Oregon State Bar Bulletin — AUGUST/SEPTEMBER 2009

Bar Counsel
Pitfalls and Perils:
Working with Loan Modification Agencies
By Helen Hierschbiel

Work is slow. Paying clients are dwindling. You are in search of new reliable and steady sources of income. Just when you convince yourself that an unplanned, unpaid sabbatical might not be such a bad idea, you get a call from Acme Express Loan Modification Inc.1

Acme, you are told, is in the business of negotiating loan modifications and staving off foreclosures. They call themselves foreclosure consultants and are doing business in several other states. They want to expand into Oregon but need the help of a lawyer. Having a lawyer to whom they can refer customers ensures that they provide the best and fullest range of services possible. They bring in the clients and pay you a fee to assist clients with filing standardized pleadings to postpone foreclosures. They will do the rest. If they can’t obtain a loan modification for the client, you simply send the client to a bankruptcy lawyer and withdraw. Sounds like pretty easy money in a bad economy, so you ask yourself, why not?

The Kentucky law firm of Brooking, Moeves & Halloran (BMH) could tell you why not. In Cincinnati Bar Association v. Mullaney, 119 Ohio St 3d 412 (2008), the Ohio Supreme Court determined that three BMH lawyers violated at least five Ohio ethics rules as a result of their association with, and representation of customers of, a company called Foreclosure Solutions LLC (FSLLC). One lawyer was reprimanded and another was suspended for one year, with a stipulation that the lawyer committed no further misconduct. A third lawyer, who was integral in forming the relationship with FSLLC, was suspended from the practice of law in Ohio for two years.

Well, you might say, that was in Ohio, not Oregon. Are these companies even doing business in Oregon? If so, would Oregon ethics rules dictate the same result as in Ohio? The OSB general counsel’s office has fielded several ethics inquiries on proposed business arrangements with such companies. In addition, loan modification companies have been on the radar of the Oregon Department of Justice and Department of Consumer and Business Services.2 So we know that at least some companies are trolling for clients and lawyer partners here in Oregon.

No lawyers in Oregon have been disciplined for their involvement with foreclosure consultants or loan modification companies. However, Oregon has had its share of disciplinary cases involving lawyers doing business with living trust mills. Those cases present many of the same ethics issues as the foreclosure consultant scenario.

In each situation, the business sells something in addition to the legal services. The living trust mill often sells annuities or life insurance products while the foreclosure consultant sells its negotiation skills. In both cases, the lawyer provides a service that the business cannot. For the trust mill, it’s drafting or reviewing the estate plan; for the foreclosure consultant, it’s appearing in court proceedings. In both scenarios, lawyers risk assisting with the unlawful practice of law, providing incompetent services and allowing nonlawyers to influence their independent professional judgment.

Unlawful Practice of Law
The first consideration is to avoid aiding nonlawyers in the practice of law. See Oregon RPC 5.5. What constitutes the practice of law can be an elusive concept, but a good generic definition is “…any exercise of an intelligent choice, or an informed discretion in advising another of his legal rights and duties….” Oregon State Bar v. Security Escrows, Inc., 233 Or 80, 89 (1962).3

In Ohio, nonlawyers who advise debtors of their legal rights in foreclosure proceedings and under settlement agreements engage in the unauthorized practice of law. Mullaney, 119 Ohio St 3d at 416, citing Cincinnati Bar Assn. v. Telford, 85 Ohio St 3d 111 (1999). In Mullaney, the court found that the lawyers had facilitated the nonlawyers’ unlawful practice of law by entering into an arrangement with FSLLC, knowing that its agents were going to be negotiating on the debtors’ behalf. Id.

Whether Oregon courts would reach a similar result is an open question. In State ex rel Oregon State Bar v. Lenske, 284 Or 23 (1978), the court determined that Lenske’s efforts to help his client solve her property problems (by dealing with delinquent mortgages and trying to sell the property) were activities that a business consultant or real estate agent could have done and therefore were not the practice of law. Whether a loan modification company would be engaging in the practice of law would depend largely on the exact nature of the assistance provided to the debtors.

The difficulty for lawyers who partner with loan modification companies is knowing whether the company agents are staying within the bounds of the law when the lawyers have no supervision over the agents’ activities. In re Morin, 319 Or 547 (1994), stands as a stark reminder of the risk of allowing nonlawyers too much freedom in handling matters that are likely to require legal advice or assistance.

In Morin, the lawyer set up living trust seminars to facilitate the sale of living trust packages. The lawyer often sent his paralegals to the seminars on their own to conduct the seminars and to interview potential clients, instructing them not to give legal advice in the process. The court determined that “… even if the accused did not intend for the paralegals to practice law, he assisted in that unlawful practice by allowing them too much freedom in dealing with clients, thereby allowing at least (one paralegal) to provide legal advice to those clients.” 319 Or at 564.

Similarly, lawyers who work with loan modification companies risk facilitating the unlawful practice of law if the nonlawyers who negotiate loan modifications on behalf of debtors are found to have provided legal advice or other services only a lawyer should provide.

Competence, Diligence and Communication
Competent and diligent representation requires: 1) devoting the necessary legal knowledge, skill and preparation to the representation; 2) not neglecting the client’s matter, and; 3) communicating with the client to the extent necessary for the client to make informed decisions about the representation. See RPC 1.1, 1.3 and 1.4. Like trust mills, loan modification companies often do not contemplate the lawyer ever meeting or speaking with the clients. Instead, the lawyer relies on a third party to communicate with the clients and gather or provide information. By doing so, lawyers risk violating the duties of competence, diligence and communication. The work may appear routine, but there is often no way of ensuring that the third party is either trustworthy or capable, or that the client is making informed choices.

In Mullaney, FSLLC gathered customer information and forwarded its files to the lawyers. The lawyers sent the clients informational brochures and responded in court with standardized pleadings. The lawyers typically did not meet or speak with the clients to determine their particular needs or objectives. Instead, they used boilerplate correspondence, leaving it to the clients to identify possible defenses to the foreclosure. The Ohio Supreme Court determined that this arrangement resulted in the lawyers violating, among other things, their duty to provide competent representation. 119 Ohio St 3d at 415.

The decision in In re Britt, 20 DB Rptr 100 (2006), suggests the result in Oregon would be the same as in Mullaney. Britt shared office space with a financial planner who asked Britt to help one of his clients. Based solely on information the planner provided and without meeting or speaking with the client, Britt prepared a power of attorney and amendments to the client’s trust which named the planner as the new trustee and attorney-in-fact. Using these documents, the planner then liquidated and converted the client’s assets to his own use. While Britt was not implicated in the criminal activity for which the planner was ultimately convicted, he was suspended from the practice of law for six months for, among other things, providing incompetent representation.

Independent Professional Judgment
Oregon RPC 5.4 prohibits lawyers from sharing legal fees with nonlawyers; RPC 1.8(f) prohibits lawyers from accepting compensation for representing a client from a third person unless, among other things, there is no interference with the lawyers’ independent professional judgment. The purpose of both rules is to protect the independent professional judgment of lawyers. Where a lawyer accepts payment of fees from, or shares legal fees with, a nonlawyer third party, there is a risk that the nonlawyer will exert improper influence over the lawyer in rendering advice to the client.

The court in Mullaney found the lawyers had improperly shared legal fees with a nonlawyer because all the fees paid to FSLLC were determined to be legal fees. FSLLC collected a flat fee from the client, from which it paid the lawyers a flat fee for their services.

Whether Oregon courts would reach a similar result is unclear. A lawyer who merely contracts with the company to provide legal services and who receives money collected by the foreclosure consultant for that specific purpose is not sharing the fees; the foreclosure company is being paid a separate amount for its services and presumably not receiving any portion of the lawyer’s fee. In any event, lawyers who work with loan modification companies should carefully examine the method of compensation for the lawyer and the company.4

Further, it is clear that lawyers who are paid by loan modification companies to provide legal services to debtors must ensure that their independent professional judgment is not impaired by virtue of their association with the company. One of the grounds for suspension in Britt was the lawyer’s violation of RPC 1.8(f).5

If It Sounds Too Good to Be True
Getting involved with a loan modification company can be a risky undertaking for lawyers. While the proposal may promise easy money, lawyers should ensure that the business arrangement does not result in the lawyer assisting in the unlawful practice of law, prevent the lawyer from providing competent representation and communicating effectively with the client, or influence the lawyer’s independent professional judgment.


1. A fictitious business not to be confused with the Acme Company out of Walla Walla, Wash.

2. See DOJ press release of March 4, 2009, at www.or.us/releases/2009/rel030409.shtml. In response to a growing number of loan modification companies soliciting business in Oregon, the Oregon legislature adopted the Mortgage Rescue Fraud Protection Act in February 2008.

3. See also Oregon State Bar v. Smith, 149 Or App 171, 183 (1997) (defining the practice of law as the “exercise of professional judgment in applying legal principles to address another person’s individualized needs through analysis, advice, or other assistance.”)

4. For more information about impermissible fee-sharing, see OSB Formal Ethics Ops 2005-168 and 2007-180.

5. For an excellent discussion of lawyers duties under RPC 1.8(f), see Stevens, “Avoid Serving Two Masters,” OSB Bulletin (July 2009).

Helen Hierschbiel is deputy general counsel for the Oregon State Bar. She can be reached at (503) 620-0222, or toll-free in Oregon at (800) 452-8260, ext. 361, or by e-mail at hhierschbiel@osbar.org.

Ethics opinions are published and updated on the bar’s website here.

An archive of Bar Counsel articles in available here.

© 2009 Helen Hierschbiel

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