States, Feds Step Up Efforts Against Loan Modification Scams

The New York State Attorney General today announced plans to sue one of the state's largest loan modification assistance companies and subpoena records from 14 others as part of an investigation into an industry that many say takes unfair advantage of homeowners in financial distress.

It's only the latest step by authorities nationwide to crack down on the mortgage loan modification industry, which is often accused of charging hefty fees to help homeowners avoid foreclosure, but failing to deliver.

"The entire industry is a scam, in my opinion," said New York Attorney General Andrew Cuomo in announcing his investigation. "These are services that homeowners don't need to pay for in the first place."

Complaints rising along with foreclosures

Complaints about fraudulent loan modification services have grown along with the rise in foreclosures in the wake of the subprime mortgage crisis. The California attorney general's office recently charged two Los Angeles-area women with 49 felony counts of grand theft and foreclosure fraud, alleging the pair swindled homeowners out of $160,000 in bogus mortgage loan modification services. Idaho has toughened its licensing requirements for mortgage professionals, effective July 1, in part to weed out bogus loan modification services and other mortgage frauds.

On the federal level, the Obama Administration announced in April a coordinated effort among federal law enforcement, state investigators and prosecutors, local authorities and businesspeople to protect homeowners seeking loan modifications from predatory schemes. The Federal Deposit Insurance Corporation issued a warning in late May to consumers to be on guard for potential loan modification frauds.

Homeowners said companies failed to deliver

Cuomo said his investigation was triggered by complaints from New York homeowners that the targeted loan modification companies failed to deliver on promises to help clients obtain more favorable mortgage terms, while leaving them further in debt than before.

Much of the controversy involving the loan modification industry has to do with the practice of charging large fees up front for their services. Clients sometimes pay several thousand dollars to a company to negotiate more affordable mortgage terms for them, but end up getting nothing for their money when the lender refuses to budge.

Those in the loan modification business often acknowledge that the industry has problems, but say they still offer consumers a valuable service, especially for those who are intimidated by dealing with a bank or who have been unsuccessful in previous efforts to modify the loan. Critics say assistance is commonly available for free from government-sponsored agencies, and that such funds would be better spent applied to mortgage payments.

Guidelines for avoiding loan modification fraud

The following guidelines are based on advice from the Federal Deposit Insurance Corporation to help homeowners avoid being taken advantage of by an unscrupulous or outright fraudulent loan modification business:

- Avoid companies that charge a large fee up front. While a modest retainer may be appropriate, final payment should be conditioned on the loan modification company achieving specific goals in renegotiating the mortgage

- Be suspicious of companies that approach you directly, by phone, e-mail or in person, or of direct mail solicitations

- Assistance with a loan modification doesn't need to cost a lot of money. Free or low-cost counseling with a trained adviser is available through agencies certified by the U.S. Department of Housing and Urban Development (HUD) at www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.

- When possible, work with lenders or other agencies you are already familiar with or have been recommended by someone you trust

- Always continue to make your mortgage payments directly to your mortgage company and not to an intermediary - a common scam is to persuade homeowners the scammer will act as their agent in handling the payments, but the scammer pockets the money instead

- If you need advice, speak with an attorney or a certified financial counselor

- Always read all documents carefully before signing them and make sure you understand them

- If you think you've been the victim of a scam, report it to your state attorney general's office or other authorities. You may wish to speak with an attorney as well.