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Indiana's Mortgage Rescue Protection Fraud Act

One of the early contributing factors to the current economic downturn was the dramatic increase in home foreclosures across the country. Due to job losses and speculative buying, home foreclosures became more pervasive in many regions of the United States, even in Indiana’s traditionally modest-growth real estate market. Unfortunately, along with the increase in foreclosures came individuals and companies that sought to mislead and defraud troubled homeowners during their foreclosure process.

In response to the growing foreclosure crisis, the State of Indiana passed the Mortgage Rescue Protection Fraud Act (the “Act”) in July of 2007 to regulate behavior and set standards for “foreclosure consultants” acting within the State of Indiana. Notably, the Act does not apply to governmental agencies, the lender or servicer of the particular loan being foreclosed upon, Indiana attorneys, or lending institutions chartered in Indiana such as credit unions, banks or trust companies. As such, the Act is focused on regulating foreclosure consultants, who are defined as people soliciting homeowners* threatened with foreclosure with the promise of (i) preventing or postponing the foreclosure process, (ii) allowing the homeowner to become a tenant in its home after foreclosure, or (iii) allowing the homeowner to repurchase the home after foreclosure (called a “foreclosure reconveyance”).

Some of the keystone provisions of the Act are (i) a general prohibition of a foreclosure consultant charging or receiving money before the complete performance of their services and (ii) the ability of a homeowner to rescind any service contract of foreclosure reconveyance agreement with the first seven (7) days after the contract is signed. These provisions are meant to limit fraudulent foreclosure consultants from receiving a homeowner’s money and not providing services and to allow a homeowner to rescind a contract that it may have felt unreasonably pressured into signing. In addition, foreclosure consultants must notify homeowners of its rights under the Act prior signing a contract, may not receive a fee in excess of 8% per year of any loan that the consultant makes to the homeowner, or acquire any interest in any homeowner’s property regarding which the consultant has provided services.

Apart from foreclosure consultants negotiating new loans for homeowners, foreclosure reconveyance agreements have other unique restrictions. Before executing a foreclosure reconveyance agreement, the potential purchaser must (i) be able to demonstrate that the homeowner can pay for the reconveyance (based on a rebuttable presumption that if the proposed monthly payments are less than 60% of the homeowner’s monthly gross income, the homeowner can pay), (ii) notify the homeowner of its rights under the Act, and (iii) have a face-to-face closing for the transfer of property. Thereafter, if the purchaser sells the property within 18 months after entering into the foreclosure reconveyance agreement, it must pay the homeowner 66% of the net proceeds received from such sale. While there is not any specific detail in the Act pertaining to the intent of this provision, the presumption is that it is intended to provide protection for the homeowner’s equity position in the property.

In the event that any foreclosure consultant or reconveyance purchaser violates the Act, the Act provides for enforcement by the Office of the Attorney General, as well as a private cause of action by the homeowner. A homeowner may bring an action for damages incurred as a result of a violation of the Act and, if successful, may be awarded attorneys’ fees. In addition and as an added disincentive for failure to meet the requirements of the Act, if the court determines that the foreclosure consultant or reconveyance purchaser willfully and knowingly violated the Act, the court may award up to three times the actual amount of damages to the homeowner.

*While the intent of the Act may have been to protect homeowners as opposed to property owners, the language does not exclude application to owners of rental residential property.

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