California homeowners facing mortgage foreclosures who want to obtain a loan modification have discovered that they cannot hire a lawyer, thanks to a recent California law which prohibits attorneys from accepting legal fees for their work. In an article in the New York Times called In California, Homeowners at Risk Struggle to Find Lawyers, David Streitfeld reports that a California statute designed to protect consumers from loan modification swindles has resulted in honest lawyers being unable to accept retainers to negotiate loan modifications for homeowners. Without the guarantee of payment, most lawyers will no longer accept cases on behalf of homeowners.
The law, which received the backing of the California State Bar and the Mortgage Banking Association, imposes a fine of up to $10,000 and up to a year in jail on attorneys who accept payment of their fee before the work is complete. The funds cannot even be placed in the lawyers trust account. The ban on accepting fees does not appear to apply to lawyers representing the banks, only to lawyers who try to help the homeowners. Thus, if the homeowner fails to obtain the modification or if the homeowner has to file bankruptcy, the lawyer will most likely never get paid for months of work.
While the purpose of the law was to protect consumers from scams, it appears to have had the opposite effect. Mortgage scams continue and complaints continue to rise, while ethical lawyers who would actually do the work have to turn down clients. Since the law took effect, it has started to take less time for banks to foreclose on homeowners, most likely due to the absence of lawyers to defend the homeowner's rights. And while some legislators defend the law by saying homeowners don't need lawyers to get a loan modification, many people who have lost their homes would disagree.
What do you think about the California law preventing lawyers from collecting their fees in advance of doing the work in loan modification cases? Was this law a knee-jerk reaction to a real problem with mortgage scams, or was this a freebie for the mortgage industry to make it easier to foreclose loans? Are there any equal protection issues presented by a law that prohibits one party in a dispute from paying a lawyer while the other party is free to hire the biggest law firms in California? Is there a way the law could be modified to provide protection to consumers without leaving them without lawyers to represent them? Share your thoughts in the comments section below.
Comments
This California statute is the epitamy of what is in store for the rest of America unless the trend is reversed. All laws that prohibit individuals and lawyers from freely negotiating fee agreements that are mutually beneficial are always couched in the theory that the general public needs protecting from predatory lawyers. The end result will be a diminished ability for the general public to obtain competent legal representation. Predatory lawyers should be permanently disbarred. I sincerely believe that the street lawyers who are the most effected by these statutes provide more service for less money than any other profession in this country. In my opinion these types of statutes do far more harm than good.
The law sets a dangerous precedent. If the government can prohibit lawyers from taking a retainer in advance of doing work in one type of case, what is to prevent them from imposing the same rule in other types of cases? Bar associations already place restrictions on lawyer free speech. Now they are cooperating (the bill was supported by the California Bar) with taking away a lawyer’s ability to make a living as well. But all these rules do is keep honest lawyers out of the game, while scammers and nonlawyers engaged in the unauthorized practice of law are free to take advantage of consumers.
Just a thought
The article by Streitfeld is a good piece. He’s the housing reporter for the NY Times and spends most of his time in California. In response to an earlier piece by him on the subject, where he failed to mention California, I contacted him. He knew nothing about the law or the State Bar’s modification of the RPC. I informed him about the new law, enacted in 2009 and pointed him to several of my blog (http://www.lawbizblog.com/admin/app?__mode=view&_type=entry&id=298638&blog_id=383) posts on this topic where he could learn more.
I’m glad that he’s written about it now, in more detail and in highlighted California’s experience.
As a side note, the Bank of America claims that of its loan modifications, more than 70% of those loans go back into default within 2 years … a scary statistic. Should the Bank be responsible for maintaining a family in a home which it can’t afford, even with a modified loan structure? I’m not sure … But, if they don’t, we’ll have many more foreclosures.
BTW, it was a politician seeking headlines that started the ball rolling. But, it was the absence of lawyers in the legislature (only about 23% today) that permitted it … and the non-profit organizations who lobbied for it (a little competition there, would you say?).
Too bad the California State Bar president seems to be hell bent on chastising sole and small firm lawyers. At the very least, he certainly gives no more than lip service to solos … Again, see my open letter (http://www.lawbizblog.com/admin/app?__mode=view&_type=entry&id=301525&blog_id=383) to the president of the state bar.
One of the problems is that outsiders do not get to see what the bank does/did to cause these defaults not the homeowners. If you could only hear the whole story. You are not being told that all the bank is doing is collecting as much profit out these situations as they can. Apparently it is legal for the bank to defraud homeowners.
I am a certified specialist in taxation law. I have not submitted the following question to the State Bar for an advisory opinion, but may. The question is whether the proscription on receipt of fees bars tax lawyers from counseling homeowners on the effects of cancellation of debt income. It seems to me that there are many homeowners who face or may face income tax if they walk away from their homes and are not eligible for an insolvency exception to cancellation of debt income.
For years I am/was being scammed by the FHA approved mortgage lender(s) and servicer(s) with numerous fake modifications and thousands of dollars paid up front. As a consequence of servicing fraud, i.e. fabricated defaults HUD/FHA, Department of Justice etc. have ignored my complaints. Now I am in bankruptcy(the only reason I filed bankruptcy was to defend the foreclosure) trying to fight the fraud and now being scammed by my attorney. Maybe the bank paid him not to defend the case? I don’t know what the hell is going on. The only one losing out is the homeowner. It is the lenders and servicers that are the massive abusers of loan modifications. How is it that they get away with scamming homeowners and others can’t? People should be paid for their work. However, as you attorneys know the problem is with the lender(s) and servicer(s). Instead of being a part of the vicious cycle of repeat fake modifications for short term gain, unite together with homeowners to get these illegal acts stopped so that when you do help a homeowner get a modification it is exactly that, and not a short term (Loan) profit for these lender(s) or servicer(s).Why you attorneys have not taken out a suit against those committing this massive criminal fraud and un-enforced laws against this country as well to protect the people is troubling.