| Last month we reviewed some case histories of fraud by so-called foreclosure rescue consultants and the lenders they hooked up with to fleece financially distressed homeowners out of money and property. (Please Read: Dirty Deeds Part 1 and Part 2 to better understand these problems).
Now we’ll take a look at the problems regulatory agencies have faced as they have tried to put these bandits out of business. Since this report was issued by the western regional office of the Consumers Union, both state and local laws have been put in place to stop such abuses. But enforcement is still difficult both because of the sheer scope of the problem and because of legal restrictions on the involved state agencies. The key issue here is lending by non-bank loan originators and funding sources.
The existing regulatory structure does little to discourage abusive home equity lending. Mortgage lending in California by non-bank entities has historically been placed under the jurisdiction of two agencies: the Department of Corporations (DOC) and the Department of Real Estate (DRE). The DOC regulates consumer and commercial funding (lending) licenses, and sets financial and reporting standards for its licensees.
A company applying for a DOC commercial or consumer lending license must demonstrate a net worth of $25,000 and must reveal the source of funds that supplies its capital. The company also must obtain copies of the lending laws, demonstrate familiarity with them, and file annual reports with the DOC. Those reports, which show the extent of the company’s lending activities, are available for public viewing upon 24-hour notice. Some DOC licensees, but not those making secured loans, must provide the names of three lenders having the same type of license with whom the broker will regularly do business.
Possession of a DOC license is no guarantee against abusive lending practices. However, for mortgage brokers and lenders involved in abusive lending, the acquisition of a real estate broker’s license presents an easier regulatory alternative to the DOC licensing requirements. An individual holding a real estate broker’s license can make or arrange mortgage loans without any other license.
However, unlike the DOC, the Department of Real Estate does not require its licensees to meet any financial standards and there are no public records regarding the brokers’ lending activities. Â Some lenders involved in abusive lending elect to hold both DOC and DRE licenses. They then choose to act under one or the other license, depending on the loopholes each license offers.
Real estate licensees are free to act as lenders (making loans from their own funds) in a private capacity without any DRE jurisdictional oversight as long as they are not “in the business” of lending. Once a real estate licensee is “in the business” by transacting in or servicing eight or more loans or promissory notes, his only duty is to notify the DRE of this fact. (Please Read: “Do You Need a Real Estate License” ) for more information
When the licensee engages in 20 or more “in the business” transactions, or transactions in an aggregate amount of two million dollars, an additional reporting requirement applies. These licensees must file fiscal year reports with the DRE. However, this requirement does little to benefit the public or the Department’s ability to regulate its license holders.
Licensees subject to the enhanced reporting requirement are exempt from filing annual fiscal reports if they have not acted as a trustee handling any trust funds in any of the 20 or more transactions. The only penalty for failing to report is the possibility of an assessment by the DRE for one and one-half times the cost for making an examination and report. Finally, the public does not have access to any financial reports filed by real estate licensees.
The DRE also is relatively limited in its enforcement abilities against its 337,000 licensees, only some of which arrange or broker loans. DRE action against licensees who have used illegal or unethical tactics is usually restricted to license revocation or suspension, which has little effect toward putting bad actors permanently out of business because they re-enter the business under someone else’s license.
Enforcement of fraud statutes generally depends on actions taken by local police departments and district attorneys. Most have not taken an aggressive stance to protect homeowners. They often receive the cases through legal aid societies, (such as Bet Tzedek) or through agencies, such as the Los Angeles County Department of Consumer Affairs. Advocates report, however, that the cases are often given low priority by law enforcement agencies because limited financial resources force them to focus on violent crime and on less complex cases.
The primary arena of recourse, therefore, has been the civil courts. Individuals are forced to sue unethical lenders and home improvement contractors who have few qualms about declaring bankruptcy or leaving the area. For those lucky homeowners who can get timely legal help, the overall success rate in the courts in providing some sort of settlement for the plaintiff is fairly high, according to victims’ lawyers.
However, victims’ advocates also report that the number of cases actually reaching court reflects only a very small percentage of the total number of abusive loans made. In addition, court proceedings are usually long and can become more complicated if notes on properties have been sold and resold in the secondary market to investors.
This is because investors who buy the notes on the secondary market will claim that they are holders in due course because they did not participate in or know about any abusive sales practices in the origination of the note. (They also may not have received the high loan fees and points — the broker acting as a middleman frequently pockets those.)
The investor asserts that as a holder in due course he or she owns the notes free from any defenses related to defects in the transactions in which the notes were originated. Often the borrower must engage in costly litigation to defeat this claim.
While the courts play an important role in providing relief in cases of equity loan abuse, court action is on a case-by-case basis and does little to prevent the abuse from occurring in the first place. It is certainly more effective and cost-efficient to prevent abuse and to help distressed homeowners avoid the financing traps into which they can easily fall.
The report by the Consumers Union goes on to make many recommendations for legislative and procedural remedies, some of which have been incorporated in the state and local ordinances noted above But, as we can see, the sheer complexity of the issue makes it possible for many of these sharks to fall through the cracks, so to speak, and continue victimizing distressed homeowners.
The foregoing information does not constitute legal advice, nor does the reading of this information create an attorney client relationship with the reader. For proper application of the information contained in these articles, you are advised to seek the assistance of an attorney whose practice emphasizes landlord-tenant law. |
