The financial crisis, like any other upheaval, creates opportunities for scams. Last week, as the Obama Administration was issuing changes to its loan modification program, California Attorney General Jerry Brown announced a stipulated court judgment against principals of a loan modification scam. As a result, two foreclosure assistance companies, U.S. Foreclosure Relief Corp. and H.E. Servicing, Inc. were shut down, and their principals prohibited from working in the real estate industry. The judgment also gives $1 million in restitution for persons that paid up front fees for between $1800 and $2800 for non-existent loan-modifications services.
The suit is a result of a joint investigation among California, Missouri and the Federal Trade Commission that commenced in March 2009. The investigation found that the companies aggressively telemarketed that they could reduce distressed homeowners' principal payments and lower interest rates for a substantial up-front payment. The investigation also found that the companies falsely claimed that they had successfully negotiated thousands of loan modifications. The FTC's enforcement division will be responsible for monitoring the companies' compliance with the judgment.
States that have been hardest hit by the mortgage crisis, such as California, not surprisingly, have also been the epicenter of many of these scams and have aggressively trying to stop these practices. In August 2009 the California Attorney General's office ordered over 386 foreclosure assistance companies to register with the state and post up to a $100,000 bond in order to continue to conduct business. At the same time it ordered 27 other companies to substantiate their marketing claims. The Florida Attorney General has engaged in similar efforts.
The Federal government also has tried to combat these scams, even as it moves to expand opportunities for loan modifications. The Obama administration's "Making Home Affordable" website prominently displays information on steps to prevent being taken in by foreclosure rescue scams.
Nevertheless, these scams are likely to continue, as a growing number of homeowners have problems making their payments. The Administration's latest initiative that gives some jobless homeowners a three month break on payments and lenders more incentives to reduce principal on certain delinquent loans, starting June 1, may only encourage more unscrupulous persons to try to take advantage of desperate debtors. Thus, a more aggressive educational effort, coupled with more state and federal enforcement, may be necessary to deter possible future heartache.