Anatomy of a Loan Mod Company

Here’s a great example of why law enforcement agencies all over the place have been warning homeowners not to pay upfront fees to people who promise to modify their loans before seeing a contract of services:

The New York Times published an excellent story Sunday about former subprime brokers who’ve adopted a different take on the home loan process these days — promising consumers to negotiate with their lenders and get more affordable monthly payments.

The story focuses on Los Angeles-based FedMod, where many of the agents hadn’t even had to switch offices after the mortgage boom ended. They used to work there getting people into the exotic loans to begin with:

For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. (Jack) Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.” …

FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company.

It’s against the law for companies to collect upfront fees before providing a contract for what services will be performed. The way around that: structure your loan mod company under an attorney’s license, which FedMod did:

The partners entrusted Mr. Soussana with FedMod’s Los Angeles sales office precisely because he had proved adept at selling the sorts of loans that now required modification. In 2006, Mr. Soussana, then 30, was listed as the nation’s sixth most prolific mortgage broker by Mortgage Originator, a trade magazine, brokering $318 million worth of loans. The same year, he paid $1.8 million for a house near Beverly Hills.

“He was one of the biggest guys in subprime mortgages,” Mr. Minitzer said. “He basically wanted to get back to his old days of 50, 60, 70 guys in his office, and we could help because we were basically taking over the market.”…

The three original partners brought in Mr. (Nabile) Anz to gain a crucial asset: his law license. Having a lawyer in charge enabled them to market their venture as a law firm and thus collect upfront payments under California rules.

“Jeff asked me how I could, for lack of a better word, legitimize it,” Mr. Anz said.

The California Department of Real Estate warns consumers that many dubious loan modification companies have organized themselves as law firms solely to allow them to collect upfront fees, even though the lawyers have little, if anything, to do with the services provided. The department cautions consumers against hiring such companies.

The whole story’s worth a read. I detailed some local loan modification efforts in a story last week.

— KELLY BENNETT