If you are just starting a loan modification business, adding loan modification services to your existing business, or are about to do either, you will need to research and address several different legal issues before you begin. Every state has different rules and laws regarding modifications, so it’s best to find this stuff out beforehand, rather than after you’ve been fined or even arrested for breaking the law.
First off, you’ll want to find out who can do modifications in your state and who cannot. Are there any licensing or certification requirements? Are real estate brokers allowed to do modifications? Are mortgage brokers allowed to do modifications? Can you simply outsource an attorney to write the letters for you, while you just handle the sales and “processing” (i.e. you do everything but sign the pre-written letter that you send over to the attorney to print and sign)?
You’ll want to decide which states you want to do modifications in, and what the different licensing requirements are for each state. Furthermore, you may need to get special licensing or certification, and possibly submit to expensive audits, in order to do modifications on FHA and VA loans, so make sure you look into this before you agree to take on an FHA or VA loan modification.
Can you pay referral fees to just anyone in your state? How much are you allowed to pay? Can you pay referral fees to mortgage brokers and/or real estate brokers? Many state-level real estate and mortgage oversight boards and commissions can get really touchy about this issue, so make sure you don’t cross any lines you shouldn’t be crossing. What about referral fees to accountants, bankers, and financial planners? Many states have regulations about referral fees to these professionals too, so find out before you start throwing money around.
Be careful about who in your company has access to your clients’ personal files and information. For that matter, be careful about who even discusses these issues with your clients and their lenders, as your release forms will necessarily be pretty limited in their ability to protect you. Some states even require you to have locking filing cabinets and a certain level of firewall protection, password logins for you computers, and other internet safety before you can even begin your first modification.
Be aware that some states do not allow you to charge up-front fees for your services. Even if your state doesn't care, you run the risk of a lawsuit by a frustrated client if the modification is unsuccessful, even if it’s not technically your fault.
Consider having an attorney draft some of your forms, including your Client Authorization, your Client Services Agreement, and any other disclaimer or important form. These are your only protection from lawsuits, so don’t let them be shoddy and loose. Spend the money to ensure that both you and your clients are fully protected. For that matter, you may even want to print this article up and take it to a local real estate attorney to help you answer these important questions. Your state real estate and/or mortgage commission may be able to help you as well.
