Playing with Fire
Working with foreclosure consultants can get a lawyer burned
BY STEVEN SEIDENBERG
AS THE RECESSION PUTS A DENT IN LEGAL
work along with just about every other
segment of the economy, many attorneys
are being tempted by a business opportunity that shows no signs of slacking off:
working with foreclosure consultants.
Foreclosure consultants, also known as loan modification agencies, advertise that they help struggling
homeowners stave off foreclosure. They negotiate
with lenders in an attempt to get
new, more affordable loans for
With the real estate market in
the tank and foreclosure numbers
continuing to rise around the
United States, these are boom
times for businesses that do
foreclosure consulting. And
many of these companies desperately want to associate themselves with attorneys.
Some of them are looking for
outside counsel. Some need in-house counsel. Others want to
enter into some sort of joint
business enterprise. And they
all routinely offer attorneys the
possibility of earning fees that
reach into six figures.
front fees but providing little in return, regulators say.
To burnish their image, many foreclosure consultants
seek to work with attorneys, even if doing so doesn’t
bring much better results for most of their customers.
“Lawyers add legitimacy,” says Wayne S. Bell, chief
counsel for the California Department of Real Estate
in Sacramento. “When people hear a lawyer is involved,
they think they will get a champion for their cause,
someone who will be impartial and really add value
to the services provided.”
Many foreclosure consultants also use attorneys in
THERE’S JUST ONE CATCH. AT-
torneys who get involved with
foreclosure consultants may be violating legal ethics rules on a number of grounds, including prohibitions against using “runners” (someone
who solicits business on behalf of a lawyer), sharing fees
with nonlawyers, and failing to exercise independent
judgment on behalf of clients.
“This is a huge issue. This is going on all over the
nation,” says Diane L. Karpman, an attorney in Beverly
Hills, Calif., who represents lawyers in professional
conduct matters. She is a member of the ABA Standing
Committee on Professionalism.
Foreclosure consultants have a checkered reputation
that often is well-deserved, say lawyer ethics regulators
who have been watching the growing involvement of
lawyers in their operations. Many of these companies
are shady operations, charging clients significant up-
efforts to get around state laws that restrict upfront fees
for loan modification services. Florida, for instance, forbids such fees—except when charged by attorneys, according to Lori Holcomb, unlicensed-practice-of-law
counsel at the Florida Bar in Tallahassee. California
has a similar statute that kicks in once a property enters the foreclosure process, says Bell. (California and
Florida have two of the highest foreclosure rates in
For lawyers, the allure is simple: Foreclosure consultants offer lots of clients—and lots of money. “These
companies can do whatever they want in terms of advertising, but lawyers can’t,” says Kenneth L. Marvin,
the Florida Bar’s staff counsel for lawyer regulation.
“So it is easier for these companies to get business.