How to Avoid Loan Modification Scams
Last week, The Mortgage Calculator explained the government’s loan modification program. What I neglected to cover in this post, however, is how this program has been commandeered by scammers and private interests. Whereas the government has arranged for both the provision of “free” counsel and “free” loan modifications (free in the sense that the program is funded through taxes, and not by charging mortgagers directly), middlemen and for-profit counselors have nonetheless come out of the woodwork to take advantage of this potential windfall.
Some of these “counselors” are outright scam artists, while others extort a fee for services that should be free. The most blatant scams involve phony correspondence, ostensibly from the government or one’s lender, offering a loan modification in exchange for a fee. Often, they will guarantee a loan modification and use this as justification for charging money up-front. Naturally, this fee is not refunded when the counselor fails to procure a loan modification on behalf of the mortgager. According to the Federal Trade Commission, “These companies touted so-called guarantees and high success rates to mislead consumers about their services; charge upfront fees that legitimate nonprofit organizations do not charge; and use copycat names or look-alike Web sites to appear to be a nonprofit or government entity.”
According to another source, “There are numerous scams involving deed transfer or questionable loan paperwork. The strategy varies, but the goal is always the same; separate you from your money and, possibly, your property.” These scammers deliberately aim to overwhelm borrowers with paperwork, such that unfavorable terms can be easily concealed. In some cases, mortgagers will unwittingly sign over the deed to the counselor; in other cases, deed transfer is stated as necessary in order to secure a loan modification. In yet another scam, a “counselor” will pretend to assume the loan for you, so that you erroneously make payments not to the actual lender but to a fake intermediary that will probably disappear after a couple months.
There are also legitimate “foreclosure rescue” companies that “prey upon the financially unsophisticated.” While such companies are technically above-board, their exorbitant fees place them in the same company as the actual scammers. These companies may insist “only an attorney or licensed debt adjuster can legally represent a borrower for a mortgage modification.” While someone with a working knowledge of the legal side of mortgages may have an easier time negotiating the loan modification process, there is no rule that stipulates that a lawyer must be involved. Then again, one consumer rights advocate says that “Unless your agent is a licensed attorney, it is illegal in most states for an agent to negotiate a loan modification with your lender.” This is a testament to how much confusion there is surrounding this system.
In the end, there are a few common-sense rules that you should follow if you want to avoid becoming a victim of a loan modification scam. First, loan modification counseling is available free of charge, which means you should never have to pay money/engage the services of a for-profit counselor. Most states remain databased of HUD-recommended counselors. At the same time, while such a counselor may be more capable of securing a loan modification, there is nothing that prevents you from trying to negotiate with the lender directly. Lastly and most importantly, if it seems to good to be true, it almost certainly is.