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Regulators consider ban on upfront fees for loan modification help

The move by the FTC comes as federal and state officials plan to expand a crackdown on mortgage-related scams to other schemes that prey on debt-ridden consumers.

September 18, 2009|Jim Puzzanghera

WASHINGTON — Federal regulators, taking aim at a common tactic used in mortgage frauds, will look at a nationwide ban on companies' charging upfront fees for helping homeowners modify loans to avoid foreclosures.

The move comes as federal and state officials plan to expand a crackdown on mortgage-related scams to other schemes that prey on debt-ridden consumers desperate to stay financially afloat during the recession.

"Working together, we can send a clear and straightforward message: If you perpetrate mortgage fraud . . . we will find you and we will charge you and we will put you in jail," U.S. Atty. Gen. Eric H. Holder Jr. said Thursday as top federal officials met with attorneys general from 12 states to coordinate those efforts.

Federal officials have been working with state attorneys general nationwide since April to ferret out fraudulent mortgage modification offers. In July, for example, California Atty. Gen. Jerry Brown filed suit against 21 people and 14 companies allegedly linked to loan modification and foreclosure-prevention scams, part of a nationwide sweep known as Operation Loan Lies.

At the end of July, the FBI had more than 2,600 pending mortgage fraud cases under investigation, many in conjunction with state officials after the creation of the multi-agency effort in the spring, Holder said. Now, federal officials want to expand that effort to other consumer debt scams, said Treasury Secretary Timothy F. Geithner.

"You need to do it on a coordinated basis because these guys don't respect state borders, don't respect national borders," Geithner said.

After the meeting, Jon Leibowitz, chairman of the Federal Trade Commission, said the agency might impose a nationwide ban later this year on upfront fees for mortgage modifications.

With foreclosures at record levels, the only way many consumers can stay in their homes is by reducing their mortgage payments. As often happens during economic downturns, scammers have tried to cash in on that desperation, this time by asking for large upfront payments for help seeking mortgage modifications.

"People are paying upfront and then have no real guarantee that the modification service will actually modify the loan," said Pedro Morillas, consumer advocate for the California Public Interest Research Group, which supports a fee ban.

"There are just a lot of bad actors out there, and it's going to take at the very least a statewide effort [to stop them]. And nationally, an effort like this would be great," he said.

Such fees, which can be as much as $4,000, have been used by con artists to rip off consumers, yet they aren't completely banned in most states. In California, for example, some services are allowed to charge them, though the city of Los Angeles has banned upfront fees and two bills awaiting Gov. Arnold Schwarzenegger's signature would prohibit them in different ways.

Leibowitz said his agency would "closely examine whether to ban upfront fees for mortgage modification services" and also would consider rules aimed at stopping false advertising by those companies.

He expects the commission to propose rules on both issues by the end of the year.

"If they're asking for advance fees . . . it's a red flag. And the service is bogus," Leibowitz said.

Highly publicized federal mortgage modification initiatives, such as the Obama administration's Making Home Affordable program, have helped raise the profile of such services.

But the federal programs don't require any upfront fees, said Housing and Urban Development Secretary Shaun Donovan.

According to the California Department of Real Estate, "foreclosure consultants" or those holding real estate licenses cannot charge an advance fee if a notice of default has been filed against a house, the first stage of foreclosure. But if there is no notice of default, a real estate broker can charge an advance fee, as long as the customer signs a state-approved agreement for the services.

In April, the Los Angeles City Council made it illegal to charge upfront fees on mortgage modifications in the city.

The state Legislature has passed two bills that also would prohibit upfront fees. One would prevent a company from collecting a fee unless all the contracted services have been performed. The other bill is tougher, preventing any fee collection until the homeowner obtains a mortgage modification.

Schwarzenegger spokesman Mike Naple said the governor had not taken a position on the bills, which have not formally reached his desk. He has until Oct. 11 to decide.

Banning upfront fees would help prevent mortgage modification scams by allowing authorities to shut down fraudulent companies quickly, said North Carolina Atty. Gen. Roy Cooper.

"Oftentimes they will pretend to do something -- they will send a letter to the lender. They will [say], 'Hey, send us your information and we'll look over your loan.' They're not really doing anything, but they're acting like they're doing something, so it's more difficult for us to prove that they're ripping somebody off," he said.

"But when you have this law . . . preventing the upfront fee, then we can immediately go into court and get an injunction and shut them down," he said.


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