In an effort to curb the predatory practices of certain "loan modification" companies, claiming to offer loan modification services for an upfront fee, the Arizona Legislature recently passed several laws with some good sized teeth – codified at A.R.S. Sections 44-1378-1378.08.
1. Claim, demand, charge, collect or receive any compensation until after the foreclosure consultant has fully performed each covered service that the foreclosure consultant contracted to perform or represented that the foreclosure consultant would perform.
2. Claim, demand, charge, collect or receive any fee, interest or other compensation for any reason that is not fully disclosed to the homeowner.
3. Take any wage assignment, lien on real or personal property, assignment of a homeowner’s equity or other interest in a residence in foreclosure or other security for the payment of compensation.
4. Receive any consideration from any third party in connection with a covered service provided to a homeowner unless the consideration is first fully disclosed to the homeowner.
5. Acquire, directly or indirectly, any interest in the residence in foreclosure of a homeowner with whom the foreclosure consultant has contracted to perform a covered service.
6. Accept a power of attorney from a homeowner for any purpose, other than to inspect documents as provided by law.
A.R.S. Section 44-1378.05 is where the teeth are, because it contains some serious financial downside to continuing the practices prohibited above:
A homeowner who is injured as a result of a foreclosure consultant’s violation of this article may bring an action against the foreclosure consultant to recover damages caused by the violation, together with reasonable attorney fees and costs.
B. If the homeowner prevails in the action, the court may award punitive damages as determined by a jury or by a court sitting without a jury, but the punitive damages shall be at least one and one-half times the amount awarded to the homeowner as actual damages.
The Arizona Attorney General is also given powers to proceed under these new laws. Even before these laws took effect in July 2010, the Attorney General filed suit against Scottsdale-based Guardian Group, LLC, a "loan reduction" service company.
According to a press release from the Attorney General, the company, which markets nationally, made claims it would negotiate with lenders to purchase a consumer’s note for less than face value and sell the note in an investment package to a third-party investor. Guardian Group then told the consumer that it would modify the rates and terms of the consumer’s mortgage loans and reduce the principal owed to 90 percent of current market value.
The lawsuit, filed in Maricopa County Superior Court, alleges the Guardian Group fraudulently represented itself as providing loan reduction services to homeowners struggling to make their mortgage payments. The company charged consumers an average advance fee of $1,595 for mortgage loan refinancing services, which it rarely provided. It collected fees from more than 2,500 consumers for enrollment in its Principal Reduction Program since August 2009.
The Guardian Group is without question not the only company out there doing the same thing. As the Attorney General commented on The Guardian Group, "this company has exploited the financial struggles of hundreds of homeowners by promising them mortgage relief it couldn’t deliver."
First it was the greed of the loan originators and general American public, then it was the greed of the Wall Street firms that securitized all these loans, then it was the greed of the Wall Street bond firms that repackaged these loans into collateralized debt obligations, then it was the greed of the ratings agencies who had no clue of what they were rating, then it was the greed of the investors who didn’t know what they were buying, be it collateralized debt obligations or credit default swaps – all of which led to the meltdown in 2008.
Now it is the greed of the mortgage loan servicers intent on stringing home owners along so they can make more fees and the "loan modification" scammers that are intent on getting money upfront and then do little to nothing to earn it. Glad to see a good law in place with some real teeth. Problem is, any recourse against these likely "fly-by-night" companies is going to be tough and expensive at the front end. Always more difficult to chase the money after the fact.