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.

Report Shows Loan Modification Program May Fall Short of Goals

Congressional investigators fear that the Obama administration’s $50-billion loan modification program may not meet the assistance goals it had promised during the launch in February.

According to the Government Accountability office, the projections to help up to 4 million troubled homeowners may have been “overstated”, having been based on unproven assumptions about the housing market and the U.S. economy.

The report revealed that about 50% of delinquent borrowers were likely to sign up for the mortgage modification program, as opposed to the 65% estimated by the Obama administration in March. As of late July 2009, only 31 mortgage companies had joined the initiative and about 180,000 borrowers had received trial loan modifications.

Since the program’s launch, foreclosures and defaults have continued to rise nationwide. According to real estate information provider RealtyTrac Inc, the number of at-risk households rose by almost 15% during the first half of the year, mostly because of unemployment. Experts believe the rise will continue until mid-2010.

Herbert Allison, the U.S. Treasury assistant secretary for financial stability, issued a statement admitting that it was hard to estimate the reach of the loan modification program. He added that the government plans to update the projections on the program’s cost and participation rate.

The government has been actively urging participating servicers to beef up their efforts by hiring more staff and improving personnel training. Housing Secretary Shaun Donovan and Treasury Secretary Timothy Geithner are scheduled to meet with company executives Tuesday, and are planning to make detailed performance reports on each company starting next month.