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California Senate Bill 94 and Loan Modification- Too Little, Too Late, Too Bad

On Sunday Gov. Schwarzenegger signed into law SB 94, effective immediately, which bans loan modification firms from being paid up-front, or even asking to be paid up-front. It also restricts attorneys from representing homeowners in trouble.

For some time the Department of Real Estate was already requiring licensed agents who received advance fees to have contracts approved by the Department. However, once the Notice of Default was recorded, no advance fees were permitted. Generally speaking, attorneys licensed in California were not subject to such prohibitions.

The new law requires that, under all circumstances, the loan modification firm must first fully perform all the services they contract to perform, or represent that they would perform, before being paid. Sounds simple- do the work first, and then get paid, what is wrong with that?

Loans are modified in a very low percentage of cases- in most instances, the request is denied. Often the clients are on the verge of losing their home because they cannot make the mortgage payment. Are they then going to pay the firm for the services already performed, if the loan is not modified?

The ban on advance fees also prohibits attorneys from requiring a deposit in their trust account. The money in an attorney-client trust account belongs to the client until it is earned by the attorney. It acts as security for the attorney to ensure that they are paid.

But the new law, prohibits any kind of security for payment. Specifically, it makes it illegal for someone, including an attorney assisting a client with a loan modification, to:

“(1) Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.

(2) Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.

(3) Take any power of attorney from the borrower for any purpose.”

I believe that this prohibits an attorney from placing a deposit in their trust account, as it is easily interpreted as “security to secure the payment of compensation.”

Clients in trouble with their mortgages often approach attorneys for assistance. The attorney can advise the client as to many options- loan modification, a short sale, offering a deed-in-lieu, bankruptcy, or even a lawsuit against the lender which would include an injunction preventing foreclosure.

SB 94 now ties the attorney’s hands. They can either forego requiring a fee deposit, or explicitly warn the client that negotiating a modification is NOT part of their services. I predict that, in most cases, the attorney will tell the client he’s on his own for a modification. The scammers have already made their money; the authorities have been closing in for sometime. By now people know not to plunk down a big up-front fee. The new law will not help anyone.

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7 responses to “California Senate Bill 94 and Loan Modification- Too Little, Too Late, Too Bad”

  1. Siena says:

    Anyone who thinks Civil Code 2944.7 (SB 94) says an attorney cannot have the client put money in trust is not reading clearly or does not understand the terms of art being used. Placing client property in trust clearly is not prohibited. SB 94 says a person cannot “Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.” Money placed in a trust account remains the property of the client. It is not claimed by the attorney. That is the whole reason it is in the trust account so it stays out of the attorney’s bank account (the place the attorney holds his or her compensation). Furthermore, money in trust account is not compensation for an attorney until it is withdrawn and becomes taxable. If it was compensation for the attorney, attorneys would pay income tax on it when it was deposited into the trust account, but they don’t. Section 2 prohibits taking “any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.” But a client trust is clearly not a wage assignment; it is not a lien lien because the attorney has no claim or hold on the trust money until it is earned after all services have been performed (at which time the attorney can properly claim in under Section 1) ; and it is not a security interest because a security interest creates a property right in what is being held and an attorney has no property right in the money in trust (again, until the attorney can properly claim in under Section 1).If the legislature did not want attorneys to be able to hold client property in trust they would have clearly inserted language that addressed client trust accounts. They also would have used the words hold instead of “claim,” and would have used the words real or personal property instead of “compensation” in the prohibition put forth in subsection 1.

  2. jfalcone-1 says:

    The legislature could also have expressly excluded attorney trust accounts. The state bar has been inundated with calls from attorneys on this question, and has still not responded.

  3. Siena says:

    They could have, but their failure to do does not override a fundamental rule of interpretation, expressio unius est exclusio alterius: “items not on the list are assumed not to be covered by the statute.”

  4. Siena says:

    Well, our worthless state bar and its incompetent “chief counsel” have weighed in with a half-baked opinion on the matter, saying “The statutory language of the prohibition uses the word “receive” and the plain meaning of that term is broad enough to encompass a lawyer’s receipt of advance fees into a trust account.”Even a 1L at a CA ABA law school would spot the problem with the chief’s analysis. It stops at the verbs and does not look at the subject of the action, which is “compensation.” Compensation which according to the single most cited reference in law, Black’s Dictionary is defined as “remuneration (payment) and other benefits received in return for services rendered.” Client money deposited into a trust account has never been considered payment or remuneration. It defies the entire theory of a trust. If the legislature or bar wanted the language to reach trust accounts, they should have drafted language that says deferred compensation, which at least can be argued to mean money put in trust.Add this to the long list of reasons why the California bar is worthless. I hope the Gov continues to deny their authority to collect dues.

  5. Bonky McGee says:

    Guys, if you want to put your law license on the line by betting on how a court or bar disciplinary committee might interpret this ambiguous law, best of luck to you. I, for one, will be telling my clients that they’re on their own with regard to loan mods.

  6. jfalcone-1 says:

    The California law those who are regulated by the State, such as real estate licensees and attorneys. It may be that an out of state attorney, if they do not file the action in California, would not be regulated by the State. Also, filing suit alone may be construed as not covered by SB 94.

  7. jfalcone-1 says:

    The statute says “offer to perform a loan modification.” Proposing a lawsuit to obtain a modification may be included.