On June 3, 2008, the state of Hawaii “Act 137: Mortgage Rescue Fraud Prevention Act” was signed into law by Governor Linda Lingle. The state legislature and governor feel this law will protect Hawai`i homeowners from individuals who prey on distressed property owners. The Act defines a “Distressed Property”, defines a “Distressed Property Consultant”, outlines the components of a “Distressed Property Consultant Contract”, notes required language in a “Distressed Property Purchase Contract”, and finally, limits the compensation for the “Distressed Property Consultant”.

A “distressed property”, as defined by Act 137 is:

“…any residential real property that:

(1) Is in foreclosure or at risk of foreclosure because payment of any loan that is secured by the residential real property is more than sixty days delinquent;

(2) Had a lien or encumbrance charged against it because of nonpayment of any taxes, lease assessments, association fees, or maintenance fees;

(3) Is at risk of having a lien or encumbrance charged against it because the payments of any taxes, lease assessments, association fees, or maintenance fees are more than ninety days delinquent;

(4) Secures a loan for which a notice of default has been given; or

(5) Secures a loan that has been accelerated.”

A “distressed property consultant” is defined by Act 137 as:

“Any person who performs or makes and solicitation, representation, or offer to perform any of the following relating to a distressed property:

(1) Stop or postpone the foreclosure sale or loss of any distressed property due to the nonpayment of any loan that is secured by the distressed property;

(2) Stop or postpone the charging of any lien or encumbrance against any distressed property or eliminate any lien or encumbrance charged against any distressed property for the nonpayment of any taxes, lease assessments, association fees, or maintenance fees;

(3) Obtain any forbearance from any beneficiary or mortgage, or relief with respect to a tax sale of the property;

(4) Assist the owner to exercise any cure of default arising under Hawaii law;

(5) Obtain any extension of the period within which the owner may reinstate the owner’s rights with regard to the property;

(6) Obtain any waiver of an acceleration clause contained in any promissory note or contract secured by a mortgage on a distressed property or contained in the mortgage;

(7) Assist the owner in foreclosure, loan default, or post-tax sale redemption period to obtain a loan or advance of funds;

(8) Avoid or ameliorate the impairment of the owner’s credit resulting from the recording or filing of a notice of default or the conduct of a foreclosure sale or tax sale; or

(9) Save the owner’s residence from foreclosure or loss of home due to non-payment of taxes.”

There are individuals and institutions exempt from being considered “distressed property consultants”. These include authorized agents acting on behalf of federal Department of Housing and Urban Development, lien holders of the property, banks, credit unions, other lenders, attorneys, non-profit organizations authorized to provide counseling for distressed property owners.

Language guidelines are identified by Act 137 for distressed property consultant contracts, which include cancellation rights for the property owner. Specific language is now also required on any distressed property conveyance contracts (purchase contracts), which include notice that, “As part of this transaction, you are giving up title to your home.” The conveyance contract of a distressed property also gives the right of the seller to cancel the contract without penalty, up until a specified date.

A “distressed property consultant’s’ compensation for services rendered is limited to “two most recent monthly mortgage installments of principal and interest due on the loan first secured by the distressed property or the most recent annual real property tax charged against the distressed property, whichever is less.”

How does Act 137 affect the real estate professional’s participation in the representation of distressed property owners? Previously, the Realtor would often communicate directly with the lender on behalf of the property owner and assist in coordinating the approval of “short sale”. This will no longer be the case. The Act does prevent the solicitation of listings by licensed agents proclaiming to be “short sale specialists”.

In response to Act 137, the Hawaii Association of Realtors has just release new forms to comply with the act, in terms of the listing of a property deemed to be “distressed”, as well as compliance of the Purchase Contract of a distressed property. As with any new law, only time will tell if the consumer’s benefits will outweigh the restrictions of services received.