United States: HUD Issues Charge Of Discrimination Against Mortgage Modification Companies

The U.S. Department of Housing and Urban Development (HUD) recently issued a charge of discrimination under the Fair Housing Act (Act) against Louis Liberty & Associates, a PLC dba The House Lawyer, Liberty & Associates, a PLC dba The House Lawyer (THL), and owners, employees and agents of THL (collectively, the "Respondents"), one of which was an attorney. The charge was issued in connection with complaints filed with HUD by specific, unidentified mortgage loan borrowers (the "Complainants"). While HUD asserts that Respondents engaged in illegal and unfair mortgage modification assistance, the basis of the charge alleging violations of the Act is that the Respondents targeted Hispanic mortgage loan borrowers and, thus, violated certain of the Act's prohibitions against discrimination based on national origin.

Among other prohibitions, the Act prohibits (1) discriminating against a person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, and (2) discriminating against any person in making available a residential real estate-related transaction, or in the terms, or conditions of any such transaction, because of race, color, religion, sex, handicap, familial status, or national origin. The Act defines a "residential real estate-related transaction" as (1) the making or purchase of loans or providing other financial assistance (a) for purchasing, constructing, improving, repairing, or maintaining a dwelling, or (b) secured by residential real estate, or (2) the selling, brokering or appraising of residential real property. The Act also provides that it is unlawful to coerce, intimidate, threaten, or interfere with any person in the exercise or enjoyment of, or on account of the person having aided or encouraged any other person in the exercise or enjoyment of, any right granted or protected by sections of the Act that include the foregoing prohibitions.

HUD asserts that the Respondents violated the Act by:

• Discriminating against the Complainants in the provision of services or facilities in connection with the sale of a dwelling.
• Discriminating against the Complainants in making available residential real-estate related transactions, and in the terms or conditions of such transactions, because of national origin.
• Interfering with the Complainants' exercise or enjoyment of rights granted or protected by the sections of the Act containing the prohibitions set forth in the first sentence of the prior paragraph.

The charge includes factual allegations of HUD regarding the Complainants, and also includes general factual allegations regarding the conduct of the Respondents. The general factual allegations include the following:

• The Respondents marketed and sold illegal or unfair mortgage modification services to financially distressed California homeowners, targeted Hispanic borrowers for financial assistance, and most of the THL clients were Hispanic.
• Most of THL's radio, television and online advertisements were in Spanish, and THL radio and television advertising aired on Spanish-language stations.
• THL's advertisements contained deceptive information regarding THL's ability to obtain loan modifications and THL's fee payment structure, and also discouraged borrowers from seeking free loan modification assistance.
• In a particular advertisement, one of the Respondents stated that "no one works for free" and that "if someone states that they will help you for free, please watch out . . .", and falsely stated that THL "only requires individuals to pay after each step of the process has been completed."
• THL's staff made false, inaccurate or misleading representations during in-person consultations with prospective clients regarding the extent of mortgage relief THL would obtain on their behalf, and the prospective clients' obligation to continue making mortgage payments while seeking a mortgage modification. THL staff also discouraged clients from seeking legitimate loan modification services.
• The Respondent who was an attorney was solely responsible for the legal services offered by THL.
• While California law prohibited attorneys from charging or collecting legal fees for loan modification services prior to the completion of those services, the Respondents charged clients fees of approximately $2,500 for the provision of mortgage modification services under a Modification Package Attorney-Client Fee Agreement, and approximately $750 to $1,000 for services under a Negotiation Package Attorney-Client Fee Agreement, and that some, if not all, of the fees were typically paid before the Respondents completed the full scope of the services that they represented they would perform at the initial appointments with clients.
• The Respondents also charged clients a recurring monthly fee of $50.
• When prospective clients did not appear to qualify for a loan modification because they were current on their mortgage payments, the Respondents routinely advised them to stop paying their mortgages, and the Respondents failed to provide accurate information, or provided inaccurate information, to clients about the risks involved in not paying their mortgages.
• The Respondents' mortgage modification activities were conducted almost exclusively by non-attorneys, even though the Respondents' advertisements and agreements misleadingly stated that mortgage modification clients would be receiving the services of an attorney.
• The Respondents routinely interfered with clients' relationships with their lenders by instructing clients to stop communicating with their lenders. The Respondents provided clients with a document titled How To Handle The Bank During The Loan Modification Process that advised clients that if their bank threatened foreclosure, they should not interfere with THL's lender negotiations, and instead should forward all lender communications to THL. Nevertheless, the Respondents regularly failed to answer or return clients' phone calls and failed to provide updates regarding the status of clients' loan modification applications.
• After convincing clients to stop paying their mortgages, collecting fees for loan modification services, and making promises that they would obtain loan modifications for clients, THL abruptly sent disengagement letters to clients and closed its office.

The alleged conduct regarding the Complainants began nearly 10 years ago, and the complaints were filed in December 2012 and July 2013. HUD states that in July 2013, the State Bar of California found that the practices of the Respondent who was an attorney violated California law by (1) collecting an advance fee for loan modification, and (2) taking a lien on real estate, personal property or other security to secure payment of this fee for mortgage loan modification work. HUD also states that in August 2015 the California Bureau of Real Estate revoked the same individual's real estate license.

HUD seeks an order that:

• Declares that the Respondents' practices violated the Act.
• Enjoins the Respondents from discriminating against any person because of national origin in any aspect of the sale or rental of a dwelling, including services in connection therewith, and/or in any residential real estate-related transaction.
• Awards such damages as will fully compensate the Complainants for any and all damages caused by the Respondents' conduct.
• Assesses a civil penalty against each Respondent for each separate and distinct discriminatory housing practice that the Respondent is found to have committed.
• Awards additional relief as may be appropriate.

Based on the number of mortgage borrowers facing financial hardship as a result of the COVID-19 pandemic, it will be interesting to see if HUD, or other regulators, will challenge companies providing loan modification services or similar services, or mortgage loan servicers, under fair housing or fair lending laws if the services provided by the entities are considered to be illegal, unfair, deceptive or abusive and are targeted to certain protected groups, or the services vary based on whether a borrower is or is not a member of a protected group. Please see our recent blog post addressing an article that advocates that regulators and private individuals should consider challenging discrimination as an "unfair" practice covered by federal and state laws prohibiting unfair, deceptive, or abusive acts and practices.

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