Legal Ethics Corner

Ethics Corner is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members. (Because of the time-sensitive nature of the following topic, part two of “Disclosing Prior Relationships with Witnesses and/or Parties” has been postponed to the next Ethics Corner in two weeks.)

On René Descartes and Mortgage/Foreclosure Legal Services: Ethics Alert re Participating in Mortgage Modifications.

French Philosopher René Descartes said that “[a] man is incapable of comprehending any argument that interferes with his revenue.” The California State Bar’s Committee on Professional Responsibility and Conduct (COPRAC), ever mindful of early French philosophy, has issued an Ethics Alert titled, “Legal Services to Distressed Homeowners and Foreclosure Consultants on Loan Modifications.” See it here:

As explained in the alert, the distress in the housing market has given rise to a “foreclosure consultant” industry, and such consultants are sometimes seeking the assistance of attorneys to perform related legal services, e.g., renegotiating mortgage terms, filing lawsuits to delay the foreclosure process, etc. The Legislature has stepped in and imposed numerous restrictions on such consultants as a means to protect consumers (Mortgage Foreclosure Consultants Act, Civil Code sections 2945 et seq.).

For lawyers, the rub of the matter is this: lured by the possibility of easy money, a lawyer might act unethically by, among other things:

  1. paying a referral or marketing fee to a foreclosure consultant or other person for referring distressed homeowners to the lawyer. This is prohibited by Rule of Professional Conduct [RPC] 1-320(B), and worse, might constitute running and capping, which is a misdemeanor under Bus. & Prof. Code sections 6151-6154, and can come with a substantial fine, if not worse;
  2. splitting a fee with the mortgage/foreclosure consultant, i.e., a non-lawyer,which is prohibited by RPC 1-320(A);
  3. aiding the mortgage/foreclosure consultant in the unauthorized practice of law (RPC 1-300(A)), or worse, forming a partnership with a non-lawyer(RPC 1-310);
  4. contacting, directly or indirectly, prospective homeowner-clients in person or by telephone where there is no prior family or professional relationship with such persons (RPC 1-400(C));
  5. filing a lawsuit without good cause to simply delay the foreclosure sale (RPC 3-200); and
  6. accepting an unconscionable fee, i.e., one that is excessive in light of the time and labor required, in addition to the consideration of other factors.(RPC 4-200(A), (B)(1-11).)  

For more commentary, see “Beware the Meltdown’s Temptations,” by Diane Karpman, Ethics Byte, Calif. Bar Journal (Dec. 2008), warning of conflicts and other problems in the lawyer-mortgage consultant relationship; and letter of Wayne Bell, Chief Counsel for the Dept. of Real Estate, to Calif. Bar Journal (Jan. 2009), warning of attempts to squeeze mortgage consultants into the “lawyer” exception of the Mortgage Foreclosure Consultants Act mentioned above.

COPRAC summed it up this way: “A California lawyer should consider carefully the applicable ethical rules before agreeing to participate in any such venture involving people acting as foreclosure consultants or in a similar capacity. Failure to do so may result in lawyer discipline.” It can also be put this way: working with mortgage or foreclosure consultants can be a minefield. Learn to talk it ethically before you walk it.

--Luis E. Ventura

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only, and not of the SDCBA or its Legal Ethics Committee.**