California has joined nearly two dozen other states in prohibiting foreclosure rescue companies from collecting advance fees for helping homeowners negotiate mortgage loan modifications.

Gov. Arnold Schwarzenegger on Oct. 11 signed into law a bill, SB 94, that prohibits any person from demanding or collecting an advance fee from a consumer for loan modification or mortgage loan forbearance services.

California has joined nearly two dozen other states in prohibiting foreclosure rescue companies from collecting advance fees for helping homeowners negotiate mortgage loan modifications.

Gov. Arnold Schwarzenegger on Oct. 11 signed into law a bill, SB 94, that prohibits any person from demanding or collecting an advance fee from a consumer for loan modification or mortgage loan forbearance services.

California had previously allowed real estate brokers and their licensed agents to collect advance fees for negotiating with lenders on behalf of borrowers — but only after entering into written agreements with their clients, using forms and procedures that had been reviewed by the Department of Real Estate. Fees collected in advance had to be placed in escrow to be drawn on as services were performed.

According to the Department of Real Estate’s Web site, more than 1,000 real estate brokers had submitted forms for review and obtained "no objection" letters from the state to collect advance fees for loan modification services before SB 94 took effect.

Nearly 500 companies have also been accused of providing loan modification services without a license, or collecting advance fees without first obtaining a "no objection" letter from the state.

Real estate brokers with "no objection" letters who entered into agreements with borrowers before Oct. 11 to collect advance fees for providing loan modification or other mortgage loan forbearance services may continue to provide those services under the terms of those contracts, but cannot collect additional advance fees from those clients, the Department of Real Estate said in a published notice.

Real estate licensees are still permitted to provide loan modification services to consumers if their fees are collected after those services are provided, the notice said.

Some companies that charge borrowers for loan modification services have defended the practice, saying they have the contacts and persistence needed to work with lenders. Some nonprofits that provide such services at no charge are overwhelmed, they say (see story).

But critics charge that many foreclosure rescue and loan modification companies are making unsubstantiated claims about their success rate, while making little or no effort to help borrowers.

The Federal Trade Commission and state attorneys general have sued dozens of foreclosure rescue and loan modification companies, and the FTC is reportedly considering a federal ban on the collection of advance fees by such companies (see story). The Associated Press reported last month that 20 states have banned foreclosure rescue companies from collecting fees in advance.

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