Calendar of Events
What Every Advocate Should Know
May 14, 2010
Author: Alex Karsten
On March 25, 2010, New York State Attorney General announced his office was commencing a lawsuit naming National Modification Service, Infinity Mitigation Services and their respective owners as defendants. These two Long Island based “foreclosure rescues” were charged with violations of Real Property Law §265-b which governs distressed property consultants, Judiciary Law §478 prohibiting non-attorneys from providing legal advice, as well as General Obligations Law §349 and General Business Article 22-A, prohibiting certain deceptive business practices and false advertisement. On the same day, two other similar suits settled. Over ten states now have cases currently pending against so-called foreclosure rescues (otherwise known as foreclosure chasers).
In general, foreclosure rescue schemes involve fraud on delinquent borrowers with the implicit or explicit promise of stopping or preventing a foreclosure. Borrowers may be targeted by mail, phone, email, or any other means of solicitation. Once a Notice of Pendency (lis pendens) is filed, borrowers become easily identifiable by a simple public record search.
Types of Foreclosure Rescue Scams
There are three general types of foreclosure rescue scams, ranging from outright deed theft to promises of assisting negotiations with lenders. These variations rely on the assumption that the borrower will not read the documents they are asked to sign, and will simply sign them based on a promise from the scammer that they will prevent or stop a foreclosure.
The first type is the ‘bait and switch’ method where the scammer will promise that a new mortgage or loan will bring the existing mortgage current. After the ink has dried, the borrower discovers that these papers are actually deed transfer documents, and they no longer own their home. This is the most obvious of the deed theft scams, as the borrower is not typically aware that they are transferring the deed.
The second method is the ‘lease’ or ‘buyback’ scam. The scammer induces the borrower to sign over the deed with the promise to save the home, repair their credit and even pay off other outstanding debts. In return, the borrower is expected to pay a monthly lease amount and after a certain amount of time the borrower will be able to buy back the home. The borrower may know they are transferring the deed, with the promise they will ultimately own the home again, without fear of foreclosure. What they often do not understand is that they are actually transferring ownership to the scammer, and have little recourse to recoup their loss.
Both these scams result in the deed effectively changing hands from the borrower to the scammer. Typically, the scammer turns around and sells the property to a third party within days of the scam, and the title may be transferred multiple times before the borrower becomes aware of the scam. This leaves the borrower with few rights to the property, and essentially results in a month-to-month tenancy, which the scammer may terminate at any time.
The third type is perhaps the most common. The ‘phantom help’ scheme involves a foreclosure ‘specialist’ who promises to work with the borrower and the bank to modify their loan. In exchange, the borrower pays an exorbitant fee, either up front or through a monthly payment, which they are told to make to the scammer rather than their bank. If the scammer does any work on behalf of the borrower, it is minimal, and the same work the borrower could easily do themselves. Further, these services are readily available in all counties of New York State through a HUD certified agency at no cost to the borrower. More typically, however, the scammer does nothing, and either simply leaves with the upfront contribution, or with the monthly payments after a certain amount of time.
These scams have given rise to New York State legislation in the past three years. Although what is discussed below is not an exhaustive examination of all the relevant statutory and common law actions and is limited only to the most recent legislation, it is a starting point. In 2008, the Foreclosure Prevention and Responsible Lending Act contained two important provisions that created statutory causes of action specifically to address scams. In 2009, the Governor’s Program Bill #46 amended these statutes.
The first of the new statutes is Penal Law Article §187. This article makes it a criminal offense to prepare or provide materially false information for the purpose of applying for, underwriting, or closing a residential mortgage loan. It is also prohibited to file documents with a county clerk in connection with the closing of a residential mortgage that either contains materially false information or conceals material facts for the purpose of misleading a borrower. In 2009, the statute was amended so that the definition of a ‘residential mortgage loan’ included modifications to an existing mortgage. Penalties for violating this section range from a Class A misdemeanor to a Class B felony, depending on the compensation received by the offender.
The 2008 Act also created Real Property Law §265-b to address so-called “Distressed Property Consultants,” which are defined as an individual or business that provides paid services in connection with a ‘distressed’ (delinquent) home loan or taxes. Although the initial 2008 amendment excluded attorneys from these requirements, in 2009 the language was changed and now excludes only those attorneys whose regular legal practice includes directly providing consulting services to a borrower. Also excluded from these requirements, are bona fide not-for-profits, such as housing counselors and legal services agencies.
Consultants are now required to have a written contract between the consultant and the borrower indicating the type of service, the compensation, as well as contact information for the consultant. The borrower must be given a copy of the contract before and after signing. The consultant cannot collect for services rendered until the completion of the services. In 2009, the law was expanded to prohibit mortgage bankers and brokers from collecting upfront fees in connection with the activities of a consultant.
Consultants must also provide a notice that alerts the borrower to their right to cancel the contract without penalty, within 5 business days of execution. This notice also advises the borrower to contact an attorney prior to signing any documents, and informs them of other housing counseling agencies that may be available. The full text of the notice can be found in Real Property Law §265-b (3)(viii).
Violations of this statute give rise to private rights of action, as well as grounds for the Attorney General to bring an action. Violations may result in voidance of the contract, actual and consequential damages and costs, and treble damages and attorneys’ fees if the violation was reckless or intentional.
Other state laws such as The Home Equity Theft Prevention Act, Real Property Law §265-a, and The Deceptive Practices Act, General Obligations Law §349, as well as various federal laws can also be used in conjunction with common law actions such as fraud or conversion to protect borrowers who have been victimized by foreclosure rescue scams.
What to Look For When Assisting a Client
Typically, by the time a borrower comes to an attorney, they know they were victimized by one of these scams. However, sometimes it is not clear. The first red flag may be when a client reports they are working with another organization on the problems with their mortgage. Upon further questioning, they may reveal that:
- they paid a fee up front, before any services were performed;
- they were asked to make a payment only by cashier’s check or wire transfer;
- they were asked to lease the home and buy it back over time;
- they were offered cash in excess of the value of the home;
- they let someone else fill out paperwork for them.
These are some of the signs that a client may be a victim of a foreclosure rescue scam, and may give rise to causes of action or defenses to a foreclosure.
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