California

California Law Prohibits Advance Fees for Loan Modification Services

On October 11, 2009,  California modified the California Civil Code, Business & Professions Code, and Financial Code to prohibit the upfront payment of fees by homeowners to anyone assisting with loan modifications.  The most important provisions of the law are included below.

General Provisions

No person or company – including attorneys and real estate agents – can demand advance payment for providing loan modification services in California.  Cal. Civ. Code § 2944.7(a) (2009), Cal. Bus. & Prof. Code § 10085.6(a) (2009).

Attorneys cannot request or collect a retainer until after the loan modification services promised have been fully performed (even if they are holding the money in a client trust account).  Cal. Civ. Code § 2944.7(a)(1).

This ban on upfront payment applies to loan modification agreements entered into on or after October 11, 2009 and stays in effect until January 1, 2013.  Cal. Civ. Code § 2944.7(e); Cal. Bus. & Prof. Code §§ 6106.3(b), 10085.6(d).

Any homeowner who paid a fee after October 11, 2009 on an agreement entered prior to that date must be given a refund.

Any agreement with a licensed real estate broker for loan modification services, agreed to before October 11, 2009 with a broker that did NOT receive a “no objection” letter from the Department of Real Estate, is still valid. BUT they are NOT permitted to collect any more advance fees.

• For a list of those individual and corporate real estate brokers who received “no objection” letters, go to the Department of Real Estate’s site: http://www.dre.ca.gov/cons_adv_fees_list.asp.

Any individual or entity that charges a fee for loan modification services in California must provide notice BEFORE the agreement is signed that paying for this service is NOT NECESSARY. The notice must be in the language used to negotiate the loan modifications services (English, Spanish, Korean, Vietnamese, Tagalog, or Chinese), be in big (14 pt), bold type and say the following:

• 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.

Penalties for Violating the Law

Any individual or entity that demands payment in advance, or does not provide the required notice before the agreement is signed could be penalized with imprisonment in jail up to a year and a $10,000 fine for individuals; and a fine of up to $50,000 for businesses. An attorney who breaks this law would also be subject to disciplinary action. 

Click here to return to the Important State Loan Modification Scam Rules and Laws section.