The New Washington Distressed Property Owner Law

Washington State Legislature has just passed a new law effective June 12, 2008, known as THE NEW WASHINGTON DISTRESSED HOME LAW with a goal to protect “Distressed Homeowners” (or “DPO”) (as that term is defined) from foreclosure rescue “equity skimming” scams. Equity Skimming was criminalized under RCW 61.34.010 in 1988, but it only applied to the fraud perpetrator. Under this new law, it also applies to “Distressed Home Consultants” (“DHC’s) which are defined in broad terms to include real estate agents, brokers, and other persons who offer “advice” to the Distressed Homeowner, and the act provides the Distressed Homeowner with a civil action against all DHC’s. (Why real estate agents and brokers were not exempt (attorneys and mortgage brokers were exempt) is a question that puzzles the real estate community. The law provides that DHC’s owe a statutory fiduciary duty to Distressed Homeowner and includes specific contractual requirements and notices provisions that give rise to automatic liability if they are not complied with.

For the DHC’s the exposure is high. The legal community is currently “circling the wagons” creating boutique law firms that will specialize in initiating lawsuits on behalf of Distressed Homeowners, because the financial incentives are built-in to this new law and the DHC’s will be the “deep pockets” because the criminal perpetrators generally avoid responsibility in these circumstances. Civil suits will be brought under the Consumer Protection Act, which provides for treble damages in some cases, as well as attorneys fees and costs.

The reactions in the real estate community are mixed. Some brokers are scurrying to revise their forms to comply with the new act, while others are taking a wait and see attitude. How do you know if someone is a DPO? It is not clear. Outside of a clear foreclosure action pending, the act only requires that they “have a good faith belief that he or she is likely to default on the mortgage within the upcoming four months due to a lack of funds, and the homeowner has reported this belief …” The list of “reportees” includes their mortgagee, their attorney, or any DHC.

The new act is not without controversy. Also, could a real estate agent be committing a felony if they increase a DPO’s sale price to include closing costs? What is a Dwelling? The definition of a “Dwelling” is not clear. Under the act it means, “a single, duplex, triplex, or four-unit family residential building.” Does this include an individual that resides in a high-rise condominium project or someone who lives in an apartment complex converted into condominium ownership? Does it include a double-wide trailer?

Contract Requirements - If there is a contract to convey interest in the Distressed Homeowner’s property, the contract also must be in writing and must conform to all the requirements set by the law.

A Distressed Property Conveyance - is a transaction in which: (1) a foreclosed homeowner transfers an interest in the distressed property to a distressed property purchaser; (2) the distressed property purchaser allows the foreclosed homeowner to occupy the property; and (3) the distressed property purchaser or a person acting in participation with the distressed property purchaser conveys or promises to convey the property to the foreclosed homeowner; or provides the foreclosed homeowner with an option to purchase the property at a later date; or promises the foreclosed homeowner an interest in, or portion of, the proceeds of any resale of the property.

What Fiduciary Duties Imposed on DHC’s? - As a fiduciary, the DHC has a duty, among other things, to act in the DPO’s best interest, even if that is contrary to his or her own interest and must use reasonable care in everything he or she does concerning the DPO. Also, the DHC engagement terms must be in writing and must contain specific language and format set by the law. Failure to do so gives rise to liability.

Other Provisions - The new law provides to the distressed homeowner, in addition to any other right of rescission, to cancel any contract with a distressed home purchaser until midnight of the fifth business day following the day on which the distressed homeowner signs a contract that complies with this act or until 8:00 a.m. on the last day of the period during which the distressed homeowner has a right of redemption, whichever occurs first. Distressed home purchasers are prohibited from certain acts provided in the new law.

Enforcement - A violation of this new law is a per se violation of the Consumer Protection Act and any legal action could be brought by a foreclosed homeowner against whom the violation was committed or by the Attorney General. The legal action must be commenced within four years after the date of the alleged violation.

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For more information on this law and other topics of current interest, visit the public service page of my website at www.richardseward.com.