DFI Advises Homeowners To Verify The Licenses Of Anyone Offering Loan Modification Services Before Hiring Them

OLYMPIA – The Washington State Department of Financial Institution’s Consumer Services Division advises homeowners who are delinquent on their mortgage to be cautious about using the services of someone offering to help them work with their lender to modify the terms of their home loan.

The Department of Financial Institutions (DFI) has received a number of inquiries regarding the legality of providing this service in this state. While there is nothing inherently illegal about this business, those providing this service in the State of Washington must be licensed as loan originators, mortgage brokers, or consumer loan companies and be overseen by the Department of Financial Institutions. Additionally, under applicable law, the loan modification provider associated with mortgage brokers have a fiduciary relationship with the borrower and must act in their best interest.

“DFI is concerned that homeowners in desperate situations may pay substantial fees for loan modification services and not take advantage of the HUD-approved counseling services offered for free by numerous non-profits,” DFI Director Scott Jarvis said. “The non-profit providers can often negotiate better deals because they have formed working relationships with many of the lenders.”

“We are concerned because loan modification businesses are using high-pressure tactics to get people to pay for their services, in some instances claiming a 100 percent success rate in negotiating their loan,” warns Deborah Bortner, DFI’s Director of the Consumer Services Division. “The truth is, not every loan is fixable.”

DFI advises homeowners to make sure loan modification providers are licensed as a loan originator before using these services. Verify a license at www.dfi.wa.gov or by calling 1.877.RING.DFI. DFI is also warning consumers to be especially wary if one of these companies asks for a fee up front. Consumers may also wish to seek free homeownership counseling. For more information, visit www.homeownership.wa.gov or call 1.877.894.HOME.

The unanswered question remains: Is helping a consumer negotiate the modification of a deed of trust the unauthorized practice of law?

If the answer is “yes,” then the nominal, paperwork intake performed by an LO must stop at some point and the file handed over to a local attorney.

I’ve submitted an inquiry to the WA State Bar Assoc on this issue asking for an “unauthorized practice of law” opinion.

Attorneys do not split their fee with non-attorneys. This means the consumer could choose to pay the LO a nominal fee for work performed such as counseling and gathering the homeowner’s information and then the consumer will pay a licensed attorney a separate fee.

I’m not sure why a consumer would choose to pay an LO a fee for doing what could be performed for free by working directly with their lender or by working with a HUD-approved Housing Counseling Agency. If a consumer does decide to pay for loan modification help, it seems more rational to just hire an attorney direct. I’ve surveyed 10 attorneys and so far almost all of them are quoting in the $1500 range for a loan modification. Some charge more if there are more liens on title. Why pay that fee, along with a separate fee to an LO?

Why pay a loan mod salesmen $3500, $4000, and upwards of $5,000 for something you can get for $1500 from a person with a law degree whose conduct is heavily regulated by the Bar?

The percentage of loan originators who know anything about loan modifications is at about one half of one percent right now because nobody up until a few weeks ago was doing them. Instead, the industry just refinanced people over and over again. 

Mortgage brokers and LOs are fiduciaries. This means they must put their client’s interests above their own interests.  There can be no undisclosed secret fee splitting. The consumer must be told everything, including fully disclosing and explaining your fee. Brokers and LOs are still coming to grips with what it means to be a fiduciary.

True story from the classroom this week:

I was delivering a 20 min lecture on fiduciary duties. One loan originator sitting in the front row with his arms crossed was not taking any notes while his colleagues were feverishly writing down everything on the board. At the conclusion he raised his hand and said, “My broker has an agreement that we have all our customers sign and in that form, it says that we are not their fiduciary so I don’t have to know any of this stuff.” 

It’s going to take a while before some mortgage brokers and LOs choose to fully embrace these higher duties. Sooner if we end up with a court case.

Just take a look at this craigslist ad: Make $15,000 per month doing loan modifications….no experience necessary.

There are many options for getting help with a loan mod. Prices range from free to predatory. Washington state Licensees ought take great care before moving in this direction. 

In closing, it’s worth mentioning that Indymac loan modifications are re-defaulting at a rate of 58% at the six month mark. This begs the question of whether a homeowner is well-served with a loan modification. This is something fiduciaries would ask themselves as well as disclose and discuss with their clients before recommending this option.

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. 

WA State residents: Governor Gregoire just appropriated 1.5 million of your tax dollars to housing counseling agencies all across the state that can help WA State residents FOR FREE.

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.