Washington Protects Distressed Homeowners from Foreclosure Rescue Scams (FRS)

Facing financial hardship and the murder of his son, Lawrence Jametsky, a man of limited education and who suffered from learning disabilities was approached by real estate investors who promised to resolve his financial crises by offering him a loan. Unbeknownst to Jametsky the document he signed was not a loan but in fact a deed conveying his house to the investor.

While this is an extreme case[1], people facing foreclosure are often the victims of unscrupulous practices. With rising interest rates and the growth of consumer debt, many Washington homeowners face the threat of foreclosure. But, at the same time, home price appreciation continues to boom, and even with the advent of online “appraisals” many homeowners are unaware of the significant value in their homes. The combination of consumer debt and rising property values have created fertile grounds for a nationwide epidemic of schemes intended to defraud unsuspecting and distressed homeowners of their home equity. These schemes are known as foreclosure rescue scams (FRS).

“A typical FRS involves the conveyance of a homeowner’s property to a ‘rescuer’ who promises to save the home from foreclosure, coupled with a lease-option agreement that makes the homeowner a tenant in the home he or she previously owned. This purported transactional ‘rescue’ is soon followed by the former homeowner’s eviction by the ‘rescuer.’ The former homeowner is left homeless; the “rescuer” walks away with the property’s equity.” [2] “Rescuers” using publicly available notices of default target distressed homeowners who are on the brink of losing their homes, preying mostly on the elderly and low-income homeowners.

To stem the rise of FRS, in 1988, our state legislature enacted the Equity Skimming Act (ESA), codified in RCW 61.34 et seq. The primary purpose of the Act was to protect homeowners who are at risk of foreclosure from equity skimming practices. While equity skimming is a term of art specifically defined in the Act, a common scheme involves the following bait-and-switch ploys:

· Lease-buy Back: a “rescuer” offers to save the home from foreclosure by paying off certain debts, and in exchange, the owner of the property transfers ownership to the “rescuer”. The “rescuer” leases it back to them with an option to buy back the property at some future date. But when that date arises, the “rescuer” has already sold the property to another party. Alternatively, the “rescuer” banks on the distressed homeowner’s inability to repurchase the home.

· Equity Stripping: A “rescuer” will purchase a home that is at risk of foreclosure for a discounted price, while promising the homeowner to pay off any liens or encumbrances, and further allowing the homeowner to remain in the house for short period of time. During that time, the “rescuer” either receives rent funds, re-sells the property for value, or removes fixtures from the property. At the end of the lease agreement, the “rescuer” refuses to pay off the debts on the property as promised, leaving the homeowner without a home and personally liable on the debts.

Under the Act, equity skimming is a Class B Felony, and a violation of this statute could result in penalties up to $100,000.00.[3]

Critics of the ESA argue that “equity skimming”, though criminalizing the practice defines the term so narrowly that it almost never applies to today’s foreclosure rescue scams. Certainly, the FRS that I have seen fall outside the narrow definition of “equity skimming” for several reasons. First, the transactions between a “rescuer” and a homeowner are such that the homeowner does not finance any part of the purchase price. Second, the “rescuer” typically pays off the existing mortgage, because it is almost always necessary to do so following an arm’s length transaction handled by an escrow company.

Although these practices outlined above are not “equity skimming” per se, the result is the same- the “rescuer” walks away with a significant amount of equity and the homeowner is left with a nominal sum of money and with no home to return to.

In 2008, in response to a request from the Washington Attorney General, whose Office was inundated with FRS cases following the housing crises, Washington amended the ESA to provide broader protections against “new” FRS. With these additional amendments, RCW 61.34 was renamed the Distressed Property Conveyance Act (DPCA).

The statute, which took affect in 2010 continues to criminalize equity skimming. But, it also prohibits many other practices that are designed to defraud vulnerable homeowners and makes violations of the DPCA actionable under the Consumer Protection Act.[4]

When does DPCA Apply?

The statute applies to distressed home conveyances.

When a homeowner is no longer able to afford payments on property obligations, selling their home may be their only option. With an impending foreclosure and limited financial means, the terms of the sale agreement are often under duress and result in a windfall by those who take advantage of distressed homeowner’s predicament.

The statute intending to curb predatory practices therefore applies to “distressed home conveyances” (DHC), a transfer of a distressed home to a purchaser or where a purchaser allows the homeowner to occupy the distressed home and

• Promises to reconvey the distressed home back to the owner;

• Provides homeowner option to purchase the property back;

• Promises the homeowner an interest in, or a portion of the proceeds from any resale of the distressed home.[5]

A “distressed home” is a dwelling in danger of foreclosure or at risk of loss due to non-payment of taxes.[6] In turn, a dwelling is at risk of foreclosure, if the homeowner has defaulted on a mortgage and the lender has exercised the right to accelerate the note[7]; or there is a good faith believe the homeowner will likely default due to lack of funds. Therefore, most homeowners who have been served with a foreclosure complaint or a notice of trustee sale, their homes will qualify as a “distressed home” and will be afforded the protections outlined in the DPCA.

A home can also be considered “distressed” for non-payment of taxes after considering a variety of factors listed by the Supreme Court in Jametsky v. Olsen, 179 Wash.2d 756 (2014).[8]

Who does the DCPA Apply to?

It applies to distressed home consultants and distressed home purchasers.

There is a fine line between a Distressed Home Conveyance permitted by law, and a FRS that results in a homeowner selling his/her home to a “rescuer”. In both situations, a homeowner is contacted by an individual who promises to assist them navigate through the foreclosure process in exchange for a sum of money, or an interest in the property. But the primary difference lies in how the agreement is reached and the terms of the agreement. Therefore, the DCPA creates procedural and substantive requirements that regulate the relationship between “Distressed Homeowners” (DHO) and “Distressed Home Consultants” and “Distressed Home Purchasers.”

A Distressed Home Consultant is an individual who works with distressed homeowners to stop, slow down, or post-pone the foreclosure process through various means including forbearance, reinstatement, or entering into various agreements with Distressed Home Purchasers. Consultants owe to the distressed homeowner a fiduciary duty to act in the homeowners’ best interest.[9] In other words, a consultant’s primary purpose is not to benefit financially but to ensure that a distressed homeowner is benefited.

Similar to the Real Estate Settlement Procedure Act (RESPA) and the Truth in Lending Act (TILA), DPCA requires a consultant to provide written notices with partcilar language to a DHO, including informing a DHO of a five-day cancellation period before any conveyances or agreements are consummated. Additionally, the following is required by law:

· Distressed home consultants must provide homeowners with a written contract detailing all services and compensation to be received by the consultant or anyone working in association with the consultant. Contracts must be signed and dated by both parties, and a copy must be provided to the homeowner and kept in the consultant's files for at least five years after the completion or termination of the contract;

· Contracts must include in at least 14-point bold type, a statement of the homeowner's right to cancel by the earlier of midnight of the fifth business day after the contract is signed, or the last day the homeowner's right of redemption may be exercised;

· Contracts must contain specific language alerting homeowners that signing a promissory note, lien, mortgage or deed could result in permanent loss of their homes, advising them to continue making mortgage payments until a modification has been approved, and recommending they consult with an attorney prior to signing the contract;

· If a contract is written in a language other than English, the distressed home consultant must provide homeowners a separate version in English. Any discrepancies between the two versions will be interpreted in the homeowner's favor; and

· A distressed home consultant has a fiduciary duty to the homeowner, which requires the consultant to act at all times in the best interests of the homeowner, to disclose information to the homeowner that may impact his or her ability to obtain the results sought, and to provide an accounting to the homeowner of all money and property the homeowner has provided to the consultant.[10]

Failure to adhere to these requirements could be grounds to rescind any subsequent agreements and could expose the consultant to civil or criminal liability.

What Practices are Prohibited by the Act?

As mentioned above, the DPCA also regulates the relationship between DHOs and Distressed Home Purchasers (DHP). A DHP means any person who acquires an interest in a distressed home under a distressed home conveyance.[11]

Once it is determined that a home falls within the DPCA, DHPs must comply with its provisions and avoid certain practices, including:

· A DHP must verify a homeowner’s ability to re-purchase the property after entering into a lease-buy back agreement;

· A DHP violates the statute by failing to reconvey the home back to the distressed home owner;

· A DHP must enter into an agreement where the homeowner receives at least 82% of the FMV of the property; and

· A DHP may not represent that they are an advisor acting on behalf of the distressed homeowners’ interest to save the home.[12]

These provisions help ensure that a homeowner in a DHC is left with a fair amount of equity, thus easing their transition into more permanent housing.

A failure to comply with these substantive requirements could also be grounds for rescinding the contract and could expose the DHP to civil liability under Washington’s Consumer Protection Act, as the DPCA recognizes that prohibiting the practices listed above is a matter of public interest. Therefore, homeowners may sue distressed home consultants and distressed home purchasers under the CPA for violations of RCW 61.34, and may recover double or triple the amount of damages available under the Consumer Protection Act.

Jametsky sued Rodney Olsen and sought relief under the distressed property conveyance act. Although the trial court and the appellate court held the property was not “distressed” at the time of the sale, the Supreme Court En Banc, reversed and required the trial court to apply various factors to determine if the home fit within the definition.

The Distressed Home Conveyance Act is designed to safeguard vulnerable homeowners who face the threat of foreclosure. Jametsky is just one example of how the DPCA could protect similarly situated individuals. Therefore, before signing any contracts with a “real estate investor” or distressed home consultant, please contact our office for a free consultation. We sincerely hope this post has been informative for homeowners and real estate investors alike.

[1] Jametsky v. Olsen, 179 Wash.2d 756 (2014).

[2] RESCUING THE RESCUED: STEMMING THE TIDE OF…, 31 U.L. Rev. 353 (2008).

[3] RCW 61.34.030

[4] See Blog Post for Consumer Protection Act (coming soon).

[5] RCW 61.34.020 (5).

[6] Id. At (2).

[7] “Accelerate” means to declare the obligation due and payable.

[8] Such factors include, “the total amount owed to the county including all fees and other costs; (2) the total number of payments the delinquency represents and when foreclosure could occur; (3) the financial ability of the homeowner to meet or cure this obligation at the time of the transaction; (4) any discrepancy between the sale price and the fair market value of the property.” In considering these non-exclusive factors, theoretically, a trial court will be able to accurately conclude whether a distressed property was conveyed and whether the protections of the DCPA apply to the transaction in question.

[9] RCW 61.34.060

[10] http://www.preventloanscam.org/states/washington/mortgage-brokers-procedures-act-regulates-third-parties-helping-homeowners-with-loan-modifications-rcw-19-146

[11] "Distressed home purchaser" includes a person who acts in joint venture or joint enterprise with one or more distressed home purchasers in a distressed home conveyance. RCW 61.34.020(6).

[12] RCW 61.34.120.