Consumer Warning: Loan Modification Fraud on the Rise

In some states in order to work on a Loan Modification it is considered licensed activity. In other states Loan Modification can only be done by attorneys and unfortunately in most states there is very little accountability, reliability or oversight in any way for a Loan Modification company. Check with your local department of Real Estate and ask if they either have a 'No Objection List' of Loan Modification company's or if they have another viable resource connected with a governmental regulatory agency like the Attorney General or even the Better Business Bureau.

Hundreds of people calling themselves "foreclosure rescue specialists," promising to quickly cut through red tape and reduce mortgage payments, have taken millions of dollars from South Florida homeowners over the past year for their services.

But unlike mortgage brokers or real-estate agents, mortgage modifiers are not required to have any special training or even a license — something many consumers don't know.

That has contributed to a dramatic rise in the number of struggling homeowners complaining they paid thousands to foreclosure loan modification or foreclosure rescue outfits, but received little or no help in return, state regulators say.

The Florida Attorney General's Office has received about 16,127 calls or complaints about mortgage modification from March through Aug. 24, state records show. The agency currently has filed 15 civil lawsuits against these operations, is actively investigating 83 statewide and has 99 additional companies under review.

Susan Spurgen, a Tampa attorney who specializes in real estate litigation, was surprised to learn the troubled industry that quickly sprung up in the wake of the sub-prime mortgage fiasco is largely unregulated.

"It's sad, given that you want only licensed professionals who know what they are doing taking money from people," said Spurgen, who gave a Florida Bar seminar on modification earlier this year.

Homeowners will have more protection beginning Jan. 1. That's when a new law passed by the Legislature this year will require all unlicensed modifiers, loan originators and mortgage lenders to get a broker's license through the state's Office of Financial Regulation.

The statute, which brings state laws in line with the 2008 federal mortgage licensing act, also requires brokers to renew their licenses annually instead of every other year, go through a background check, have 24 hours of training and pass a written exam. Beginning in 2011, they also must be listed in a nationwide registry that will include employment histories and disciplinary actions from all states.

Officials with the Attorney General's Office, saying the new requirements should help weed out questionable operators, supported the law. So did the Florida Association of Mortgage Brokers.

"We are hoping that by requiring licensure, it will hold people accountable," said association president Valerie Saunders.

Until licensing becomes law, consumer advocates and regulators advise homeowners to steer clear of modification companies asking for money up front — something prohibited under the 2008 state Foreclosure Rescue Act. The 2009 law narrowed the exemption allowing attorneys to collect advance fees, stating as of July 1 it applied only to those handling modifications as "ancillary" work connected with other cases, such as bankruptcies.

"If someone asks you for money prior to completion of work, they are breaking the law," said State Rep. Ritch Workman, R- Melbourne, a mortgage banker who worked on this year's bill. Even taking post-dated checks or credit card numbers, to be charged later, is not allowed.

In the past 15 months, hundreds of foreclosure rescue and modification firms have cropped up in the state, Saunders said. While homeowners can try renegotiating their loans themselves, "it's extremely paper intensive and it's complicated," Saunders said.

And slow. The Treasury Department reported earlier this month that eligible homeowners going through the federal Making Homes Affordable program — designed to encourage lenders to renegotiate loans with struggling homeowners — can't get modifications approved by their lenders or mortgage servers. Only 9 percent received loan reductions. The White House has called on servers to start on at least 500,000 modifications by Nov. 1.

I predict the licensure provisions will drive out some of the bad actors and encourage some legitimate foreclosure operations to consolidate. I suspect it also may make it harder for homeowners with bad credit to get approved for modifications or that they'll be charged higher fees.

"The sub-prime model was that everyone was entitled to a mortgage. We don't need that same model for loan modification negotiators"

-Christopher Rockey
rockey@mresolution.com