Government’s crack down on loan modification scams

California has become the latest state to target companies taking advantage of struggling home owners searching for help to save their homes. The state is the most recent to join a growing list of governments that have banned companies from charging a fee upfront for a promise to help home owners modify their mortgage. Loan modifications have become one of the most highly marketed financial services over the last two years. Homeowners who are struggling with their finances and face the potential of losing their homes have become a target for shady companies and scam artists.

The purpose of a loan modification is for a home owner to rework their mortgage commitment with their existing mortgage lender to offer more favorable payment terms. The modification may include the forgiveness of payments and interest, reduction to the interest rate or lowering of the principal balance of the note. Borrowers typically explore a loan modification when they are unable to refinance their existing mortgage loan, because they do not qualify or their value is not sufficient to meet the lenders guidelines.

The government has been instrumental in pushing more lenders and loan servicer’s to offer loan modifications through their Making Home Affordable program. This program was put in place earlier this year with a goal of helping five millions homeowners keep their homes and avoid foreclosure over the next two years. The push to help struggling homeowners comes at a time when job losses are mounting and consumers are struggling to pay their bills. To date, the program has been met with mixed reviews and ample criticism for poor customer service from many of the countries largest lenders and loan service providers.

The move by the State of California to ban upfront payments for loan modifications is an action taken to curb private companies from trying to take advantage of homeowners. The traditional marketing pitch is that a separate company will represent the borrower to handle to the loan modification on their behalf, working directly with the lender to negotiate a better settlement. These companies often charged $1000 to $5000 upfront for their services, with no guarantee the lender will modify the borrower’s loan. The changes to the law still allow for individuals to be represented by third party companies, but eliminate the ability of the company to charge the borrower a fee upfront for this service.