Aiding Illinois consumers victimized in mortgage rescue scams

I. Introduction

With the rapid rise and fall of the housing market, Illinois has seen tremendous growth in the number of mortgage rescue services being offered to consumers who are delinquent on their mortgage payments and/or are at risk of foreclosure. Unfortunately, fraudsters have used these services to cheat consumers out of money and/or ownership and equity in their home. Consequently, the Mortgage Rescue Fraud Act,1 (hereinafter “the Act”), was signed into law on June 1, 2006, and came into effect on January 1, 2007. The purpose of the Act is to protect consumers who are at risk of losing their homes from dishonest individuals and organizations offering mortgage rescue services. In order to protect consumers in these harsh financial situations, the Act establishes contractual requirements for companies offering mortgage rescue services. In addition, the Act lists the specific violations and provides both civil and criminal penalties for any party who violates the Act. The Act covers residential properties consisting of one- to six-family dwelling units that are in foreclosure or at risk of loss due to nonpayment of taxes or whose owners are 30 days delinquent on any loan secured by the property.

As a result of the Act, attorneys representing consumers who are victims of mortgage rescue scams now have a powerful weapon in assisting their clients recover from these crimes. The following will assist attorneys representing victims of mortgage rescue scams in how to conduct a preliminary investigation in order to build their prima facie case and thus potentially survive a motion to dismiss or a motion to strike.

II. The Scams

Since the housing market downturn, two types of mortgage rescue scams have been repeatedly used to deceive distressed homeowners: the consultant scam and the purchaser scam.

A. The Consultant Scam

Due to the credit crunch, loan modifications have become the most prevalent type of scam used by fraudsters to victimize consumers. In this scheme, for a large upfront fee the distressed property “consultant” promises to buy time for the consumer and save the home by negotiating deals with their lenders. These consultants sometimes offer to help repair the consumer’s credit and modify their existing mortgage. Often times the consumer will receive a deceptive solicitation via mail, e-mail or telephone, implying that the consultant is affiliated with the consumer’s lender or a government agency. Furthermore, consultants often times advise consumers to stop making their mortgage payments, if they are current, and to cease all communication with their lender; resulting in the lender filing for foreclosure. These consultants often take the consumer’s money and fail to perform any services, thus leaving the consumer worse off then before.

B. The Purchaser Scam

This is an elaborate scheme that involves enticing consumers into complex transactions that allow fraudsters to strip equity and/or title from the home. In this scenario, the consumer is induced to transfer title of their home to the distressed property “purchaser.” In many instances the consumers do not fully understand that they are selling their home and becoming tenants of the purchaser. Moreover, consumers are usually told that once they become financially stable, title to their home will be re-conveyed to them.

In some instances, the purchaser will charge an exorbitant amount of fees which are paid out of the closing monies. In other cases, once the purchaser obtains legal title to the home, they take out loans against the home’s untapped equity. Often times, the consumers struggle to make the monthly rental payments, which typically cost the same as or more than their previous mortgage payments. As a result, this makes it impossible for the consumer to repurchase their home after the lease term. Once the consumer has fallen behind on their rent and all of the equity has been stripped from the home, the purchaser will evict the consumer and resell the house to a third party. Alternatively, after all of the equity has been stripped from the home, the purchaser will simply walk away with the monies and default on the loan, leaving the home to fall into foreclosure.

As a result, most consumers will find themselves either evicted or without any equity in their home.

III. Legislation

In an effort to protect consumers from either losing the equity in their homes or losing their homes all together, the Act was legislated to regulate these types of transactions. The Act created new disclosure requirements for mortgage rescue companies and guarantees that distressed homeowners receive the majority of the equity in their homes. Prior to Illinois’ passing of the Mortgage Rescue Fraud Act,2 only four other states (California, Minnesota, Maryland, and New York) had passed legislation to combat consultant and purchaser scams. Due to the widespread nature of these scams, nearly all 50 states have since enacted similar laws. In addition, on November 19, 2010, the Federal Trade Commission issued the Mortgage Assistance Relief Services (MARS) Rule to protect consumers from mortgage rescue scams.

IV. Investigating and Building a Mortgage Rescue Scam Case

Because Illinois is a fact-pleading state, it is imperative that attorneys representing victims of mortgage rescue scams obtain the necessary documents from their client to determine whether the Act applies and has been violated.

A. Consultant Investigation

Counsel should first review any marketing materials (i.e. ads, mailers, business cards, and websites) available to determine whether the company or individual is engaging in the business of distressed property consulting.

Section 5 of the Act defines a “distressed property consultant” as any person who, directly or indirectly, for compensation from the owner, makes any solicitation, representation, or offer to perform or who, for compensation from the owner, performs any service that the person represents will in any manner do any of the following:3

(1) stop or postpone the foreclosure sale or the loss of the home due to nonpayment of taxes;

(2) obtain any forbearance from any beneficiary or mortgagee, or relief with respect to a tax sale of the property;

(3) assist the owner to exercise any right of reinstatement or right of redemption;

(4) obtain any extension of the period within which the owner may reinstate the owner’s rights with respect to the property;

(5) obtain any waiver of an acceleration clause contained in any promissory note or contract secured by a mortgage on a distressed property or contained in the mortgage;

(6) assist the owner in foreclosure, loan default, or post-tax sale redemption period to obtain a loan or advance of funds;

(7) avoid or ameliorate the impairment of the owner’s credit resulting from the recording of a notice of default or the conduct of a foreclosure sale or tax sale; or

(8) save the owner’s residence from foreclosure or loss of home due to nonpayment of taxes.

Exemptions from this definition include HUD certified counseling agencies, attorneys licensed in Illinois engaged in the practice law, and banks, among others.4 Many consultants will advertise that they can “stop” foreclosures or “assist” distressed homeowners from losing their home. Counsel should note what types of “promises” or “guarantees” the company made.

In a consulting transaction the consumer receives and is asked to sign a number of documents, which counsel should request. These documents include contracts signed between the consumer and the consultant; proof of any payments made to the consultant and any marketing materials.

Counsel should then review the contract signed between the consumer and the consultant. Section 10 of the Act governs the contract terms and mandates that contracts are in writing; signed and dated by the owner and the consultant; include the name and address of the consultant, and in the same language that is principally used by the consumer.5 The contract must also fully disclose the services that will be rendered as well as the total amount and terms for compensation.6 Finally, the contract must contain the statutory “upfront fee” provision and the statutory cancellation notice provision (in 12-pt boldface type) which must be accompanied by the detachable cancellation notice provided for in the statute.7 Failure of the consultant to provide a contract as described constitutes a violation of Section 10.

Section 15 of the Act gives consumers the right to cancel their contract at any time prior to the consultant’s full performance of the contract.8 Thus, any provision in the contract limiting a consumer’s right to cancel is a violation of Section 15. Additionally, waiver clauses are void and unenforceable.9

Equally important, counsel should determine whether the distressed property consultant took a power of attorney or demanded or received an upfront fee from the consumer before rendering any services; or more egregiously, whether the consultant acquired an interest in the distressed property. This conduct violates the Act.10 Additionally, any type of security (i.e. wage assignment or lien on real or personal property) the consultant may have taken from the consumer is void and unenforceable.11 The Act also limits the amount of compensation a consultant can charge.12 Finally, counsel should ascertain whether the consultant received any compensation from a third party in connection with the services to be rendered, and if so, whether such compensation was fully disclosed to the consumer; as failure to do so constitutes a violation of the Act.13

B. Purchaser Investigation

During the initial client interview, counsel should ask what representations, if any, the purchaser made. It is a violation of the Act, for purchasers to represent to a consumer that he can assist in saving the house or buying time.14 Additionally, any misrepresentations as to the purchaser’s status with respect to licensure or certification also constitutes a violation of the Act.15

The Act requires contracts with purchasers to be in writing and to be signed before the execution of any instrument conveying the property.16 The contract must include the name, address, and telephone number for the distressed property purchaser, the address of the property to be sold and the signatures of both the consumer and purchaser, dated, witnessed, notarized and must contain every term negotiated between the consumer and the purchaser.17 Failure to include any of the above information constitutes a violation of the Act.

Counsel should then check whether the contract states that the contract is fully assignable and whether the consumer may terminate any lease-back agreement at any time without liability. The contract should also include a statement of the total consideration to be given by the purchaser in connection with the conveyance of the property.18 The lease agreement provisions must be fair and commercially reasonable.19

Counsel should also determine whether the contract includes a complete description of the payment terms or other consideration. Any other agreements related to the purchase, such as a rental agreement or repurchase agreement must be included in the contract.20 Failure to include any of the above constitutes a violation of the Act.

Required notices include a form notice stating that the consumer has the right to cancel the purchase contract until midnight of the fifth (5) business day following the day on which the consumer signs the contract, or 8:00 a.m. on the last day of the redemption period under the Illinois Mortgage Foreclosure Law,21 or Property Tax Code,22 whichever occurs first.23 Additionally, a form notice explaining that the purchaser may not ask the consumer to sign any deed or other document until the right to cancel the contract has ended, must be included.24 If title to the home will be transferred as part of the transaction, the contract must include a form notice stating: “As part of this transaction, you are giving up title to your home.”25 Contracts failing to include the statutorily required notices are unenforceable under the Act.

If the client cancelled the transaction, counsel should establish whether the purchaser returned the original contract and any other documents the consumer signed within 10 days from the receipt of the notice of cancellation.26 Counsel should also check whether the purchaser recorded the contract with the recorder of deeds within 10 days of the contracts execution, as mandated by the Act.27

In addition, counsel should determine whether the purchaser demanded that the consumer waive any requirements under the Act;28 or whether the purchaser demanded a liability waiver.29 Any such demands violate the Act.

Other inquiries counsel should make are whether the purchaser (1) verified the consumer’s ability to pay the monthly lease payments and future re-purchase of the property before purchasing the home30 and (2) purchased the home for at least 82% of the home’s fair market value or, in the alternative, paid off all existing obligations on the home and established the cost of re-purchase as no greater than 125% of the purchaser’s original cost to purchase the home from the consumer.31 If at the conclusion of the rescue transaction, a consumer is unable to repurchase the home, the Act requires a purchaser to make a payment to the consumer so that the consumer has received consideration in an amount of at least 82% of the home’s fair market value.32

Furthermore, counsel needs to determine whether the purchaser accepted or recorded title to the home before the expiration of the consumer’s right to cancel the purchase contract;33 entered into a conveyance contract with the consumer where any party to the transaction is represented by power of attorney;34 induced the consumer to execute a quit claim deed;35 caused the home to be conveyed or encumbered without the knowledge or permission of the consumer, or in any way frustrated the ability of the consumer to complete the conveyance back to him or herself.36

Finally, counsel should ascertain whether conveyance of the home was completed before a notary in the offices of a title company licensed by the Department of Financial and Professional Regulation, before an agent of such a title company, a notary in the office of a bank, or a licensed attorney where the notary is employed.37 Counsel should also ascertain if the purchaser failed to assume or pay off all liens or interests on the home immediately after the conveyance of the home.38

In a situation where the client was able to re-purchase the home, counsel should determine whether the purchaser failed to give title back to the consumer after all the re-purchase requirements were fulfilled.39

V. Conclusion

The Act can be a valuable tool in representing Illinois consumers who have been defrauded by unscrupulous mortgage rescue service providers. Attorneys should familiarize themselves with the Act, so that more homeowners will have legal recourse should they fall victim to these scams.

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Jennifer Franklin is the Assistant Dean for Career Services at the Southern Illinois University School of Law.

1. 765 ILCS 940/1 et seq.

2. 765 ILCS 940/1 et seq.

3. 765 ILCS 940/5

4. See, 765 ILCS 940/5 and 940/7 for additional exemptions.

5. 765 ILCS 940/10 (a), (c), (d)

6. 765 ILCS 940/10 (a)

7. 765 ILCS 940/10 (c), (e)

8. 765 ILCS 940/15

9. 765 ILCS 940/20

10. 765 ILCS 640/50 (a)(1), (5) and (6)

11. 765 ILCS 940/50 (a)(3)

12. See, 765 ILCS 940/70

13. 765 ILCS 940/50 (a)(4)

14. 765 ILCS 940/50(b)(4)

15. 765 ILCS 940/50(b)(5)

16. 765 ILCS 940/25

17. 765 ILCS 940/25 and 30(1)-(2)

18. 765 ILCS 940/30, (3)

19. 765 ILCS 940/50(b)(3)

20. 765 ILCS 940/30(4), (5)

21. 735 ILCS 5/15-1101 et seq.

22. 35 ILCS 200/1-1 et seq.

23. 765 ILCS 940/30(6)) and 765 ILCS 940/40(a)-(b)

24. 765 ILCS 940/30(7)

25. 765 ILCS 940/30(8)

26. 765 ILCS 940/35

27. 765 ILCS 940/40

28. Under the Act, the Homeowner may not waive any requirements under the Act except for the 5-day right to cancel the contract with the purchaser (if the property is subject to a foreclosure sale within the 5 business days), and any such waiver must be written and signed by all parties holding title to the property. 765 ILCS 940/45

29. Under the Act, any lease entered into pursuant to the contract with the purchaser is terminable at will by the homeowner without liability. 765 ILCS 940/30

30. 765 ILCS 940/50(b)(1)

31. 765 ILCS 940/50(b)(2)

32. 765 ILCS 940/50(b)(2)

33. 765 ILCS 940/50(b)(6)

34. 765 ILCS 940/50(b)(9)

35. 765 ILCS 940/50(b)(8)

36. 765 ILCS 940/50(b)(12)

37. 765 ILCS 940/50(b)(11)

38. 765 ILCS 940/50(b)(10)

39. 765 ILCS 940/50(b)(7)