Mortgage Fraud Litigation Forecast for the New Economic & Technological Climate

1. Mortgage Fraud Litigation Forecastfor the New Economic & Technological Climate Stuart B. Wolfe Wolfe & Wyman LLP

2. Fraud Forecast for the New Climate Overview • Fundamentals of Fraud Litigation • Fraud on Owners • Home Equity Sales Act (CA) • Foreclosure Consultant Regulations (CA) • Electronic Recording Delivery Act (CA)

3. Fraud Forecast for the New Climate • Fundamentals of Fraud Litigation • ID type of fraud • ID size & scope of fraud • ID target defendants • Asset & income stream investigations • Insurance and bond info • ID litigation forum • Location • ADR? • Determine causes of action • Breach of contract – easiest • Consider effect of pleading intentional torts on possible insurance

4. Fraud Forecast for the New Climate • Fundamentals of Fraud Litigation – Cont’d. • Special Litigation Considerations • Consider need for pre-judgment writs against thinly capitalized target defendants • Consider lis pendens issues • Consider fraudulent conveyance issues

5. Fraud Forecast for the New Climate • Fundamentals of Fraud Litigation – Cont’d. • Other Special Considerations • Title insurance company target defendants • Malicious prosecution issues • Criminal referrals

6. Fraud Forecast for the New Climate • Fraud On Owners: • Home Equity Sales Act (CA) CA Civ C. §§ 1695 et seq. • Enacted: 1979 • Designed to protect and inform homeowners in foreclosure from “fraud, deception, and unfair dealing by home equity purchasers…[who] are vulnerable to the importunities of equity purchasers who induce owners to sell their homes for a fraction of their fair market values through the use of schemes which involve oral and written misrepresentations, deceit, intimidation, and other unreasonable commercial practices.”

7. Fraud Forecast for the New Economic & Technological Climate • Fraud On Owners: • Home Equity Sales Act (CA)–Cont’d. • Included Transactions & Definitions: • Act regulates sales and transfers of a “residence in foreclosure” (RIF) to an “equity purchaser” (EP) • RIFs - O/O, 1-4 units • Act calls any contract for sale of a RIF as a “home equity sales contract” (HESC) • Persons Regulated: • EPs - Any person who acquires title to a RIF • Exceptions include: o/o purchasers, spouse, certain relatives • Representatives of EPs

8. Fraud Forecast for the New Economic & Technological Climate • Fraud On Owners: • Home Equity Sales Act (CA)–Cont’d. • Requires written HESC with certain specifics • Establishes Right to Cancel (and requires notice) • Restricts Deed to EP prior to expiration of cancellation period • Provides for EP property alienation restrictions during: • Cancellation period • Repurchase option period • Establishes heightened duties owed by EPs to Sellers • Other miscellaneous prohibitions and restrictions

9. Fraud Forecast for the New Climate • Fraud On Owners: • Home Equity Sales Act (CA)–Cont’d. • Establishes regulations on representatives of Equity Purchasers • Broad definition of “representative” and involvement • DRE License • Bond Requirements • Declaration of Same • Failures make HESC “void” (c.f. “voidable”) • Establishes Limited Protections for Bona Fide Purchasers and Encumbrancers

10. Fraud Forecast for the New Climate • Fraud On Owners: • Home Equity Sales Act (CA) – Cont’d. • Remedies • Equitable: • Rescission – Rescission period does not commence until notice provided (no limitation) • EP representative's failures make HESC “void” (c.f. voidable; c.f. BFE protections) • Monetary Damages: • 4 year SOL • Atty fees • Punitive damages • Criminal Sanctions

11. Fraud Forecast for the New Climate • Fraud On Owners: • Foreclosure Consultants Act (CA) • CA Civ C §§2945 et seq. • Enacted: 1979 • Designed to protect homeowners who are in foreclosure from “fraud, deception, harassment, and unfair dealing by foreclosure consultants … [who] charge high fees, the payment of which is often secured by a deed of trust on the residence to be saved, and perform no service or essentially a worthless service.” [Emphasis added.]

12. Fraud Forecast for the New Climate • Fraud On Owners: • Foreclosure Consultants Act (CA)-Cont’d • Included Transactions & Definitions • Foreclosure Consultant (FC) defined as one who, for compensation, solicits to, offers to, or does in fact represent an owner of a Residence in Foreclosure (RIF), or otherwise to perform services for a RIF owner, relating to f/c avoidance / postponement, loan modification, new loan to avoid f/c, repairing credit due to f/c and much more (very broad) • Certain types of professionals excepted from definition of FC: • Attorneys • CPAs • Many types of lenders (but limits on CA DRE licensees) • Others • Regulated Activities – very expansive

13. Fraud Forecast for the New Climate • Fraud On Owners: • Foreclosure Consultants Act (CA)-Cont’d • Requires written FC Contracts (FCCs) with certain specifics • Prohibitions & Regulations: • No payments until completion of services • No security permitted to repay fees for services • 10% interest cap on direct loans • No compensation from third parties without disclosures • FC can not receive an interest in the PIQ • Severe limits on POAs from RIF owner • No arbitration provisions • Others • Liens and interests obtained by FCC in violation of Act are “Voidable” • Establishes Right to Cancel (and requires notice)

14. Fraud Forecast for the New Climate • Fraud On Owners: • Foreclosure Consultants Act (CA)-Cont’d • Establishes Regulations on Representatives of FCs • Broad definition of “representative” and involvement • DRE license • Bonded requirements • Declaration of same (written) • Failures “shall, at the option of the [RIF] owner, render the FCC void.” • Establishes limited protections for Bona Fide Purchasers and Encumbrancers

15. Fraud Forecast for the New Climate • Fraud On Owners: • Foreclosure Consultants Act (CA)-Cont’d • Remedies • Equitable • Rescission – Rescission Period does not commence until notice provided (no limitation) • Monetary Damages • 4 year SOL • Atty fees • Punitive damages • Criminal Sanctions

16. Fraud Forecast for the New Climate • Electronic Delivery Recording Act (CA) - EDRA • AB 578 / Govt. C. §§27390 – 27399 (CA) • Grant of authority permitting counties to allow certain persons to submit instruments affecting interests in real property in either a digitized or digital format for recordation • No fundamental / conceptual change in Recording Act • Tension: marketplace efficiencies vs. new variations of fraud

17. Fraud Forecast for the New Climate EDRA (CA) – Cont’d. Potentially Eligible “Authorized Submitters” • Title Insurers • UTCs • Govt. Entities • “Institutional Lenders” per Fin. C. §50003(j) • Not CFLs or DREs

18. Fraud Forecast for the New Climate EDRA (CA) – Cont’d. Prerequisites • AG promulgates regs • County’s “Electronic Recording Delivery System” certified by AG • Approval of ERDS by county bd. of sups. • Contract between county recorder and potentially eligible Authorized Submitter

19. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. Submissions

20. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. Who May Record?

21. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. Periodic Security Audit

22. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. Notarial Acknowledgment

23. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. Ingredients for Fraud

24. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. • § 27391(e): “When a signature is required to be accompanied by a notary’s seal or stamp, that requirement is satisfied if the electronic signature of the notary contains…[notary’s name, title, commissioned county & no. and seal ID no.]” • All required notary info public • Security dependent on technological standards for “electronic signatures” Notary’s Electronic Signature

25. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. • No restriction that “Authorized Submitter” can only submit docs in a transaction in which it is involved • OC Pilot Project: no auto-log off? • Consider requirement that a bio-ID be required and recorded for each recordation/transaction • Solutions: AG regs? Additional Sources of Potential Fraud

26. Fraud Forecast for the New Climate ERDA (CA) – Cont’d. • Mortgage lending now anonymous • Notary bond only $15k • Digital recordation of recons: possibility of eliminating notary requirement? • Recording date vs. Index date • DRE & CFL lenders? • Technology key to success: bio-ID, secure lines, careful security of individual access holders, passwords, encryption, etc. (AG regs?) Additional Notes & Comments

27. Fraud Forecast for the New Climate Questions/ContactInformation Stuart B. Wolfe, Esq. 5 Park Plaza, Suite 1100 Irvine, California 92614 (949) 475-9200 SBWolfe@WolfeWyman.com WolfeWyman.com ORANGE COUNTY - LOS ANGELES COUNTY - SAN FRANCISCO BAY AREA