Foreclosure Protection Acts

(And Other Regulated Conduct of Foreclosure Investing)

WHAT YOU NEED TO KNOW TO STAY OUT OF JAIL!

California passed the “Foreclosure Consultant” law (CAL CIVIL CODE SECTION 2945-2945.11) about 20 years ago to regulate scam artists in the foreclosure “rescue” business.  Of, course, there are as many legitimate investors who buy houses from sellers in foreclosures, too.  Maryland was the second state to enact legislation, and over the last 8 years or so since, scores of states have passed similar laws that require compliance with certain rules and regulations that you must be aware of.

Despite the “chicken littles” of the world, the passage of these laws do not mean that foreclosure investing is illegal from here on out.  The State Attorneys General offices and the legislatures (at least for now)  do not think that just because a homeowner makes a bad deal, they’ve been defrauded.  They felt, however, they needed to level the playing field because of a few bad investors taking advantage of people.  The new laws make a few bad practices illegal and gives some guidance to legitimate and honest investors.  It’s not impossible to follow, but it will mean that investors need to take extra care when they do these deals.

Another thing to keep in mind and be happy about is that the legislatures gave a few “safe harbors” for investors.  What this means is that while for certain things, disclosures are required, the law defined not only the wording but the type size you must use.  Why is this good?  Well, it’s hard for someone to bring a lawsuit against you for bad disclosure if you gave it exactly as the law requires.  KEEP IN MIND, and this is important, the language in the statute is for specific required disclosures and contractual provisions.  Using this language does not make you immune from every lawsuit. These laws are not perfect, but they never are.

Everyone who is an investor or “consultant” must be aware that there are Criminal penalties if you don’t follow the law, and if you don’t run your business as set forth in the statute.  You may also be liable under your State’s Consumer Protection Act which gives the Seller the right to sue for triple damages and get their attorney’s fees from you.  This may be worse than jail. Still, if you just follow the requirements of the law, which are fairly reasonable, you can still do well and find good deals.

Who Do the Laws Affect?

The new laws mainly deal with two groups of business people who deal with “Homeowners” in foreclosure.  The law defines and attempts to regulate the actions of :

1.  Foreclosure Consultants – generally people who give advice to homeowners in foreclosure for a fee;

2.  Equity Purchasers – generally those investors buying properties from homeowners in default; and

3. Buyback Agreements – those investors who are dumb enough to offer the former owner a lease with an option to repurchase the property.

It is important to know that in some states, it the law only applies to someone who is IN FORECLOSURE, that is, some legal notice (e.g., notice of default or lis pendens) has been filed.  In other states (like my state of Colorado), it applies to anyone who is IN DEFAULT of either mortgage payments or taxes.  That’s a tough one because if a seller is late on payments and no action has been publicly filed, he could be lying and you’d have no way to verify it.

The “Foreclosure Consultant”

People who don’t want to buy houses in foreclosure but want to make money giving advice to the owners are now deemed “Foreclosure Consultants”.  Read on and you’ll see that there are a fair number of restrictions on these people and some things to really be concerned with.  However, doing this is not illegal.  It’s just very important to do it correctly.

The new laws have a pretty detailed description of a Foreclosure Consultant, so here’s an example from Colorado’s Foreclosure Protection Act, which is pretty typical:

“…a person who does not, directly or through an associate, take or acquire any interest in or title to the residence in foreclosure and who, in the course of such person’s business, vocation, or occupation, makes a solicitation, representation, or offer to a home owner to perform, in exchange for compensation from the home owner or from the proceeds of any loan or advance of funds, a service that the person represents will do any of the following:

(I)  Stop or postpone a foreclosure sale;

(II)  Obtain a forbearance from a beneficiary under a deed of trust, mortgage, or other lien;

(III)  Assist the home owner in exercising a right to cure a default as provided in article 38 of title 38, C.R.S.;

(IV)  Obtain an extension of the period within which the home owner may cure a default as provided in article 38 of title 38, C.R.S.;

(V)  Obtain a waiver of an acceleration clause contained in an evidence of debt secured by a deed of trust, mortgage, or other lien on a residence in foreclosure or contained in such deed of trust, mortgage, or other lien;

(VI)  Assist the home owner to obtain a loan or advance of funds;

(VII)  Avoid or reduce the impairment of the home owner’s credit resulting from the recording of a notice of election and demand for sale, commencement of a judicial foreclosure action, or due to any foreclosure sale or the granting of a deed in lieu of foreclosure or resulting from any late payment or other failure to pay or perform under the evidence of debt, the deed of trust, or other lien securing such evidence of debt;

(VIII)  In any way delay, hinder, or prevent the foreclosure upon the home owner’s residence; or

(IX)  Assist the home owner in obtaining from the beneficiary, mortgagee, or grantee of the lien in foreclosure, or from counsel for such beneficiary, mortgagee, or grantee, the remaining or excess proceeds from the foreclosure sale of the residence in foreclosure.

What does all this mean?

First foreclosure consultants can’t obtain any interest in the property, even through a company, association, joint venture or partnership.

Second, you’re a consultant if you’re going to receive anything of value or get paid in any way by any party for telling a Homeowner in foreclosure you can do any of the following for that Homeowner:

a. You can stop or delay the foreclosure sale.

b. You can get the lender, who has a lien on the property, to stop the sale or collection on the loan.

c. You can help the Homeowner cure their default.

d. You can get an extension of time to cure the default.

e. You can get the lender to waive their right to call the loan due because of the default.

f. You can help the Homeowner get any type of loan or advance.  This doesn’t even have to be for the house.

g. You can save their credit which is getting trashed due to the foreclosure.

h. You can help the Homeowner get excess proceeds from the foreclosure.  (remember, if the home sells for more than is owed at the foreclosure sale, the owner gets the excess.)

 and…

You don’t obtain any interest in the property, even through a company, association, joint venture or partnership.  The way the Law reads, a Foreclosure Consultant, or its affiliate (THINK friend or partner or shill) cannot obtain an interest in the Homeowner’s property or you can go to jail.  In laymans’s terms, you cannot switch hats and go from being a “consultant” to a buyer (nor anyone affiliated with you).  The lesson is, DON’T BE A JACK OF ALL TRADES.  Either be a consultant and charge a fee, or buy the property.  Don’t try to be EVERYTHING to the seller!!!

Is Anyone Exempted from the Foreclosure Consultant Laws?

Yes.  The lawmakers knew that some people needed to consult with homeowners and even get paid for it, but should not be controlled by the law.  Those people are as follows:

1. Lawyers.  They wrote the law so of course they’re exempt.  However, if the Lawyer is not representing the Homeowner they are probably not exempt.

2. A lender, or its attorney, who has a lien or deed of trust on the property, but only while they perform services in connection with the lien or deed of trust.

3. Anyone who is operating under the banking, trust, insurance or escrow laws.

4. The person originating or closing a loan if the loan is subject to RESPA or if it’s a second, done in conjunction with a first subject to RESPA.

5. A judgment creditor where the judgment is recorded and the legal action where the judgment came from started before the foreclosure.

6. Title Insurance companies or agents while they are performing services.

7. Licensed real estate agents and brokers so long as they are performing services for which they are licensed.  Therefore, if the agent or broker is just trying to be a foreclosure consultant for money, which is not an activity specifically licensed by the Real Estate Commission, they are acting as a foreclosure consultant.  If as part of their agent or broker relationship where they’re trying to sell a house for a Homewoner in Foreclosure and they try to help the homeowner get a forebearance, they would be exempt from the act.

8. A non-profit (such as a counseling agency) that only gives advice unless that non-profit is associated with someone who is deemed a foreclosure consultant.

You may not act “unconscionably”

The statute expressly forbids this but strangely does not send you to jail if you do. What does “unconscionable” mean?  It’s not very clear but common sense goes a long way here.  Vis-à-vis the Foreclosure Protection Acts, a court has the power to void ANY contract that is unconscionable.  For some reason the legislature wanted to reiterate that power and allow the court to void any foreclosure consulting contract they thought was entered into by fraud, lack of choice, unreasonably favorable to the consultant.

Are you really still interested in being a “Foreclosure Consultant”? Those are the basics and as an investor you  really need to decide whether you’re going to make more money and have less risk buying properties in foreclosure or advising homeowners in foreclosure.  If you choose to advise, the best thing to do is have an attorney review your contract and never change that contract unless the law changes.  Then again, you could just be an Equity Purchaser, make more money and follow some easier rules.

The Foreclosure Buyer – The “Equity Purchaser”

The legislatures really wanted to regulate the purchase of homes from people in foreclosure, not just people who take a fee for “consulting”.  The new laws defines an Equity Purchaser (sometime called a “Foreclosure Purchaser” in a few states) as someone who in the course of their business, vocation or occupation (meaning any time you intend to make money) acquires title to the home of someone living in that home as their primary residence which is also in foreclosure.  Pretty easy, pretty broad.

The statute is chock full of exceptions on the definition of Equity Purchaser. It’s important to know when you’re not.  Again, this doesn’t mean you shouldn’t follow good practice, deal honestly and disclose things if you’re not an Equity Purchaser under the statute.  The people who are not “Equity Purchasers” are as follows:

1.   People buying for their personal residence to be used for at least one year.

2.   Holders of a debt, or their associates, who get a deed in lieu of foreclosure AND the lien (think deed of trust) was recorded before the foreclosure began (which is most likely the filing of the Notice of Election and Demand.).  Normally this means banks.  However, an investor could buy a bank debt and then negotiate a deed in lieu deal with the owner.

3.   People who acquire the property by a trustees or sheriff’s deed after the sale.

4.   People who acquire the deed at any sale authorized by statute.  This would mean those people who go to the foreclosure sale and bid.

5.   If a court transfers the ownership to you.  This would mean because of a lawsuit, or a bankruptcy or even a settlement enforced by the Court.  The real thing to keep in mind is that if the court transfers the property to you, you don’t have to worry about the contracts with the Owner.

6.   If you get the deed from your spouse, close relative, guardian, conservator or personal representative.

7.   If you obtain the property while performing normal business activities, duties or services under any banking, trust, insurance, title or escrow regulation.

The Equity Purchase Contract

Every contract between an Equity Purchaser and a Homeowner needs to contain certain thing to make it valid.  The contract survives the transfer of the property to you, which means that if you didn’t do something you said you would, they can still sue you even if they signed over the deed.  The contract must be in writing, in English or translated for the party in whatever language “Principally spoken by the Home Owner.”  If it’s translated it needs to be certified by a translator that the translation is a true and correct copy of the English version which must be given to them as well.  So this means that even if they speak perfect English but they speak another language at home most of the time, you probably need to get the contract translated.

The intricacies differ from state to state, but here’s a sample of what you need as a minimum for your equity purchase contract to be valid.

1. It has to be in writing with twelve point Bold faced type.

2. The contract has to be fully completed, signed and dated by every person that owns the home and the equity purchaser BEFORE you execute and instrument (usually a deed) which transfers the interest.  This also applies to any deal involving a situation where the homeowner gives you any lien, mortgage, or deed of trust.

3. The written contract has to contain all points of the deal, nothing can be oral or in some other document. The contract has to contain at the VERY LEAST, the following.

a. The name, business address and phone number of the Equity purchaser.

b. The street address and the full legal description of the residence in foreclosure.

c. A clear disclosure of any financial or legal obligations that will be assumed by you. This means you need to say whether or not you’re going to pay off any of the liens.  You can’t say nothing.  If you are not assuming any of these obligations, you need a separate disclosure, signed by the seller that clearly identifies which liens are being paid off and which are not.

d. The total amount your are going to pay “in connection with or incident” to your purchase.  This means if you’re giving any money or any property or even a can of soup to the seller or to anyone else, you need to disclose it in the contract.  Don’t just disclose the dollars you’re paying for the property.

e. The terms of payment, or, if as part of the deal you are doing anything else for the homeowner, before or after the sale, such as moving them out, paying their electric bill or mowing the lawn, you need to disclose that as well.

f. The date and time you are transferring ownership.  So you can’t just put a day in, you need to give a time as well.

g. The terms of any rental agreement or lease.  The law doesn’t specify what this means, so to be safe, you need to specify any current lease or any lease you may offer to anyone including the homeowner.

h. The specifics of any option or right to repurchase including the amount of escrow, deposit, down payment, the purchase price, the closing costs, commissions and any other fee or cost. We’ll talk more about this later.

i. The following notice in Fourteen Point Bold Faced Type and completed with your name.  This must be right before the Notice of Cancellation which has to come right before the signatures, and usually reads something like this:

NOTICE REQUIRED BY _______ STATE LAW

Until your right to cancel this contract has ended, (Name) or anyone working for __________ (Name)
CANNOT ask you to sign or have you sign any deed or any other document.

The Notice of Cancellation

As the last provision in the contract, right before the signature lines you need to disclose the right of cancellation.  It must be in at least twelve point bold type, and it must say the following with the actual date and time the cancellation right expires.  In some states, it’s three day, in others it’s 5 or 7 days.  Read the statute carefully whether it’s business or calendar days.  It looks something like this:

You may cancel this contract for the sale of your house without any penalty or obligation at any time before _______________________
(Date and time of day).  See the attached notice of cancellation form for an explanation of this right.

Now, you need to know that this statement is in addition to the cancellation form you attach to the contract and any other right they may have to cancel.  So if they could cancel the contract because of fraud, bad signatures, incorrect names etc., they still can even after the time in the notice.  Of course, they could have done that without the new law.

The cancellation is good when they deliver it or just put it in the mail.  YOU DON’T HAVE TO RECEIVE THE MAIL FOR THE CANCELLATION TO BE GOOD.  So it might be a good idea to hold off until the end of their cancellation period and then see if they have or get them to sign something that says they have not, which is not a perfect solution.

You need to attach to the contract duplicate forms that have the actual “Notice of Cancellation” on it.  These need to be detachable so the seller can sign it and send it to you if they cancel.

Repurchase Agreements

Giving the homeowner a lease with a future option to repurchase is rarely successful, and in my opinion foolish and deceptive.  Some of the state legislatures went so far as to formulate the maximum profit you can make if the seller (now a tenant) defaults and you resell the property.  I think this is nuts, but so is selling a property back to a person who couldn’t afford it in the first place.  Rather than go into the details of the repurchase agreement legislation, I would rather impart some common sense – don’t do it.

Important Things to Remember

1. Always give a copy of the entire signed contract to the Seller IN THEIR NATIVE LANGUAGE AND IN ENGLISH.

2.  Make sure you filled in every blank correctly.  Read it over to yourself out loud and make sure you have the names in the right place, the dates and times filled out and any numbers you need put in.

3. IF YOU DON’T FILL IT OUT CORRECTLY, THE SELLER CAN ALWAYS CANCEL THE CONTRACT AT ANY TIME – EVEN AFTER THE CLOSING!!!

And remember, all of this is just the MINIMUM you need to disclosure to a seller in foreclosure.  A good set of well-drafted disclosures in addition drafted by a qualified attorney is advised.