The calls started last November. Speaking in Spanish, a representative from New Century Solutions in Lake Forest, Calif., pitched Jose Chirino to purchase a forensic loan audit. For $2,995, the representative said, an audit could help the San Jose, Calif., homeowner get a much-desired loan modification and principal reduction. Chirino, who works for Santa Clara County, said no, but New Century called again -- and again, and again. After about 20 such calls, Chirino finally agreed and sent $1,500 to start the process in January.In a written contract, New Century said an attorney would review and advise Chirino, draft a demand a letter, and negotiate with his lender. And then, nothing happened.
He's not alone. Hundreds of organizations have cropped up over the last two years offering forensic loan audits, often linked to professional attorneys and auditors. They promise to review a homeowner's mortgage loan documents to determine whether the lender complied with state and federal lending laws, and expedite a loan modification request. While the audit may indeed reveal errors in loan documents, the process very rarely results in a loan modification or rescind.
Thousands Have Been Scammed
In 2010, the Federal Trade Commission issued its first alert about the bogus auditing practice. That year, the Better Business Bureau had no complaints filed in its category for forensic loan audits. But in the first eight months of 2011, the BBB said it filed 50 complaints in that category, with more than half of them against Accelerated Equity & Development, Inc., and Tila, LLC.
Since 2008, the FTC has seen a jump of more than 300% in mortgage foreclosure relief and debt management complaints, and last year received more than 28,580 for the category that includes all mortgage-related issues. The not-for-profit Homeownership Preservation Foundation, which operates a national free counseling hotline, receives 4,000 calls a day for housing help, and between 100 to 150 of those callers identify themselves as victims of a mortgage scam, says Josh Fuhrman, the organization's senior vice president of community affairs.
"They lure consumers to believe that by hiring them for a review of loan modification package, they can expedite the process and get better results, or they make false promises that they can get a loan mod or principal reduction," says Fuhrman. "Homeowners are not typically getting any results. [Scammers] are just stringing [homeowners] along, or they disappear."
Fighting Back
By March, Chirino started to wonder why hadn't heard anything from his lender. He contacted the audit organization, which pressured him to pay the remaining $1,495, he said. After a few rounds of back-and-forth with the company -- and still no movement on his primary mortgage -- Chirino contacted a local nonprofit, the Fair Housing Law Project, for assistance. With the help of a volunteer attorney, he drafted a demand letter in July and was able to recoup his $1,500 from New Century. Separately, he was able to obtain a loan modification through a HUD-approved housing agency, and today remains in his house, where he lives with his wife and daughter.
Like so many mortgage scams, this one was based on a kernel of truth: Chirino says his original 2006 home loan from Countrywide -- which has since been accused of widespread lending violations -- may have marked him as a potential scam target. But the difference between what New Century Solutions promised -- a loan audit and modification -- and what it delivered -- nothing -- is the hallmark of the scams that continue to plague distressed homeowners. Homeowners, burned once by bad mortgages, are now getting burned again as scammers try to milk their distress for profit.
New Century Solutions did not return several calls for comment on Chirino's case.
How the Scam Works
Bait-and-switch auditing shops attempt to leverage specific guidelines in the Truth in Lending Act that allow for some loans to be rescinded if certain disclosures were not made in the loan origination documents. The practice of forensic loan auditing is in fact a real one, and it has been used in recent years to expose mortgage fraud in specific instances. However, scammers have deployed their own marketing to exploit the law and capitalize on people's misunderstandings of it -- with door-to-door, radio, TV, direct calls, and web advertising. Their goal is to lure vulnerable homeowners into paying a substantial sum of money for an toothless audit.
The latest evolution of this scam involves approaching homeowners who are current on their payments.
"The [scam] that we have seen have a lot of traction with most recently is targeting borrowers who are current. [They are selling] the notion of taking a preventative measure," says Marietta Rodriguez, the national director of home ownership programs for NeighborWorks, a government agency. "With the forensic audit, [the scammers] see if they can refi or get you into a lower mortgage."
Reilly Dolan, assistant director for the division of financial practices at the Federal Trade Commission, says operators promise to find the mistakes that [the homeowner] can use to obtain the loan modification they want. "If they are making false promises like, 'We'll find a violation and guarantee you can use this information to make a loan modification,'" that's a deceptive practice, he says. In reality, however, very few loans qualify for the Truth in Lending Act exception.
Another complication surrounds the three-year statute of limitations for the right to rescind. "Even if they do uncover something, they are very unlikely to able to assert [a case] because of the statute of limitations," says James Zahradka, supervising attorney at the Fair Housing Law Project of the Law Foundation of Silicon Valley, where Chinino found help. The foundation has been providing resources to homeowners to mount their own small claims cases to get their money back from auditing shops that make false claims. Zahradka says it has helped about 100 homeowners with loan mod scams over the last year.
He adds that this particular scam undermines real cases because it can pit real legal work against feckless attorneys, who are either not filing cases at all based on the audit or creating frivolous cases.
There is still an estimated 4.5 million to 5 million homes at risk of foreclosure, according to the Homeownership Preservation Foundation. Mortgage mod scams are continuing to cloud the path to help for distressed homeowners, and borrowers looking for help are increasingly faced with a confusing landscape. One outcome is that many of the government- and lender-sponsored events offered to provide help to homeowners have been poorly attended, as DailyFinance has reported.
Fuhrman says that many homeowners turn unwittingly to scammers after getting frustrated with legitimate attempts to work with the lenders. As the loan modification process has become more visible in the last year, the number scammers has shot up.
"They go where there is blood in the water," he says.
Five Ways to Spot a Mortgage Mod Scam
- Don't trust any organization or person who guarantees results.
- Avoid any organization that asks for an upfront fee before providing any services.
- Don't sign any contracts under time pressure, and don't sign an that you do not understand.
- Don't stop making payments on your loan, even if they advise you to.
- Don't hand over your personal financial information unless it to an appropriate loan help organization.
What To Do If You Have Been Scammed
Zahradka says that many homeowners must take matters into their own hands if they hope to get the money back from scam organizations. The first line of defense is a persuasive demand letter, in which the homeowner asks for the money back, specifies what happened, what was promised and what was delivered including dates. The letter can threaten to take the organization to small claims court. He suggests that homeowners be ready to compromise and accept partial refund.
If you have been scammed, report the fraudulent company to your state's licensing entity, and make a complaint to the state bar if an attorney was involved, and/or the local district attorney.
Where to Get Free, Legitimate Help
All homeowners in the United States who have questions or are facing foreclosure can call (888) 995-HOPE for free, nonprofit housing counseling 24 hours a day, 365 days of the year, with assistance in more than 160 languages. Housing counselors work with homeowners in a three-way conversation with the lender. HUD also provides a list of housing organizations providing help to homeowners by state.
Catherine New is a staff writer for DailyFinance.com with the AOL Huffington Post Media Group.
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