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Underwriters' Bulletin

Claims Corner

Mortgages; Fraud

Mortgage Rescue Fraud
Originally published in the November-December 2006 issue of the ATG Casenotes and Underwriters' Bulletin

P.A. 94-0822(S.B. 2349): Bill creates 815 ILCS 505/27, called the "Mortgage Rescue Fraud Act." Effective January 1, 2007.

The Mortgage Rescue Fraud Act (the Act) articulates the terms that are required in every contract between the owner of a distressed property and a distressed property consultant, as well as the terms that must appear in contracts pertaining to the conveyance of distressed property. Further, this Act provides civil remedies to aggrieved parties for violations of the Act.

Under the Act, a contract with a distressed property consultant must fully disclose the nature of the services provided, along with the total amount and terms of compensation. Additionally, the owner of the distressed property must be given a notice saying that he or she will not be obligated to pay the consultant until the contract work is completed. Further, this contract must also contain a notice of the owner's right to cancel, which runs until the consultant's performance is completed. Prepared by the consultant and attached to the contract, the consultant must also provide a fill-in-the blank form that allows the owner to cancel the contract. Under the Act, effective cancellation occurs by filling out and mailing the attached form, or when the owner provides the consultant with any other written notice expressing a desire to terminate the contract.

If the contract with a distressed property consultant includes a provision requiring the owner to convey the property to the consultant, then it must contain the names of the parties, the address of the property, a notice of the right of cancellation and a complete description of the terms of payment, as well as a description of any pre- or post-sale services the purchaser will provide for the owner. This contract must also contain a written notice that provides the owner may not sign any deed or document until after the right to cancel the contract of conveyance has terminated. Further, if the purchaser is to convey title to the consultant, the contract must contain the following statement: "NOTICE REQUIRED BY ILLINOIS LAW: As part of this transaction, you are giving up title to your home."

Under the Act, the owner has the right to cancel a contract of conveyance of distressed property until midnight of the fifth business day following the day on which the owner of the distressed property signs a valid contract or until 8 a.m. on the last day of the redemption period under the Illinois Mortgage Foreclosure Law or the Property Tax Code, whichever occurs first. Cancellation may be done in writing, or by filling out and mailing the notice of cancellation form that was provided by the purchaser and attached to the contract for conveyance. Additionally, a distressed property purchaser must record the contract with the recorder in the county where the distressed property is located within ten days of its execution, as long as the contract had not been cancelled.

The Act also explains conduct of distressed property consultants and purchasers that violates the provisions of the Act. Specifically, it contravenes the Act for a purchaser to enter into a sale back to the owner unless the owner has demonstrated a reasonable ability to pay, or to cause the property to be encumbered without the knowledge or permission of the owner. Any intentional violation constitutes criminal mortgage rescue fraud and is subject to criminal penalties.

Lastly, the Act states that any violation constitutes unlawful practice under the Consumer Fraud and Deceptive Business Practices Act; accordingly, the same remedies and penalties are available.

Please note that the amendment to section 40(d), which provided that conveyances under unrecorded contracts are void ab initio, did not make the final version of the Act, thus limiting the risk to title companies insuring a bona fidepurchaser for value who purchases from a distressed property purchaser.

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[Last update: 10-11-10]