Beware the Meltdown's Temptations
By Diane Karpman
* Diane Karpman, a legal ethics expert, defends lawyers at the State Bar and advises firms regarding conflicts and risk management. She can be reached at 310/887-3900

It would be difficult not to see potential opportunities in the sub-prime mortgage meltdown. Gov. Schwarzenegger's AB 1830 is designed to mandate that lenders wait an additional 90 days before selling a defaulting borrower's home. President-elect Obama has proposed a three-month moratorium on foreclosures. Although some may think this presents boundless business opportunities, wait a minute.

A few months ago, I mentioned a scenario that is spreading throughout the legal community. Lawyers are being solicited by brokers and loan modification agents who want to create "new business models."Remember, lawyers cannot be in business with nonlawyers, regardless of what creative paradigm a broker presents to avoid the historic prohibitions on fee splitting.

On Sept. 16, the Ohio Supreme Court suspended one lawyer, enjoined another from pro hac vice practice in the state, and reprimanded a third for providing perfunctory legal services to customers of a high-volume mortgage foreclosure counseling firm that was engaged in the unauthorized practice of law (Cincinnati Bar Ass'n v. Mullaney, Ohio, No. 2008-0412).

These types of sham companies are proliferating throughout California since we are one of the epicenters for upside down mortgages. The company sells the lawyer "modification services" and charges the client for referring them to the lawyer. Other creative variations exist, but they all present the same problems.

The companies exploit the vulnerability of the clients and advertise their ability to help debtors reinstate or rework their loans. Typically, the lawyers never meet with the clients. The companies negotiate directly with lenders, generally following a predetermined script of stalling with boilerplate correspondence. That cookie-cutter approach may not be the best procedure for all the debtors and demonstrates that the lawyers involved with the companies failed to exercise independent judgment regarding the needs of that particular client.

Conflicts abound in these situations because lawyers will be reluctant to advise the client to sue the referring company, fearful of cutting off future referrals. The problem is that a lawyer's focus must be solely on that particular client's needs and not on other ongoing business relationships.That is the overarching reason lawyers can't share fees with nonlawyers.

Other disciplinary allegations include the possibility that the lawyer is aiding and abetting in the unauthorized practice of law. In People v. Sipper (1943) 61 Cal. App. 2d Supp. 844, a broker advised the clients on what documents to execute, stepping beyond merely being a scrivener or clerical service, and was found to have violated Business and Professions Code §6125.

Clearly, lawyers can employ outside service providers like accountants, investigators and translators, or they can hire in-house loan modification agents so that they can be properly supervised.The cases must be self-generated by the lawyer, because buying clients or paying referral fees has been prohibited for centuries.

It doesn't matter what type of newfangled business "model" is employed, it is still capping and running, and can result in significant criminal and disciplinary penalties.

Steve's comments:

The text is verbatim from the article. The bolding and coloring is me highlighting relevant passages.

After reading the article above, who does not see a problem with a broker referring a loan modification case to an attorney and expecting to receive some form of compensation?

Even if the attorney collects the fee and does all of the disclosures directly with the homeowner, how does that fit the requirement that the cases be "self-generated by the attorney"?

In any case, how would you envision that an attorney would collect a retainer from a client, then pay the referring entity some portion of the retainer?

What about the other issues that may be present in the transaction? How about the part which describes the brokers actions in specifying which documents are needed for the modification?

I would be interested to hear why you don't think this information would apply to any of the business models you have ever heard of. I am referring to any of the "attorney" biz models and it does not matter which state.

Steve,

I'm glad to see you and I are in agreement on things again! LOL

I see ads all over Craig's list wanting to refer mods over to attorneys and then be paid a referral fee. Some idiots even use the word referral.

There are plenty of attorneys that affer something similar, just changing the words around a bit. No matter how you cut the cake, it is a referral. As you might know, I had some direct experience in this area.

Basically, what I'm saying is that I don't see how any of these broker models even come close to being in compliance to the Bar. None of them. I would love for someone to get on here and tell me how their's works and is legal.

Course, no one will do that....

Steve,

What are the DRE guidelines in regards to using "affiliates"? 

If you are asking about "affiliates" in a totally compliant, broker business model (advance fee agreement, Brokers lic, salesperson license, etc.), my opinion would be that in order to be compensated the person needs to be DRE licensed and it needs to be hanging at that brokers shop.

Here is the way that the DRE commissionsers have explained things during the conversations I have had with Sacramento.  According to them, discussing & "selling" loan modifications is considered a "licensed activity", therefore the "licensed activity" guidelines apply.

If you are asking about affiliates regarding the attorney office paying an affiliate for getting a loan mod client, there that is actually a Bar issue and we know the answer to that.

I went to a seminar last week that had 2 DRE deputy ommissioners, and 2 state bar people there talking about all of the different work-around that are sprouting up. There were probably 20 other attorneys and maybe 20-25 brokers at this meeting as well as a few consumer advocate types. The conversation got QUITE heated at times.

It was quite informative I must say. The DRE and the Bar people knew at LOT more details about all the little tricks and work-arounds that people are trying to get around compliance issues.

I think I would rather have Mike Wallace knocking on my office door.

Which law are you referring to? The stuff about referral fees and affiliates?

If so, the American Bar has essentially the same language regarding arrotneys being in business with non-attorneys, and paying referral fees is again a 50 state and territory rule I am 99% sure.

Because attorneys are licensed by the state, it would be a state law probably, but modeled after language in the ABA.

The referral fee thing is a basic tenet that lawyers have held since back in the Roman days. The principle is that the attorney must always the duty to the client ahead of all else. IF the attorney receives clients (business opportunities) from outside sources, there might be the conflict that the attorney protect the source and the flow of clients before protecting his client.

It is early in CA to be thinking this deeply. Jeez, let me get another couple of Monster Lo-Carbs down before we start talking about the evolution of man.

CoronaSteve-In regards to the broker affiliates, to what extent is the mod company liable for the actions of it's broker affiliates? 

Darkstar-Attorneys cannot pay referral fees and the attorney could get disbarred for it.  They also can not go into business with non-attorneys.  See the othe loan mod thread where CoronaSteve and I talk about this.

>>>>CoronaSteve-In regards to the broker affiliates, to what extent is the mod company liable for the actions of it's broker affiliates? <<<<<

I am certainly not an attorney on this one, (or anything for that matter!) but here is what I would see. And this is not just oan mod related, it is any type of company-affiliate relationship.

It depends on the actions of the affiliate, the company, and what the company requires of each other. When the requirements of the company require the affiliate to perform certain tasks, use certain forms, communicate to the client on behalf of the company, be present at certain events, like TRAINING, etc., then I believe a certain legally defined relationship exists, "The Agent" and an agency relationship.

When this type of relationship exists, the company is exposed to the Agent's actions, or lack of action, hence some liability is created.

Again, not an attorney, but it has been explained to me thusly, as related to Loan Mods. When the company "sets-up" the "affiliate" with everything they need to do to provide business to the "company", an agency relationship will be created, and presuming some of the things mentioned above happens.

It doesn't matter what name this "affiliate" person is called, even if everyone tries to stay away from the word "Agent". It is how this person and the company interact on the business playing field.

I really appreciate this thread as I am trying to do my due diligence as an attorney.  I read in one of CoronaSteve's posts somwhere about an eight loan modification negotation limit for attorneys who are not brokers.  So I am trying to get my broker's license... no biggie.

It seems that after I get it, I would be better off running around as a broker employing CA DRE licensed agents who can negotiate side by side with me.  It would appear that my attorney license would be better off being applied to truth in lending forensic audits and other legal foreclosure defense maneuvers.

Coronasteve, can you direct me to more information about that OC Seminar that took place January 14, 2009?  It seems like it was really informative.

Much appreciated

I am an attorney who has spent the last two weeks trying to figure out how an attorney can receive referrals from loan consultants and share fees while providing loan modification services for clients.  While it seems that there is no loophole the question remains how come I know of numerous attorneys who are doing just that?  Here is a fabulous article that was sent out by the California Ethics Committee on February 2nd, 2009. http://www.calbar.ca.gov/calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf Click on the numerous links to find out additional information.  It seems like there is no way an attorney can share fees with a non-attorney (Rule 1-320 "Financial Arrangements With Non-Lawyers”).  What happens if the attorney acts independently of the foreclosure consultant (i.e. it is not a one-size fits all approach but where the attorney makes all of the decisions for the client)?  Does it matter whether the loan consultant bills the client and pays the lawyer or vice versa?  What happens if the client signs a disclosure which clearly states that there may be a conflict of interest and that there will be fee sharing?  How about if the client is referred to the lawyer but is told that they can choose any lawyer regardless if the loan consultant has a relationship with a lawyer (thus, the client isn't forced to use a certain lawyer)?  Can the lawyer pay the marketing firm that advertises for clients and then send them to the lawyer who pays the marketing firm a fee for services regardless of the amount of clients sent to the attorney?  How about if the attorney hires loan consultants who work under the attorney?  If so, what kind of limitations are there on how the attorney can market his services (some clients don't require legal advice and only loan modification advice - so can you market services of loan modifications but not attorney services)...very confusing.  Lastly, does it matter that I am also a real estate broker.

Bottom line:  IS THERE A WAY TO DO BUSINESS WITH A LOAN CONSULTANT OR MARKETING FIRM WHO REFERS CLIENTS TO AN ATTORNEY AND WHERE THE ATTORNEY IS SUPPOSED TO PAY THE LOAN CONSULTANT OR MARKETING FIRM SOME SORT OF COMPENSATION?  IF NO, ARE ALL OF THE ATTORNEYS WHO DO SO IN DANGER OF BEING DISBARRED?

THANKS.  DAVID

Here's the thing though...

All of you guys are working the business. So in fact you guys are saying don't do my job, don't do what I do, but you're doing exactly what your telling other people not to do; unless you can show or state otherwise.

No I'm not trying to bash or gainsay, but I honestly want to hear how your marketing methods are different and what you're doing? I see a lot of examples where in business, specially accountants, realtors, mortgage people, and lawyers tell someone not to do something, not because its wrong but because they want all the business for themselves...how are you guys any different from that.

I want an honest detailed answer.

You do have some good points and it is clear that there are some wolves in sheeps clothing...but it seems like you're also saying ok, because there's some wolves in sheeps clothing, we're going to get rid of anyone that looks like a sheep.

Especially in today's economy, I hope you will also recognize the fact that companies are leaving the U.S. because there's so much legal bullshit that anyone can get sued for anything, even when dealing honestly...so in the end, how are you guys different? You haven't disclosed any of your own marketing methods.