Unfair Law Stops Troubled Borrowers from Hiring Attorneys

It is with a heavy heart that we have withdrawn our plaintiffs' constitutional challenge to California's SB 94.  We sued the State of California to try to have overturned a law we feel is both unconstitutional and dangerous.  The law interferes with the right of homeowners to seek counsel and advice from attorneys in serious matters involving what is often the largest financial obligation and asset they will administer in their lifetimes.  We continue to support the Attorney General and the State Bar of California in efforts to prosecute and discipline attorneys who defraud clients and engage in misconduct.  But this law does not accomplish that goal.  Instead it confers enormous power on banks and servicers who use seasoned attorneys to take advantage of unrepresented borrowers.

After repeated challenges to our plaintiffs' standing to bring suit, their circumstances and focus changed over the course of the past year and they decided that they no longer had the same interest in pursuing this challenge.  Our concern is not merely with SB 94, but with the trend to limit access to legal representation.  It is a trend that began with Congress' limits on attorney compensation for representing veterans in their claims for medical care and compensation from the Veterans Administration.  That law was passed during the Great Depression as part of a package of laws designed to radically reduce the amount of benefits paid to veterans of World War I.  This provision was sold to the public as "protecting vulnerable veterans from scam artist attorneys" but the law was designed to reduce the amount of money that the US government spent on veterans.

Because the courts are a relatively egalitarian place where backroom deals, political payoffs and secret meetings with interested parties are both uncommon and illegal, the courts are a place that powerful forces do not like to visit.  It is possible to remove a recalcitrant legislator with some well placed contributions and a media campaign.  But judges cannot be so easily removed.  It is possible to visit privately and confidentially with a legislator regarding a matter of legislative importance, but it is illegal to discuss with a judge a case pending before him.  For this reason, we predict that the wave of laws seeking to limit legal representation and access to the courts will continue and may increasingly be justified under the guise of protecting the "vulnerable" (which will be defined as any corporate adversary).

Proponents of Senate Bill 94 (SB 94) claimed that the law would stop unscrupulous attorneys from charging borrowers for services that they then did not provide.  Although that was and continues to be a problem, it is one that was already forbidden by the law before SB 94.  Attorneys could already be prosecuted for criminal fraud, disciplined and disbarred for defrauding clients.  The problem that existed before SB 94 was not the law, but law enforcement.

SB 94 was most likely the result of opportunistic bank lobbyists seeing a real problem and trying to use it as a tool to camoflauge their desired result: eliminate attorney representation for borrowers to make the foreclosure process easier in an environment where many banks and servicers have defective documentation of their right to foreclose.

The New York Times wrote about this problem on December 20, 2010.  In that article, David Streitfeld wrote that the law was "intended" to protect borrowers from fraud,

But foreclosure specialists say there has been an unintended consequence: the honest lawyers can no longer afford to assist Ms. Bell and all the others who feel helpless before lenders that they see as elusive, unyielding and skilled at losing paperwork.

California State Senator Ron Calderon (D Montebello) introduced SB 94 on January 22, 2009.  Perhaps coincidentally, Senator Calderon is a long time member of the Mortgage Bankers Association.  SB 94 sought to impose civil and criminal liability on any person performing a loan modification or related activity who collects an "advance fee" including real estate agents, but not lawyers.

In July 2009, after extensive lobbying by various groups, Governor Arnold Schwarzenegger demanded that the California Legislature add a provision barring attorneys from collecting "advance fees" for representing mortgage borrowers in any matter relating to a loan modification or forbearance.  It is unclear whether the attorney provision was a strategic objective of the initial bill, but one that was put off until later in the legislative process.

Governor Schwarzenegger signed SB 94 into law on October 11, 2009 and it became effective the same day.  It amended California Civil Code Section 2944.7(a) to make it unlawful for any person to:

[Negotiate, arrange or offer to perform] a mortgage loan modification or other form of mortgage loan forbearance [for any fee or compensation received] until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.

The maximum penalty for violating the statute is a year in jail and a $10,000 fine.

The statute is disguised as a consumer protection law, but it is in fact designed to bar mortgage borrowers from consulting with attorneys about their mortgages and their legal rights.  The present topography of the mortgage debacle is unsettled.  State and federal lawmakers, banks and the media continue to strive for an acceptable narrative that minimizes the perception of the damage banks and other parties have inflicted on our country, our economy, and increasingly our civil liberties.

In such an unsettled place, borrowers often can benefit from representation.

Why We Sued the State of California

A mortgage borrower approached our firm and asked if we could review his loan documents, the current state of his mortgage obligations, who serviced his loan, who currently owned the loan, how those parties acquired their rights, whether a modification or forbearance could help his situation, his rights under state and federal law and to attempt to secure a loan modification for him on three residential properties.

We were aware that SB 94 had created criminal and administrative penalties for attorneys who represented borrowers for a fee and we weren't entirely clear what conduct was illegal.  Although Olender Pham is an avid provider and organizer of pro bono legal services, we did not qualify this case for pro bono representation.  We were either going to represent this client for a fee, or not at all.

At no charge to the client, we researched what matters we could advise the client about for a fee without violating the law.  To our amazement, we learned that the statute SB 94 amended vaguely described the conduct that was illegal (CCC 2944.7), while the statute that described the term "advance fee" (CBC 10026) was very specific in describing fees that weren't advance fees at all.  We learned that almost every course of action we could pursue against the lender began with a loan modification and involved negotiating, arranging or performing a loan modification at every stage from negotiations avoiding litigation through attempting to settle before, during or after a trial.

Anyone who ponders for a moment the situation of a borrower in arrears on his mortgage will realize that the only possible remedy available is a loan modification.  For the borrower to actually receive any money damages, the amount of damages would have to exceed the value of the entire debt that the homeowner owes the bank.  Anything short of that involves the bank agreeing to reduce the borrower's principal or interest or both, or to restructure the loan.  Every single strategic possibility from a demand letter through a post trial settlement to avoid appeal would necessarily involve a loan modification.  There is simply no other useful remedy an attorney can pursue for a borrower in default.

Although CBC 10026 generally applies to real estate agents, SB 94 modified CBC 10026 to define the term "advance fee" and the State Bar of California used the term "advance fee" (one specifically used in the text of SB 94) in its "FAQs" describing the penalties it would mete out to attorneys who violated the State Bar's interpretation of the law.  (Read the California State Bar's FAQs here).  Could the State Bar and the State of California backtrack and assert that they most likely wouldn't discipline or jail an attorney for charging a borrower for services already performed?  Sure, but we decided that we weren't going to risk a year in jail to find out.

We concluded that we could not represent the borrower without violating the law and we decided to refuse representation.  But then during a discussion with the client about this problem, we all began to think about whether it was constitutionally permissible that the client, in the midst of a dispute with his bank, could not legally hire an attorney even though the bank could.

Olender Pham's suit against the State of California seeking to overturn SB 94 resulted from that discussion.  But the law is so vague, we believe it is possible that if we charge the client a fee to bring a suit challenging the constitutionality of the statutes SB 94 amended, this representation could be deemed illegal and subject our attorneys involved to a year in jail because the purpose of the suit is ultimately to be able to assist the borrower in a loan modification dispute.  So, for safety's sake, we decided to represent the client at no fee, but to seek attorney's fees and costs of suit from the State of California if we prevail.  We are confident, but not absolutely certain that this is not a crime in the State of California.

In the links at the right is California Attorney General (and father of current California Governor Edmund G. "Jerry" Brown) Edmund G. Brown's 1955 amicus brief in Williamson v. Lee Optical.  In that case, ironically, the State of California sought to uphold a law requiring only specially licensed and trained persons to... furnish and fit eyeglasses.  That's right, not to perform an eye exam or to prescribe a specific prescription for lenses, but to simply "fit" eyeglasses to a person's face, as opposed to, for example, sunglasses.  In other words, making sure that eyeglass frames fit comfortably on a person's face.  The State combated the risk of harm from ill-fitting eyeglass frames, for example frames that made an embarrassing red mark on the bridge of the nose, or resulted in a person making awkward index finger pushes to keep the glasses from sliding down the bridge of the nose -- to protect the public from such harm, the State mandated that only persons with proper education, training and a State license could put lenses in frames and stick the frames on a person's face.

In what seems an about face, in Duenas v. Brown, the State of California is arguing that homeowners facing a dispute over the loss of their homes must use untrained and unlicensed laypeople for advice while battling in complex legal and contract negotiations with mortgage servicers and banks represented by an army of attorneys.  I think a lot of Californians would be more comfortable using an unlicensed and untrained person to repair a broken eyeglass lens, or "fit" new eyeglass frames than to use an unlicensed and untrained person who is not an attorney and who is unable to give legal advice to negotiate, arrange and prepare a loan modification on a home that represents most or all of the person's life's savings.

For more details, see the links at top right.  For a detailed analysis of the constitutionality of SB 94 and the political issues driving the current debate, read Sean Olender's July 2010 article in Verdict Magazine.  To learn more about our lawsuit against the State of California, read a copy of the complaint.  To learn how generously the bailout treated banks and investors compared to ordinary US citizens, read Sean Olender's article The Trickle Down System Bottoms Out in the July 2009 issue of Verdict Magazine.

Feel free to contact us for further information.