ATTORNEYS AND THE FORECLOSURE RESCUE FRAUD EPIDEMIC

Transcription

1 ATTORNEYS AND THE FORECLOSURE RESCUE FRAUD EPIDEMIC The Lawyers' Committee for Civil Rights Under Law (Lawyers Committee) and its coalition partners in the Loan Modification Scam Prevention Network (LMSPN) have been tracking the foreclosure rescue fraud crisis since March As of early 2014, the national Loan Modification Scam Database, managed by the Lawyers Committee, has compiled over 40,000 complaints with total reported losses of over $90 million to homeowners. A particularly troublesome trend is the increasing prevalence of legal services entities (real or not) and attorneys among the scam complaints gathered in the Lawyers Committee s Database. According to Database complaints, attorneys appeared to be jumping into foreclosure rescue fraud beginning in early The Lawyers Committee began to look more closely at these scams that allegedly involved attorneys and the impact this trend had on the foreclosure rescue fraud fight. Did attorney involvement cause more harm to complaining homeowners? Does the sales pitch of scammers change with the involvement of attorneys? Are attorneys involved in foreclosure rescue services actual attorneys engaging in the authorized practice of law? The Lawyers Committee continues to seek out the answers to these and other questions to clear the way for distressed homeowners seeking real help to stop foreclosures. So far, after an in-depth analysis of over 40,000 complaints, the Lawyers Committee s findings on lawyers impact on distressed homeowners and scams are troubling.

2 ALLEGED ATTORNEY INVOLVEMENT IS ON THE RISE The percentage of total Database complaints alleging attorney involvement in foreclosure rescue scams is high and has increased every year since From July 2012 through December 2013, the majority of complaints received in the Database each month indicate attorney involvement. The Lawyers Committee determines which complaints allege attorney involvement based upon three factors in the text of the complaint reports: According to the complaint: The homeowner checked the box for offered legal representation YEAR % of Complaints Alleged Attorney Involvement The homeowner reports they dealt with an entity calling itself a law group, legal group, litigation group, or attorney group or similar description The homeowner s contact person claimed to be an attorney % % % % Total Complaints Reported Alleged Attorney Involvement All Other Complaints

3 LAWYERS ENGAGED IN FORECLOSURE RESCUE FRAUD RESULTS IN HIGHER HOMEOWNER LOSSES The data from the Lawyers Committee s Database also point to higher average losses reported by homeowners when the scam allegedly involves a lawyer a dangerous combination. During 2012 and 2013, an increasing number of lawyer-related organizations appeared in the Database. These Law Groups or Law Networks claim to include of lawyers from around the country and or claim that they will connect homeowners to lawyers in their home state. As of December 31, 2013, homeowners who indicated attorney involvement in their complaint suffered an average loss of $730 more than homeowners who did not indicate Average Loss Per Homeowner Alleged Attorney Involvement - $3,601 All Other Complaints - $2,871 attorney involvement. MINORITIES ARE HIT HARDER BY ALLEGED ATTORNEY INVOLVEMENT IN SCAMS Much like the subprime mortgage crisis, minorities are hit harder by the foreclosure rescue fraud epidemic, especially Hispanic or Latino homeowners. Hispanic or Latino homeowners lose more on average than White or African American homeowners, and when the scam involves an attorney, the numbers only get worse. On average, Hispanic or Latino homeowners lose a stunning $4,750 per scam when the scam alleges attorney involvement. Race Average Lost Alleged Attorney Involvement Average Lost All Other Complaints Difference + / - Hispanic or Latino $4,750 $3,229 + $1,521 White $3,164 $2,628 + $536 Black or African American $3,333 $2,894 + $439

4 PROFESSIONAL RULES FOR LAWYERS PROHIBIT MANY ACTIVITIES TYPICALLY ASSOCIATED WITH SCAMS In the context of preventing foreclosure rescue fraud, the American Bar Association (ABA) Model Rules of Professional Conduct ( Model Rules ) provide critical guidance, both to practicing lawyers and to distressed homeowners. First, lawyers should refresh their knowledge of these ethical rules so that they can maintain the professional standards expected of them and avoid possible sanctions (including losing the ability to practice law) and prosecution for improper or unauthorized practice of law. Homeowners should know that certain of these ethical rules can help them identify behavior by lawyers and others claiming to provide foreclosure rescue assistance that raises red flags. Three of the Model Rules are particularly relevant to identifying foreclosure assistance that is potentially improper or illegal: Rule 5.4: Professional Independence Of A Lawyer Rule 5.5: Unauthorized Practice Of Law; Multijurisdictional Practice Of Law Rule 7.1: Communications Concerning A Lawyer's Services Restrictions on Lawyers Partnering with Non-Lawyers: In most instances of alleged lawyer-related foreclosure rescue fraud reported into the Lawyers Committee s Database, the homeowner does not communicate with a lawyer. The conversations, the document transfers, the payments are all directed to and through processors or other non-lawyers. Homeowners must beware in these situations, because the chances are high that this is not a legitimate legal representation. Model Rules 5.4 and 5.5 restrict the ability of lawyers to partner with non-lawyers so much that it almost prohibits them from going into business together entirely. These two rules should give any distressed homeowner, and any responsible lawyer, pause when considering whether to work with someone claiming to offer relief from foreclosure for a fee.

5 Sharing Payment Streams - Model Rule 5.4 (a) prohibits lawyers from sharing payment streams with non-lawyers except in the following narrow circumstances that do not apply to distressed homeowners trying to modify their mortgages: (1) the payment of money to the lawyer's estate or to one or more specified persons; (2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may pay to the estate or other representative of that; (3) a lawyer or law firm may include non-lawyer employees in a compensation or retirement plan; and (4) a lawyer may share court-awarded legal fees with a nonprofit organization that employed, retained or recommended the lawyer. Forming Business Partnerships - Model Rule 5.4 (b) prohibits lawyers from forming business partnerships to practice law with people who are not lawyers. Model Rule 5.4 (d) states that a lawyer shall not practice with a non-lawyer, or in the form of a professional corporation or association authorized to practice law for a profit, if (1) a nonlawyer owns any interest therein, (2) a non-lawyer is a corporate director or officer thereof, or (3) a non-lawyer has the right to direct or control the professional judgment of a lawyer. Assisting Non-Lawyers in Giving Legal Advice - Model Rule 5.5 is also important for distressed homeowners to consider. Model Rule 5.5 (a) states that [a] lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction, or assist another in doing so. If a homeowner is talking only with non-lawyers and never meets the lawyer this is a red flag, because it is improper for a lawyer to help a non-lawyer give legal advice. Restrictions on Where a Lawyer May Practice If a homeowner is getting legal assistance from a lawyer or company the homeowner found online, or the homeowner is sending documents or money to a lawyer or company in a different state then where the homeowner or the home is located, this is another important red flag. Model Rule 5.5 (b) makes it clear that a lawyer must have a license in the state where he or she is doing business. A lawyer who is not admitted to practice in this jurisdiction shall not: (1) except as authorized by these Rules or other law, establish an office or other systematic and continuous presence in this jurisdiction for the practice of law; or (2) hold out to the public or otherwise represent that the lawyer is admitted to practice law in this jurisdiction. In addition to this ethical 68 % of the homeowner complaints that allege Attorney Involvement indicate an out of state operation rule, there are also federal rules that require any lawyer helping a homeowner to avoid foreclosure must be licensed where the homeowner or home is located.

6 Restrictions on Guaranteeing Results Finally, lawyers cannot guarantee results. A homeowner who is hearing these types of promises from a company that claims to offer legal services must beware because lawyers are not permitted to make these promises. Lawyers are required by ethical rules, specifically Model Rule 7.1, to avoid making misleading statements. Model Rule 7.1 states that [a] lawyer shall not make a false or misleading communication about the lawyer or the lawyer's services. A communication is false or misleading if it contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading. Lawyers are not permitted to promise distressed homeowners that they can achieve a particular outcome in any way; homeowners who are hearing these promises should walk away. The ABA Model Rules of Professional Conduct were adopted by the ABA House of Delegates in These Model Rules serve as models for rules that 49 of 50 states have issued to govern the conduct of the lawyers they license. California is the only state that has not adopted the Model Rules; however, California aggressively pursues and disbars lawyers who violate applicable laws and evade the consumer protections California has enacted to protect distressed homeowners.

7 WHAT CAN WE DO BETTER TO STOP LAWYER-RELATED FORECLOSURE RESCUE SCAMS? The Lawyers Committee and its LMSPN partners held a town hall discussion about the impact of attorney involvement in foreclosure rescue options for distressed homeowners on Tuesday, May 13, 2014: Rip-offs, Retainers, and Rescue Some suggestions from our town hall panelists: Better fraud alerts for consumers Better public enforcement documentation from state bars Better contacts among state bar counsel so federal authorities can access testimony, legal opinions, and information More clarity and anti-fraud measures by agencies rolling out official trusted resources so consumers, counselors and legitimate legal service providers can better avoid fraudulent resources Eliminate lawyers exemptions in federal and state laws on foreclosure rescue fraud Increase scope of private rights of action in state laws so consumers have more tools to sue scammers Strong statement from national legal organizations denouncing lawyer involvement in these frauds Improving collection of data to better understand borrower and scammer profiles Enhance delivery of borrower education, especially as related to appropriate circumstances under which to hire a lawyer About the LMSPN The Loan Modification Scam Prevention Network (LMSPN) is a national coalition of government agencies, nonprofits, and service providers using education and a centralized complaint gathering process to help stop foreclosure rescue scams. This effort is led by Fannie Mae, Freddie Mac, the Homeownership Preservation Foundation ( HOPE), NeighborWorks America (LoanScamAlert.org) and the Lawyers Committee for Civil Rights Under Law (PreventLoanScams.org). The work that provided the basis for this publication was supported by funding under a grant with the U.S. Department of Housing and Urban Development. The substance and findings of the work are dedicated to the public. The author and publisher are solely responsible for the accuracy of the statements and interpretations contained in this publication. Such interpretations do not necessarily reflect the views of the Federal Government.