June 12, 2008

Distressed Homeowner Lease/Option Programs
Now Regulated in Washington

Governor Gregoire signed a bill that will regulate what many real estate agents market as “lease/option programs” for distressed homeowners.  It  takes effect on June 12, 2008.

The 18 page bill is very complex.  It defines real estate agents and others who market these programs as “Distressed Home Consultants.” 

Distressed Home Consultants.  A distressed home consultant has a new fiduciary duty to a distressed homeowner and must act in the homeowner's best interest, disclose all material facts to the homeowner, use reasonable care in performing his or her duties, and provide an accounting to the homeowner.

Distressed Home Conveyances.  A distressed home conveyance must be by in writing and the homeowner has a right to cancel the contract within five business days. It must be in at least 12 point boldface type, be in the same language principally used by the parties, and specify: the total consideration to be provided by the purchaser; a complete description of the terms of payment; the time at which possession is to be transferred to the purchaser; a complete description of the terms of any related agreement to allow the foreclosed homeowner to remain in the home; a complete description of the interest, if any, the foreclosed homeowner maintains in the proceeds of, or consideration to be paid upon, the resale of the property; the notice of right of cancellation; and notice that the purchaser cannot ask the foreclosed homeowner to sign any deed or other document until the right of cancellation has ended.

Distressed Home Purchaser.  A distressed home purchaser is prohibited from doing specific acts and practices listed in the bill. The purchaser must not enter into, or attempt to enter into, a distressed home conveyance unless the purchaser verifies and can demonstrate that the foreclosed homeowner has a reasonable ability to pay for the subsequent conveyance of an interest back to the foreclosed homeowner.  

Reasonable Ability to Pay.  An evaluation of a distressed homeowner's reasonable ability to pay includes debt to income ratios, fair market value of the distressed home, and the distressed homeowner's payment and credit history. There is a rebuttable presumption that the distressed home purchaser has not verified a distressed homeowner's reasonable ability to pay if the distressed home purchaser has not obtained documentation of assets, liabilities, and income, other than an undocumented statement, of the distressed homeowner.

Purchaser’s Statutory Obligations.  The Distressed Home Purchaser must extinguish or assume all liens encumbering the distressed home immediately following the conveyance of the distressed home, and must close the conveyance in person before an independent third party authorized to conduct real estate closings within the state. The Distressed Home Purchaser must not enter into repurchase or lease terms that are unfair or commercially unreasonable. The Distressed Home Purchaser must not represent that he or she is acting as an advisor or consultant or acting on behalf of or in the interests of the foreclosed homeowner or acting to save the home or buy time. Other prohibitions are listed in the bill.

A Distressed Home Purchaser must either: (1) ensure that title to the property has been reconveyed to the foreclosed homeowner; or (2) make payment to the foreclosed homeowner so that the foreclosed homeowner has received consideration in an amount of at least 82 percent of the fair market value of the property as of the date of the eviction or voluntary relinquishment of possession of the property by the foreclosed homeowner.

Equity Skimming.  An "act of equity skimming" occurs when:

(a)(i)  A Distressed Home Purchaser purchases a dwelling with the representation that the Distressed Home Purchaser will pay for the dwelling by assuming the obligation on the underlying mortgage and:

(ii) The person fails to make payments on such mortgages, deeds of trust, or real estate contracts as the payments become due, within two years subsequent to the purchase; and

(iii) The person diverts value from the dwelling by either (A) applying or authorizing the application of rents from the dwelling for the person's own benefit or use, or (B) obtaining anything of value from the sale or lease with option to purchase of the dwelling for the person's own benefit or use, or (C) removing or obtaining appliances, fixtures, furnishings, or parts of such dwellings or appurtenances for the person's own benefit or use without replacing the removed items with items of equal or greater value; or

(b)(i) The person purchases a dwelling in a transaction in which all or part of the purchase price is financed by the seller and is (A) secured by a lien which is inferior in priority or subordinated to a lien placed on the dwelling by the purchaser, or (B) secured by a lien on other real or personal property, or (C) without any security; and

(ii) The person obtains a superior priority loan which either (A) is secured by a lien on the dwelling which is superior in priority to the lien of the seller, but not including a bona fide assumption by the purchaser of a loan existing prior to the time of purchase, or (B) creating any lien or encumbrance on the dwelling when the seller does not hold a lien on the dwelling; and

(iii) The person fails to make payments or defaults on the superior priority loan within two years subsequent to the purchase; and

(iv) The person diverts value from the dwelling by applying or authorizing any part of the proceeds from such superior priority loan for the person's own benefit or use.

Violation is Consumer Protection Act Violation.  A violation of the act is a per se violation of the CPA. An action for violating the act may only be brought by a foreclosed homeowner against whom the violation was committed or by the Attorney General. In a private right of action under the CPA, the court may double or triple the damages award, subject to the statutory limit. However, if the court determines that the defendant acted in bad faith, the limit for doubling or tripling the damages award may be increased up to $100,000. A claim for damages must be commenced within four years after the date of the alleged violation. A CPA action is in addition to any other remedy available. An action under the CPA does not affect the rights in the distressed home held by a distressed home purchaser for value under the act or other applicable law.

Unlawful Detainer Actions. In any unlawful detainer action (eviction) under the Residential Landlord Tenant Act, the plaintiff to the action must disclose to the court whether the defendant/tenant previously held title to the property and explain how the plaintiff came to acquire title. When a defendant claims that the plaintiff acquired title through a distressed home conveyance, there must be an automatic stay of the unlawful detainer action and consolidation of the action with a pending or subsequent quiet title action. In addition, a defendant who previously held title to property that was a distressed home is not required to escrow any money pending trial when a material question of fact exists as to whether the plaintiff acquired title from the defendant directly or indirectly through a distressed home conveyance.