Co-writer John Davis, Schwabe, Williamson & Wyatt
A new state law is causing waves in the Washington real estate industry. House Bill 2791, which went into effect June 12, is intended to protect financially distressed homeowners from predatory “equity skimming” and “foreclosure rescue” scams.
The recent downturn in housing has resulted in an increased number of schemes that promise to save homes, but all too often strip the equity from the property and leave the homeowner with nothing but charges for unnecessary or nonexistent services.
The Legislature enacted HB 2791 to target these practices by providing additional rights for distressed pre-foreclosure homeowners and additional duties for distressed home consultants and purchasers.
However, some critics argue the new law is onerous and will dissuade honest real estate consultants from providing potentially home-saving services to distressed owners.
Know this about the new law:
• It is broad. The law protects any homeowner who is in default, 30 days late on a mortgage payment, at risk of losing the home due to unpaid taxes or simply “believes” he or she will default on a mortgage in the next four months.
• It imposes duties on “distressed home consultants” – any person who contacts a distressed homeowner and offers to perform services, such as stopping a foreclosure sale, refinancing a loan or arranging a repurchase option.
• A real estate broker who sells a distressed home or conducts a short sale prior to foreclosure, for example, could be considered a distressed home consultant. These consultants must, among other things, provide detailed written contracts specifying exactly what services will be provided. Financial institutions, mortgage brokers and a few other groups are not distressed home consultants and are not charged with these additional duties.
• Purchasers must make a meticulous financial inquiry to verify the homeowner has the ability to make rental payments and buy the home back. If the homeowner does not repurchase the foreclosed home, the original homeowner must be given at least 82 percent of the fair market value of the home.
• At no time may distressed home purchasers enter into a transaction with a homeowner that is unfair or commercially unreasonable. Additionally, the law provides homeowners five days to cancel any sale contract with the purchaser.
• It imposes fiduciary duties on all distressed home consultants. They must act in the best interests of the distressed homeowner at all times, disclose all known material facts that may reasonably affect the distressed homeowner’s rights and perform all duties with reasonable care.
Although this change shouldn’t affect most real estate transactions, it may dissuade many professionals from offering services to homeowners in danger of foreclosure.
Complying with the new law may be time-consuming and expensive, particularly for real estate brokers. Standard real estate transaction forms and listing agreements must be redrafted and re-signed by sellers. Furthermore, brokers already are heavily regulated by the state and it is not yet clear how HB 2791 will be applied to the existing laws.
Because homeowners do not have to say whether they are distressed, many in the industry are worried about being blindsided with post-sale legal claims. Real estate professionals who unknowingly work with sellers who didn’t divulge their state of affairs could later be liable for failing to comply with the strict requirements of the law.
Failure to comply with the law is considered a violation of the Consumer Protection Act. Distressed homeowners can sue for actual damages, attorney fees and up to $100,000 in additional treble damages.
For now, because of the ambiguities created by the law, professionals who work in the pre-foreclosure market are well advised to seek legal advice before assisting sellers.
Matthew Bisturis is an attorney in Schwabe, Williamson & Wyatt’s Vancouver law office, focusing his practice in the areas of real estate and business. He can be reached at 360-905-1113 or mbisturis@schwabe.com. John Davis is a third year law student at Willamette University College of Law, clerking in the Vancouver office.
