By Leslie Berkman, The Press-Enterprise, Riverside, Calif.
Oct. 25--A flood of foreclosures has yielded a bumper crop of scam artists nationwide, drawn by the opportunity to prey on homeowners in financial distress who are willing to spend their last dollars to grab at a chance to save their homes.
The phenomenon, which continues to escalate, this month prompted the governor to sign urgent legislation that prohibits anyone from charging an advance fee to negotiate a change in the terms of a homeowner's mortgage to make it more affordable.
The law, SB 94, which became effective Oct. 11, is designed to stop mortgage modification consultants who have taken thousands of dollars from borrowers and then done nothing, wasting precious time to work out a loan adjustment with their lenders before their homes are foreclosed on.
Advertising heavily in neighborhoods hard-hit by foreclosure and monitoring public notices of defaults in search of potential clients, such operations frequently claim a high success rate that they cannot deliver, according to real estate industry officials.
Starting immediately, anyone selling loan modification services may take money only after they do what they have promised. Also they must advise any potential customers that they may negotiate a modification with their lender on their own or obtain help free of charge from nonprofit counseling agencies that are pre-approved by the Department of Housing and Urban Development.
Penalties for violation of the law include fines of up to $10,000 and up to a year in jail for an individual and a fine of up to $50,000 for a corporation.
Consumer advocates called the law "a step in the right direction," but say more needs to be done to make loan modifications easier to accomplish in order to reduce the frustration that leads homeowners to hire the unscrupulous.
Ginna Green, spokeswoman for the Sacramento office of Center for Responsible Lending, a national consumer advocacy group, said she welcomes the crackdown on loan modification fraud.
"We need to protect people who may have already been victimized by getting a loan they never should have. We don't need to add insult to injury," she said. "I think here are a large pool of people who need modifications and they are desperate for almost any kind of assistance they can get."
State Sen. Ron Calderon, of Montebello, who authored the bill said as chairman of the Senate Banking Committee and a former loan originator he was concerned about the sales pitches by loan modification consultants on billboards, radio and television.
Calderon said his concern increased when he learned people were paying $1,000 to $4,000 upfront to such consultants and "horror stories that people weren't getting anything for the money."
IN SEARCH OF RELIEF
Among those who contend they have fallen prey to deceitful mortgage modification consultants is Debra Julien, 41, of Wildomar. Julien said she and her husband Brian in September 2008 paid $1,999 to an Orange County company called Home Relief Services after Brian's hours were cut at a warehouse company that serves home builders and they needed a lower house payment.
Julien said a Home Relief Services representative told her the company had a 98 percent success rate in negotiating with lenders and she could expect their monthly payment to be reduced from $2,542 to $1,500. She said she was told Home Relief Services would convince her lender, Countrywide, to waive the second mortgage and reduce the interest rate on the first mortgage or have the loan extended from 30 to 40 years or lower the principal.
She was assured, she said, that if a mortgage modification was not accomplished in 60 days, her fee, with the exception of $499 for administrative costs, would be refunded.
Too Little, too late
After Home Relief Services received the upfront payment, Julien said, it took four weeks before she received paperwork to prepare for the next step -- not 7 days as she had been advised. And then, she said, her case was transferred to someone else at the company who was supposed to be negotiating for her.
Julien said when she called Countrywide she was told it had not been contacted by Home Relief Services. She said as the weeks passed she demanded to see the company's written proposal for her mortgage modification.
When she ultimately received a copy of the proposal, she said, "I could not believe what I saw. They had somebody else's address on it and they said our home was vacant and in danger of being vandalized when we live in our home ... When I saw that sloppy work I knew that I had been scammed."
"It was past 60 days and I said I wanted my money back," Julien said. She said she was promised a refund in 10 days but didn't get it and the person she was told was in charge of refunds did not return repeated calls.
"Then it dawned on me that I used my credit card to pay for this," Julien said, and she got the credit card company to delete the charge, minus the $499 in administrative fees, when Home Relief Services failed to contest her claim.
Not all customers of Home Relief Services were so fortunate, according to the office of the California attorney general, which has sued Home Relief Services, its executives and its law firm for bilking thousands of homeowners out of thousands of dollars each.
Vincent J. LaBarbera Jr., an attorney representing one of the founders of Home Relief Services, said his client followed the advice of lawyers about how to operate it. He did not address whether the way the company handled its business, including accepting upfront fees, was lawful.
Uptick in complaints
The California Department of Real Estate, the attorney general and State Bar of California report that mortgage modification fraud has burst onto their radar involving real estate brokers, lawyers and many others with no professional license.
So far this year, the Department of Real Estate has fielded more than 1,300 complaints involving loan modifications, up from just 20 complaints in mid 2008, said Tom Poole, department spokesman. He said the department has issued more than 350 desist and refrain orders and 30 actions to discipline licensed brokers.
The state attorney general's office reports it has received more than 2,500 complaints about loan modification consultants this year, compared to 160 last year, sought court orders to shut down more than 30 companies and brought criminal charges and obtained prison sentences against dozens of deceptive consultants.
Also, as of July 1, all loan modification companies have been ordered to register with the attorney general's office and post a $100,000 bond, starting with about 400 companies for which the office had received a large number of complaints, said Attorney General spokesman Evan Westrup.
Lawyers on bandwagon
The California State Bar, in response to an avalanche of complaints from consumers, homeowners and various government agencies, launched an investigation into the role of lawyers in modification scams.
Suzan Anderson, trial counsel for the state bar, said so far, as a result of the bar's scrutiny, seven lawyers have resigned their license to practice law and another 150 to 200 lawyers are under investigation for ethical violations that could lead to disciplinary action.
In an unusual move, the bar has publicly identified 16 of the lawyers under investigation for ethical misconduct related to loan modification. All are in Orange, Los Angeles and San Bernardino counties.
"The number of attorneys using their law licenses to essentially take money from unwary but trusting consumers is astounding, Russell Weiner, the California Bar's interim chief trial counsel, said in a statement releasing the names. He added there are "literally thousands of victims who have lost money they could not afford to lose."
Previously, lawyers were among the few people exempted from a law that prohibited foreclosure consultants from demanding upfront fees from homeowners who received the default notice that starts the foreclosure process.
As a result, modification companies solicited lawyers with whom to associate so they could charge advance fees.
SB 94 closes this loophole and another that had allowed a licensed real estate broker to charge an advance fee for helping to negotiate a loan modification as long as the fee agreement was reviewed by the Department of Real Estate and that agency had no objection. Now no broker can charge an advance fee.
Constraint Complaints
Calderon acknowledged that his office has received complaints from some lawyers who contend the prohibition on upfront fees threatens to put them out of the loan modification business -- and robs the public of access to legal expertise in negotiating with their lenders, they say.
Tom Key, a Tustin lawyer, said the mortgage modification business he had been building since March, collapsed under competition from low-balling scammers and SB 94, which he said makes it financially unfeasible to stay in operation.
Lawyers cannot afford to take the risk of working many months and possibly not getting paid if a client is unhappy with the outcome and threatens to complain to the state bar, said Corona lawyer Paul Molinaro.
Calderon argues that the law, which was supported by the state bar, will remove the incentive for lawyers to promise more than they can deliver or to take on clients they can't help.
The prohibition against upfront fees will end in 2013, a compromise that Calderon said was sought by the real estate and banking industries to assess whether it will still be needed when the foreclosure crisis is over.
Reach Leslie Berkman at 951-368-9423 or lberkman@PE.com
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