What is the general purpose of California SB 94?

SB 94 was drafted in an attempt to eliminate the common practice of loan modification companies charging advance fees in California. Charging Advance fees prior to performing any services is a frequent tactic used by fraudulent loan modification companies and individuals. SB 94 prohibits any company or individual from charging fees in advance of performing the work specified to be performed in the signed contract.

What does “advance fee” mean?

An advance fee is defined in SB 94 as a fee collected “from a principal before fully completing each and every service the licensee contracted to perform, or represented would be performed, as specified.”

In other words, it is a fee collected before contracted work is performed.

How does the advance fee definition apply to me?

It essentially means that you as a homeowner do not have to pay a fee until your specified level of service has been finished as defined by the contract you executed between you and the company working on your loan modification.

Can a real estate licensee with an advance fee agreement from the California DRE still charge an upfront fee?

With regards to existing advance fee agreements, the California Department of Real Estate has posted the following on its website:

“If you are a real estate broker, or the designated officer of a licensed corporation, who has been issued a “No Objection” letter by the Department of Real Estate for loan modification or other mortgage loan forbearance services, you can no longer enter into these agreements effective as of October 11, 2009, nor can you collect any advance fees for such services.”

What if I paid an advance fee before the law went into effect?

The California DRE website has the following statement:

“Agreements entered into and advance fees collected prior to October 11, 2009 are not affected. Advance fees inadvertently collected after October 11, 2009 must be fully refunded.”

When was SB 94 enacted and is it permanent?

The bill was enacted on October 12, 2009 and immediately went into effect. The bill will be repealed on January 1, 2013 effectively resetting the law to the way it was prior to October 12, 2009.

Is there anything I should look for on the contract of the mitigation company I hire?

Yes. SB 94 contains a provision that the following must appear in 14 pt. bold type in the contract.

“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.”

Are these contracts reviewed by a government agency?

Not necessarily, but SB 94 does state that any materials related to obtaining an advance fee agreement may be requested for review. This means any advertisement or contract could be subject to review, but is not explicitly required.

Does SB 94 apply to commercial properties?

No. SB 94 states that the prohibition of advance fees only applies to “property containing four or fewer dwelling units.”

“If you are a a real estate broker, or the designated officer of a licensed corporation, who has been issued a “No Objection” letter by the Department of Real Estate for loan modification or other mortgage loan forbearance services, you can no longer enter into these agreements effective as of October 11, 2009, nor can you collect any advance fees for such services.”

FTC Chairman Jon Leibowitz offered the following on why advance fees are a problem that needs to be remedied:

“In particular we are going to closely examine whether to ban upfront fees for mortgage modification services as several states have already done,” he said. “Because very often, if they’re asking for advance fees, … it’s a red flag that the service is bogus.”

The state of California  has already taken this step, but still allows companies to charge advance fees with the appropriate agreement granted by the state’s Department of Real Estate. The fact that a company collecting advance fees is registered is a good thing, but there remains a possibility for abuse.

It shows every loan modification company that has received a Desist and Refrain Order and/or Accusation by the Department of Real Estate in California. In many cases, these companies are collecting advance fees which can be illegal.

Even if you’re not in California, pay close attention to who is on the list. Many of these companies are likely doing business in other states as well.

• Are Advance Fees involved? If yes, there needs to be an advance fee agreement. Many California companies have an advance fee agreement on file with the Department of Real Estate.
• Are advance fees charged? In 32 states, we only charge our clients for work performed. That means we detail the services that will be performed in your contract and then charge you only when that service is complete. This is extremely uncommon but more in line with protecting the consumer.
• Are you being promised EVERYTHING? Run fast from someone who makes promise after promise. The truth is, we are in a negotiation with your lender and the outcome is not guaranteed. We know how to present a package, we know what a good file looks like and we know what is typically going to be successful. This all helps us take on files we feel we will lead to a successful outcome, but it doesn’t guarantee it. We will be up front with you about your chances and sometimes, that means we have to turn people down.
• Is someone telling you to miss a mortgage payment? Yikes. This is dangerous territory. We will never flat-out recommend you skip a mortgage payment if you can afford it. this goes back to the fact your outcome is not guaranteed and we don’t want to see you fall deeper into a hole if it is avoidable. We might at times tell you that your lender would be more receptive if you were late so you have all the facts at your disposal, but you have to remember that you have an obligation to make that payment first and foremost.
• When you call in for updates, is anyone taking care of you? This is a little tough to know before you have signed on as a client, but it’s important nonetheless. We’ve read about situations where someone sent $4,000 to the company they hired and all of  a sudden couldn’t find anyone to talk to them.
• Do you feel comfortable? It’s probably not a good idea to send someone your money if you don’t feel comfortable with the situation and quite frankly, any good company is going to want you to be comfortable before working with you. That sounds harsh, but it’s a long process and any disconnect between a mitigation company and its clients hurts the process.

These are just a few things and there are surely other indications. Feel free to leave your comment and let us know what you think indicates a reputable loan modification company.