When Is a Property Distressed for the Purposes of Equity Skimming Protection?

Washington has an equity-skimming law designed to protect homeowners at risk of foreclosure or tax sale.  A recent case makes clear that, with regard to a risk of tax sale, a notice of sale need not be issued to trigger the law’s protections.

There are three primary protections in the law.  First, “distressed property consultants” and buyers of distressed properties are required to include warning notices in their agreement forms   Second, the consultants have similar duties of care and loyalty toward their clients that a lawyer or trustee would.  Third, deals may not be arranged to divert equity from the homeowner to the buyer.  A victim of equity skimming is allowed to sue under Washington’s very strong consumer protection law, with potential for trebled damages up to $100,000 in excess of the actual loss and attorney fees, and also may seek remedies that existed under preexisting law, which includes claims for fraud or to rescind the deal.  In addition, committing three acts of equity skimming in three years is a felony.

Not all properties, however, are protected by the law.  “At risk of foreclosure” is clearly defined:  the property must either be in foreclosure, or the owner has defaulted to the point that foreclosure is allowed, or is more than 30 days late with a payment, or has notified the lender that he or she expects to miss payments within the next four months.  “At risk of loss for nonpayment of taxes,” the other protected situation, is not defined by the law.

In the new case, the homeowner had inherited his home and the mortgage was paid off, but he had fallen 2 1/2 years behind on the taxes when he lost his job.  He searched for help and was introduced to a mortgage broker who offered him what was purported to be a $100,000 loan (for a $10,000 tax delinquency).  The paperwork that was presented, however, was a $100,000 sale-leaseback arrangement for a $230,000 property, with fees so high that the homeowner only netted $5,000 after paying the taxes.  Because of a learning disability and limited education, the homeowner did not recognize that what he was signing was not what was represented to him.

After about a year, the “lender” threatened to evict the homeowner for nonpayment.  At that point, the homeowner sued.  The “lender” and broker argued that the home was not at risk of loss for nonpayment of taxes because the county had never filed a tax foreclosure.

The Washington Supreme Court ruled in favor of the homeowner.  It ruled that the legislature had not intended to incorporate the procedures of the tax sale law as a bright-line test of when a home was at risk for two reasons:  the law was intended to be a consumer protection law that was to be interpreted broadly, and the legislature had cross-referenced various other laws without referring to the tax foreclosure laws.

Instead, the court noted that risk of tax sale might arise at different times for different homeowners.  As a result, it directed lower courts to look at the question on a case-by-case basis, considering several factors:  (1) the total tax debt owed, with fees, interest, and other expenses; (2) the number of missed payments and the time a foreclosure might begin; (3) the ability of the homeowner to pay the debt at the time of the challenged transaction; and (4) comparison of a sale price to the value of the property.

The court sent the case back to the trial court to decide whether the home was at risk of loss.  I think it would be hard to find that the home was not at risk under the circumstances.

If you’re in financial trouble and someone offers you a deal that you think might be too good to be true, be careful.  It might be.  If you have questions, consult a lawyer to get an opinion before signing.

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