Litigating Foreclosure Rescue Scams

~An Emerging Area of Consumer Law~

By Phillip Robinson

Imagine that a client comes to you, facing dire straits. He has little money, owns a home, recently lost his job, has mounting unsecured debts and just received an eviction notice from the District Court of your county. Why, your client wants to know, is he being threatened with eviction if he owns his home?

Since the enactment of the Protection of Homeowners in Foreclosure Act of 2005, and subsequent heightened media exposure, more and more of these situations are coming to the attention of public interest attorneys and the private bar. Previously, practitioners meeting with a client presenting the kinds of facts in this example might not have even considered looking into the underlying facts concerning the eviction, perhaps concentrating instead on the client's overall financial situation. However, a little further investigation of the facts may yield new remedies for your client worthy of their consideration – as well as a statutory attorney fee award.

Last year, the National Consumer Law Center (NCLC) released a new report entitled Dreams Foreclosed: The Rampant Theft of Americans' Homes Through Equity-Stripping Foreclosure ‘Rescue' Scams. In this report, NCLC outlined three types of foreclosure rescue scams:

Phantom Help: This is where the Foreclosure Rescue Consultant charges outrageous fees either for phone calls and paperwork the consumer could have done him/herself. Typically the homeowner is usually left without enough assistance to actually save the home and with little or no time left to prevent this grievous loss by the time s/he realizes it. The consultant essentially abandons the homeowner to a fate that might well have been prevented with better intervention.

Bailout: This type of scheme is where the consumer conveys title to the house, usually rich in equity, in the belief that he is entering a deal to remain as a renter and then buy the house back over the next few years. The terms of these deals are almost invariably so onerous that the buyback becomes impossible, the homeowner permanently loses possession, and the Foreclosure Rescue Consultant thereby strips all the equity for himself.

Bait-and-Switch: Here the consumer does not realize she is surrendering ownership of the house in exchange for a "rescue." Many consumers later insist that they believed they were only signing documents for a new loan to make the mortgage current.

In February 2006, Judge Steven I. Platt of the Circuit Court for Prince George's County, Maryland, issued an opinion and order in the case of Tommie Mae Smith v. Vincent Abell which is quickly becoming the benchmark in Maryland and around the country for other foreclosure rescue cases. In finding for the consumer, the Court awarded the homeowner $10,968 in actual damages – the amount that she spent to pay the attorney for the mortgage company and her own attorney. The court also awarded $500,000 in punitive damages, finding that there was clear and convincing evidence that the foreclosure rescue consultant's conduct was motivated by actual malice in that there was clearly ‘conscious and deliberate wrongdoing' emanating from an ‘evil or wrongful motive.' In determining the degree of reprehensibility of the conduct in connection with setting the amount of the award, the court stated:

The Defendant [Foreclosure Rescue Consultant's] tortious conduct in this case constitutes the most reprehensible actions this Court has ever observed in his 28 years on the Orphans Court, the District Court and the Circuit Court, save only the physical violence and death routinely visited on the Court's conscious in criminal cases. On a scale of one to ten as to reprehensibility ... the Court rates this an eleven. If the Defendant sleeps at night, the Court can't help but wonder how.

In Tommie Mae Smith, the plaintiff was an 83-year-old woman in poor physical health but good mental health who had a total income each month equal to approximately $1,300. In 2004, when she had approximately $200,000 of equity in the home, her mortgage was substantially in arrears and her mortgagor initiated foreclosure proceedings. It was at this point that the foreclosure rescue consultant began his scheme to purchase the home, bring it out of foreclosure and allow the homeowners to continue to live in the home for one year at a rent of over $1,900 per month – $600 a month more than her total monthly income. After one year, the homeowner would have the option to repurchase the property. However, in this scheme, the homeowner never signed the sales agreement, nor did she ever sign a deed transferring the home – but the Foreclosure Rescue Consultant filed such a document with the Recorder of Deeds.

It is exactly this kind of practice that is demonstrated by Tommie Mae Smith that the General Assembly sought to stop in enacting the Protection of Homeowners in Foreclosure Act of 2005. The Act criminalizes some activities commonly found in these scams and also provides a treble damages award to victims when the Foreclosure Rescue Consultant willfully or knowingly violates the Act plus reasonable attorney's fees.

Cases applying the Protection of Homeowners in Foreclosure Act are just beginning to emerge. The Act does exempt from its liability many settlement service providers connected with the transaction. However, as more cases like Tommie Mae Smith evolve, it is expected that realtors, title insurers, settlement firms and others facilitating the transaction while not properly evaluating the underlying facts as alleged by the Foreclosure Rescue Consultant may also face certain liabilities based on their other legal obligations.

Phillip Robinson is Executive Director & Attorney for Civil Justice, Inc.