What you need to know before you offer your services

By Marcie Geffner

REALTORS® might seem perfectly positioned to offer foreclosure prevention counseling and loan modification services to homeowners who can’t afford their mortgage payments. After all, many of these struggling homeowners naturally turn to the trusted REALTOR® who helped them purchase their home to ask for such assistance. But while you might be willing to help, you also should consider a number of risks before you decide to tackle this type of activity.

Why It’s Risky

The potentially risky areas include real estate licensing law, advance fees, the Foreclosure Consultants Law, and errors and omissions (E&O) insurance coverage.

Licensing. “Generally speaking, you would need to have a real estate broker’s license or be an attorney to negotiate a loan modification,” says Tom Pool, a spokesperson for the California Department of Real Estate (DRE) in Sacramento. That means realty salespeople who offer such services must comply with licensing laws and conduct these activities under the supervision of a licensed broker. For instance, setting up a separate unlicensed company to offer loan modification services would be a no-no.

Advance fees. Fees that realty licensees collect in advance for any activity that requires a license are subject to a whole set of special rules. For instance, licensees who collect advance fees must use an advance fee agreement that’s been reviewed—in advance, of course—by the DRE and found to be unobjectionable. Licensees also must comply with advance-fee collection and accounting rules. State law generally bans the collection of any advance fee for foreclosure-related services if a notice of default has been filed against an owner-occupied property. Violations of these rules can result in disciplinary action or license revocation, Pool warns.

Foreclosure Consultants Law. Real estate brokers generally are exempt from this state law; except if, among other things, he or she helps a former homeowner recover the remaining proceeds from a foreclosure sale of that person’s home. In that case, the broker or salesperson would be subject to all the requirements of the Foreclosure Consultants Law, according to Delphine S. Adams, an attorney with Adams & Associates in Santa Rosa. The penalties for a violation can include actual and punitive damages, a fine, and imprisonment, so you should familiarize yourself with these exceptions and consult your broker or an attorney if you have any questions or concerns.

E&O. Whether a standard E&O insurance policy would cover mistakes that occurred in connection with foreclosure consulting services may be an open question, Adams warns, so again, you should check into this issue before you get involved in this line of business. One important question to ask would be whether your E&O insurance would cover activities that fall under the Foreclosure Consultants Law. The answer may be no.

Stay in Your Lane

Butch Grimes, broker at Team Equity L.A. Properties in Los Angeles, appears well situated to offer his services as a foreclosure prevention or loan modification consultant. After all, Grimes specializes in bank real estate-owned (REO) properties and he hosts a radio show, “We Talk Real Estate,” that he says generates plenty of calls from homeowners who want referrals to foreclosure prevention consultants. But while Team Equity counsels homeowners who need to sell their home to escape a burdensome mortgage, the bulk of the nitty-gritty loan modification work is referred to local nonprofit housing counseling agencies.

“We prefer to work with them because it’s a lot cleaner,” Grimes explains. “I’m a firm believer that everyone needs to stay in their lane.”

If You Do It

REALTORS® who decide to get involved in foreclosure prevention or loan modification services despite the legal and licensing risks would do well to follow these six tips:

1. Don’t over-promise. Remember, it’s the lender, not you, who controls the outcome of a loan modification request. “In many cases, lenders have their own set of policies and procedures, and [you] are not going to be able to sway them one way or the other,” Adams says. Never promise results that you might not be able to achieve.

2. Keep the homeowner involved. Financially pressured and stressed-out homeowners tend to be highly emotional about their situation, so it’s especially important to keep them informed about your activities and the likelihood—or not—of a positive outcome. When you call the lender, do so with the homeowner present, so he or she can “hear first-hand what’s being said,” Adams suggests.

3. Review documents. Read the homeowner’s original loan application and loan documents before you get involved in a loan modification effort. These documents may contain important information, such as whether a loan is recourse or non-recourse that may impact the homeowner’s options and best course of action. Watch out for documents that could trigger allegations of loan fraud.

4. Research loan modification programs. A loan modification program may be difficult to interpret and apply correctly to individual situations. Read up on the programs to better understand the finer points of the lender’s rules and requirements before you get involved.

5. Inform your broker. Your broker is legally responsible for all your licensed activities. That’s why it’s important to make sure you know the rules and, as Adams adds, “keep your broker in the loop.”

6. Consult your E&O carrier. A phone call to your insurance broker before you perform foreclosure consulting services is a must to ascertain whether your policy will cover such activities. “It’s better to clarify [this] ahead of time,” Adams says, rather than risk a problem later.


HUD’s Foreclosure and Financial Counseling

The U.S. Department of Housing and Urban Development has launched “Keep Your Home. Know Your Loan,” a consumer campaign that includes print, radio, and television public service announcements (PSAs), as well as a toolkit for non-profit counseling agencies that will support the effort. The Department is launching this campaign to help consumers earlier in a financial crisis and to fight the explosion of “pay-to-play” loan modification scams. In each PSA, consumers are directed to call HUD’s toll-free counseling hotline (877-HUD-1515) to arrange free face-to-face meetings with a counselor near them.

REALTORS® can access HUD’s toolkit and distribute the PSAs via business card templates and flyers: www.hud.gov/keepyourhome/index.cfm .

In addition, agents can assist clients by identifying HUD-approved counselors in their area at www.hud.gov/keepyourhome and refer clients to these agencies and counselors.


More Information

Visit the Legal Section on C.A.R. Online (password-protected) and view several articles, including Loan Modifications, an article available on Legal’s “What’s New” and the “Legal Articles” pages. This article covers topics such as advance fee loan modifications, loan modification contracts, licensing requirements for doing loan modifications, tax consequences, and more.

California Department of Real Estate

Introduction to Sample Advance Fee Agreement: www.dre.ca.gov/mlb_intro_advfees_sample.html

The Essential Elements of an Advance Fee Agreement:
www.dre.ca.gov/pdf_docs/adv_fees_essential_elements.pdf

Sample Advance Fee Agreement for Loan Modification Services: www.dre.ca.gov/pdf_docs/adv_fee_agree_sample.pdf

Consumer Alert - Advance Fees and Loan Modification Services:
www.dre.ca.gov/mlb_adv_fees.html

List of licensees who have received DRE “no objection” letters for advance fee agreements: www.dre.ca.gov/mlb_adv_fees_list.html

California Mortgage Foreclosure Consultants Act:
www.leginfo.ca.gov/cgi-bin/display-code?section=civ&group=020013000&file=2945-2945.11

Marcie Geffner is a freelance writer and former senior editor of California Real Estate magazine.