California Bar Journal
CBJ - March 2009 #02.
Bar issues foreclosure ethics alert
California Bar Journal March 2009 Bar issues foreclosure ethics alertBy Nancy McCarthyStaff WriterWhen San Diego attorney Carol S. was asked recently if she wanted to associate with a firm offering foreclosure modification services, she saw red flags. At a meeting with an intermediary who had approached her firm, she expressed concern about potential ethical constraints, such as splitting fees with non-lawyers and soliciting clients, but "they tried to explain some easy loopholes."
Just three years out of law school, Carol (not her real name) said she has heavy student loan debt and the risk seemed too great. After consulting with both the Department of Real Estate and the State Bar's Ethics Hotline, she decided to forget it.
"These places are largely unregulated," she said. "But I think it would be impossible to live up to your ethical obligations."
Carol is not the only lawyer who's worried about working with foreclosure consultants or loan modification operations that have developed in response to the collapse of the housing market. Indeed, so many have contacted the State Bar for ethics advice that its professional responsibility committee issued an alert last month offering guidance to lawyers thinking about signing up. "The most important thing is for lawyers to understand this area is fraught with danger from an ethics point of view," said Jon Rewinski, a Los Angeles litigator who drafted the ethics alert.
California law specifically addresses foreclosure consultants and restricts their activities; among other things, they are prohibited from collecting upfront fees for their work. However, because attorneys are permitted to accept advance fees, they are in demand by some loan modification businesses. (Licensed brokers also may accept advance fees under certain circumstances.)
According to the alert, posted on the State Bar's home page (calbar.ca.gov), "There is evidence that foreclosure consultants may be attempting to avoid the statutory prohibition on collecting a fee before any services have been rendered by having a lawyer work with them in foreclosure consultations."
The alert goes on to list a series of ethics rules prohibiting lawyers from:
* paying a referral or marketing fee to a foreclosure consultant or other...