(e) and 2944.7(a), (c), and (d)).

A violation of this law by a natural person is a public offense punishable by a fine not exceeding $10,000 or by
imprisonment in the County jail for a term not to exceed one year or by both a fine and imprisonment. If the
violation of the law occurs by an entity, the violation is punishable by a fine not exceeding $50,000. The
penalties described in this law are cumulative to any other remedies or penalties provided by law (Business and
Professions Code Section 10147.6(e); and Civil Code Sections 2944.6(c) and 2944.7(b)). The section
prohibiting the collection of advance fees is repealed as of January 1, 2013, unless extended by a later statute
enacted before January 1, 2013 (Civil Code Section 2944.7).

Conclusion

It is illegal for any person to take “unconscionable advantage” of any property owner in foreclosure or in
connection with mortgage loan modification or loan forbearance services. While real estate broker licensees
may, under certain circumstances, be exempt from the provisions of the Mortgage Foreclosure Consultants
Law, a licensee should proceed with an abundance of caution when dealing with owners of residential property
where a Notice of Default has been recorded and remains outstanding or a Home Equity Sales Contract is being
considered. This note of caution extends to engaging in any activities involving mortgage loan modification or
other loan forbearance services, including the prohibition from collecting advance fees.

Among other requirements, real estate licensees must act within the course and scope of their licenses, must
not accept any advance fees, and must not acquire any interest in the residence in foreclosure. Prior to
representing either a seller of residential real property or an equity purchaser when the property is subject to an
outstanding Notice of Default, or prior to offering loan modification or other loan forbearance services, real
estate brokers (MLBs) should seek the advice of knowledgeable legal counsel.