OREGON’S REGULATION OF FORECLOSURE CONSULTANTS & DEBT MANAGEMENT SERVICE PROVIDERS – A SLIPPERY AND MISUNDERSTOOD SLOPE
(PART ONE)
[Note: This is the first of a two-part article on the foreclosure consultant law (HB 3630) and the debt management services law (HB 2191) and how they affect real estate licensees when dealing with and on behalf of owners of distressed housing.]
Generally. For the past two to three years, we have witnessed short sales become an increasingly larger portion of total transactions. For almost everyone, sellers, buyers and Realtors®, they were plowing new ground. Most of us had never seen short sales in our professional careers. As a result, OREF, the statewide Realtor® forms provider developed several new forms, as did some real estate brokerages. Most Realtors® willing to venture into the short sale minefield found the process to be slow, complicated, and frustrating.
House Bill 3630. As the volume of distressed transactions increased, attention was turning to the influx of people and companies, many from out of state, that were establishing “consulting” businesses offering to help owners negotiate with their lenders for loan modifications or short sales. In some instances, the consultants may have been effective; but many were not. To make matters worse, there were stories of consumers being defrauded by consultants who took their money but did nothing in return.
This did not go unnoticed in the Oregon Legislature. In the 2008 Special Session, it passed HB 3630, entitled “The Mortgage Rescue Fraud Protection Act.” This new law targeted two specific activities:
(1)Foreclosure consulting; and (2) Equity purchases. The foreclosure consulting portion of the law defines the process in very broad strokes, including almost any activity designed to assist distressed homeowners deal with their lenders, their credit, and many of the other parade of horribles that go with owning a home that is “underwater” – that is, the total mortgages against the home significantly exceed its fair market value.
A violation of the law may give rise to a claim under Oregon’s Unlawful Trade Practices Act for damages, costs and attorney fees. Under certain circumstances, a violation of the law is a criminal offense with a maximum penalty of one year in prison and a $10,000 fine, or both.
Businesses and Professions Excluded. The law contains many exclusions, including state and federally chartered banks, lawyers and real estate licensees. One common theme running through all the excluded professions is that the person or company’s foreclosure consulting services must be performed as a part of the main activity they are licensed to perform. In other words, the foreclosure consulting activity should be incidental to the primary activity for which the person or company is licensed.
The other theme running through all of the exceptions is that the person’s license must have been issued in Oregon or the company must have been authorized to transact business in Oregon. For example, a Washington-licensed lawyer or real estate broker would not fall under the protections given by the law’s Oregon exclusions unless they also held an Oregon license.
Requirements for Foreclosure Consultants – The Contract. Unless otherwise excluded, an arrangement to provide any of the above listed activities constitutes a foreclosure consulting service. Such arrangements must be contained in a written and signed contract (“the Contract”). A copy of the Contract must be given to the homeowner at least 24 hours before the homeowner signs it. The Contract must meet several strict requirements, such as: (a) It must be written in a language that is spoken by the homeowner and was used in discussions between them and the foreclosure consultant;
(b)Fully disclose the foreclosure consultant’s services, terms and costs; and (c) Notify the homeowner of their right of cancellation at any time.
Prohibited Acts. A foreclosure consultant may not engage in certain activity, such as:
- Seeking compensation unless the foreclosure consultant “…has performed in good faith under the contract each service the foreclosure consultant contracted to perform….”; other parade of horribles that go with owning a home that is “underwater” – that is, the total mortgages against the home significantly exceed its fair market value.
- Receiving payment from a third party in connection with services provided to the homeowner, unless it is first fully disclosed in writing to the homeowner;
- Inducing a homeowner to enter into a foreclosure consulting contract when the contract does not comply in all respects with the foreclosure consultant law; and
- Any other similar acts that are false, deceptive, misleading or likely to cause confusion or misunderstanding regarding a foreclosure consulting contract or the residence in default or foreclosure.
House Bill 2191. As if HB 3630 was not enough homeowner protection for a while, in the 2009 Regular Session, the Oregon Legislature created HB 2191. This law was sponsored by the Oregon Department of Consumer and Business Services (“DCBS”). Its primary difference from HB 3630 is that HB 2191 is broader in application, dealing with debtor protections to the consumer in general, and not just homeowners with distressed housing issues.
House Bill 2191 governs those providing “debt management services,” which are defined to include activities such as: (a) Distributing a consumer’s funds among their creditors for repayment of their debt; (b) Offering to improve the consumer’s credit; (c) Offering to modify an existing loan; and (d) Attempting to obtain a homeowner’s reduction of principal, interest, penalties or fees associated with a loan.
The above items (b), (c) and (d) squarely overlap into the foreclosure consulting arena. However, under HB 2191, debt management service providers must be registered with the DCBS and carry a minimum $10,000 bond. Failure to do so means that one may not legally provide these services to a consumer.
Of importance to real estate licensees are the following provisions of HB 2191:
(a)Registration with DCBS is required for persons receiving, or expecting to receive payment for referring a consumer to a debt management service provider.
(b)The law exempts lawyers, mortgage brokers and bankers, escrows, and others, from coverage – but not real estate licensees.
Thus, a real estate licensee’s negotiation with a bank on, say, a short sale of their seller’s primary
residence, is permitted conduct under the foreclosure consultant law (which excludes them) but not permitted conduct under the debt management law without first being bonded and registered with the DCBS.
Both the DCBS and the Real Estate Agency understand this inconsistency. So how are they interpreting these laws when it comes to real estate licensees engaged in short sale transactions?
[The second installment of this article will address the many issues as to what real estate licensees need to watch out for when using third party providers in short sales and other distressed sale situations.]
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