Maria Lozano, a Los Banos, CA homeowner, recently struggled to pay her mortgage so she hired who she thought was a real estate broker. The broker charged her more than $2,000 for a loan modification she never received.
When Lozano attempted to cancel the contract with the non-licensed “loan consultant” the consultant refused to refund her money and managed to extract another $500 from the homeowner’s bank account.
Bella Aguilar, a struggling homeowner from Union City, CA, paid a California attorney $2,300 for a loan modification months before it was final.
She since has been unable to make final payments to and the attorney who is threatening to sue, but the contract isn’t valid because California law prevents upfront fees on mortgage modifications.
Foreclosure rescue operations demanding up-front fees continue to rob homeowners looking for relief, even as the services circumvent state and federal laws enacted to prohibit the way they conduct business.
The laws primarily prohibit foreclosure relief or foreclosure rescue services from collecting fees before services are actually rendered, and they come with heavy disclosure requirements.
Federal, state and other jurisdictions enacted the laws in recent years in response to questionable operations that have sprung up since the housing crash to capitalize on vulnerable homeowners struggling to pay the mortgage.
The laws provide consumers with protections against mortgage modification fraud, but they also target shady short sale operations, questionable deed-in-lieu of foreclosure deals and other services professing to help homeowners prevent foreclosure.
State, federal laws
In California, former Governor Arnold Schwarzenegger signed Senate Bill 94 (SB 94) Oct. 11, 2009, effective on that date, to prohibit advanced fees.
The new law also applies to operations holding California Department of Real Estate “no objection letters,” operations which once were exempt from the advance fee ban.
Since Jan. 31, 2011, the Federal Trade Commission’s (FTC)“Mortgage Assistance Relief Services (MARS) Rule,” designed to curb fraud, scams and rip-offs in the mortgage services industry, likewise has prohibited most services from collecting up-front fees. Attorney’s are exempt, under certain conditions in the federal law, but not under California’s law.
The FTC says state laws that are stronger than federal rules, including California’s law, take precedence over the federal law.
Despite California’s law and the federal rule, some real estate brokers and attorneys continue to break the law, especially when it comes to collecting advance fees.
Attempting to find a loop hole in the law, some operations carve up or itemize loan modification services and ask homeowners to pay for each itemized service as it is completed.
That’s illegal, according to a California Department of Real Estate (DRE) bulletin and SB94 Frequently Asked Questions (FAQ) which clearly explain the reversed “no objection letter” exemption as well as the ban on collecting advance fees when services are itemized.
Payment for services is only due upon completion of a mortgage modification or other service and the service isn’t complete until the lender has issued, in writing, a trial or permanent loan modification or other workout.
Loan Mod Testimonial
“I found out about the company on a local radio station where an individual was announcing her loan modification services,” said Lozano.
“She demanded an upfront payment and wanted me to make monthly payments of $500 to her broker’s office and when I asked her why I was being charged every month, she replied to me by saying ‘We all have to eat and pay the bills’,” Lozano said.
Lozano grew suspicious when the salesperson told her to deposit extra money every month into her bank account. The salesperson also told her to lie the lender that the money was income earned from renting rooms. Lozano did not rent rooms and the request prompted her to ask the salesperson for her real estate license.
That’s when Lozano discovered the salesperson wasn’t licensed, but was distributing business cards identifying her as a “loan consultant” for a mortgage broker.
Home buyers falsifying incomes and other information, when they were unable to afford a mortgage payment, contributed to the housing crisis.
“Although SB94 does in fact prohibit individuals from collecting advanced fees, people are still doing it” said Tom Pool, a spokesperson for the California’s DRE, which has issued a host of alerts about the scams.
Fannie Mae, Freddie Mac, NeighborWorks America and the Lawyers’ Committee For Civil Rights Under the Law also opened the Prevent Loan Scams website to thwart fraud.
To that end, the FTC offers the “Mortgage Assistance Relief Scams” web page.
“Our advice is to file a formal complaint and let us look at all the documents and facts and investigate each complaint,” Pool said.
Lozano now has a complaint on file with DRE.
Confusion about her contract made Aguilar suspicious.
“The attorney had me pay for loan modification services and assistance before they began or completed their loan modification services,” she said.
“I was confused because the contract that I signed with the attorney states that I am not paying for loan modification services, yet on another page it stated ‘loan modification services’,” said Aguilar who is filing a formal complaint with the California Bar Association.
In California, any contract that is unlawful and/or entered into unlawfully is void and cannot be enforced.
Forensic load audit scams
A related scam is the forensic loan audit which comes with the promise of a reduced interest rate, the promise of a reduced loan balance, even the promise of a full mortgage cancellation if errors are found in the homeowner’s original loan documents.
There’s little evidence these audits will reduce anything but a homeowner’s bank account balance. They are not an effective way to get a loan modification.
“There is no evidence that forensic loan audits will help you get a loan modification or any other foreclosure relief, even if they’re conducted by a licensed, legitimate and trained auditor, mortgage professional or lawyer,” according to the FTC.
The services are, however, so heavily marketed via the Internet, television and radio, they triggered an FTC consumer alert “Forensic Mortgage Loan Audit Scams: A New Twist on Foreclosure Rescue Fraud.”
California has also warned of “mass joinder” or class-action-litigation posturing that scammers use to try to separate homeowners from their money and their homes.
Let’s Talk Real Estate Video: New One Page Loan Modification Prequalifier
View more Let’s Talk Real Estate videos about loan modifications.
Bottom line for mortgage relief
If you believe a mortgage modification, short sale or other mortgage relief program can help you, educate yourself on the program, just as you should have educated yourself about obtaining a mortgage.
Chances are, just as you don’t need to pay anyone to help you complete a mortgage application and provide the necessary documentation, you don’t need to pay for mortgage modification assistance or related services.
Examine your foreclosure relief options at Making Home Affordable or by calling 1-888-995-HOPE for free personalized advice from housing counseling agencies certified by the U.S. Department of Housing and Urban Development (HUD).
Study their guidelines and be clear, concise, thorough and honest on your loan modification application. Falsifying information is as damaging to your hopes as not correctly filling out a loan modification application.
Even a certified agency is not above you asking how long they take to get answers from lenders and about their track record of successfully modifications from your lender.
A certified agency should be able to go over the guidelines and qualification requirements for specific lenders to determine your eligibility before you actually begin the mortgage modification, short sale or other process.
They initially should help you learn if you qualify for a modification or other service and can afford any new payment plan, before you spend time wrangling with your lender.
Throughout the process, when you talk with your lender, document (date, time, discussion details) every conversation and action.
Finally, become part of the anti-fraud solution by avoiding illegal loan modification scams and by reporting them to your local district attorney’s office, local real estate regulator and local state bar as well as federal regulators.
If you believe you don’t have the time to learn the application process and proceed through it, perhaps you don’t have the time to save your home.
It isn’t easy, but the end result of your hands-on attention could be well worth the effort and your time.