This article examines the attorney-exemption loophole currently plaguing loan modification.
Attorneys are using their exemption to invade the field
California attorneys have long held exemptions to many state rules and regulations when they are rendering legal services to their clients in the ordinary course of his practice as an attorney-at-law. However, without a real estate broker license they cannot take or share in a brokerage fee.
The current mortgage crisis has put new emphasis on loan modification and a great number of people have begun soliciting troubled borrowers, including attorneys. However, whether attorneys can hold themselves out as loan modifiers and solicit clients under the guise of being an attorney without also being licensed as a real estate broker with the DRE is being challenged by some brokers.
An individual must be licensed as a broker to receive compensation for soliciting borrowers or lenders, negotiating loans, or collecting payments or performing services for borrowers or lenders in connection with a loan secured by real estate. The attorney exemption allows attorneys to perform mortgage loan brokerage services without a real estate license if they render these services “in the course of his or her practice as an attorney at law.” However, they may “not actively and principally engage[d] in the business of negotiating loans secured by real property”. [Calif. Business and Professions Code §10133.1(a)(5)]
Under the newly amended Foreclosure Consultant Law effective July 1st, attorneys have an exemption when modifying loans as a service undertaken “in the course of his or her practice.” Whether this exemption allows an attorney to “solicit clients” for this purpose without either a real estate license or being registered with the DOJ again hinges on how rendering service in the course of his or her practice is defined.
While it is widely accepted that attorneys can perform brokerage activity or act as a foreclosure consultant for current clients, are attorneys exempt from licensing or registration when “soliciting” new clients for the specific task of arranging or modifying real estate loans?
The DRE is aware of this hot-button issue, but kindly defers to the California State Bar with regards to attorney conduct under the Real Estate law upon contacting their Legal department.
The State Bar declined to comment.
The Public Inquiry Department of the DOJ stated the attorney exemption is interpretable on a case by case basis depending on how a judge would define “in the course of practice”.
The Real Estate Fraud and Media Relations Department of the DA’s office did not have any current, readily retrievable statistics on consumer complaints against attorneys holding themselves out as loan modifiers or soliciting clients for services requiring a real estate license.
Someone, like you, needs to write their local assemblyman or senator. Ask them to request an Attorney General’s Opinion on what precisely “in the course of his or her practice” really means for soliciting and negotiating real estate loan arrangements (modifications) which require a broker license under California Business and Professions Code §§10130 et seq. It could mean the difference between getting the clients rightfully due you or letting attorneys siphon off your clientele. The next stop for attorneys: solicit buyers to negotiate their purchase of real estate!
See related commentary in our blog item “A threat to borrowers who want to lower their mortgage payments.”
UPDATE 03/25/09: No doubt in response to multiple inquiries, the DRE wrote an article entitled “Cautionary notes regarding residential loan modifications” in their Spring 2009 Real Estate Bulletin. In addition to their own commentary on the situation, they refer to a similar responses by the California State Bar. The California State Bar’s comments can be found here and here.