In times of economic distress, opportunities for corruption become more plentiful. Just as insects are known to propagate in the ruins of a fallen city, loan modification facilitators demanding advance fees thrived in the carnage of the subprime collapse. This is indicative of the dark side of human nature – when one individual suffers a tragic twist of fate, another is perched and ready to make a quick buck off his misfortune.  This opportunity was so good for brokers and agents that even attorneys piled into the fray.  [For information covering the previous attorney-exemption loophole which plagued loan modification regulations, see the March 2009 first tuesday article, Loan modification negotiations are the domain of real estate licensees.]

This has especially been felt in the real estate industry where the fallout of the Millennium Boom has left 25% of California’s homeowners underwater – around 2,500,000 people – and all needing a loan modification. Nefarious loan modification facilitators have taken advantage of this increased demand by collecting advance fees from the homeowner then accomplishing little to nothing in negotiations for a loan modification with the homeowner’s lender. To make matters worse, the services charged and “performed” by the facilitator could just as easily be obtained for free by the homeowner directly through his lender or a nonprofit housing counseling agency.

In 2009, one of the most calamitous years in memory, the Department of Real Estate (DRE) revoked a record breaking 672 licenses in relation to loan modification scams, up 50% from 2008. Additionally, 105 licensees have surrendered their licenses to the state and are currently facing disciplinary action for accepting advance fees.

first tuesday take: Effective October 11, 2009, California Business and Profession code §10147.6 prohibits advance fees to be paid for any loan modification or loan forbearance service on a one-to-four unit residential loan – even if the licensee received a “no objection” letter from the DRE previously granting him authority.

As evidenced by three of the four feature articles currently published on the DRE’s website, advance fees are still a problematic issue in California. The numbers cited by the Real Estate Commissioner are even more dire than those presented in the above reported Sacramento Bee article. The Commissioner reports the DRE is in the process of investigating over 1,300 loan modification complaints. In the last 12 months alone, the DRE has issued over 400 desist and refrain orders against individuals illegally receiving advance fees. Obviously, this problem continues to be a thorn in the side of California’s recovery. [For more information and additional requirements regarding advance fees, see the January, 2010 first tuesday Legislative Watch (LW)]

If one of your family members, friends or clients is considering a loan modification, keep in mind the revealing disclosure which must be provided prior to entering into any residential loan modification service:

“It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting”

Re: “105 real estate licenses revoked – a record,” from the Sacramento Bee