Foreclosure Scams and the Law

Across the United States, during the past two years our difficult economic times have caused federal, state and local government entities – and some lenders – to create new policies and programs to encourage lenders and borrowers to attempt to modify mortgages to lessen, if not prevent, the possibility of foreclosure. This activity was largely inspired by the March 4, 2009, Treasury Department guidelines which enabled loan servicers to begin modifications of eligible mortgages through the Obama Administration’s “Homeowner Affordability and Stability Plan.” Despite this, however, in many areas the crisis is only expected to worsen in 2010 as many adjustable rate mortgages are scheduled to be set to higher interest rates.

Foreclosure Scam Issues

Advance Fee Collections from Loan Modification Companies?
Loan Modification Fraud
Who are the Loan and Foreclosure Scammers?
Allow Foreclosure Help Companies Full Communication with Your Lender?
Forensic Loan Audits and Time Constraints
Foreclosure Deed Theft Scams
What is the Best Real Solution for Foreclosure Relief?

Advance Fees for Loan Modification Services are Prohibited

Homeowners who have fallen behind in their mortgage payments and who are already in foreclosure have been bombarded by calls, mass mailings, email spamming and other contacts by individuals or companies who offer services that supposedly will prevent a foreclosure, trustee sale and/or post-sale eviction. Many of these service providers are competent and trustworthy; indeed, some states regulate “foreclosure consultants” in the close to the same manner as they control real estate brokers. For example, the California Department of Real Estate issues permission for individual and corporate real estate brokers to execute advance fee agreements for loan modification and similar services; citizens can obtain information on brokers by searching the agency’s “advance fees list.” However, California law forbids both real estate licensees and “foreclosure consultants” from collecting any advance fees for these types of services if a notice of default has been recorded against the subject property.

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Loan Modification False Promises

But, in California and nationwide, there has arisen a growing number of unscrupulous actors who, preying upon the most desperate of homeowners threatened with foreclosure, take handsome advance payments after making false representations of past success and empty promises to:

• negotiate a modification of the interest rate, principal balance, or other terms of the loan prior to a recording of a notice of default;
  
• void a mortgage promissory note and/or deed of trust via a “forensic loan audit;”
• prevent the recording of a notice of default;
• obtain a forbearance from the lender;
• obtain a waiver of the foreclosure-inducing “acceleration clause” contained in a promissory note or contract secured by a deed of trust or mortgage;
• obtain re-financing;
• prevent the default and foreclosure from appearing on a credit history;
• obtain forgiveness of arrears; and/or otherwise accomplish a foreclosure workout solution.

Some of these purported service providers employ the use of logos and seals on their documents and websites that resemble the seal of the federal Department of Housing and Urban Development, or the homeowner’s state of residence’s official seal. A sub-class of scammers preys upon homeowners who speak English as a second language. They use the homeowner’s native language in oral communications, but all contract documents – for the foreclosure relief services, as well as copies of the papers given to lenders to purportedly prevent the foreclosure – given to the homeowner are written in English.

Who are These Scammers?

It seems no profession involved in real estate transactions has escaped the taint of illegal or unethical foreclosure relief activity. The principals involved in foreclosure rescue scams include attorneys, real estate agents, mortgage brokers, title company employees, notaries, credit repair entities and private citizens.

Additionally, many of these scammers falsely tell consumers that they use attorneys to review the mortgage, deed and foreclosure paperwork and negotiate with the lenders. Yet, in most cases no such attorney exists. And, attorneys can be co-scammers – e.g., the attorney refers a prospective client to the foreclosure consultant and takes an illegal and/or unethical “referral fee” if the client contracts with the consultant; the attorney allows the foreclosure consultant to use her or her firm’s name for a fee and does no work on any foreclosure cases at all; or the homeowner is sent to the consultant’s attorney and is told there are no actionable legal issues in the wake of the consultant’s failure to obtain foreclosure relief.

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Allow Foreclosure Help Companies to Assume All Communication with Your Lender?

The scammers tend to force their “clients” to cede control over communications with the lender. Homeowners are commonly instructed not to speak to their lenders about their financial circumstances and actions undertaken to avoid foreclosure, and they are unwisely told to avoid responding to any communications and to forward all communications received from the lender to the consultant. In this way, they shut the homeowner out of negotiations with the lender – assuming that any negotiations are even undertaken on the homeowner’s behalf – and they can filter and control the information the homeowner receives about the foreclosure. But, once the scammer fails to contact or remain in contact with the lender, and the homeowner proceeds with the advice to ignore all communications from the lender, not surprisingly the lender is likely to summarily cancel or reject the loan modification due to the homeowner’s perceived lack of cooperation and communication.

Forensic Loan Audits and Statute of Limitations

The substantive nature of foreclosure relief scams vary – some scammers stick to one form of misconduct, others run the full gamut of illegal or unethical behaviors. There is always the old fashioned classic “take the money and run” where the client pays in advance for the negotiation of a loan modification or forbearance agreement and, once their check clears, they never again see or hear from their supposed rescuer. A great number of scammers, on the internet in particular, offer a “forensic loan audit” where they claim to analyze foreclosure papers for violations of the federal Truth in Lending Act (TILA) or similar state statutes that could void the mortgage loan documents. However, if the loan is more than three years old, the statute of limitations has probably run on legal issues that could arise from TILA violations on the face of the documents.

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Foreclosure Scammers and Deed Theft

Other scammers commit deed theft – they promise a refinancing or loan modification, and give the desperate homeowner (usually an elderly person, a person with limited education, or an individual with limited English skills) a stack of papers to sign. Hidden in the papers is a transfer of title document, perhaps a quitclaim deed; the homeowner signs over title without realizing it. Then, the scammer obtains a “cash-out” refinance of the loan, takes the money and disappears. Yet others do what they promise to do – they stop the filing of a notice of default or sale, or they stay the sale of the property. But, they do it do by filing a Chapter 13 bankruptcy petition without the homeowner’s knowledge or consent. Yet another scam involves an illegal transfer of a fractional interest in the homeowner’s property to a third party company, followed by a false bankruptcy filing in the name of the illicit company.

And, habitually truthful homeowners can be lured into permitting the scammer to prepare false financial statements that do not reflect their actual income and expenses and to submit the fraudulently modified information to lenders. In some instances the homeowner is aware of the practice, in others the false income and expense information is submitted to lenders without the client’s knowledge or permission.

What are some Real Solutions?

If you have been victimized by a foreclosure relief scam your first priority, of course, is to take immediate legal action to stay or prevent the foreclosure process. You will want to retain the services of a competent and reputable attorney to contact and begin new negotiations with your lender. Depending on the stage of the foreclosure process, you will probably need to move the court for injunctive relief to halt the foreclosure process while all parties assess the damage created by the scammer and determine a new course of action. Your attorney will be able to also help you take action against the scammer – e.g., reporting attorney and other state licensee misconduct to the appropriate state and/or federal agencies, including the state bar if an attorney is one of the bad actors; filing a civil lawsuit; and/or contacting your local District Attorney’s office so that a experienced prosecutor can determine if any crimes have been committed.

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