New state law aims to slam door on scam artists targeting homeowners facing foreclosure

As a Seattle housing counselor, Donna Dziak says she's seeing a heartbreaking trend: a growing number of older, financially troubled homeowners losing their homes to scam artists.

Now there's a new state law to protect them.

These homeowners don't fall victim because they're greedy, says Dziak, the housing-counseling program manager for Solid Ground, a nonprofit social-services agency.

Rather, she says, "they're faced with a primary crisis — a family issue, a health issue or an employment issue — so they're already under duress."

That puts them behind on their mortgage payments and soon foreclosure is looming.

Then they are contacted by someone with a plan to "rescue" them. Before they know it, the home they've lived in for years is gone.

"If you think of being under a lot of stress and needing money quickly, it's easy to see why they would make those decisions," Dziak says.

The new law reins in the actions of so-called distressed-home consultants who solicit homeowners with offers to help postpone a foreclosure, buy their house temporarily or sell it and share the proceeds.

Or they may say they can help them work out a deal with their lender or get a new loan.

Many homeowners sadly learn later the promises were bogus and that they permanently signed their home over to a scammer who found them by trolling through public foreclosure notices. The illegal practices are called equity stripping.

Organizations and individuals not considered distressed-home consultants are nonprofit credit-counseling services, licensed attorneys, financial institutions or real-estate agents acting in certain capacities. All may legitimately offer aid to homeowners in trouble.

"We didn't attempt to make distressed-home sales illegal; we simply wanted to impose conditions based on our experience with the complaints we've been receiving," says state Attorney General Rob McKenna, who spearheaded the legislation. It passed as House Bill 2791.

"Our goal is to get word out that you can't take unfair advantage of people in vulnerable situations," adds Dave Huey, an assistant attorney general.

"If you're going to be involved in dealing in foreclosed properties — and there's nothing inherently unlawful in dealing in foreclosed properties — there's someone looking out. It's just not open season on people suffering foreclosure," Huey says.

Washington follows several states in enacting such protections. The legislation was passed in March and became law June 12. Among the fine points:

• All distressed-home consulting transactions must be in writing in the language the consultant used to describe the services to the homeowner.

• The document must fully disclose the exact nature of the services and include the consultant's name and address.

• It must contain, in large type, the following disclaimer: "This is an important legal contract and could result in the loss of your home."

• Homeowners have five days after signing to cancel the contract; there can be no penalty for doing so.

Breaking the law is a felony. But the thing that makes this law unique, says Huey, is the civil-penalty provision. A homeowner can sue and potentially get triple damages. State law rarely allows so high an award. They can also sue for attorney's fees and costs.

Huey says hard statistics on equity-stripping scams don't exist; however "we're seeing a significant increase in the number of cases."

Dziak says she, too, has seen an increase. That's why she's in favor of the new legislation.

"It's important to protect vulnerable residents in our community, and especially for elders it's going to be helpful," she says.

Other new state

housing laws

Here are summaries of other new housing-related legislation taking effect this month.

• HB 2770: Homeownership Security

This requires additional disclosure of key mortgage conditions to borrowers, puts limits on prepayment penalties, prohibits negative amortization for subprime residential loans, prohibits the steering of consumers into higher cost loans and establishes a framework and penalties for mortgage-fraud crimes. For example, it's now a felony punishable by up to five years in prison to receive compensation in connection with a mortgage closing that resulted from a fraudulent practice.

• SB 6381: Mortgage Brokers

This says mortgage brokers have a fiduciary duty to act in the borrower's best interest, disclose all other interests to the borrower, refuse to accept undisclosed compensation for an expense paid by the borrower, follow the borrower's instructions and disclose all material facts that could affect the borrower's interests. Brokers may collect a fee for services if the fee is disclosed before the services are provided.

• SB 6272: Financial Literacy

This requires the state Department of Financial Institutions to provide financial education and homeownership counseling, and funds it.

Elizabeth Rhodes: erhodes@seattletimes.com