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MCLE Self-Assessment Test

Bar targets new breed of loan modification scams

By Amy Yarbrough
Staff Writer

A Southern California firm focused on foreclosures ran a scheme so aggressive that even the State Bar’s managing director of investigations, mistaken for a homeowner in distress, received five different offers to rescue his home from foreclosure.

Set up in an office building in a nice part of Ontario, Calif., Realty Group & Consulting is accused of operating a sham law firm with the help of local attorney Gary David Tracy. Court documents allege that the firm pledged to help clients fight bank foreclosures. But instead of preventing them, the firm bilked clients out of thousands of dollars in dubious legal fees and they still lost their homes.

Since February 2009, loan modification fraud has led to discipline for 121 attorneys, including 28 who have been disbarred. 

The case involving Realty Group was just one of the nearly 12,000 loan modification complaints the State Bar has received since it began logging them in early 2009.

Managing Director of Investigations John Noonen found himself in the crosshairs of a persistent Realty Group saleswoman named Natalie after calling a toll-free number given to him by one former client.

“Apparently, they unblocked my cell phone and read my number as a potential customer hang-up call,” Noonen explained in a declaration filed in San Bernardino County Superior Court that helped shut down Realty Group in September.

Believed to have ensnared dozens of vulnerable homeowners, Realty Group used an increasingly popular scam, one of several that have been festering since the financial crisis began, authorities say. According to State Bar investigators, Tracy allowed non-lawyers to use his name and law license to file bogus bankruptcy petitions, stalling the inevitable loss of clients’ homes. The State Bar has not yet filed formal disciplinary charges against him.

Joe Dunn, CEO/executive director of the State Bar, said this bankruptcy fraud tactic seems to be new, although similar scams have fleeced vulnerable homeowners at various stages of the foreclosure process.

“On that slide down they’ve been targeted every step of the way,” Dunn said. “It’s the same consumers tumbling down the economic ladder and the same core group of non-lawyers.”

Often, non-lawyers find vulnerable attorneys to draw into their scheme, he added. “Some lawyers don’t know they’re being used.”

To help combat the problem, the State Bar has participated in periodic foreclosure fraud summits with the U.S. Department of Justice, the state Attorney General's office, the Federal Trade Commission, Consumer Financial Protection Bureau and other agencies.

By discussing the latest fraud schemes and passing along new information, agencies aren't duplicating efforts and ultimately get a jump on the latest scam, according to Evan Davis, an assistant U.S. Attorney who has helped to organize them.

“Every time one organization gets shut down either legislatively or otherwise, [the scam] merely changes,” he said.

Since February 2009, the State Bar’s Office of Chief Trial Counsel has received 11,751 complaints related to loan modification. Of them, the bar has filed disciplinary charges in 1,432 cases involving 179 licensed California attorneys. Of those cases, 1,028 resulted in discipline involving 121 attorneys, and 396 cases have resulted in the disbarment of 28 attorneys.

Another 390 cases involving 69 attorneys are still pending before the State Bar Court, and some 284 matters involving 129 attorneys are being actively investigated.

State Bar investigations have increasingly targeted lawyers working with organizations run by non-attorneys who claim they can file predatory lending lawsuits to rescue clients from foreclosure. After being convinced to stop making mortgage payments, the homeowners end up losing their property and thousands of dollars in the process.

In November, a State Bar Court hearing judge recommended disbarment for one such attorney, Sharon Lapin, 57, of Greenbrae. She was found culpable of multiple counts of professional misconduct, including moral turpitude, aiding the unauthorized practice of law, sharing fees with a non-lawyer and participating in a non-legal lawyer referral service. According to State Bar prosecutors, Lapin made $177,000 as a result of the scheme, while doing virtually no legal work.

Yet another type of scheme involves false promises to work with lenders to modify clients' loans.

In what may be the biggest such case handled by the Office of Chief Trial Counsel, attorney Vafa Allan Khoshbin admitted in May 2012 to misappropriating $1.1 million from 10 clients and agreed to be disbarred. Khoshbin had falsely claimed he could get clients' first mortgages modified and their second mortgages settled for pennies on the dollar.

As for Tracy, the attorney accused of participating in the bankruptcy filing scheme, his involvement with clients appears to have been minimal, if any, according to investigator Noonen's declaration. In it, Noonen notes that Tracy's Realty Group office appeared empty, other than a picture on the wall.

“Most of the clients I interviewed had never met him, the court records showed no appearances by him in any of the pending matters, and when he appeared before two bankruptcy judges to answer questions about the office, he didn't know his own phone number and could not detail the number of bankruptcy petitions they filed,” he wrote.

Realty Group is accused of filing at least 80 “bad faith” bankruptcy petitions on behalf of clients, many of whom had no idea those documents had been filed in their names.

Davis, the assistant U.S. attorney, said some scammers have even gone so far as to file bankruptcy petitions using fake names to stall foreclosure, or to piggyback onto someone else's bankruptcy, claiming that person had a stake in an unrelated client’s pending foreclosure. If the deception was uncovered, they moved on to another fake petitioner.

“It can last six months, but if lenders are not on the ball it can literally mean years,” he said.

Davis said foreclosure fraud will continue to be an unrelenting issue because “people are going to be underwater for years on these homes in California and elsewhere.”

“It’s going to be a big problem for a long time,” he said.