The Foreclosure Protection Act: spotting equity-skimming and rescue scams

Bottom line first. When you are behind on your mortgage, people will contact you. Some are honest. Some are not. Colorado has a law, the Colorado Foreclosure Protection Act (C.R.S. 6-1-1101 through 6-1-1120), that sets minimum rules for two kinds of people: those who charge you to help and those who buy your home while it is in foreclosure. This lesson explains what the law requires of them so you can tell when someone is skipping the rules. It is general information, not legal advice, and it does not recommend any buyer or deal.

Why the law exists

The legislature wrote that homeowners in financial distress, "especially the poor, elderly, and financially unsophisticated," can be targeted by deceptive practices designed to strip the equity from their homes (C.R.S. 6-1-1102). Equity means what the home is worth minus what you owe on it. For many families it is their biggest savings. The law is meant to protect it.

Which homes and people the law covers

A residence in foreclosure is a home that is your principal place of residence and has a residential mortgage loan at least thirty days delinquent or in default (C.R.S. 6-1-1103). For the rules on buyers, it also counts when a foreclosure action has started, or when the buyer otherwise knows the loan is at least thirty days behind (C.R.S. 6-1-1103).

The law sorts the people you may meet into two groups.

• A foreclosure consultant is someone who, in business, offers to do something for a fee, such as stopping or postponing a sale, getting a forbearance, helping you cure, getting a loan for you, protecting your credit from the foreclosure, or in any way delaying or preventing the foreclosure, and who does not take title to or an interest in your home (C.R.S. 6-1-1103). Lawyers acting for a client, lenders and servicers, banks, licensed brokers doing licensed work, title companies and nonprofit counselors who only give advice are not counted as consultants (C.R.S. 6-1-1103).
• An equity purchaser is someone who acquires title to a residence in foreclosure. It does not include a buyer who acquires the home to use as a personal residence, or title acquired from a close relative, through a deed from the public trustee or sheriff after a sale, by court order, by a bank in the course of regulated business, by a deed in lieu to the lender, or in a short sale that uses the state's short sale addendum and follows the law (C.R.S. 6-1-1103).

These categories have details and exclusions, so a person can fall on either side. If you are unsure which applies, ask an attorney.

If someone charges you to help (foreclosure consultants)

The law sets a list of must-haves for the contract (C.R.S. 6-1-1104).

• It must be in writing, and you must be given it, unchanged, to keep and review at least twenty-four hours before you sign.
• It must be in at least twelve-point type and give the consultant's name, address and the date you signed.
• It must fully describe the services and the total amount and terms of any pay.
• It must be dated, signed by each of you with each page initialed, and notarized in front of you.
• It must carry a bold notice, in at least fourteen-point type near your signature, saying the consultant cannot ask you to sign any paper that transfers an interest in your home, cannot guarantee a refinance or that you keep the home, and that you may cancel at any time without penalty. It also urges you to contact an attorney or a HUD-approved housing counselor before signing.
• A separate, detachable Notice of Cancellation must come with it.

You may cancel at any time, in any written form that shows you mean to cancel; mailing it counts as soon as it is posted (C.R.S. 6-1-1105). You must repay money actually spent for you before the notice, within sixty days, with limited interest, but the right to cancel cannot depend on repaying first (C.R.S. 6-1-1105). The time to cancel does not start until the consultant has followed the contract rules (C.R.S. 6-1-1104).

A consultant may not:

• charge or collect anything until every promised service has been fully performed;
• take a lien, wage assignment or other security for the pay;
• take a power of attorney from you, except to inspect documents as the law provides;
• acquire any interest in your property; or
• take payment from a third party for the work without first disclosing it to you in writing (C.R.S. 6-1-1107).

Breaking these rules is a misdemeanor punishable by up to one year in county jail, a fine of up to $25,000, or both (C.R.S. 6-1-1108).

If someone wants to buy the home (equity purchasers)

For buyers, the contract must be written in legible type of at least nine points and be complete, signed and dated by both sides before any deed or other paper transferring or encumbering an interest in the home is signed (C.R.S. 6-1-1111). It must contain the entire agreement and include, among other things, the buyer's name and address, the home's street address and legal description, any obligations of yours the buyer takes on, the total price, when and how you are paid, when possession changes, any lease terms, and the exact terms of any option to buy back (C.R.S. 6-1-1112). It must also carry a notice saying that until your right to cancel has ended, the buyer cannot ask you to sign any deed or other document (C.R.S. 6-1-1112).

Your right to cancel lasts until 12 midnight of the third business day after you sign a contract that complies with the law, or until 12 noon on the day before the foreclosure sale, whichever comes first (C.R.S. 6-1-1113). Cancelling can be done in person or by mail, in any wording that shows you do not want to be bound (C.R.S. 6-1-1113). Until the buyer has given you all the required cancellation forms, you may still cancel (C.R.S. 6-1-1114).

Until your cancellation time has run out, the buyer may not accept a deed from you or push you to sign one, record any document you signed, transfer the home to someone else, or pay you anything. After you cancel, the buyer must return the original contract and anything else you signed, with no conditions, within ten days (C.R.S. 6-1-1117). The buyer also cannot make untrue or misleading statements about the home's value, how much you will receive after a sale, any contract term, your rights, or the nature of any paper you are asked to sign (C.R.S. 6-1-1117).

The law also covers "sale-leaseback" or "buy-back" setups, where you sign over the deed and are allowed to rent or repurchase. They are allowed only if several conditions are met, including that you get a non-waivable thirty-day right to cure a default on at least three separate occasions, the buyer takes over or pays off the loan in foreclosure, the buyer can show you can reasonably afford the lease and the repurchase, and the repurchase price is not unconscionable. The statute also says a repurchase price "exceeding twenty-five percent" of the buyer's acquisition price creates a presumption that the deal is unconscionable, so have a lawyer check how that is measured for your deal (C.R.S. 6-1-1115). Unconscionable means so one-sided that a court may refuse to enforce it.

Waivers do not work: a clause saying you give up these rights, the right to a jury trial, or agree to sue far from the property in another state or county is void, as is one adding costs above actual costs (C.R.S. 6-1-1106; 6-1-1116). Violations of the key buyer rules can also bring up to one year in jail and a fine of up to $25,000 (C.R.S. 6-1-1118).

Red flags

• You are asked to sign a deed, a quitclaim or "just some papers" before a full written contract is complete.
• Someone wants money up front to "stop" the foreclosure.
• They guarantee you will keep the house.
• They tell you not to talk to your servicer, a lawyer or a housing counselor.
• They refuse to give you the contract to take home for a day.
• They ask for a power of attorney.
• They say there is no time to cancel, or hide the cancellation notice.
• Pressure, secrecy, or a price far below what the house is worth.

Example with real numbers

All dollars here are made up. Mateo's home would sell for $280,000 and he owes $230,000. A buyer says he will pay $12,000 and take over the loan if Mateo signs over the deed.

1. Mateo's equity is $280,000 - $230,000 = $50,000.
2. The buyer's total payment is $12,000 + $230,000 loan = $242,000.
3. The gap is $280,000 - $242,000 = $38,000, before any selling costs that a normal sale would also have.

That is a lot to give up in a hurry, which is why the law gives time to cancel and to read.

Before you sign anything, take the contract to a HUD-approved housing counselor or a lawyer, and check the Colorado Attorney General's consumer office if you think a rule was broken.