Ban Proposed on Loan Modification Upfront Fees

Federal regulators are considering a ban on the upfront fees commonly charged by loan modification companies for helping troubled homeowners. The move is part of a nationwide crackdown on loan modification and mortgage scams, which prey on borrowers desperate to stay afloat amid the recession.

Government officials and attorneys-general from 12 states met last Thursday to coordinate their efforts to stop mortgage fraud. U.S. Attorney General Eric H. Holder Jr. sent a clear warning to fraudulent companies, saying anyone who commits mortgage fraud will be found, charged, and put in jail.

Efforts to stop mortgage fraud have been in place since April, with federal officials working with attorneys-general from different states. In California last July, Attorney General Jerry Brown filed suits against 14 companies and 21 individuals linked to various foreclosure-prevention scams in a project called Operation Loan Lies.

By the end of July, the Federal Bureau of Investigation (FBI) was investigating over 2,600 mortgage fraud cases, many as part of a multi-agency effort launched earlier this year. The move to ban upfront fees is aimed at expanding these efforts to other debt scams, according to Treasury Secretary Timothy Geithner.

Fraudulent companies have been known to charge up to $4,000 in upfront fees without any guaranteed results. Most states have little or no legislation against such charges; in California, for instance, only Los Angeles has completely banned upfront fees. Two bills are currently awaiting approval from the state, each proposing a different approach to the ban.

Federal Trade Commission (FTC) chairman Jon Leibowitz announced after the meeting that the FTC might impose the ban on mortgage modification upfront fees nationwide later this year.