Early reports of loan modification/foreclosure rescue scams identified subjects purporting to be loan modification or foreclosure rescue specialists. These subjects targeted financially troubled homeowners with promises of assistance. These scams involved the homeowners signing quit claim deeds, and resulted in loss of equity in or title to their property. The scammers used straw borrowers, who misrepresented income, employment, or occupancy, or provided other fraudulent information to deceive a new lender into making a new mortgage loan.
The scams described in later reports in the dataset reflect an evolution into “advance fee schemes,” in which purported loan modification or foreclosure rescue specialists promised to arrange modification of a homeowner’s mortgage for more favorable repayment terms. Following receipt of large advance fees, scammers rarely, if ever, provided any service. A variation of the advance fee scam involved phony debt elimination programs in which the homeowners paid advance fees and were given bogus documents, or were instructed to contact their lenders with assertions that the original mortgage debt was illegal under various laws.
Overview of Loan Modification / Foreclosure Rescue Scams
During the past decade, large numbers of financially distressed Americans facing foreclosure became victims of loan modification/foreclosure rescue scams that stripped them of advance fees, home equity, and sometimes even title to their property. The Suspicious Activity Reports (SARs) identified and reviewed in this analysis contained elements and characteristics of foreclosure rescue scams previously identified by FinCEN and other law enforcement, regulatory, and consumer protection agencies at both the state and federal levels. SARs reported that most scams began with a phony loan modification/ foreclosure rescue specialist identifying financially strapped homeowners and approaching them with false guarantees to avoid foreclosure through a loan modification or alternative plan. Loan modification/foreclosure rescue scam activities as reported in the SARs generally fell within two categories.
- Use of Straw Borrowers/Equity Skimming/Property Theft – Typically, the filers reported that a subject would tell a homeowner that if the homeowner signed a quit claim deed for the benefit of the rescuer, the mortgage would be paid, and the homeowner could pay rent and continue living in the house with the promise that the property would be deeded back when the homeowner was in a better financial position. Instead, the “rescuer” often recorded the quit claim deed and then sold the property. The purchasers were often straw buyers who misrepresented income, employment, or occupancy, or submitted other fraudulent information to deceive a new lender. Other activities reported in the SARs included appraisal fraud, creating phony investment scams, fraudulently orchestrating short sales of properties, and flipping. Parties involved in those scams included realtors, loan originators, lenders, appraisers, title companies, settlement agents, and borrowers, among others.
- Advance Fee Scams – Filers reported that con artists promised homeowners that they would save their homes, but instead simply raked in profits by requiring homeowners to pay an advance fee for services and never providing any services. The scammers contacted financially distressed homeowners with promises to negotiate a loan modification to prevent foreclosure. The scammers insisted upon payment of an advance fee, sometimes totaling thousands of dollars. They frequently cautioned the unsuspecting homeowner against telling anybody about the arrangement, particularly the lender, to “avoid jeopardizing the negotiations.” The scammers then failed to contact the lender to modify the loan, and the homeowner’s loan continued toward foreclosure.
Another variation found in SARs reporting advance fee scams involved debt elimination schemes. SAR filers reported that the scammers, in return for payment of an advance fee, advised homeowners that their debts could be eliminated because they were illegal. Financial institutions described two variations of these schemes.
- The Redemptionist Theory scam, in which the homeowner is informed that his mortgage or other debt can be renounced based on the spurious argument that the Federal Government assumes responsibility. A scammer provides the homeowner with numerous, complicated or confusing forms, as well as with legal declarations to send to the lender.
- The Freeman in Nature scam is based on the specious argument that a loan was illegally made and the borrower has no duty to repay it. This argument relies on unreasonable interpretations of federal law, the Uniform Commercial Code (UCC), or real estate law, and often involves jeopardizing a lender’s loan security by the filing of fraudulent lien releases among county land records.
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