By ED POLL, Special to Lawyers Weekly
Lawyers nationwide increasingly face state and federal government actions to implement a whole new regulatory structure aimed at what is in fact a growing problem: companies that charge consumers an up-front fee to modify the terms of a mortgage or deed of trust they can no longer afford, then either fail to deliver results or actually abscond with the fee itself.
In an early effort, New York banned upfront mortgage-modification fees but explicitly exempted retainers to lawyers. Later, reports that mortgage companies were using relationships with lawyers to get around the fee ban led to passage of another law, this time banning retainer and escrow collections by lawyers unless the fee is collected as part of ongoing, regular legal counsel.
In 2009, California adopted a penal code section that makes it a felony for anyone to collect money in advance for loan-modification work. The State Bar followed by enacting a rule of professional conduct stating the same. This law and regulatory code section make no distinction between money advanced as an earned fee (general account) and money advanced for payment of services to be completed in the future (client’s trust account).
As a result, lawyers in California (and across the country where applicable) increasingly have stopped doing loan-modification work for clients. People with mortgage problems are having financial troubles anyway and lawyers with business sense will not take a case knowing there is a rather likelihood they will not get paid.
After all, if a client is having financial difficulties requiring loan modification, what makes anyone think they will have a pot full of money at the end of the modification process to pay their lawyer? Why is it that this very needy group of people cannot now seek the help and guidance of lawyers?
Other states are passing similar laws, and the Federal Trade Commission has acted to make such a fee ban national unless lawyers taking upfront modification fees are also representing homeowners in bankruptcy cases or some other legal proceeding.
The irony, of course, is that there are already comprehensive regulations and remedies for fee disputes under Rule of Professional Conduct 1.15, et al., which in every state serves to prevent misappropriation or negligence. And what misconduct the rules of professional conduct do not catch, the penal code does.
Banning loan-modification fees is a prime example of “fixing” what wasn’t broken; there were already rules on the books sufficient to punish the “bad apples” in the profession who were guilty of fraud.
What really seems to be at work in the loan-modification controversy is that legislators and other government officials apparently believe that a self-regulating State Bar will not be committed to “protecting the public” as legislators want. This, and not the well-being of lawyers, is what the legislators apparently believe should be the focus of the bar.
Moreover, bar associations unfortunately – in such issues as mandatory malpractice-insurance disclosure – sometimes appear to agree. Lawyers are thus left to fend for themselves despite a vast apparatus of bar association bureaucracy in place, paid for by the very lawyers they abandon.
Where this ultimately could lead is also seen in California. In 2009, the legislature (which has unique powers over the collection of mandatory bar association dues) enacted a law requiring the State Bar of California to examine how it governs itself.
With less than 30 percent of the members in the legislature (and of Congress) having a law school degree, there increasingly surfaces an animosity between lawyers (the bar) and the political power structure (legislature).
The loan-modification issue shows that when legislators take over governance of lawyers from lawyers, it is the public that suffers – lawyers will not now help the people who need help the most, those about to be kicked out of their homes. Does this “protect the public?”
Editor’s note: Poll is the principal of LawBiz Management, a national law firm practice-management consultancy based in Venice, Calif. For more information, visit www.lawbiz.com.