California State Bar Testifies On Role Of Some Attorneys In Upfront Fee Foreclosure Rescue & Loan Modification Scams

In a U.S. House of Representatives hearing Wednesday entitled Legislative Solutions for Preventing Loan Modification and Foreclosure Rescue Fraud, Mr. Scott Drexel, Chief Trial Counsel of The State Bar of California testified as to the role that some attorneys are playing in scamming the public in foreclosure rescue & loan modification fraud. He pointed out to the subcommittee that since approximately November 2008, calls to The State Bar's toll-free telephone lines have averaged nearly 900 per month on the subject of loan modification and foreclosure rescue fraud, an annual rate of more than 10,000 telephone calls on this subject alone. Among other points made by Mr. Drexel in his prepared testimony are the following:

• [A]ttorneys have been complicit in loan modification and foreclosure rescue fraud in several respects. The key component of their involvement in fraudulent activities is their ability to demand and receive advanced fees for services.

• Regrettably, a certain number of attorneys are willing to engage in these fraudulent activities on their own.(1) In many cases, however, attorneys are approached by non-attorney foreclosure consultants who seek to work in concert with them. In exchange for the use of the attorney’s name and his or her ability to charge and receive advanced fees, the foreclosure consultant typically offers to perform most or all of the loan modification services and promises to either pay the attorney a specified amount for each loan modification or to provide an agreed-upon percentage of the fees received from the homeowner.

• The foreclosure consultants often prey upon new attorneys who are unaware of their ethical responsibilities and who, in the current economy, are having problems in attracting sufficient legal business.

• These consultants also appear to prey upon older attorneys who cannot afford to retire but who no longer have the energy or ability to maintain a large law practice by offering them a steady monthly income to supplement what the attorney can earn through his or her legitimate law practice.

• Besides the fraudulent aspect of the activities themselves, these arrangements violate numerous provisions of California’s Rules of Professional Conduct. For instance, rule 1-310 of the Rules of Professional Conduct prohibits a member of the State Bar from forming a partnership with a person who is not a lawyer if any of the activities of the partnership consist of the practice of law.

• Similarly, rule 1-320 prohibits a member or a law firm from directly or indirectly sharing legal fees with a person who is not a lawyer, with exceptions that are not applicable to the alleged services to be provided by foreclosure consultants.

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• In the cases that the California State Bar has been investigating, we have typically encountered advanced fees for loan modification services ranging from approximately $2,500 to more than $10,000, with the average fee in the range of about $3,000 to $4,000.

• In most of the cases that the State Bar is investigating, the attorney and/or the foreclosure consultant perform few, if any, services in exchange for these advanced fees. In essence, these monies have been obtained from homeowners under false pretenses. At most, in exchange for these advanced fee payments, the attorneys or foreclosure consultants make a few, largely ineffectual, telephone calls to the financial institution that holds the mortgage.

Go here for the entirety of Mr. Drexel's prepared testimony.

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In a related point, from the Committee on Professional Responsibility and Conduct ot The State Bar of California, see: ETHICS ALERT: Legal Services to Distressed Homeowners and Foreclosure Consultants on Loan Modifications.

In a related story, see SF Weekly: State Bar Takes Over 'Son of Super Swindler' Law Firm -- 2,000 Con Jobs Too Late (The State Bar of California has taken over the law firm of Mitchell Roth, who had, in partnership with convicted felon Paul Noe II, convinced more than 2,000 troubled homeowners to fall for an apparent "foreclosure assistance" scam).

Go here and Go here for other posts on the potential perils relating to attorneys and non-attorney loan modification firms joining forces to provide foreclosure-related rescue services.

(1) Mr. Drexel describes one particularly egregious case, in which the attorney and the foreclosure consultants with whom he is working have talked homeowners into providing them with bank account information before the homeowner has even signed an agreement retaining the attorney for loan modification services. The attorney then electronically withdraws funds from the homeowner’s bank account without any prior notice or authorization from the homeowner and before the homeowner has even decided to retain the attorney. UnauthPractOfLawTheta