How to spot loan-mod fraud

Flickr image by Don Hankins.

Equity skimming, illegal property flipping, foreclosure rescue scams -- and now, say hello to the newcomer on the fraud block: The home-loan modification scam.

"There's no evidence that the same companies or the same people are involved," said Deborah Bortner, director of consumer services for the Washington state Department of Financial Institutions (DFI). "But the intent is about the same -- they are looking to take people's money."

State agencies like DFI were established to regulate and examine a variety of state-chartered financial services. The agencies also provide education and outreach to protect consumers from financial fraud. Given the peaks and valleys of real estate and mortgage banking, the agency has had its hands full.

"We proposed a new loan-servicer bill because we received so many complaints from homeowners who lost their dreams -- their homes -- to questionable third-party loan-servicing practices," Bortner said. "Throughout the foreclosure crisis, homeowners desperately hoping to avoid losing their homes have fallen victim to companies offering to help -- for a substantial fee. In many cases, the homeowner pays several thousand dollars, receives no loan modification and loses their home to foreclosure anyway."

All servicers now must explain all fees, credit all payments within one business day of receipt, make reasonable attempts to comply with requests for information from the borrower, and promptly correct errors and refund invalid fees.

A typical loan modification is a permanent change in one or more of the terms of a borrower's loan, allows the loan to be reinstated, and results in a payment the borrower can afford. This can mean a lower interest rate or an adjustment in loan term or monthly payment.

While there are legitimate loan modification companies, there are many more who charge fees for services never rendered.

For loan-modification services, some states' guidelines require:

• A written fee disclosure must be provided and signed before any upfront-fee is paid;
• Upfront fees may not exceed $750;
• Total fees charged must be reasonable and customary in the industry;
• The service-provider must not require the borrower to waive his or her legal rights, cease communication with the lender, or pay any charges not enumerated in any agreement;
• Loan originator and mortgage broker licenses may not be issued to persons who have provided unlicensed loan-modification services in the last five years.

"It seems there is a large group of these companies in Irvine, Calif.," Bortner said. "Nobody knows why, but the foreclosure problems in Southern California have been well publicized and these types of services are sought after. In fact, some of the (Federal Trade Commission authorities) who service the Western U.S. have been focusing in Irvine because of the number of cases." ...CONTINUED

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