California Law Prohibits Advance Fees for Residential Loan Modifications

On October 11, 2009, SB 94 (Calderon) which prohibits upfront or advance fees for residential loan modifications and mortgage loan forbearance services was chaptered. The legislation took effect immediately.  The legislation prohibits the collection of advance fees for loan modifications, as specified. Among other provisions, new Civil Code Section 2944.7(a) (1) provides as follows:

“Notwithstanding any other provision of law, it shall be unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following: (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.”

Civil Code Section 2944.7(d) provides that Section 2944.7 applies only to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units.

Required Notice to Borrower


The legislation also requires that specified notice be provided to the borrower, as a separate statement, prior to entering into any fee agreement with the borrower. Among other provisions, new Civil Code Section 2944.6(a) provides as follows:


“Notwithstanding any other provision of law, any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, shall provide the following to the borrower, as a separate statement, in not less than 14-point bold type, prior to entering into any fee agreement with the borrower:
 

It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.”


Civil Code Section 2944.6(b) provides that if loan modification or other mortgage loan forbearance services are offered or negotiated in one of the languages set forth in Civil Code Section 1632, a translated copy of the required statement must be provided to the borrower in that foreign language. Civil Code Section 2944.6(e) provides that Section 2944.6 applies only to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units.

Upfront Attorneys Fees

Many attorneys attempt to create a loophole by breaking down the loan modification process into individual services and various steps.   For instance an attorney may charge a fee for an initial meeting, then a fee to review your financials, and then an ongoing retainer as they process the loan modification with the lender.  From our experience this has two major issues.   First, it's an unlawful scheme that clearly violates the mandate of the policy.  And more importantly, it almost always ends in a homeowner paying large upfront fees and ongoing monthly retainers  with little to nothing to show at the end.  

Keep Your Keys

Keep Your Keys never charges upfront for such services and recommends homeowners always works with a licensed, bonded, and insured company that follows the mandate completely.