Loan Modification Fees: Is it Justifiable for a Fiduciary to Charge for a Free Service?
Mortgage brokers and loan originators have become curious in learning about loan modifications. When I ask why, they say that they’re hearing there’s good money to be made doing loan mods. What? Wait a second. I thought loan modifications were done by the lender for free.
More and more spam is popping up in my spam bin targeted at LOs and selling “loan modification referral programs,” so I decided to call one of these LOs after sending an email late last night asking for more information and receiving no reply.
This particular person goes by the title of ”mortgage planner.” On her website, she advertises a wide variety of mortgage products including the pay option ARM and the hybrid ARM (are those even available anymore?) but there’s nothing on her website about loan modifications. None of the staff bios show any experience in doing loan modifications. Here’s what I found out. The upfront fee charged to the homeowner is $3500. But the LO assures me that all the work is handled by attorneys, she says. The borrower’s up front fee is placed into escrow. If a request for loan modification is accepted by the lender for loss mitigation (statistics were offered that 93% of loans are being modified) the full fee is due. If the loan does not get modified, $2,000 is refunded and the remaining $1500 is not. I asked the LO why a homeowner wouldn’t just work directly with an attorney. She said that she works with a network of attorneys with a high loan mod approval rate and homeowners are always free to hire their own attorney and not work with her.
I asked her how much of the $3500 goes to the attorney and how much of it she gets to keep. Her response was, “why are you asking me that?” To which I replied, “because if the attorney is doing all the work, then I’m wondering how much of that fee is going to you.” She said “Well I work with the clients. I put a package together and follow up with the lender.” I said, “but a few minutes ago you mentioned that everything is handled by attorneys.” If I were to guess, I’d say that the LO earned $2,000 for a successful loan mod and the remaining $1500 went to the attorney. There are forums out there confirming my guess.
In some states, including Washington State, Mortgage Brokers and their LOs now owe fiduciary duties to consumers. A fiduciary is a person who has the power and obligation to act for another under circumstances that require complete trust, good faith and honesty. Fiduciaries are obligated to avoid self-dealing and conflicts of interests in which the real or potential benefit to the fiduciary is in conflict with the best interests of his or her client. All fees earned must be disclosed to the consumer. The fact that this mortgage planner/LO felt uncomfortable discussing his portion of the $3500 and the actual work performed is a big red flag.
Loan modifications are performed by a lender with no fee to the homeowner. HUD-approved Housing Counseling Agencies perform loss mitigation/loan modification services for free. These agencies are supported by our tax dollars.
I suppose the argument is this: “Well the loan servicing departments are really busy and by paying our $3500 fee, you have a 93% chance of getting your loan modified.” But doesn’t the homeowner still have that same 93% chance going at it alone or with the help of a housing counselor?
If I had $3500 to spend, then I think I’d rather spend the whole $3500 on legal counsel, instead of just $1500. How many homeowners headed toward foreclosure have $3500 to be paid up front? One of the hallmarks of a sham operation listed on the FDIC website is if a lender requires an upfront fee, before any service is performed.
Loan originators, a fee for services rendered is fine, but what are those services being performed? This particular person shows zero experience in loan modifications and admitted to me that the attorneys are doing all the work. Is “gathering papers together” worth $2,000? A fee earned that is not commesurate with services rendered has been catagorized as an illegal kickback via RESPA’s Section 8. Loan Servicing companies are also subject to the provisions of RESPA. All lenders are subject to RESPA whether or not the LO owes fiduciary duties to consumers. Any amount over what’s considered normal and customary for services rendered is considered a junk fee and subject to challenge.
Sigh. I suppose we need to consider that we’re coming out of a mortgage orgy where LOs actually did just gather together some papers, threw them on the processor’s desk, and picked up a fat paycheck. Why wouldn’t they believe this could be their ticket back to the good old days?
Loan Originators, before you begin earning these referral fees for basically doing nothing and handing the file over to an attorney, consider what would happen if the homeowner did not feel that he or she was well served.
Your regulator ends up with a phone call, which turns into an investigation. Perhaps you’ll end up having to refund all those fees back to the consumer. It could happen.
Loan originators, my advice is to refer your financially distressed homeowners to legal counsel and free HUD counselors. Loan modifications are performed free of charge by lenders.
As a fiduciary, is it possible to justify charging anything above zero when you know free services are available for your client?
Okay all you banker types. Help me analyze this trend. If banks/servicers are offering upwards of $3500 to outsource loss mit/loan mods, that can mean several things. It surely means that a large percentage of these people who are receiving a temporary interest rate freeze on their ARMs will be back in 3 to 5 years with their hand out again, asking for another loan mod; IF they even make it that far. 40% of recent loan mods have already re-defaulted. Random, desperate loan mods without common sense underwriting means we’re just pushing this whole mess further down the road, delaying the eventual recover until many years into the future.
Apparently one of these companies coming to town in September to sell this system to LOs immediately following the WAMB convention. They’re charging LOs a pretty hefty set-up and monthly fee to participate in their referral program. Someone is definitely getting rich quick off of desperate LOs.
If you’re interested in learning what it really takes to process loan modifications, I’ve been teaching Realtors how to successfully negotiate Short Sales for 8 years. Attend one of NAMF’s Short Refi classes (yes, this is approved for CE credits) and you’ll get a better feel for if loan mods are worth the time and effort.
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Comment by Kurt Jackson on 4 September 2008:
Jillayne,
While I agree with a lot of what you have said here, do you really think that the consumer is smart enough, or ambitious enough to do it on their own SUCCESSFULLY? I mean many of these folks weren’t smart enough to understand the loans they were getting themselves into, what makes you think they will be savvy enough to make sure they are getting themselves through this complicated process?
As far as the goverment provided sources go, do you really want to trust the government to provide that type of help? Are they really getting qualified help or half ass help from underqualified pencil pushers?
I think that a properly trained mortgage professional working with an attorney well versed in the laws surrounding the lending industry can create an effective team to help the consumer achieve the best possible outcome for them- whether it is a refinance, a loan modification, a short refinance, a short sale, deed in lieu, BK Chapt 13 or Chapt 7, etc.
Comment by Jillayne Schlicke on 4 September 2008:
Hi Kurt,
Thanks for visiting the NAMF blog. Yes, I do believe consumers are smart enough and ambitious enough to go it alone. I have heard of many consumers successfully obtain a loan mod these days on their own, and some have hired consumer protection attorneys.
Kurt asks, “do you really want to trust the government to provide that type of help?”
This is not entirely accurate. Do you mean to say HUD-approved housing counseling agencies? These are non-profit agencies supervised by HUD. HUD has a long history of keeping a watchful eye over their approved agencies. If you’re asking me if I trust HUD-approved agencies, the answer is yes.
Often, these agency employees have ZERO conflict of interest with what the client needs. Further, these agencies employees are often trained in counseling skills. I have met very few LOs with ANY counseling skills, yet all LOs are taught “selling” skills. The exception to this is LOs who came into the industry with a degree in psychology and a state therapist credential.
Kurt asks, “Are they really getting qualified help or half ass help from underqualified pencil pushers?”
We could ask the same question about LOs.
Comment by Jillayne Schlicke on 5 September 2008:
I received confirmation from Mortgage Law Central this morning that unearned referral fees (for doing no work; just refering the client) on a loan mod are a violation of RESPA Section 8:
“Section 5(b)(6) of Regulation X exempts from RESPA “any conversion of a federally related mortgage loan to different terms that are consistent with provisions of the original mortgage instrument, as long as a new note is not required, even if the lender charges an additional fee for the conversion.” Hence, if you do replace the note (which would be a refinancing) and you do not change the terms of the mortgage, the loan modification is not subject to RESPA. By implication, any conversion of a mortgage loan to terms that are different from the original mortgage is a transaction subject to RESPA.
You might argue that no amendment of the mortgage is recorded and, therefore, the loan modification is not subject to RESPA. That is not quite correct. The proper legal analysis asks whether changing the terms of the loan to a fixed rate from a variable rate is consistent with the terms of the ARM Rider to the mortgage. The answer is that the ARM Rider permits the lender to modify the interest rate and P&I payments, but the loan modification does away with these rights. It is irrelevant whether the changed terms are noted in the public records. The fact remains that the terms of the mortgage instrument have changed, and the loan modification is a transaction subject to RESPA.
This begs the question of whether loan modification assistance is a “settlement service,” since only referral fees for settlement services are barred by Section 8(a) of RESPA. For this, we go back to the definition of a “settlement” and a “settlement service” in Section 2 of Regulation X:
Settlement means the process of executing legally binding documents regarding a lien on property that is subject to a federally related mortgage loan. This process may also be called “closing” or “escrow” in different jurisdictions.
“Settlement service means any service provided in connection with a prospective or actual settlement, including, but not limited to, any one or more of the following…..Provision of any other services for which a settlement service provider requires a borrower or seller to pay.”
A settlement occurs when the borrower or the lender signs documents that commit to change the terms of a loan from an ARM loan to a fixed rate loan. Because the borrower is required to pay the loan modification company to complete this transaction, the $1500 fee bootstraps the loan modification company’s services into “settlement services,” and the $500 paid to our inquisitive reader is an illegal referral fee.”
http://www.mortgagelawcentral.com
Comment by David Hopkins on 2 October 2008:
Fee for service is the American way, fiduciary duty or not. As long as the person doing the service does something for the money they are charging (per RESPA). There are alternatives for just about everthing in the country and competition sets a fair price. As for the free government help. I wouldn’t trust them to have the knowledge or the savvy to push for the best deal for me.
Comment by Stephen Harris on 24 October 2008:
I would be interested to know if Jillayne has ever completed a modification? If she really understands the procedures involved, if she understands what these consumers go through every day with their servicers, investors and/or state agencies/non profits in order to get modifications completed. Does she have data of a self mod compared to someone completed professionally. Does she realize the additional cost the consumer bears going alone or with a state/non profit?
I have always wondered how people who never did can pontificate on those that do.
And when we speak of ethics, sure there are unethical people in the lending community, just like any other field, they should be punished. Just as I believe media should be held responsible for their body of work.
Comment by Jillayne Schlicke on 24 October 2008:
Hi Stephen,
Thanks for stopping by NAMF. To answer your question, I use to work inside loan servicing/loss mitigation for a national mortgage lender.
In terms of ethics, I disagree. I do not believe unethical people should be punished.
I believe (with some very minor exceptions) we all have the capacity for moral growth and people in the industry can all help each other in this way by talking about ethical problems and discussing all the possible choices we have, and then setting a path for the industry to follow.
Comment by Sandi Paradiso on 27 October 2008:
Wow! this is great. I’m a new LO, matter of fact I’m not working as a LO now, so all this is so new to me. As I read this a couple of things came to mind. I feel that allot of consumers out their are confused about what they can get. A lot of greeding lenders and LO a like. I think we need to educate the consumer to be care full. For me it’s all about helping individuals with their needs and if loan mods are one of them, then we need to do it to the best of our ability, when need to be trusted and if there is help that doesn’t cost, why wouldn’t we want to send our client that way. If we take care of our clients, our clients will take care of us. We want them to come back, better yet, we want them to tell their friends. Isn’t a mod the same thing as a re- fi? If not please explain to me. As Jillayne said, most people can’t afford $3500. I am a financial counselor and I see clients every day that are in a big mess with there morgatge, they don’t have the funds to pay for a re-fi or they are afraid, some one screwed them once it can very well happen again, this is why I decided to become a LO to protect some of them and make sure they get treated right. I like what Jillayne said “she hasn’t meet any LO’s with counseling skills, but all LO’s are taught selling skills”, I want to be the exception.
Comment by Michael Belisle on 3 November 2008:
Loan Modifications seem like a pre forclosure bail out to me. I do not know the work involved for a loan modification. I am sure I will find out soon enough. $3,500 for someone to handle the process with the attorney’s and home owners does not seem out of the questions. I do know that most people struggling to pay the bills do not have time during there work week to deal with the endless phone calls and transfers and hangups it will take to get a modification done. I am sure its not a five minute phone call.
Comment by Jeff Rafuse on 5 November 2008:
I can see both sides of this subject. There is definitely a huge value added by someone who is experienced and can help a client through the loan modification process. That experience could very likely translate into either a quicker resolution or a more favorable modification and that would add value and justify the fee. Particularly is this is offered as one alternative out of many, and the mortgage professional is essentially providing a consulting service to the borrower, than they deserve to be compensated for their time. Does anyone have any feedback on how efficient the non-profit groups are at these?
Comment by John Mayfield on 6 November 2008:
My brain at first could just not comprehend that a borrower having trouble with their mortgage would even have $3500! I don’t entirely trust our government but it looks like they did something with our tax dollars on this one. Free help in Housing Counseling Agencies.
Shame on those trying to take advantage of those already hurting. Kicking a dog while its down, does not help the dog get up! I don’t know how these scammers are getting away from it. We need some more media coverage on this issue for those that need it.
Comment by Garry Carlin on 7 November 2008:
Wow, this opened up quite a discussion. Since I’m a “Loan Officer” and not a modifyer I’ll never be doing any of these.
It all gets back to the basic idea of lending. If you are a licensed originator then that should be the only thing that such a license allows you to do. If the lenders who are getting these requests are too busy to handle all the calls that are coming in then maybe there is a need for a facilitator but it sure shouldn’t be one of us unless he/she has a law degree.
Comment by trianglelossmitigation.org on 7 November 2008:
In my experience as a Loss Mitigation Professional and Counselor, it is surprising yet true that many folks who are behind in their mortgage can very well afford $3500. This is primarily because their lender is not accepting their payments and sending them back if they don’t cover the arrearages and late fees, etc. Most people actually save their rejected mortgage payments believing that they can save enough to get back on track until they realize that it is a very steep uphill climb to get back on track.
Most of my clients are responsible people who just happened to have experienced a temporary hardship that caused them to get behind. They are generally eager to get back on track, and feel that our representation is the best option for them because of our 20+ years experience in Loss Mitigation, AND our fees are not even half of $3500 in most cases with a money back guarantee in all of our written agreements. There are no upfront fees however we do require a deposit in escrow (along with the necessary paperwork) to show your commitment to the lender and to cover the fee when they agree to a workout.
As far as homeowners attempting to do this themselves with Free Counseling Agencies, while it is definately an option that I explain to all of my clients BEFORE I take their case, it is often very likely that they will not get the best solution to their situation. They don’t realize that even though they may have a valid and proven hardship, lenders simply don’t care about anything but their bottom line and will usually offer an aggressive plan that often result in the homeowner having to pay MORE than they originally (couldn’t) pay. It takes deep financial analysis and sometimes hard negotiation to get what’s in the best interest of my clients and experience tells me that most homeowners just don’t have the knowledge and skill or in our case, a great rapport, that it takes to get what’s in their best interest. It’s like going to court without representation and expecting the best outcome.
Free Counseling firms have the burden of having a backlog of cases that require extensive processing times that most often exceed 90 days with a fairly modest success rate where we close cases on average from 3 weeks to 45 days with a 97% success rate. Like they say, you get what you pay for.
Comment by Denise Swafford on 10 November 2008:
I work on modifications for numerous brokers. I make sure that they sign a full disclosure that they have the option to check with a mortgage law attorney, a not for profit orginization, and different federal agencies. I find that most of the customers that come to me for the negotiation process have tried to do this on their own unsucessfully. The reason is that they don’t have the time to dedicate to the phone calls and follow-up required to make it happen. They don’t understand the options and they are so emotional with the situation that they become overwhelemed.
Comment by Harlan Delgado on 12 November 2008:
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