August 2009
Lawyers and Buyers Beware
by Bob Lipson and David Huey, Consumer Protection Division, Washington State Attorney General’s Office
This article is to alert you to serious, potential ethical pitfalls if you are considering working with a loan modification company in conjunction with your practice.
It should not come as news to Washington lawyers that the national financial crisis precipitated by the collapse of the subprime lending market is now hitting our state with full force. Mortgage delinquencies are rising. Real estate values are falling. Foreclosures are up. So are consumer bankruptcies. People are out of work. Distressed borrowers need your legal help, and sometimes that might include a mortgage loan modification or other type of work-out arrangement.
Innumerable companies and organizations, some for-profit and some nonprofit, advertise to consumers that they can help. “Lower your debt.” “We will get your loan modified.” “We can stop your foreclosure and work with your lender.” “We guarantee it.” Just turn on mid-day or late-night TV, listen to the radio, or surf the Internet. Some of these, especially those with nonprofit or government affiliation, can and do help consumers in work-out situations and often work for free or a small charge. But other companies may be less honorable. Some may be simply rip-off artists. One hallmark of these less-than-reputable companies is a large up-front fee. Frequently, little or nothing is done of benefit to the borrower.
Governmental agencies, including the State Attorney General’s Office, the State Department of Financial Institutions, and the Federal Trade Commission, are bringing pressure to clean up the marketplace and protect citizens. The private bar is helping, too, through programs like the recently announced Home Foreclosure Legal Aid Project. Several state laws support this effort. Depending on the type of loan and how the modification entity does business, look at the Washington Debt Adjusting Act (RCW 18.28), the Credit Services Organization Act (RCW 19.134), the Mortgage Broker Procedures Act (RCW 19.146), the Distressed Property Conveyance Act (RCW 61.34), and the Consumer Protection Act (RCW 19.86).
Some of these laws exempt attorneys “while performing services solely incidental to the practice of their profession,” or when “not principally engaged in the business of negotiating residential mortgage loans when such attorney renders services in the course and scope of his or her practice as an attorney,” or for issues relating to substantive quality as opposed to the entrepreneurial aspect of the business. See, RCW 18.28.010(2)(a) and RCW 19.146.020(1)(c). For this reason, some for-profit loan modification companies are attempting an end-run around state consumer-protection laws by associating lawyers into their operation.
The effort by some loan modification companies to associate themselves with lawyers can be fraught with problems, as exemplified in Cincinnati Bar Assn. v. Mullaney, 119 Ohio St. 3d 412 (2008), a recent disciplinary case decided by the Ohio Supreme Court. There, a law firm agreed with a loan modification company to represent the company’s customers in foreclosure proceedings. For its services, the law firm received part of the fee that the customer paid to the loan modification company. The law firm followed a plan of the loan modification company, delaying foreclosure proceedings while the client followed a savings plan developed by the company and the company tried to renegotiate the loan. When the company’s loan modification attempt on behalf of the customer was unsuccessful, the law firm sent a standard letter advising the client of the date of the foreclosure sale, and recommending that the client contact a bankruptcy lawyer. The Ohio Supreme Court held that the lawyers had violated professional conduct rules by aiding non-lawyers in the unauthorized practice of law, sharing fees with non-lawyers, forming a partnership with non-lawyers that involved the practice of law, accepting impermissible case referrals, and failing to assess the individual legal needs of their clients. The case is instructive and should be taken as a word to the wise.
There are obviously multiple variations in how a loan modification company might seek to associate itself with a lawyer and how it might go about its business. Nevertheless, whatever the model used by the loan modification company, for the licensed Washington attorney, caution is warranted. Make sure that the loan modification company is operating in compliance with all substantive laws that apply to loan modification companies and that the company is properly licensed. For example, the state Department of Financial Institutions requires that all mortgage loan modifiers be licensed under the Mortgage Brokers Procedures Act and abide by it. Additionally, the Attorney General’s Office has brought several successful actions against loan modification companies because of their systematic use of unfair and deceptive acts and practices.
Equally important, make sure that you don’t violate the Rules of Professional Conduct. In all circumstances, be mindful of these basic ethics rules:
• You may not share or divide legal fees with a non-lawyer, including a loan modification company (RPC 5.4);
• You may not pay a referral fee to the loan modification company (RPC 7.2);
• You may not aid in the unauthorized practice of law (RPC 5.5);
• You may not form a partnership or joint business with the loan modification company if any of its activities involve the practice of law (RPC 5.4);
• Where a third party recommends or pays for your services as a lawyer, your obligation as a lawyer is still to your client, and your professional judgment may not be directed or regulated by the third party (RPC 5.4); and
• You must provide competent representation to your client, including appropriate consideration of the client’s individual circumstances, regardless of the expectations of the loan modification company (RPC 1.1).
