Bulletin: RI2008001

Dear Associates:

Foreclosure rescue scams continue to be a problem in Rhode Island and nationally. Rhode Island previously enacted legislation addressing this issue in 2006entitled "MORTGAGE FORECLOSURE CONSULTANT REGULATION", now known as R.I.G.L. 5-79-1, et. seq.

The intent of the legislation was to restrict the practices of mortgage foreclosure consultants whose motivation is to "rescue" distressed borrowers with the promise of a "foreclosure reconveyance" as defined in the statute. While the legislation did not specifically prohibit consultants from assisting these borrowers, it did put limitations and controls on the services of the consultant, as well as carve out exemptions for persons and entities who may be involved in assisting or providing advice or services to the distressed borrower in the normal course of business. (See R.I.G.L. 5-79-1(b)(1-10, inclusive).

The term "foreclosure reconveyance" is defined as:
"The transfer of title to real property by a foreclosed homeowner during a foreclosure proceeding, either by transfer of interest from the foreclosed homeowner or by the creation of a mortgage or lien or encumbrance during the foreclosure process that allows the acquirer to obtain title to the property by redeeming the property as a junior lienholder; and
The subsequent conveyance, or promise of a subsequent conveyance, of an interest back to the foreclosed homeowner by the acquirer or a person acting in participation with the acquirer that allows the foreclosed homeowner to possess the real property following the completion of the foreclosure proceeding, which interest includes, but is not limited to, an interest in a contract for deed, purchase agreement, option to purchase or lease."

Under R.I.G. L. 5-79-3, a written contract is required which must fully disclose the nature and services to be provided by the foreclosure consultant and the total amount and terms of compensation. The statute further mandates that the contract be in the same language that the consultant used to negotiate the transaction and contain a specific notice in (fourteen) 14 point boldface type. Each transaction is further subject to a three (3) day notice of cancellation which cannot be waived by the homeowner. (For specific details on the contract requirements, see R.I.G.L. 5-79-3.)

From a title insurance perspective, any waiver of the provisions of the chapter by the owner renders the transaction void and unenforceable. Any attempt by the foreclosure consultant to attempt to have the owner waive any of its provisions is a violation of the chapter, subject to the remedies provided therein as well as those enumerated in R.I.G.L. 6-13.1-5.2. These remedies may include judgment against the foreclosure consultant for actual and punitive damages, attorney’s fees and costs, and other equitable relief.

Closing agents must carefully scrutinize any transaction which may be subject to these statutory provisions and exercise extreme caution in determining those transactions which may embody facts that indicate an improper "rescue" is in the works. One way to make a cursory determination is to simply ask the seller/owner if they have received an acceleration notice or notice of foreclosure of any mortgage currently encumbering the property. Look for:

1. A seller who may retain possession of the property after the transaction;
   
   
2. A transaction where the existing debt is not being paid off and the seller is not being specifically released by the lender;
   
   
3. Creative transactions which include leaseback arrangements, options torepurchase or other equity participation.

The insurance of these types of transactions are considered a risk and may not be insured without the written approval of a Stewart Underwriter. Please refer these transactions to state underwriting counsel for analysis and approval.

Please review the statutory requirements and if you have any questions or doubts, contact the state underwriter for further guidance before issuing title insurance.