GAO Takes Closer Look at Home Loan Modification Scams

The Government Accountability Office (GAO) comprised a report, Homeownership Preservation: Federal Efforts to Combat Foreclosure Rescue Schemes Are Under Way, but Improved Planning Elements Could Enhance Progress, based on “information available to federal and state agencies and nonprofit organizations, such as consumer complaints and the number of enforcement actions.”

The report revealed two predominant schemes in this day and age targeting vulnerable home owners facing foreclosure and interesting developments from studies conducted in five high foreclosure rate states; Arizona, California, Florida, Illinois, and New York. However, it was mentioned that “data that can provide a reliable indicator of prevalence are limited, information available to federal and state agencies and nonprofit organizations, such as consumer complaints and the number of enforcement actions, suggests that these schemes are a problem.”

Types of Schemes

Advance-Fee Loan Modification Schemes

This type of scheme is the primary focus and concern in our country at the moment. These are schemes that deliver promises of loan modifications and the lowering of mortgage payments, often with a money back guarantee, that on average charge an up front fee of $3,000. However, they are not following through with the service they are promising nor are they refunding the fee if they cannot close the deal with lenders. “Law enforcement officials reported that these schemes are difficult to combat because persons engaging in such schemes can start up or shut down their activities quickly and can do so across state lines.”

Roughly 38% of the FTC’s enforcement actions asserted that the companies misrepresented their connection with the government, a mortgage provider, lender or nonprofit organization. It was also shown through studies conducted by the National Community Reinvestment Coalition that these schemes actually increased the risk homeowners were in because they were encouraged by these companies to not to pay their mortgage or talk with their lender which put them in further jeopardy of losing their homes to foreclosure.

Illustration of an Advance-Fee Loan Modification Scheme

Sales-Leaseback Schemes

These schemes usually occur when a homeowner at risk of foreclosure and is convinced to transfer the deed of their home to another person or company as a means of saving the home. The home is then in the hands of the transferee and they can do what they will with it. Although, “according to these sources, the original homeowner is permitted to lease the home from the person engaging in the scheme and told that he or she may buy the property back in the future. However, the person engaging in the scheme may have no intention of selling the property back to the original homeowner and may make the terms of the buy-back agreement too difficult for the original owner to comply with, thereby resulting in the homeowner losing the property.”

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However, with the crash of the housing market it is evident that these schemes were more predominant before the decline of the market because companies that partook in this scheme benefited more with higher equity in homes.

Case Studies

It was reported that those that usually partake and mastermind these schemes are “former mortgage industry professionals who had been involved in the subprime market; career scam-artists; and licensed professionals, such as attorneys who allow their names or licenses to be used by those perpetrating schemes to add credibility to their promises to provide relief. ” Scam-artists are master manipulators and on occasion attempt to gain a consumer’s trust by claiming they are backed or work in conjunction with the government to gain trust. Meanwhile the use of an attorney’s or firm’s name is also a tactic for creating a “trustworthy” source.

“Information provided by federal and state officials indicates that newer schemes have been emerging. For example, a March 2010 FTC consumer alert warned consumers to watch out for a forensic mortgage loan audit scam, which it explained as a “new twist on foreclosure rescue fraud.” In this scheme, someone charges a fee to conduct an “audit” intended to find regulatory violations in the mortgage loan origination in order to allow the homeowner to use the “audit” results to avoid foreclosure, accelerate the loan modification process, reduce the loan principal, or even cancel the loan. According to the FTC consumer alert, there is no evidence that forensic mortgage loan audits will help borrowers obtain a loan modification or any other foreclosure relief, even if the audits are conducted by a licensed, legitimate, and trained auditor; mortgage professional; or lawyer. Similarly, in May 2010, based on information provided in Suspicious Activity Reports (SAR), FinCEN described variations of advance-fee scams in which a person promises to eliminate a homeowner’s mortgage or other debt on the premise that the debts were illegal or the government would assume responsibility.”

Although federal and state officials lack comprehensive information on the potential victims of these schemes, officials believe that potential victims are likely to include anyone desperate to save their home from foreclosure, regardless of their economic status or demographic characteristics. For example, many federal and state officials said that persons engaging in these schemes will target anyone having difficulty in paying their mortgage loan, and an FTC official and officials from two of our case-study states said that even wealthy individuals or professionals may become victims of these schemes if they are unable to pay their mortgage. However, officials from three of our case-study states also said that they were specifically aware of schemes in which a particular ethnic or religious community was targeted. As explained by one state official and a representative of a local housing nonprofit organization, in these cases, persons engaged in the schemes gained the trust of those within the community because they spoke the same language as the homeowners or had emigrated from the same country.

It’s difficult to fight these scams when they can so easily be started and shut down via the internet. The companies often cross state lines which makes it especially troublesome for state officials to pursue. It has been said that these companies run similarly to any other telemarketing firm; “most of the employees work in sales, soliciting customers and obtaining payments, while performing no work on behalf of the customers. ”

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FBI officials have admitted that these schemes are considered to be a problem based on the information 56 of their field offices received, “50 percent of which reported the schemes as prevalent and another 20 percent of which identified them as emerging schemes”

To protect consumers from these schemes the FTC has suggested a rule that would prohibit for-profit companies from being paid until promised services are provided. While, “California, Florida, Illinois, and New York have passed specific laws prohibiting companies that provide these services from collecting fees in advance, and officials from these states noted that these laws have helped them to take action against perpetrators of these schemes, although a Florida official said that these schemes persist despite the existence of the law. They explained that the existence of these laws generally allows them to cite a violation without having to otherwise prove criminal intent, which they explained can be more difficult to establish.”

Where Does Your State Stand?

Number of Home Loan Payments More Than 60 Days Past Due, by State

Top Three States at High Risk of Foreclosure

California – 485,195
Florida – 279,373
Texas – 155,926

Lowest Risk of Foreclosure States

North Dakota – 987
South Dakota – 1,894
Wyoming – 2,030

As always…Stay educated. Stay strong. Seek help.

Original GAO Report

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