THE MARYLAND PROTECTION OF HOMEOWNERS IN FORECLOSURE ACT (PHIFA)
by Mitchell Alkon
In the winter of 2008 I wrote an article entitled, “Alternatives to Foreclosure.” Unfortunately, as the year comes to an end, the news has not improved. Economic conditions have spawned a new cottage industry of “foreclosure consultants.”
Effective April 3, 2008, the Maryland General Assembly passed the Protection of Homeowners in Foreclosure Act (“PHIFA”). PHIFA defines a foreclosure consultant as a person who offers to perform a service that the person represents will (i) stop, delay, or set aside a foreclosure sale; (ii) obtain forbearance from foreclosure from a loan servicer, a beneficiary or a mortgagee; or (iii) save a homeowner’s residence from foreclosure. There are exceptions, including a lawyer performing activities related to his/her regular practice of law, a person holding or servicing a mortgage loan secured by a residence in default, a person doing business under a law regulating banks, trust companies, savings and loans, and credit unions, and licensed real estate brokers.
PHIFA details activities that the foreclosure consultant cannot engage in, including involvement in a foreclosure rescue transaction (i.e., when a residence in default is conveyed by a homeowner who retains a legal or equitable interest in all or part of the property, including a lease-purchase agreement), collection or charging compensation prior to the full performance of the consultant’s obligations, and acquiring any interest in a residence in default from a homeowner with whom the foreclosure consultant has contracted.
The essence of the law is found in the Maryland Code Real Property Article, Section 7-305, which permits a homeowner to rescind a foreclosure consulting contract at any time. The homeowner must repay, within 60 days, any funds paid or advanced by the foreclosure consultant plus interest at 8% per year. However, PHIFA expressly provides that “the right to rescind may not be conditioned on the repayment of any funds.” Homeowners will contend that the right to rescind “at any time” means they can rescind a foreclosure consulting contract well after funds have been disbursed to them, even years later. Foreclosure consultants will point to the repayment provision in PHIFA; homeowners will acknowledge this obligation but argue that it is not a condition to the right of rescission, leaving the foreclosure consultant with a mere unsecured claim against the homeowner.
PHIFA also provides that an owner of a residence in default has the right to rescind a contract for the sale or transfer of the residence within 5 days of execution of the contract. During this 5-day period the deed to the residence cannot be recorded. Within 10 days after receipt of a notice of rescission the purchaser must return, without condition, the original deed, title contract or other document signed by the homeowner. A residence in default is subject to other restrictions. The purchaser cannot represent that he is assisting the homeowner to save the home or make any statement that has the likelihood to cause confusion or misunderstanding. The latter statements include those regarding the value of the residence or the proceeds the homeowner will receive after a sale or transfer.
PHIFA is an attempt by Maryland to regulate this growing industry and protect a vulnerable class of individuals. PHIFA may be applicable when a transaction involves a home in default, and is applicable where a foreclosure is pending, where the seller is a homeowner in default who is being offered a chance to live in the home after the sale, where a power of attorney is used, where a seller is assigning proceeds, and where save-the-home or credit repair promises are made. The rescission rights provided by PHIFA establish a statutory cooling off period for the homeowner in default and provides a warning to those offering assistance that their activities will be scrutinized. A violation of PHIFA may subject the wrongdoer to injunctive relief, attorney fees, triple damages and criminal penalties.
If a homeowner in default is unable to use one of the options described in the Winter 2008 newsletter, a foreclosure consultant may be a last resort. The homeowner should consult with counsel before entering into a contract or transaction with such a consultant. Similarly, persons who seek to do business with homeowners in default as foreclosure consultants should get legal advice about their obligations under PHIFA.
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