Lawyers and Loan Modification Companies
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UPDATED: Jul 15, 2021
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Loan modification companies and other debt management companies often advertise that they employ lawyers to help negotiate with your creditors. In many cases, this is illegal. Of course, as a consumer, you won’t get in trouble for buying into one of these schemes, but you should be aware that companies that do this are violating legal ethics rules that are meant to protect you. These companies use lawyers for two reasons. First, lawyers are often exempt from regulations that would otherwise require the company to be licensed or restrict its practices. Second, they want to use the lawyers as a marketing tool—suggesting that they’ve got special expertise in the field of loan modification or foreclosure prevention.
If you are a lawyer considering one of these arrangements, you should know that several states have already issued ethics opinions or warnings about sharing fees with non-professionals or offering legal services to the public when you are in-house counsel for a company that isn’t authorized to offer them. (See Florida, California , Washington, New Jersey and Arizona.)
There are several arrangements out there, each with its own legal ethics problems. Two of the most common arrangements are the loan modification company that employs lawyers and the loan modification company that “refers” you to a lawyer, who shares fees with the company—or the company charges you for the referral. There are several ethics rules that apply to these arrangements. First, non-lawyer entities may not practice law. So an ordinary LLC or Corporation cannot allow its lawyer-employees to provide legal services. Second, lawyers may not pay referral fees to, or share fees with, non-lawyers. Any arrangement that involves a lawyer sharing a fee or giving something of value to another person or entity violates legal ethics rules. Third, if a lawyer represents a consumer, the consumer is the client, and the client’s wishes must be respected. In most cases, the loan modification company is calling the shots, which is improper if the company’s wishes end up superseding the client’s wishes.
There are two sorts of arrangements that are usually permissible. In the first, the loan modification company is a law firm. Law firms are required to meet certain criteria (to make sure that non-lawyers are not sharing fees or directing the legal decision of the lawyers). If the company is a law firm and the consumer arranges to pay the law firm a fee in exchange for legal representation, the arrangement is probably fine. Second, the consumer hires a lawyer, and the lawyer hires a loan modification consultant. Just as a lawyer can hire an expert witness or paralegal with special expertise, the lawyer is allowed to retain a loan modification expert. The lawyer still cannot share fees with the loan modification expert, but can pay the expert for his services or have the modification expert bill the consumer directly for services.
Advertising legal services is also regulated by ethics rules. For example, lawyers generally can’t guarantee results, and they can’t contact consumers in person, by telephone, or online in real-time communications. Legal advertising must also generally indicate that it is an advertisement and give the name of the attorney or law firm that is responsible for the content of the advertisement.
If you see an advertisement that suggests a loan modification company will provide legal services, you should contact your state’s bar association. In some states, ethics complaints are considered by a different agency, but the bar association should be able to tell you which agency to contact.