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May 15, 2011
Beware of contracting with nonlawyers on foreclosure-related rescue services

The Florida Bar’s Ethics Hotline has received many calls from lawyers who have been contacted by nonlawyers wanting to set up arrangements involving loan modifications, short sales, and other foreclosure-related rescue services on behalf of distressed homeowners.

The Bar has updated its ethics alert about providing legal services to distressed homeowners, after a Federal Trade Commission rule, effective January 31, 2011, banned providers of mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or servicer that they decided is acceptable.

The FTC issued the Mortgage Assistance Relief Services (MARS) Rule to protect distressed homeowners from mortgage relief scams that have sprung up during the mortgage crisis. Bogus operations falsely claim that, for a fee, they will negotiate with the consumer’s mortgage lender or services to obtain a loan medication, a short sale, or other relief from foreclosure, according to the FTC. Many of these operations pretend to be affiliated with the government and government housing assistance programs. The FTC has brought more than 30 cases against operations like these, and state and federal law enforcement partners have brought hundreds more.

New language in the Bar’s ethics alert is as follows:

“State statutes and federal rules impose restrictions on providers of foreclosure rescue and/or loan modification services. Although The Florida Bar cannot provide legal advice, lawyers should be aware of and comply with the requirements of state and federal law. State statutes prohibit accepting advance fees and require registration of service providers. There are exceptions for lawyers, but only under specific circumstances. See Florida Statutes, Sections 501.1377 and 494.00115(1)(d). The Federal Trade Commission has adopted a rule on Mortgage Assistance Relief Services (MARS). The rule bans providers of mortgage foreclosure rescue and loan modification services from collecting fees until homeowners accept a written offer from their lender or servicer. There is an exception for lawyers who meet specific requirements and who place their fees into a trust account. This rule effectively bans nonrefundable fees in Florida in these cases, because nonrefundable fees cannot be placed into a trust account under the Rules Regulating The Florida Bar. See Rule 5-1.1(a)(1) and Florida Ethics Opinion 93-2.”

According to the Bar’s ethics counsel, lawyers can charge clients fees in advance if: 1) they’re providing mortgage assistance relief services as part of practice of law; 2) they’re licensed in the state in which their client or their client’s home is located; 3) they’re complying with state laws and regulations concerning attorney conduct; and 4) before they perform any services, they place the fees in a client trust account that complies with state laws and regulations. Nonattorneys who offer mortgage assistance relief services can’t collect fees until their customer has accepted a written offer of mortgage relief from their lender or servicer.

Under the rule, attorneys can’t withdraw fees in the client trust account before earning the fee or incurring the expense. To maintain their exemption from the rule’s ban on upfront fees, attorneys must comply with all state requirements related to use of client trust accounts. Laws and regulations for attorneys vary by state, but examples of activities that likely could cause attorneys to lose their exemption include:

1) Withdrawing money from a client trust account before the attorney earns fees or incurs expenses;

2) “Front-loading” fees for mortgage relief assistance services to expedite the withdrawal of funds from a client trust account;

3) Failing to keep complete records of transactions associated with a client trust account;

4) Failing to notify a client of a withdrawal so that he or she has an opportunity to review the transaction and, if necessary, contest it; or 

5) If a client contests a withdrawal, failing to keep those funds separate from other clients’ and attorneys’ funds. 

The rule doesn’t restrict the type of fees attorneys may charge their clients. Attorneys may charge any kind of fee, including flat fees, contingency fees, hourly fees, or some combination. However, before performing promised services, attorneys must deposit any fee in a client trust account. Regardless of the type of fee an attorney charges, he or she can’t withdraw money from the account until fees are earned or expenses incurred. [Note: Under Florida Bar rules, a nonrefundable retainer is earned on receipt and cannot be placed in the trust account. Therefore, the legislation does restrict what fees a lawyer can charge, because a Florida Bar member would not be able to charge a nonrefundable retainer, because the statute requires that it be placed in trust until the fees are earned.]

This alert does not address every potential problem or concern. If you are a Florida Bar member with specific questions about your own conduct related to this type of situation, contact The Florida Bar Ethics Hotline at (800) 235-8619.

[Revised: 07-22-2014]