[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE SOLUTIONS FOR
PREVENTING LOAN MODIFICATION
AND FORECLOSURE RESCUE FRAUD
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MAY 6, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-28
U.S. GOVERNMENT PRINTING OFFICE
51-587 WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Housing and Community Opportunity
MAXINE WATERS, California, Chairwoman
NYDIA M. VELAZQUEZ, New York SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
EMANUEL CLEAVER, Missouri THADDEUS G. McCOTTER, Michigan
AL GREEN, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri GARY G. MILLER, California
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
JOE DONNELLY, Indiana WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
PAUL E. KANJORSKI, Pennsylvania ADAM PUTNAM, Florida
LUIS V. GUTIERREZ, Illinois KENNY MARCHANT, Texas
STEVE DRIEHAUS, Ohio LYNN JENKINS, Kansas
MARY JO KILROY, Ohio CHRISTOPHER LEE, New York
JIM HIMES, Connecticut
DAN MAFFEI, New York
C O N T E N T S
----------
Page
Hearing held on:
May 6, 2009.................................................. 1
Appendix:
May 6, 2009.................................................. 37
WITNESSES
Wednesday, May 6, 2009
Anderson, John W., Vice Chair, Federal Housing Policy Committee,
National Association of Realtors (NAR)......................... 26
Coakley, Hon. Martha, Attorney General, Commonwealth of
Massachusetts.................................................. 7
Drexel, Scott J., Chief Trial Counsel, The State Bar of
California..................................................... 22
Freis, James H., Jr., Director, Financial Crimes Enforcement
Network (FinCEN), U.S. Department of the Treasury.............. 4
Saunders, Lauren, Managing Attorney, National Consumer Law Center 20
Story, Robert E., Jr., Chairman-Elect, Mortgage Bankers
Association (MBA).............................................. 24
Twohig, Peggy, Associate Director, Division of Financial
Practices, Bureau of Consumer Protection, Federal Trade
Commission (FTC)............................................... 5
APPENDIX
Prepared statements:
Anderson, John W............................................. 38
Coakley, Hon. Martha......................................... 49
Drexel, Scott J.............................................. 57
Freis, James H., Jr.......................................... 66
Saunders, Lauren............................................. 75
Story, Robert E., Jr......................................... 98
Twohig, Peggy................................................ 104
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written responses to questions submitted to John W. Anderson. 117
Written responses to questions submitted to Hon. Martha
Coakley.................................................... 120
Written responses to questions submitted to Scott J. Drexel.. 126
Written responses to questions submitted to James H. Freis,
Jr......................................................... 131
Written responses to questions submitted to Lauren Saunders.. 138
Written responses to questions submitted to Peggy Twohig..... 145
Capito, Hon. Shelley Moore:
Written statement of Florida Attorney General Bill McCollum.. 153
LEGISLATIVE SOLUTIONS FOR
PREVENTING LOAN MODIFICATION
AND FORECLOSURE RESCUE FRAUD
----------
Wednesday, May 6, 2009
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the subcommittee] presiding.
Members present: Representatives Waters, Lynch, Cleaver,
Green, Ellison, Driehaus, Himes, Maffei; Capito, Jones, Putnam,
Jenkins, and Lee.
Also present: Representative Moore of Wisconsin.
Chairwoman Waters. This hearing of the Subcommittee on
Housing and Community Opportunity will come to order. Good
morning, ladies and gentleman. I would like to thank our
ranking member, Shelley Moore Capito, and the other members of
the Subcommittee on Housing and Community Opportunity, for
joining me today at this hearing entitled, ``Legislative
Solutions for Preventing Loan Modification and Foreclosure
Rescue Fraud.''
I believe that this hearing is critical, given the
emergence of a new type of criminal actor in the housing
market, at a time when the U.S. economy is still reeling from
subprime meltdown. We are witnessing homeowners being taken
advantage of by predators claiming they can modify their loans
or prevent foreclosure.
Today's hearing will help identify legislative solutions to
put an end to loan modification and foreclosure rescue fraud.
These scam artists portray themselves as foreclosure
consultants, and offer to rescue or help struggling homeowners
stay in their homes through aggressive marketing campaigns. For
a fee, these individuals or entities promise to help save homes
from foreclosure, but either charge an excessive fee for
services that can be obtained for free by a qualified nonprofit
counseling agency, or deliver little or nothing for the money
received.
In addition, loan modification consultants are also
entering the market, claiming to have established relationships
in the mortgage industry which will enable them to negotiate
better loan modification terms than borrowers could do for
themselves. They can charge as much as 2 percent of the loan
amount to negotiate with the homeowner's market servicer, but
often deliver either nothing or a higher payment than the
homeowner was paying before contacting these companies. These
companies often use terms such as ``Federal,'' to mislead
borrowers into thinking they are official U.S. programs.
In response to this growing crisis, Federal agencies have
begun to take action. Earlier this month, Treasury Secretary
Timothy Geithner announced the establishment of the multi-
agency task force to address foreclosure rescue and loan
modification fraud, including the Department of Justice, HUD,
and the FTC, State investigators and prosecutors, civil
enforcement authorities, and the private sector.
States have also taken action to protect their citizens and
stop these criminal actors. I commend those States that are
aggressively addressing foreclosure rescue scams. For example,
earlier this month, Massachusetts Attorney General, the
Honorable Martha Coakley, a witness on our first panel, filed
lawsuits against four individuals claiming to be loss
mitigation specialists who were falsely claiming to be 1 of 14
firms recruited by the government to provide foreclosure
prevention services.
Although a number of States have enacted foreclosure rescue
fraud statutes that would prohibit advanced fees and/or require
written contracts for all foreclosure-related services, many of
these statutes exempt attorneys or real estate brokers. Because
attorneys are allowed to charge up-front fees, fraudulent loan
modification companies contract with law firms to use their
name. For example, the Federal Loan Modification Law Center was
able to skirt California law by contracting with lawyers so
they could receive up-front fees.
During the Financial Services Committee mark-up of H.R.
1728, the Mortgage Reform and Anti-Predatory Lending Act, I
worked with Congresswoman Gwen Moore on an amendment she
authored and withdrew, which was similar to her bill, H.R.
1231, the Foreclosure Rescue Fraud Act of 2009, that would
prevent the practices of foreclosure consultants such as
charging up-front fees for services, acquiring interest in the
property, or receiving a lien on the property.
In addition, Ms. Moore's amendment renewed the exemption
for attorneys, except for those filing non-frivolous bankruptcy
petitions or proceedings to prevent a foreclosure.
As this bill moves through Congress, we want to make sure
that it will effectively put a stop to the deceptive practices
of foreclosure rescue and loan modification scam artists. That
is why this hearing is so important today.
Again, I look forward to hearing the witnesses' views on
this very important issue, and I would now like to recognize
Ranking Member Capito for her opening statement.
Mrs. Capito. Thank you. I would like to thank Chairwoman
Waters for recognizing me. I would also like to ask unanimous
consent to submit for the record the written testimony of
Florida Attorney General Bill McCollum on this very topic.
Chairwoman Waters. Without objection, it is so ordered.
Mrs. Capito. Thank you. While many Americans across the
Nation continue to struggle with meeting their obligations,
there are those in our society, unfortunately, who are taking
advantage of families who are already stressed, which I believe
is unacceptable. The actions of these unscrupulous individuals
are an example of the worst in human nature, and they should be
held to the most stringent criminal procedures and penalties.
According to the Mortgage Bankers Association, in the most
recent national delinquency survey a record number of borrowers
are delinquent on their mortgages, and entering foreclosure.
Given the recent uptick in distressed borrowers facing
delinquency, borrowers often--some borrowers have fallen victim
to foreclosure prevention and loan modification fraud scams.
On February 10, 2009, the Treasury Secretary announced a
series of plans intended to help struggling homeowners. As a
follow-up to increased reports of fraud, on April 6, 2009, the
U.S. Department of the Treasury's Financial Crimes Enforcement
Network, FinCEN, issued guidance to financial institutions on
filing suspicious activity reports regarding loan modification
foreclosure rescue scams.
In addition, States like Florida--as the chairwoman noted--
Nevada, California, Illinois, Maryland, and Minnesota have all
taken action to combat mortgage and foreclosure assistance
fraud.
Following the FinCEN announcement of guidance on April 6th,
the regulators must continue to utilize existing authority to
protect consumers, and maintain the safety and soundness of
home financing.
One key aspect that will aid in this are the national
licensing standards and registration database for all mortgage
originators that was signed into law last year. This will help
in preventing bad actors from preying on borrowers and
homeowners by providing greater accountability and
professionalism in the industry. But it is critical that
Congress exercise rigorous oversight to ensure these abusive
practices are halted, and those responsible for carrying them
out are punished.
I would like to thank the chairwoman for holding this
hearing. I would also like to thank Ms. Moore for offering her
legislative proposal on foreclosure, H.R. 1231. I look forward
to hearing from our witnesses, and learning their thoughts on
how Congress and regulators can prevent further abuse and
fraud.
And I yield back. Thank you.
Chairwoman Waters. Thank you very much.
Mr. Lee?
Mr. Lee. I do not have an opening statement.
Chairwoman Waters. No opening statement? Thank you very
much. Then we will go right to our panel.
Our first witness will be Mr. James Freis, Director of the
Financial Crimes Enforcement Network at the U.S. Department of
the Treasury.
Our second witness will be Ms. Peggy--I think that's
Twohig--when you come, you can correct me--Associate Director
in the Division of Financial Practices at the Bureau of
Consumer Protection at the Federal Trade Commission.
And our third witness will be the Honorable Martha Coakley,
attorney general of Massachusetts.
Would you please come forward? There we are. Thank you very
much. And, Ms. Peggy Twohig, would you please tell me the
correct pronunciation of your name?
Ms. Twohig. ``Twohig.''
Chairwoman Waters. ``Twohig?'' All right. Thank you. We
will start with Mr. ``Freis,'' is it? Is that the correct
pronunciation?
Mr. Freis. That is correct.
Chairwoman Waters. Thank you.
STATEMENT OF JAMES H. FREIS, JR., DIRECTOR, FINANCIAL CRIMES
ENFORCEMENT NETWORK (FinCEN), U.S. DEPARTMENT OF THE TREASURY
Mr. Freis. Good morning. Chairwoman Waters, Ranking Member
Capito, and distinguished members of the subcommittee, I am Jim
Freis, the Director of FinCEN. I appreciate the opportunity to
appear before you today to discuss our work in combating
mortgage loan fraud, and our role in the Administration's
efforts to address the current foreclosure rescue fraud
problem.
FinCEN has unique authorities to make contributions to this
regard. Congress placed us at the intersection of law
enforcement and the regulatory communities, as well as the
financial industry. FinCEN's basic purpose is to safeguard the
financial system from the abuses of financial crime. Pursuant
to the Bank Secrecy Act, FinCEN issues regulations, notably
including requirements that financial institutions monitor for
and report suspected fraudulent activity. FinCEN analyzes these
suspicious activity reports, also known as SARs, in support of
its regulatory and law enforcement functions.
FinCEN first focused on analyzing trends and patterns
related to mortgage fraud back in 2002. It has since become
apparent that SAR data was a leading indicator that mortgage
loan fraud was a serious escalating problem.
In November 2006, FinCEN published the first in a series of
analytical reports in an effort to provide the financial
industry with red flag indicators that could help them protect
their financial institutions and their customers from being
victims of fraud. We greatly value our partnership with the
financial industry to advance our shared goals of protecting
against abuse of the financial system.
Subsequent FinCEN mortgage fraud studies have focused on
the role of complicit insiders, how fraud can be uncovered
during foreclosures, and how criminal activity is
interconnected, transcending multiple financial sectors.
In addition to the published analytical reports, FinCEN
provides both strategic and tactical support to Federal and
State law enforcement and financial regulatory communities to
investigate and prosecute fraud.
FinCEN has a long history of supporting law enforcement
efforts to root out fraud, waste, and abuse in government
programs. Recently, FinCEN joined a multi-agency task force
headed by the Special Inspector General for the Troubled Asset
Relief Program, the SIGTARP, as part of a proactive initiative
to deter, detect, and investigate instances of fraud in some of
the Administration's programs under the financial stability
plan.
Broad new policy initiatives must be accompanied by
increased vigilance to protect against criminal abuse that
could undermine them. On April 6th, Secretary Geithner, along
with Attorney General Holder, Secretary Donovan, FTC Chairman
Leibowitz, and Illinois Attorney General Madigan announced a
major inter-agency effort to combat foreclosure rescue scams.
This included two specific FinCEN initiatives:
First, FinCEN issued an advisory with red flags to help
financial institutions spot and report questionable schemes
that may indicate a loan modification or foreclosure rescue
scam.
Second, the Treasury Department announced an advanced
targeting effort coordinated by FinCEN to combat fraudulent
loan modification schemes. FinCEN is marshaling information
from the financial industry and participating industries to
identify possible loan modification fraud suspects, and to
refer them to appropriate enforcement authorities for civil and
criminal investigations.
By serving as a networking and deconfliction center, FinCEN
is also helping law enforcement agencies streamline and
coordinate their efforts. While Federal criminal investigators
and prosecutors are committed to pursuing the most egregious
organized criminal actors, it is critical that we involve our
State and local partners to avoid letting criminals slip below
the radar screen.
FinCEN can play a natural role here, through its
relationships not only with all major Federal law enforcement
agencies, but also FinCEN's longstanding support of law
enforcement in all 50 States. Collectively, we must send a
strong deterrence message to criminal opportunists tempted to
prey upon struggling homeowners.
On behalf of the just-over-300 men and women of FinCEN, we
are proud to play our part in supporting the Administration's
and the Treasury Department's broader efforts under the
financial stability plan, including the Making Home Affordable
programs.
At least as important as our law enforcement efforts to
hold criminals accountable, are efforts to prevent this illegal
activity from happening in the first place. We can promote this
goal by educating financial institutions and homeowners about
risks and vulnerabilities and, where possible, using regulatory
authorities to help mitigate risks.
Thank you for raising awareness of this important issue. I
am happy to answer your questions.
[The prepared statement of Mr. Freis can be found on page
66 of the appendix.]
Chairwoman Waters. Thank you very much.
Ms. Twohig?
STATEMENT OF PEGGY TWOHIG, ASSOCIATE DIRECTOR, DIVISION OF
FINANCIAL PRACTICES, BUREAU OF CONSUMER PROTECTION, FEDERAL
TRADE COMMISSION (FTC)
Ms. Twohig. Chairwoman Waters, Ranking Member Capito, and
members of the subcommittee, I am Peggy Twohig, Associate
Director of the Division of Financial Practices at the Federal
Trade Commission. I appreciate the opportunity to appear before
you today to discuss the FTC's efforts to protect consumers
from foreclosure rescue and loan modification scams.
With the rapid increase in mortgage delinquencies and
foreclosures, the Commission has intensified its efforts to
halt the proliferation of, and to warn consumers about, these
types of scams. Today, I will briefly describe the FTC's recent
law enforcement, consumer education, and policy development
efforts to protect financially distressed homeowners from
mortgage relief scams.
There are many varieties of mortgage relief scams. But, in
most cases, the perpetrator makes misleading promises that they
will be able to stop foreclosure or obtain a loan modification.
These scams often share these characteristics.
First, they use terms like ``guarantee,'' or ``97 percent
success rate,'' to mislead consumers about their chances of
getting what the company is promising.
Second, they charge large up-front fees, as high as $1,000
to several thousand dollars for these promised services.
Third, after collecting the fee, they typically do little
or nothing to help consumers obtain a loan modification or stop
foreclosure.
Some of these companies use copycat names, or look-alike
Web sites to appear to be affiliated with a nonprofit or
government entity when, in fact, they are not. The Commission's
latest case illustrates this tactic. The FTC alleged that the
Federal Loan Modification Law Center misrepresented, through
its advertising, that they were affiliated with or endorsed by
the United States Government. The Commission also alleged that
they misrepresented that they could obtain a loan modification
or stop foreclosure in all or virtually all instances.
On April 24th, the court issued a preliminary injunction
prohibiting the company from making misleading claims and
collecting up-front fees. In a little over a year, the FTC has
brought 11 cases targeting foreclosure rescue or loan
modification scams. In our law enforcement program, we are
working closely with other Federal agencies, such as FinCEN, as
well as State law enforcers who are also actively pursuing
these scams.
In addition to its recent enforcement actions, the
Commission announced a new consumer outreach and education
initiative to reach homeowners directly, with the help of other
government agencies, nonprofit organizations, and mortgage
industry members. Through this initiative, homeowners are
receiving materials, such as this flyer, about how to spot and
avoid mortgage rescue scams.
Most recently, the Commission provided mortgage servicers
and others with an audio public service announcement from the
FTC that they can use when consumers call. These announcements
warn consumers about mortgage foreclosure scams, and provide
tips on how to avoid them.
The FTC also will be considering what rules are warranted
to more comprehensively protect consumers in this marketplace.
The Omnibus Appropriations Act of 2009 authorized the FTC
to issue rules to prohibit unfair or deceptive practices with
respect to mortgage loans. Using this new rule-making
authority, the Commission intends to address unfair or
deceptive practices by those selling mortgage loan modification
or foreclosure rescue services. New Federal rules have the
potential to greatly increase the protection the FTC can
provide to financially distressed homeowners.
In conclusion, the Commission is committed to protecting
consumers throughout the credit life cycle, including
preventing harm to the many American consumers who struggle
with mortgage debt. And the FTC is employing all of its tools--
enforcement, consumer and business outreach, and policy
development--to protect consumers from mortgage relief scams.
Thank you for the opportunity to testify at this hearing
today.
[The prepared statement of Ms. Twohig can be found on page
104 of the appendix.]
Chairwoman Waters. Thank you very much.
Ms. Coakley, Attorney General Coakley? Thank you.
STATEMENT OF THE HONORABLE MARTHA COAKLEY, ATTORNEY GENERAL,
COMMONWEALTH OF MASSACHUSETTS
Ms. Coakley. Thank you. Good morning, Chairwoman Waters,
Ranking Member Capito, and members of the subcommittee, my
Federal colleagues here, this morning. I am Martha Coakley, and
I serve as the attorney general of the Commonwealth of
Massachusetts. I just want to note that my colleague in
Florida, Attorney General McCollum, has been a leader on this
issue, as have many of us at the State level, looking at the
problems coming out of predatory lending.
I appreciate the opportunity to testify this morning on
H.R. 1231, and the important issue of protecting homeowners
from fraud related to specifically loan modification and
foreclosure rescue.
While we have some concerns about H.R. 1231 as originally
filed, we support the amendment offered by Congresswoman Gwen
Moore, and we urge you to adopt it, so that consumers will be
further protected from foreclosure rescue fraud.
Let me note that it has been apparent to me that there are
few times when homeowners will be more desperate or more
vulnerable than when they are facing losing their homes, or it
has already occurred. In fact, it is the reverse of the
American dream, and it has been most unfortunate, and it
continues.
In Massachusetts, as in many parts of the country, we have
experienced a dramatic surge in home mortgage foreclosures,
due, in large measure, to unsound and predatory lending
practices. Many foreclosures and delinquencies have resulted
from loan practices and products that were, in fact, destined
to fail, which is important to understand when you look at this
crisis.
In response to this situation, our office has sought
accountability through regulation under our powers under
chapter 93(a), through litigation, and other advocacy, both
with our fellow attorneys general and with Federal partners.
For instance, in June of 2007, our office enacted an
emergency regulation under our chapter 93(a) for unfair and
deceptive practices around foreclosure rescue schemes. We
issued other regulations after hearing, but we felt that the
issues around the kinds of schemes I'm going to discuss in a
minute were so apparent that it was important to issue the
emergency regulation.
In addition, we have brought litigation around and against
attorneys, brokers, and loan modification assistance companies
who have preyed upon homeowners facing foreclosure. We have
brought suits against subprime lenders who promoted and
originated risky loans, and finally, against mortgage
professionals who engaged in loan application fraud.
For instance, our office filed suit against two major
subprime lenders, Fremont Investment and Loan, Fremont General,
and H&R Block, owned by Option One Mortgage Corporation, for
predatory lending practices. In Option One we also brought a
claim that minority borrowers were targeted for subprime
lending.
In both actions, we were able to obtain injunctions,
injunctive relief, that restricted foreclosures on certain
loans because of the specific combination of ultra-risky loan
features and, most importantly, allowed us to essentially
freeze those loans in time, so that they either had to be
modified or come back before us before the holders were able to
foreclose.
That has been our goal--in addition to enforcement,
obviously--is to try to seek loan modification. So it is most
disturbing to see the kinds of fraud that have arisen around
those people who are already in trouble, and who, once again,
are victims of predatory action. We have seen an increase in
that. We think it will continue.
I want to just say we have seen two specific types of
fraud. They include those who attempt to convince desperate
homeowners to transfer ownership of their homes. That was
really the first wave that we saw in 2006 and 2007, and really
was our entree into looking at regulating predatory lending
issues.
The second, which is what we see more frequently now, those
who charge up-front fees with faulty promises to help
homeowners obtain loan modification, often with little or no
qualifications to do so, or ability to do so. That first scheme
claims to assist consumers facing foreclosure by promising
replacement mortgage financing. Owners would turn over title to
their home. They would essentially become renters in their own
home, but then couldn't pay the rent either, and would be
evicted. So they would lose not only their home, their equity,
and any chance of recovery.
More frequently, we have seen the fraudulent loan
modification scheme that allows people, we believe, to make a
quick profit by claiming to help consumers obtain loan
modifications.
It has been apparent to us that by issuing these
regulations in our State, it has allowed us to give quick and
effective relief, particularly because these practices now are
known to be illegal, and so we believe it has had a deterrent
effect. And when it has not, we have been able to act quickly
in court, by seeking injunctive relief, which is really what is
necessary in these situations.
Particularly for the Federal legislation, we think that it
will be effective to do it, and that Federal legislation will
provide that kind of consistent Federal deterrent, as well as
allow for State enforcement. The preemption issue is paramount
for many of the attorneys general, and this allows us to
continue to enforce our own State regulations, as well as this
one.
We believe that many of the features of this would be very
effective in the issues that we have seen. And so, we support
it. We think it's particularly important that you not exempt
brokers and attorneys. Many of the schemes that we have seen
involved attorneys and brokers, and they are the very group of
people who are most able to, frankly, unfairly and deceptively
advertise and get business along these lines.
If I could make one other note, we would ask that you look
at least at the allowable fees foreclosure cap. Our concern is
that, in our experience for instance, that would allow, on the
second prong, the sum of 2 monthly mortgage payments, as much
as $6,000. We would observe that if a homeowner facing
foreclosure is unable to make their monthly mortgage payments,
or they're in imminent danger of falling behind, they will
likewise be unable to afford 2 months' payment.
And indeed, we are concerned that cap might become a floor
for what people would charge. So we just ask that you visit
that.
We think it's crucial, as I mentioned, that States be
allowed to bring these actions. We believe we have had success
in Massachusetts in doing that. And we think that this trend of
predatory loan foreclosure schemes will continue, but this
would provide a very effective deterrent, and an effective way
to enforce.
I appreciate today's opportunity, and we look forward to
working with you, as I know my other colleagues do, on any
other issues that arise around this legislation or this issue.
Thank you.
[The prepared statement of Attorney General Coakley can be
found on page 49 of the appendix.]
Chairwoman Waters. Thank you very much. I will recognize
myself for 5 minutes.
I thank you for coming today to give us testimony on this
very important amendment that was offered by my colleague, Ms.
Moore. And I think you can be very helpful to us in our
strengthening this amendment to make sure that we accomplish
what we would like to accomplish.
There are several things I would like to get a better
handle on. Lawyers--as you know, lawyers are basically exempted
in the amendment. And, because they are able to charge fees for
their services not directly related to loan modifications, they
are in the position of being able to offer services as any
lawyer could offer various kinds of services on loan
modification.
But I, too, have discovered that they are responsible for
most of the problems we are having. I was in--I think it was--
Detroit, Michigan, recently, where I learned about what some
lawyers were doing.
And, of course, I have been paying a lot of attention to
the Federal Loan Modification well-advertised program on TV,
where I took the opportunity to call late one night, and made
up a case for needing a loan modification. And, of course, they
did what these fraudulent representatives do. After playing a
little music, after hearing my story, they came back and told
me how lucky I was that they would accept me for a loan
modification, and asked me for $3,500.
These are the same people who had a blog that had me in the
blog, having picked up some testimony that made it appear that
I was supporting them. And then, of course, there is another
blog with the President in it, making it look as if the
President is supporting them. One is the United Law Group, and
the other arrives from the Federal Home Loan Modification. I
understand the founder of the Federal Loan Modification Group
is a lawyer.
So, the question becomes, what do we do about lawyers? Some
States have already exempted them. I attempted to offer a
modification to Ms. Moore that was accepted that would deal
with frivolous lawsuits, but I'm not so sure that covers it
all. Do you have any thoughts about that? Let me start with
FinCEN.
Mr. Freis. Thank you, Madam Chairwoman. FinCEN has
certainly seen, with respect to mortgage fraud problems more
broadly, that insiders to the industry, including lawyers, have
often been a part of the problem. I hope to say--and I believe
it's true--that that's the exception, rather than the rule,
that most lawyers do seek to serve their clients in productive
ways. But I certainly agree with you, that certain lawyers have
been bad apples.
But in terms of the aspect of how to exempt them, I defer
to my colleagues who are responsible for the enforcement and
the prosecution side with how it would affect them in the
individual cases. But FinCEN does have broader familiarity with
this issue under the aspect of our Bank Secretary Act
regulations--
Chairwoman Waters. No, I appreciate that. But I want to
focus right in on lawyers and this amendment. This is an
important amendment that could do a lot of good. We don't want
to have a big loophole in here, though.
How do you feel about the exclusion of everybody who does
not fit the qualifications that are being identified, Ms.
Twohig?
Ms. Twohig. In terms of attorneys, as you noted yourself,
one of the primary defendants in the Federal Loan Modification
Law Center case that we have brought was an attorney. And so we
have seen it firsthand in our law enforcement actions, that
some attorneys are trying to use their bar license to basically
set up shop as a mortgage relief company, and, in the process,
we think--we have alleged--deceiving consumers about the
services they are going to get.
So, I think, to the extent that there is any exemption for
attorneys, it needs to be very narrowly drawn. They should not
be able to exempt their telemarketers, the folks that you
called when you called their number. There is no reason why
those employees on the other end of the line should be exempt.
So, I think there could be ways to carve out a narrow
exemption. Pro bono work likely should be carved out. But I
think it needs to be very carefully considered, so that there
is not a loophole that attorneys can drive through.
Chairwoman Waters. Attorney General Coakley?
Ms. Coakley. We have considered that. And it's our belief
that competent and ethical attorneys can be a valuable asset
for homeowners trying to avoid foreclosure. Many people do
employ attorneys for filing for bankruptcy, or representing
them in connection with court proceedings.
But we have also found that many of the scams that we have
investigated and prosecuted--for instance, one recently was
called Loan Mods By Lawyers, and that was--that goes to the
point that lawyers carry with them the authenticity that they
will do this fairly and correctly.
I think the key is to stress that this does not prohibit,
in Massachusetts, someone from taking a retainer, for instance,
that then may be charged against services that are incurred--
time incurred or other valuable service. What is concerning to
us is that lawyers and others take a fee up front--$1,000,
$1,500, as you indicated--and that is an entry fee. That does
not go to anything that's useful or beneficial.
Particularly when there are lots of nonprofits around to
help people, people are getting more success now in trying to
modify their own loans, that's the advice we give to folks.
We believe lawyers, frankly, would have a problem of their
own if they continued to take these fees without providing
services. And so we had no problem in Massachusetts saying,
``We are going to declare for everybody that you cannot take a
fee up front.'' It does not prohibit an ethical lawyer from,
again, charging a retainer for which services afterwards could
be charged against it.
But the fee for, frankly, no service involved, we have
determined to be unfair and deceptive in Massachusetts.
Chairwoman Waters. Thank you very much. Ms. Capito?
Mrs. Capito. Thank you, Madam Chairwoman. I want to start
with the attorney general. I think you covered this in your
statement, but I am curious to know.
For the States who have existing laws that deal with
mortgage and foreclosure fraud on the books, and this
particular bill, I think you stated that there isn't a
conflict, and that your State statutes would still hold up, and
the Federal statute wouldn't take over--could you explain that
to me a little bit?
Ms. Coakley. My understanding is that this statute, unlike
many other Federal statutes, does not preempt current State
law, so that a State, for instance, that had higher measures or
higher standards around this could still enforce those.
I think the nice piece of this is that these standards,
though, will be consistent across the States so that they can
be enforced either by the Federal Government or, in a State,
for instance, where there has not been legislation passed, an
attorney general could enforce this in a way--again,
particularly in this area, I think we would have a huge
deterrent effect on this activity.
And so, we see it as a complement to Federal legislation.
It's not duplicative, and it does not disadvantage the States
by preempting us from the field.
Mrs. Capito. All right. Thank you. Just an informational
question. With these--are you finding in your investigations
of--or when you're bringing suit, that a lot of these
fraudulent scam artists--we will put it that way--are they
national in nature? Are they targeted in, let's say, Florida or
Massachusetts or Nevada or California? You know, what's the
nature of that?
And my additional question is, we know that this exists.
Just for my information, are there legitimate businesses that
actually carry forth this business of helping people prevent
foreclosure that exist throughout the country? I'm sure people
have assistances, but are there businesses created just for
this?
Ms. Twohig. I can take that one. Starting with your first
question, clearly some of these companies are national. The
Federal Loan Modification Law Center had nationwide advertising
on TV, radio, and the Internet. And they were nationwide.
Some are not. Some are more local in nature. I think, in
the old days, we used to see people knocking on doors,
literally going door-to-door. I think more often now they are
using the Internet and telemarketing and telephones to reach
out more broadly. And I think what is true is almost always
they are clearly crossing State lines. So, that's the picture
that we see.
And, in terms of--your second question?
Mrs. Capito. Are there legitimate businesses--
Ms. Twohig. Oh--
Mrs. Capito. --created on a national level, more
interestingly, that are playing by the rules, although there
are really no rules for this?
Ms. Twohig. I think that's a hard one for--from the Federal
Trade Commission's perspective, to answer. Because, of course,
we zone in on the ones we think are problems. And so, we see
the bad practices and the bad actors. We spend our time there.
And so, from what we see, we see very troubling practices.
I will say, though, that there are some things that no one
can legitimately promise. No one can guarantee that you will
get a loan modification. No one can guarantee that they will
stop a foreclosure. So no one can legitimately do that. That's
just not possible, to promise that.
Mrs. Capito. Mr. Freis?
Mr. Freis. Ranking Member Capito, if I can add, in response
to your first question about the national nature, first it must
be said that we have seen schemes that cross the entire
country, from California to Massachusetts, from Washington
State to Florida, and multiple places in between.
With respect to the targeting effort that we have ramped up
in the past month, one of the successes that we have had, on an
initial basis, is the ability to bring together the attorneys
general from different States with respect to specific actors
that are operating in multiple States. And, more broadly, with
respect to the mortgage fraud issue that we have been focusing
on for years, we do indeed see national organized criminal
groups.
Mrs. Capito. Just in closing, I would like to reiterate
something the attorney general said, that--and we have had this
in our committee several times, trying to get, you know, help
for homeowners, and all the assistance to help people really
figure their way out of this problem. There are a lot of great
nonprofits all across this country that are daily trying to
help folks figure out a way to stay in their home and keep
their home.
And, additionally, I would say that if there is anybody out
there who has an 800 number that advertises, the chairwoman
will be calling you on one of her sleepless nights, because she
always has them on speed dial, I think. So I yield back. Thank
you.
Chairwoman Waters. Thank you. Mr. Lynch.
Mr. Lynch. Thank you, Madam Chairwoman. I want to thank you
for holding this important hearing. And also, I want to thank
our witnesses, especially my own attorney general from the
State of Massachusetts, Martha Coakley. I appreciate the work
that you have been doing on this, all of you.
A while back, in my district, the Town of Randolph was kind
enough to give me the high school auditorium, and we did a
foreclosure prevention workshop. We expected maybe 100 people
to show up. We had over 400 families coming in.
And the one thing that I did like was the fact that we had
already vetted a group of banks, mortgage companies, and
nonprofits, to come in and help with these work-outs. Would
that type of model--you know, if we had--and I know in
Massachusetts, we have--at least in Brockton--we have some good
groups that are nonprofits that are working to help families
out of this, and to work with banks to get these modifications
accomplished.
Is there a way that we might intervene, do these town
meetings, bring in the legitimate folks to conduct these, or
assist with these modifications the way they should be done, as
opposed to just trying to fly the red flag about, ``These are
the guys you need to watch out for?''
Ms. Coakley. If I can answer that, I think they are not
mutually exclusive, and I think they complement each other. On
the one hand, you need to make those folks who need help aware
of what the resources are. And I know we do that through our
Web site. I know there are lots of other organizations that
have tried to do that, bar associations that do volunteer work.
But it still is the individual who doesn't pay attention to
that until they get the notice in the mail, and then they
panic, and then they're going to be victimized, potentially, by
one of these e-mails, faxes, telephone calls.
And I agree with the assessment. They are national, but
there are also very local ones.
Mr. Lynch. Yes.
Ms. Coakley. Our first case was against an individual in
one of our communities who, frankly, preyed upon his neighbors
and friends and church members, and took all the titles to
their homes. And it was pretty discouraging to see that happen.
Obviously, with the economy, and with brokers out of work,
and attorneys looking, this is a scam that can be lucrative
with quick hits on the small level and on the national level.
So, I think we need to continue to advise people of how
they can get loan modifications, and banks have been a little
better about trying to do that without help. But with not-for-
profits available, that is the route to go. And for someone to
say, ``I can guarantee you that I will help you modify your
loan,'' it's too good to be true, so it isn't.
Mr. Lynch. Right. Mr. Freis, yes?
Mr. Freis. I concur with the attorney general, that the
education aspect is critical, and must underscore the
Administration's commitment as part of the Making Home
Affordable program to promote the work of financial
institutions to help homeowners who have a legitimate ability
to modify their loan.
But, of course, bringing in--some of the banks only get
part of the parties involved. You need to ultimately bring in
the servicers with respect to the individual homeowner's loan.
And, once again, I think that needs to be a national effort. We
know that the mortgage market is no longer just on a local
basis.
Mr. Lynch. Director, let me ask you. I work with FinCEN a
lot, as you know. We just worked on opening the financial
intelligence unit in Morocco about 3 weeks ago. It's tough to
get my head around the fact that you're dealing with all that,
you know, anti-terrorist financing--I happen to co-chair the
task force on terrorist financing and non-proliferation--and
you're also doing this.
I can only imagine the volume of suspicious activity
reports and cash transaction reports that you're getting from
banks under the Bank Secrecy Act and all the other statutes
that are steering information through your office. And now
you're dealing with this, which is more generic and home-
grown--insidious, nonetheless.
But how are you handling it, as an Agency within Treasury?
How are you handling the responsibility of screening all this?
And is this something that is coming to you regularly? And how
do you deal with that, from a workload perspective?
Mr. Freis. Congressman Lynch, first let me thank you. You
have been a great supporter of FinCEN, and in particular in
reintroducing the Reauthorization Act. We appreciate that
ongoing support for all of the work that we do.
Basically, with respect to your question, it's true. FinCEN
is a very small agency of a little over 300 persons with a
broad mandate. And, basically, it's all about following the
money. Criminals, they don't respect the law. They certainly
don't respect the borders.
So, one unique authority that Congress has given us is the
ability to go beyond the jurisdictional limits that constrain
some of the work of our law enforcement partners, and to reach
out to our counterpart agencies around the world. Exactly as
you mentioned, the financial intelligence units, now we have
relationships with more than 100 countries.
So, in the past, when a criminal sent money abroad--and we
have seen multiple instances, including those suspects involved
in mortgage fraud who have shuttled money out of the country,
that's detailed in the March 2009 report that we published--we
have the ability to reach out to our counterpart agency and not
lose that trail.
In other cases, agencies literally--they give up. They say,
``It gets too hard for us to follow the money when it leaves
the country,'' and we have an ability to extend that effort
along the continuum.
In terms of the resource issue, focusing on domestic fraud
has been a core part of FinCEN's mission from its very
inception. And, next to all the work that we're doing with
respect to mortgage fraud, loan modification schemes, and the
like, the next biggest area where we're working on is the
southwest border and Mexico-related threats from the homeland.
Chairwoman Waters. Thank you very much. Mr. Driehaus?
Mr. Driehaus. Thank you, Madam Chairwoman, and thank you
very much for conducting this hearing on, as Mr. Lynch
indicated, a very important matter. And I want to thank Ms.
Moore for her efforts in this area, as well.
As I have heard each of you testify, and read your
testimony, I am pleased with the fact that we are moving in the
right direction, in terms of cracking down on some of these
fraudulent schemes. But I continue to be very concerned about
local enforcement, and the resources going into local
enforcement.
You know, for years, we have seen these predatory
activities. And even when we knew that fraud was occurring, and
prosecution could take place under existing State law, it
didn't happen. And it didn't happen, in many cases, because it
was either not on the radar screen of the attorneys general and
the various States that we represent--I happen to be from
Ohio--and certainly it wasn't on the radar screen of local
county prosecutors who are worried about robberies and murders,
and things of that nature.
How do we--you know, in your experience, how do we better
help local prosecutors and attorneys general to become aware of
the issues regarding mortgage fraud? And how do we get them the
needed resources? And what types of resources do you think they
need in order to fully investigate and prosecute this type of
behavior?
I appreciate the testimony, Ms. Coakley, about what you are
doing, and what some of your colleagues are doing in the
various States, but I would like your opinion on whether or not
we're going nearly far enough, given the scope of the problem.
Ms. Coakley. I think in this particular area, which is
limited appropriately to these kinds of frauds, I think this
is--in fact, goes far enough, and will be very helpful.
In general--and it's a bigger issue than I think we can
address today--many of the State attorneys general have been
held back because they specifically have been preempted from
taking action for banks and other areas. So we have, in
beginning this effort, been limited to those companies over
which we had jurisdiction, and weren't preempted from.
For instance, we have no ability to look at credit card
interest rates, because we're totally preempted from that. So I
just use that as an example.
We could always use more resources. Everybody could in
Massachusetts. It is the DAs who, as you indicated, do the
violent crime. We try to focus on both civil and criminal,
these kinds of issues.
But I guess I feel that this particular problem was one
that caught everyone on Wall Street, Main Street, Elm Street,
AG's office, Federal level, we all kind of saw it coming, but
we didn't. And, to the extent that we are able to start to
identify pieces of it, we did what we could where we were not
preempted.
And I would just ask for this committee, as we go forward,
to look at this model and this bill, which says, ``We're not
going to preempt States, we want a consistent model. We will
let States enforce the Federal model,'' which I think is a
workable way to go about this issue. But we are the ones who do
see these problems first. They start out small, often, and we
see them, in some States and not in others, well before they
reach the level that Washington can respond to them.
And it is incredibly important, I think, as the AGs have
worked together on many of these issues, that we can--and I am
hopeful that we will--work more closely with the Federal
Government in ways that do not duplicate these kinds of
actions, that we have consistent standards for those that we
are going to regulate, and that we complement both the
deterrent effect that the legislation or regulations have, and
our ability to enforce violations of them.
Mr. Freis. Congressman, certainly we see every day the
resource limitations that the State and locals have, in terms
of going forward with enforcement actions, particularly in this
economic environment.
But I think one of the critical things that we can do--and
what FinCEN has always tried to do--is serve a multiplier
effect in leveraging resources. We do that in a number of ways.
We have relationships in every State, with the State law
enforcement coordinator, such as the Massachusetts State Police
Department which operates a fusion center, together with other
local entities in Massachusetts. We provide them with
information, and we provide them with leads in areas such as
this, with respect to loan modification fraud.
Another thing that we actively do is try to share
expertise. We go out there and we train them as to what are the
modus operandi that the criminals are following, and what are
some of the successful ways we have been able to do that in law
enforcement.
Basically, what we're trying to do is move away from the
compartmented model so that every single field office, every
single State entity, has to reinvent the wheel with a recurring
problem. I think that has been very successful. We would like
to do more. And, with respect to this effort in particular, we
have established relationships with 38 States' attorneys
general. Every one of those is multiplying and building off of
successes of one another.
Chairwoman Waters. Thank you very much. Mr. Ellison?
Mr. Ellison. Thank you, Madam Chairwoman, for this very
important hearing. I appreciate it. As usual, you are leading
the way.
Ms. Twohig, how would H.R. 1231 enhance the FTC's
enforcement powers with respect to stopping these fraudulent
actions?
Ms. Twohig. I think what it would do would establish some
Federal standards, some Federal rules of the road, if you will,
that would help us protect consumers. Without that, we are
using the tools we have now, which is primarily the Federal
Trade Commission Act, which prohibits unfair and deceptive acts
and practices. And that is what we are using to go in and
charge the companies with deceptive practices when they promise
things that they can't deliver to consumers, a loan
modification or rescuing them from foreclosure.
But, with that said, it would be helpful, in my view, to
have some standards in place that would outline exactly where
the lines are, what's legal, what's not, and to rein in and
prevent some of the practices, such as the taking fees up
front.
Mr. Ellison. Does the FTC have adequate staff to carry out
the new clarifying powers that it would have?
Ms. Twohig. We have stepped up our efforts in this area
considerably, both enforcement--and we have new authority under
the Omnibus Appropriations Act to do rule-making with respect
to mortgage loans. So the Commission has said it intends to use
that authority to also see what it can do under that authority
to put some rules in place.
Mr. Ellison. Do you have enough staff?
Ms. Twohig. Yes.
Mr. Ellison. Would the FTC essentially do the investigative
work, and then refer the case for prosecution to the U.S.
Attorney?
Ms. Twohig. The cases we do we bring ourselves--
Mr. Ellison. Okay.
Ms. Twohig. --in Federal court. We have to refer to the
Department of Justice if we are seeking civil penalties under a
particular statute. But under the Federal Trade Commission Act,
we file the suit in the name of the Federal Trade Commission
directly, ourselves, in Federal court.
Mr. Ellison. Okay. So, for the cases that you might refer
to Justice, in your view, do you have any view on whether
they're adequately staffed to handle the cases you might refer
to them?
Ms. Twohig. Well, right now, in this area we are bringing
them under the Federal Trade Commission Act. So right now,
that's not an issue in this area.
Mr. Ellison. Okay. One of the issues that has come up quite
a bit--well, let me ask you this. In your written testimony you
state that the FTC has rule-making authority to prohibit unfair
and deceptive practices with respect to mortgage loans, and is
working on a rule to restrict foreclosure consultants.
What is the FTC's progress on the rule? And when will a
proposed rule be issued?
Ms. Twohig. We just got that authority recently in the
Omnibus Appropriations Act, and so we are currently busily
formulating a recommendation to make to the Commission, which
would get that rule-making process started. We expect that to
be very soon.
Mr. Ellison. You know, in some of my conversations in my
own district in Minneapolis and the surrounding suburbs, we
have heard people complain about high re-default rates after
there has been a loan modification. How is this foreclosure
prevention fraud related to re-defaults? Or is it?
Ms. Twohig. I think it's really two separate issues. The
issue that we have been focusing on, that the testimony focuses
on, is the segment of the market place as trying to prey on
consumers--
Mr. Ellison. Right.
Ms. Twohig. --who are desperate, in desperate straits, and
reaching out for an answer, and they are falling victim to the
companies that are promising them something they just can't
promise.
Mr. Ellison. I understand.
Ms. Twohig. I think a whole separate issue is when the
mortgage servicers themselves and the legitimate nonprofit
sector are obtaining actual modifications for consumers, and
whether--what the standards are there, and whether they're
actually succeeding.
Mr. Ellison. So these companies engaging in fraud are not
setting people up to re-default?
Ms. Twohig. Mostly, from what we have seen, they're not
getting their modifications at all.
Mr. Ellison. Okay, I got it.
Ms. Twohig. Exactly.
Ms. Coakley. I agree with that, that they have been totally
ineffective in any way, so they are not--the re-default loan
rate is due to something else.
Mr. Ellison. They don't even get to re-default, because
they never even get the modification.
Ms. Twohig. Right.
Ms. Coakley. Correct.
Mr. Ellison. All right. I think that is all of my
questions, Madam Chairwoman. Thank you very much.
Chairwoman Waters. Thank you very much. Without objection,
Representative Moore will be considered a member of this
subcommittee for the duration of this hearing, and we thank Ms.
Moore for her amendment and the work that she has done. And I
will recognize Ms. Moore for questions.
Ms. Moore of Wisconsin. Thank you so much, Congresswoman
Waters. And you promised me early on that, even though I'm not
a member of this subcommittee, that you would honor me when I
came. And I thank you so much.
I do want to thank Congresswoman Waters publicly for all of
the work that she has done on this. California, of course,
has--they passed a law back in 1979 with respect to mortgage
fraud problems. Were you in the State legislature then, in
1979?
Chairwoman Waters. Yes, I was there.
Ms. Moore of Wisconsin. Yes. And so I appreciate all of the
sage experience that she has had. And, of course, being the
subcommittee chair, she has worked very closely with me on this
issue of exemptions, in particular, for attorneys. And given
her 2\1/2\ hour long vigils on the phone, she has really been a
point person, and known up front the toxicity of this problem.
And I can tell you that, while this has been a problem all
along, with the mortgage meltdown this has just created an
environment where there has been an 800 percent increase. So I
appreciate questions like the one Mr. Ellison has made, with
respect to whether or not there are enough resources to do
that.
And I might just add, knowing that I am consuming my time,
Madam Chairwoman, but what I continue to hear is that
legitimate help, like with the HUD-sponsored counseling,
homeowners counseling, it's very, very underfunded. And perhaps
that's an avenue for putting a lot of these folks out of
business, to make sure that we take seriously--when I bought my
first home, I had a certified HUD counselor, and I just took
that for granted, that people would have those kinds of
services available to them.
I also want to thank Ms. Twohig from the FTC for helping us
work on developing this bill, and appreciate your having
stepped up.
Now, let me ask some questions. Ms. Twohig, the authority
that you have gotten through the omnibus with respect to
mortgage fraud, is that for just non-banking institutions, or
for all financial institutions?
Ms. Twohig. It--
Ms. Moore of Wisconsin. Because I noticed in your testimony
that you were recommending that you have power over, you know,
banking mortgage, as well as the--your current stewardship over
non-banking activity.
Ms. Twohig. Right now, the authority we would have would be
the same authority we have under the FTC Act, which is non-bank
entities. So, under the FTC Act, we do not have authority over
banks.
In this area, however, I would say that the foreclosure
rescue and loan modification services that we're concerned
about, the ones that are taking advantage of consumers, are in
the non-bank sector. So we believe we can cover pretty much
what needs to be covered there.
Ms. Moore of Wisconsin. Okay. I am only asking that because
I noticed in your testimony that you were seeking authority
over all financial institutions, and I was wondering if you
thought that that was important toward ending this activity, or
was that just a suggestion for some other point.
Ms. Twohig. Right. I think what you're referring to is the
Commission's views that, in the larger scheme of things, when
it comes to broader-based financial services regulatory reform,
that if those issues are considered and a new agency is thought
to be needed, that the Commission be considered and consulted
in that calculation.
On this area, I think it's--as I said, I think we could
basically cover what needs to be covered with our jurisdiction
because it's non-banking entities that are taking advantage of
consumers.
Ms. Moore of Wisconsin. Okay. Ms. Coakley, I believe that
you spoke to us about the caps on fees. And I guess I--you said
that 1 percent or 2 monthly payments would be too much.
And so, I was wondering, number one, what you thought would
be appropriate. And I also would like--because I see my time is
expiring--you to make a little bit more clarification about the
exemption for attorney's fees. And, you know, what--the problem
we ran into in trying to craft a perfect amendment is that we
don't want to stop attorneys from helping people with
legitimate work regarding, you know filing for bankruptcy, and
so on.
And so, please--Madam Chairwoman, with your indulgence, can
she answer?
Chairwoman Waters. Yes.
Ms. Moore of Wisconsin. Thank you.
Ms. Coakley. Let me answer it this way, because we agree
with you. We want attorneys who do the work who are qualified--
and people certainly are entitled to engage attorneys for that
work.
But attorneys have a way in which they either bill their
time or enter into a contingency fee agreement. This is neither
of those. This is an up-front fee, basically as an entry fee
that doesn't go towards the result.
And so, we firmly believe--and, frankly, when we issued
this regulation, we did not hear from the bar. We did not have
problems that lawyers felt that this was unfair, because we
think that those who are competent and ethical and who do play
by the rules--and, again, they can take a retainer if the party
agrees and the lawyer agrees. But the retainer has to then be
counted against time that the attorney has spent on the
process, as he or she would bill any client for work done.
Ms. Moore of Wisconsin. So the question is--okay, like I'm
thinking now--what we want to do is regulate the relationship
between the attorney and non-lawyers. So if I am a delivery
service delivering stuff to the court because I'm filing some
papers, the attorney might need to pay me to do--
Ms. Coakley. Correct.
Ms. Moore of Wisconsin. --to that. So, what we're trying to
do is regulate that relationship without stopping the attorney
from doing it.
So, we do need help in the rule-making process, Ms. Twohig,
to narrow it, as you suggested it, but still keep the normal--
Madam Chairwoman--legal relationships intact. And just, very
quickly, the other question that I asked, about the caps?
Ms. Coakley. Oh. I talked with our folks yesterday about
this, because our experience, at least in Massachusetts, and it
may differ in other States, is that these fees have been
around, you know, $1,000, $1,500. But with this cap, it could
be as high as $6,000. We think that second prong, 2 months of a
payment, would essentially become a floor that people would
start to charge.
And so, I'm afraid I don't have an absolute, but just to
consider whether there may be a lower cap, in terms of a dollar
amount or a percentage. And I would assume my colleague may be
able to help with that, also. But that seemed high to us, given
our experience in the field.
Ms. Moore of Wisconsin. Okay. Thank you. Thank you so much.
My time has expired. I would love to continue, but I don't want
to get gaveled.
Chairwoman Waters. Thank you.
Ms. Moore of Wisconsin. You have been very generous, Madam
Chairwoman.
Chairwoman Waters. Thank you very much. And let me thank my
witnesses, particularly the attorney general, who has done so
much work in Massachusetts on this. And, of course, the Federal
Trade Commission that we have turned to, and you have been very
effective in shutting something down.
But we want to remind you that the blog, KeepmyHouse.com,
is still up, even though the Federal Loan Modification Web site
is not connected to it any more. So stay on top of them. And we
are going to do everything we can, working with Ms. Moore, to
give you more help.
Thank you all very much for being here today. We will get
our second panel up. The Chair notes that some members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for members to submit written questions
to these witnesses, and to place their responses in the record.
Again, I dismiss this panel and call on our second panel.
Our first witness will be Ms. Lauren Saunders, managing
attorney at the National Consumer Law Center.
Our second witness will be Mr. Scott Drexel, chief trial
counsel at the State Bar of California.
Our third witness will be Mr. Robert E. Story, chairman
elect at the Mortgage Bankers Association.
And our fourth witness will be Mr. John Anderson, vice
chair of the Federal Housing Policy Committee at the National
Association of Realtors.
Without objection, your written statements will be made a
part of the record. And I will recognize each of you for 5
minutes, beginning with Ms. Saunders.
Thank you for being here.
STATEMENT OF LAUREN SAUNDERS, MANAGING ATTORNEY, NATIONAL
CONSUMER LAW CENTER
Ms. Saunders. Thank you. Thank you, Chairwoman Waters,
Ranking Member Capito, and members of the subcommittee. I
appreciate the opportunity to testify before you today.
Yesterday's home equity strippers have become today's loan
modification specialists, charging thousands of dollars for
work, if any, that often leads nowhere and leaves the homeowner
closer than ever to foreclosure. Lead generators are selling
the names of homeowners who are 30, 60, or 90 days late, to
loan mod mills.
Firms are springing up from and recruiting among the ranks
of the same people who were offering subprime loans and no doc
loans of the type that led us into this crisis. The primary
qualification for the jobs that are being advertised on the
Internet seems to be the ability to ``close,'' the ability to
pressure a reluctant homeowner into agreeing to the contract.
Many of the loan mod firms are outright crooks, who have no
intention of doing anything. But others are operating in a gray
zone, perhaps making some unsuccessful efforts to contact the
lender. But, from the homeowner's perspective, there is really
no difference between a crook who takes the money and runs and
somebody else who says, ``Sorry, I tried, but you can't have
your money back.''
The sheer number of people in foreclosure is an obvious
attraction to the scammers. But loan mod scams are flourishing
because, as the chairwoman well knows, servicers have been
unresponsive, and homeowners are not able to get loan
modifications directly.
I will get to the scams in a moment, but I would be remiss
if I didn't point out that the most important work that
Congress can do to prevent these scams is to attack the
servicing problem, as the--the chairwoman, of course, has been
a lead on this issue, and to mandate access to a decision-maker
at the servicer, somebody who has the information and authority
to actually deal with the loan modification, and to require
that the servicers engage in loss mitigation efforts before
they foreclose. People are going to these middlemen because
they can't do it directly. And if they could do it directly, I
think a lot of this would go away.
Regarding the scams themselves, many States have been
active in passing laws to address them. Others have been
slower. As long as stronger State laws are not preempted, as
they are not under this bill, Federal legislation can be
helpful, as long as it creates strong, substantive protection,
as H.R. 1231 does, and not just disclosure hoops for scammers
to jump through. Any law or rule will do more harm than good if
it simply is sanitizing the Web sites, but allowing the
operations to continue.
Effective legislation should prohibit up-front payments for
foreclosure consultants. And, setting aside the lawyers for a
moment, I think that should include taking money and putting it
in escrow, but then charging against it.
Second, it should require results. The fee should not be
earned unless and until the homeowners receive an affordable,
sustainable loan modification, and that gets to, I think,
Congressman Ellison's point about the re-defaults. A loan mod
that increases your payments isn't worth paying for.
The level of the fees should be tied to the results
achieved. And I agree with the concerns about the 2-month
standard as being too high. I would urge that you look to
Illinois, which has capped the fees at 50 percent of the
monthly payment, unless the modification results in a reduction
for 5 years, in which case it can go up to 100 percent, a full
month.
And we need to avoid unnecessary exemptions that open wide
loopholes. I don't think legitimate mortgage brokers and real
estate brokers need an exception for advance fees, because
they're not normally paid until they sell a house or obtain a
mortgage. But if they're operating outside of the scope of
their traditional activities, the mere fact that they possess a
license should not insulate them.
Lawyers are a trickier case. I fully recognize that lawyers
are part of the problem. I support the efforts of the FTC to
crack down on those lawyers who are engaged in deceptive
conduct. But I am concerned that we not go too far in stopping
the work of the front-line people who are actually helping the
homeowners who are confronted with foreclosure rescue scams, or
predatory mortgages.
I note that Attorney General Coakley interprets her
regulation to permit a retainer. But we don't want that loose
standard to infect the rest of the bill as well. My own office
offers a paid consulting service, even though we're a
nonprofit, where other lawyers can pay us to review loan
documents and advise on claims. Certainly, legitimate lawyers
may send a demand letter and engage in activities short of
litigation, and they should be able to charge for those.
So, on the other hand, we do want to crack down on the
lawyers who are offering the cloak of their license to shield
the work of non-lawyers, whether it is a loan mod firm that
contracts with an attorney, or an attorney who is running a
large mill operation which really has nothing to do with the
practice of law.
To the extent that the FTC adopts rules in this area, we
think it's essential that they use their unfairness authority
to ban up front fees and fees with no results, and not merely
its deception authority to require disclosures or sanitize Web
sites.
Finally, Congress does need to increase funding for the
HUD-approved counseling agencies which are really the best next
step, after the servicer themselves, to get homeowners the help
they need.
Thank you for inviting me to testify, and I welcome your
questions.
[The prepared statement of Ms. Saunders can be found on
page 75 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Scott Drexel?
STATEMENT OF SCOTT J. DREXEL, CHIEF TRIAL COUNSEL, THE STATE
BAR OF CALIFORNIA
Mr. Drexel. Thank you, Madam Chairwoman, Ranking Member
Capito, and members of the subcommittee. I am the chief trial
counsel of the State Bar of California. California has a total
of more than 225,000 attorneys, more than 165,000 are whom are
active members and entitled to practice law in our State.
Approximately 1 of every 7 attorneys in the United States is a
California attorney. My office is responsible for the
investigation of complaints against California attorneys, and
for the disciplinary prosecution of those attorneys who have
violated our rules of professional conduct or our State Bar
Act.
Since approximately November 2008, we have received an
average of more than 900 telephone calls per month to our 1-800
complaint line, an annual rate of more than 10,000 telephone
calls, on the subject of mortgage foreclosure scams and loan
modification scams alone. Clearly, this is a problem of
significant, if not crisis, proportions in California.
The problem is so serious that in February 2009, our
committee on professional responsibility and conduct issued an
ethics alert to all California attorneys and to the public
about the dangers of loan modification and foreclosure rescue
fraud, warning attorneys about the possible ethical
implications of their involvement in these sorts of activities.
In response to the large number of written complaints
received by my office on this subject, we have created a staff
task force to focus solely on complaints of foreclosure rescue
and loan modification fraud. We are working extensively with
other agencies to address the issues, especially the California
Department of Real Estate, which regulates mortgage foreclosure
consultants in California.
We have tried to be proactive in our response to suspected
involvement of California attorneys in this area. Pursuant to
our statutory authorization in March 2009, we successfully
petitioned a California superior court to assume jurisdiction
over the practice of a California attorney who was engaged in
loan modification fraud.
Pursuant to court order, and with the assistance of local
law enforcement, we seized more than 2,300 of the attorney's
files, downloaded records from his computers, froze his bank
accounts, both his client trust account and office accounts,
and redirected his telephones and mails to the State Bar
offices. We are in the process of returning files and advance
fees to the attorney's clients, and assisting them in obtaining
services from legitimate practitioners.
We have also attacked the accuracy and propriety of
advertisements by attorneys in this area. Under our rules of
professional conduct, attorneys are prohibited from making
false, misleading, or deceptive statements in advertisements,
and can neither guarantee success nor advertise past successes
without appropriate disclaimers.
We have, therefore, been demanding copies of the attorneys'
advertising, and demanding documentation to substantiate the
claims made in their advertising. Our goal is to force the
removal of all false and misleading advertisements from the
media, thereby making it more difficult for these unethical
practitioners to prey upon members of the consuming public.
We have initiated more than 175 active investigations of
attorneys suspected of engaging in these activities. And we are
especially targeting those practitioners against whom we have
received multiple complaints, or who appear to be particularly
egregious in their victimization of consumers.
Tomorrow morning, in Los Angeles, I will be meeting with
representatives of the United States Attorney's Office, the
California Attorney General's Office, the Department of Housing
and Urban Development, the Federal Trade Commission, the
Department of Real Estate, and local DA representatives to work
cooperatively and to try to develop a plan for attacking these
loan modification and fraud schemes in our State.
H.R. 1231, in my opinion, will provide significant
assistance in preventing foreclosure rescue fraud by
prohibiting foreclosure consultants from demanding or receiving
advance payments from homeowners, and by requiring loan
services to notify homeowners of the dangers of these
fraudulent activities, and to direct them to the Department of
Housing and Urban Development and others for instance in
avoiding foreclosure.
H.R. 1231 currently excludes attorneys, as does our
California statute. California, as Representative Moore has
indicated, has had regulated mortgage foreclosure consultants
since 1979. However, attorneys are excluded from the definition
of a mortgage foreclosure consultant.
Currently in California, there is pending a bill, Senate
Bill 94, which would extend the prohibition upon advance fees
to attorneys, as well as to others. The board of governors of
the State Bar will be considering, next week at their meeting,
whether they support or oppose that legislation. However, as an
independent prosecutor, I have already gone on record as
supporting that measure and that limitation upon attorneys'
fees.
Attorney fees in California are regulated in other areas,
in medical malpractice actions. Attorneys' fees are limited by
statute. In workers compensation, probate proceedings and the
like, attorneys' fees are regulated. I see no reason why they
cannot and should not be regulated here. Therefore, I
personally support Representative Moore's proposed amendment.
And again, I thank you for the opportunity to appear today.
[The prepared statement of Mr. Drexel can be found on page
57 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Robert Story?
STATEMENT OF ROBERT E. STORY, JR., CHAIRMAN-ELECT, MORTGAGE
BANKERS ASSOCIATION (MBA)
Mr. Story. Chairwoman Waters, Ranking Member Capito, and
members of the subcommittee, thank you for inviting me and the
Mortgage Bankers Association to discuss the very important
issue of foreclosure rescue scams.
I am here today because MBA shares your concerns about the
rapid rise in these scams. There is no doubt we need to protect
innocent homeowners. Those committing fraud prey on people at
the end of their financial rope. Their scams start with a phone
call, a mailing, or an advertisement promising help. These
scammers are difficult to distinguish from organizations
offering real help. They even use similar names. They are all
designed to achieve one thing, and one thing only, to lure the
person who is desperate for help.
When a fraudster makes contact, the borrower is told that
their situation is dire, and they are going to lose their home.
The scammer does everything possible to raise the anxiety level
of the borrower. When the borrower is at their lowest point,
the scammer says, ``There may be a solution.'' But the solution
comes with a price. The borrower must agree to cooperate, and
the borrower is told to cease any communication with their
lender, to avoid being detected.
These scams take many forms. Scammers promise to complete
paperwork and obtain a loan workout in exchange for fees that
can escalate into thousands of dollars. Then the scammers
either don't follow through, or perform menial tasks that a
servicer or HUD-approved counselor could complete for free.
Scammers convince homeowners that they can save their homes
from foreclosure through deed transfers and promises to lease
or sell back the property, which never happens. In extreme
instances, scammers sell a home or secure a second loan without
the homeowner's knowledge, stripping the property's equity for
personal gain.
So, what can be done to stop these cruel practices? First
and foremost, borrowers need to turn to the right sources for
help. MBA encourages borrowers in financial trouble to call
their mortgage servicer right away. Mortgage servicers want to
avoid foreclosure. They have an economic incentive to do so.
Servicers have the legal authority to create repayment plans,
refinance, or modify a mortgage. Borrowers should contact
trustworthy sources for advice and counseling. The HOPE Hotline
at 1-888-995-HOPE, or a HUD-approved counselor are trustworthy
resources. State and local governments across the country have
also set up hotlines.
Raising consumer awareness of scams is a vital function of
government and industry efforts. The Treasury Department and
banking regulators have issued alerts for consumers. And the
FTC has produced a fact sheet warning consumers about servicers
that promise to stop the foreclosure process.
We also need to redouble our efforts to go after those who
prey upon vulnerable homeowners. The legal tools needed to
investigate and prosecute fraud are already in place. The
Federal mail and wire fraud laws reach all possible varieties
of foreclosure rescue fraud. What's missing are the resources.
MBA has asked Congress to appropriate additional funding
for the FBI to investigate and prosecute fraud. The funding
will pay for new FBI field investigators. It would also allow
the Justice Department to hire additional prosecutors focused
on this area. The funding would also support the operations of
the FBI inter-agency task force in the 15 areas with the worst
problems.
MBA is particularly pleased that today the House is taking
up S. 386, the Fraud Enforcement and Recovery Act. This bill
includes $245 million for law enforcement to crack down on
financial fraud, including foreclosure rescue fraud.
On behalf of the MBA, I would like to thank the
subcommittee for the opportunity to testify today. Foreclosure
rescue fraud is a growing problem that is becoming more
expensive for homeowners and lenders. MBA believes increased
enforcement, better communication, and further innovation are
required to adequate protect borrowers from the cost of
foreclosure rescue fraud. Thank you.
[The prepared statement of Mr. Story can be found on page
98 of the appendix.]
Chairwoman Waters. Thank you very much. Mr. Ellison, will
you introduce our next witness?
Mr. Ellison. Thank you, Madam Chairwoman. Madam Chairwoman,
members, John Anderson has been a licensed Realtor with Twin
Oaks Realty in Crystal, Minnesota, as a sales person and broker
since 1980. He is the present owner of the family business
started by his father in 1961. John has assisted and counseled
thousands of buyers and sellers over the years as, primarily, a
residential broker. He has also been active in the industry,
serving as a volunteer on national, State, and local levels of
the Realtors Association.
One of his key interests, because of his personal
involvement, has been in the area of government financing,
specifically FHA/VA mortgages, and their importance to the
customer. He has been recognized as Realtor of the Year on both
local and State levels, and has been named as ``Super Real
Estate Agent,'' by Minneapolis St. Paul Magazine every year
since 2003. He is married and has three children. Thank you,
and welcome.
STATEMENT OF JOHN W. ANDERSON, VICE CHAIR, FEDERAL HOUSING
POLICY COMMITTEE, NATIONAL ASSOCIATION OF REALTORS (NAR)
Mr. Anderson. Thank you, Representative Ellison. Thank you,
Chairwoman Waters, Ranking Member Capito, and members of the
subcommittee. I want to thank you for the opportunity to
testify today on foreclosure rescue scams and the need for
mortgage reform. I am testifying on behalf of NAR's 1.2 million
members. I can tell you firsthand that the more lending abuses
we see, the higher the prevalence of foreclosures. Foreclosures
are like mold; once they start, it's difficult to get rid of
them. Foreclosures lead to families losing their homes, as well
as their savings, and can cause all homes in a neighborhood to
lose value.
Foreclosure rescue scams and loan modification scams are
becoming more and more prevalent. One of the most pervasive
foreclosure rescue scams that I have seen is the reconveyance.
In this situation, a so-called foreclosure counselor tells a
homeowner that, in exchange for paying the mortgage debt, the
homeowner will sign a quit-claim deed, and can remain in the
house as a renter.
The scammer says the homeowner can make lower monthly
payments to the scammer's company, and the payments will be
credited the principal of the original mortgage. While the
homeowner is making these payments, the scammer is keeping the
money, and often using a home equity line of credit to suck out
any remaining home equity. Soon the homeowner learns he or she
is in further debt, and has added the burden of new liens from
the scammer's home equity loans on the house. In almost every
case where there is no legal intervention, the homeowner loses
the home to foreclosure, all the money paid to the scammer as
rent, and home equity that has built up over the years.
Based on our experience, Realtors would like to share six
recommendations on how to prevent foreclosure scams. First, we
recommend that Congress enact legislation that puts disclosure
requirements and minimum levels of service on people who offer
to rescue homeowners from foreclosure. My home State of
Minnesota passed such a law in 2004, which has proven
successful and resulted in 12 lawsuits against predatory
programs in just the last year.
H.R. 1231 creates a fair balance between legitimate housing
counselors and consultants that provide beneficial services to
struggling homeowners and those predatory practices that take
advantage of families who are facing foreclosure. As
introduced, this bill provides an exemption for licensed real
estate professionals similar to the 2004 Minnesota bill.
Exempting these professionals when they are engaged in their
normal business practices will allow Realtors to continue to
offer these valuable services to their clients. Consumers rely
on Realtors for their professional service, and trust their
code of ethics. We urge passage of this important legislation.
Second, lenders and servicers should be more aggressive in
helping distressed homeowners. Too often we hear from Realtors
that borrowers seeking help from a lender are told that nothing
can be done until they are at least 90 days delinquent. We
believe this increases the chance that a homeowner may turn to
a mortgage rescue scam in order to get help.
Third, Realtors believe legitimate foreclosure prevention
options need to be widely advertised, especially in areas where
rescue scammers like to operate.
Fourth, the process for closing a short sale needs to be
considerably shortened. NAR hears every day from members
frustrated that servicers take months to even consider a short
sale. Potential buyers, in the mean time, get frustrated and
give up, while homeowners become even greater prey for
scammers.
Fifth, the private sector should be actively educating home
buyers about safer affordable mortgage products.
And, finally, NAR believes that the government needs to
increase funding for financial counseling and consumer
education programs to help borrowers avoid foreclosure.
In conclusion, Realtors across the Nation believe anti-
predatory lending reforms are required to restore consumer
confidence in the housing industry, and avoid another housing
crisis in the future.
Historically low mortgage interest rates and significant
tax credits for first-time home buyers have enticed consumers
back into the housing market. However, we believe that
wholesale reform of the mortgage lending sector will give
consumers the protections they need and will remove the last
impediment to a housing recovery.
NAR supports lending reforms that protect the consumer, but
ensures them reasonable access to mortgage capital, so that the
American dream of sustainable homeownership can still be
available.
Thank you very much for your time, and I look forward to
any questions.
[The prepared statement of Mr. Anderson can be found on
page 38 of the appendix.]
Chairwoman Waters. Thank you all very much for your
testimony. I recognize myself for 5 minutes. Let me first say
to Mr. Scott Drexel, chief trial counsel of the State Bar of
California, I really appreciate your no-nonsense attitude. We
do have a copy of the ethics alert that you did, which I think
was very, very good, and it certainly should have put everybody
on notice. But I guess there are some people who just don't
believe, as the old folks would say, fat meat is greasy.
So, we're going to have to do what is necessary to avoid
the opportunity for these scam artists to continue to harm our
would-be homeowners that find themselves in foreclosure
problems. And so, I am opposed to exemption for anybody. I
think that it is very, very hard to nuance it so that you can
track it.
Now, I do have some sympathy for--or some questions about--
the filing of bankruptcy. That is legitimate work for lawyers.
And in the filing of bankruptcy, if it is considered that, in
that work, it is loan modification, and it would prevent the
lawyer from proceeding with legitimate bankruptcy work, then I
think that needs to be looked at.
So, Mr. Drexel, could you help me to understand whether or
not we have a problem exempting lawyers if, in fact, they are
involved with--we have a problem trying to protect lawyers so
that they can do this work, if, in fact, they do do this work
by way of bankruptcy?
Mr. Drexel. Well, Madam Chairwoman, I would not have a
problem with that. The fees charged by attorneys in bankruptcy
proceedings are reviewed and approved by a bankruptcy judge or
trustee. And so, that provides some measure of protection to
the consumer. My concern is that with receiving fees in
advance, even in the loan modification area, attorneys are free
to provide services for clients. The preclusion would simply be
upon getting money up front.
And so, we would look to find ways to encourage attorneys--
and many attorneys do, on a pro bono basis, assist people in
this area. But even on a compensated basis, we're not seeking
to preclude them performing the services, but simply from
receiving money up front for that, but rather charging it as
they perform the services.
Chairwoman Waters. And isn't it true that in the final
analysis, when you have foreclosure that would end up in a
bankruptcy, that--if our bankruptcy legislation is signed by
the President--in the final analysis, isn't it the judge who is
determining whether or not there is going to be a write-down of
principal, or a deduction of interest? And they, indeed, are
the ones who are doing the modification?
Mr. Drexel. That is my understanding.
Chairwoman Waters. All right. So, having said that, you're
sitting next to the Realtors, who think that they have some
special knowledge and concern, certainly, in this area. Should
they be exempted?
Mr. Anderson. Well, thank you for the question. You know,
on a daily basis--
Chairwoman Waters. I was asking Mr. Drexel.
Mr. Anderson. Oh, I'm sorry.
Mr. Drexel. I'm sorry.
Chairwoman Waters. I know what--
Mr. Drexel. No, Madam Chairwoman, I do not. And in
California, real estate brokers and sales people are not
exempted, they are not permitted to receive money in advance of
performing the services. And it has been that way for the last
30 years now.
Chairwoman Waters. And so, Mr. Anderson, what do you think
about that?
Mr. Anderson. Well, I would agree. I believe right now
Realtors don't get any fees up front. I would be very cautious
of any type of exemption that would be broad-based, and the
reason being is I know right now, on a daily basis, I am
meeting with people because they trust me and they come to me
and ask me for advice. So anything that would tie my hands I
would be very concerned about.
So, I guess we would have to go and discuss that, you know,
if the exemption came through. But we would agree with the up-
front fees, because right now we don't collect up-front fees.
Chairwoman Waters. Let me just also say, before my time is
up, that this problem really lies with the servicers. The
servicers, whether they are independent, or whether it's a
servicing company, such as the one that's owned by Wells
Fargo--they have their own servicing company--it seems to me
our responsibility is to make sure that they have adequate
numbers who are servicing, that they have ways by which people
can reach them more easily than they are able to do now, having
enough telephone lines, having competent, trained servicers.
They are the ones who are holding this paper. They're the
ones that are initiating these foreclosures, these loan
initiators. And we just have to make them do what they are
supposed to be doing.
All right. Thank you. And with that, I will turn to, I
suppose, Mr. Cleaver for 5 minutes.
Mr. Cleaver. I just wanted to express my appreciation to my
colleague, our colleague, Ms. Moore, for introducing this
legislation. And when you consider that mortgage fraud is up 26
percent from last year, it shows that people will take
advantage of anything. And I appreciate those of you who came
today to provide us with information. I yield back the balance
of my time.
Chairwoman Waters. Thank you. Mr. Green, for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman. I would like to
associate myself with the remarks of Mr. Cleaver and the
chairlady. I think that we do have a problem, in terms of
servicers having a limited amount of capacity. And I think that
capacity is what allows these fly-by-night businesses to do
what they do.
I would like, if I may, to ask someone, any one of you, how
can we, in your opinion, enhance the capacity--as the chairlady
has said, it is a problem--how do you perceive us enhancing
that capacity? And I would like for Ms. Saunders, if you would,
to give your opinion.
Ms. Saunders. Enhance the capacity among the servicers?
Mr. Green. Yes, ma'am.
Ms. Saunders. By telling them to do it. I mean, for years
we have been trying to rely on voluntary efforts, and they are
not working. And we have new program after new program, and we
say, ``Aha, this one is going to give them the incentive to
participate. Well, maybe this one will give them the
incentive.''
And it's time to give up on voluntary efforts and say,
``You have to give somebody a contact person who you can reach,
who has the authority and information you need, and you have to
go through this process to consider a reasonable loan
modification, before you can embark on foreclosure.''
Mr. Green. Mr. Story?
Mr. Story. Well, I think we all agree that it's unfortunate
that there is a capacity issue, or there has been a capacity
issue with servicers. But there is a financial incentive for
servicers to make sure that they can modify loans that are able
to be modified.
So, the servicers are actively trying to do this as quickly
as possible. They're hiring more people, they're putting in
sophisticated technology in their telephone systems in order to
get to the customers as soon as possible when they call. So
there is a big effort out there. It could always be better, but
there is a true incentive for them to get this done as quickly
as possible.
Mr. Green. Mr. Anderson?
Mr. Anderson. You know, it's interesting that we have given
them the money in order to shore them up, but I can tell you
from someone who meets with these consumers every single day,
the reason why they are struggling so badly is that they call
their lenders, they call the loan servicers, and they don't get
any help. And then I will get on the phone with them, I will
try to assist them.
And someone asked the question previously about why loan
modifications go back into foreclosure again. The reason being
is that they don't modify it enough. And if they really truly
want to keep them in the homes, then they need to say, ``We are
willing to take something and cut it right now in order to keep
these people in homes,'' because it's not just good for them,
it's good for their neighborhoods.
I work in Mr. Ellison's neighborhood, I work in--all around
there. And we need to help these people get--be able to get in
contact and get a reasonable amount of time to get answers back
on modifications, short sales, and advice.
Mr. Green. Mr. Drexel?
Mr. Drexel. Representative Green, with all due respect, I
don't feel qualified to intelligently respond to your question,
since my area is more the regulation of attorneys.
Mr. Green. Let me just have one follow-up. Do you think
that the $1,000 incentive, the incentives that we have given to
maintain a loan, that those things are helping to some extent?
Ms. Saunders?
Ms. Saunders. The numbers are getting better, but they are
just not there yet. And, sure, every little incentive helps a
little bit, but I think it is time to stop with the carrots,
and we need some sticks, too. The numbers still are that, even
for the people who get loan modifications, only about half of
them are getting a reduction in payment. About half of the loan
modifications are ending up in foreclosure.
And so, we need to say, ``This is what you have to do. You
have to consider it, and it has to meet these standards.'' And,
by the way, the standards need to be transparent. That is one
of the things that we are asking for in the Administration plan
is that everybody ought to know what is the formula, what do
you have to do to qualify, so we can hold them to it.
Mr. Green. Mr. Story, is it helping at all?
Mr. Story. I think that the $1,000 is not necessarily an
incentive, but it is helpful in covering the costs. And there
are areas where--I mentioned HOPE NOW in my talks, and we have
seen over 3 million modifications with that organization. So
there is some modification--
Mr. Green. Just one follow-up with you, Mr. Story. I--you
are among the first to tell me this, that you had--did you say
3 million?
Mr. Story. Right.
Mr. Green. Do you have any empirical evidence to support
the premise?
Mr. Story. I don't have it with me today, but I can get you
that information.
Mr. Green. Okay. And, if you would, in so doing, give me
the definition of modification you are utilizing.
Mr. Story. Sure, no problem.
Mr. Green. Thank you. I thank you, Madam Chairwoman, I am
going to yield back.
Chairwoman Waters. Thank you very much. Next, we have Mr.
Ellison.
Mr. Ellison. Thank you, Madam Chairwoman. Thank you, Madam
Chairwoman, very much.
Mr. Anderson, I would like to ask you a question about, you
know, a Minnesota approach. Thanks for discussing the
foreclosure reconveyance statute in our home State. Can you
talk to us today about how that statute defines a foreclosure
consultant? And how does that differ from the scope of H.R.
1231?
Mr. Anderson. Thank you. Actually, it is very close in
relationship, the bill--the two bills. And it is--it does
exempt Realtors and those who are legitimate types of
organizations that are trying to give advice. It prohibits up-
front fees. It prohibits an automatic conveyance to the person
that is, you know, the provider, and so forth.
So, the Minnesota bill did a terrific job, and went a long
way. And I think this bill, likewise, does a terrific job and
matches up very closely in lots of ways.
Mr. Ellison. Do you feel it has had a chance to demonstrate
some results? I mean, do you think it is working?
Mr. Anderson. I think it is working, and the statistics
prove that it is working. I think what the Federal bill would
do will help in a broader scope, because I know that one of the
large companies that our attorney general went after just
recently was out of Florida. And so it does cross State lines.
And so I think the Federal bill, then, I think will assist
State attorneys general in doing this.
Mr. Ellison. Thank you. Ms. Saunders, do you think that the
foreclosure prevention fraud legislation should only cover
foreclosure consultants and loan modification specialists?
Should we cast the net a little wider?
Ms. Saunders. Are you talking about the sale lease-back
transactions? Or what are you getting at in terms of--
Mr. Ellison. I am talking about the scope of H.R. 1231.
Ms. Saunders. Okay.
Mr. Ellison. Yes.
Ms. Saunders. I think the scope is appropriate. And,
frankly, my concern, from the attorney perspective, is how
broad it is. We all have in our mind what these loan mod firms
look like. But the language, of course, is written more broadly
to govern a variety of services that are represented will help
with foreclosure.
And so, I think you need that flexible language in order to
address the variations that these schemes can take. I mean,
this bill is patterned after State legislation that was written
long before anybody had heard of a loan modification. And yet,
it is useful.
But, to the extent you do have a broad definition, you have
to be careful about what you are catching within that. A lawyer
who looks at a predatory loan and charges a fee to review the
documents and identify claims and write a demand letter, well,
they are doing that to try to stop a foreclosure. But we don't
want to stop that.
Mr. Ellison. Right.
Ms. Saunders. So, yes, I think the scope is appropriate,
but we need to be careful about how it relates to legitimate
attorney services.
Mr. Ellison. Do you think that the penalties in H.R. 1231
are sufficient?
Ms. Saunders. I would recommend strengthening them. I think
simply returning the fee isn't much of a penalty. You get a lot
of fees from 1,000 people, and if a couple of them speak up and
squawk, well, that is the cost of doing business.
So, you know, I would say that double or treble damages
would be more appropriate.
Mr. Ellison. You know, I just want to observe that if you
are talking about a Realtor, a licensed Realtor, or an
attorney, if they do something that is unethical, they are
going to have to deal with much more than returning a fee. But
for people who are--don't fit in either category who do operate
in this area, all they are doing is returning the fee. So the
incentive to stop is not as strong.
What would you recommend, in addition to what is in the
bill?
Ms. Saunders. You could add in statutory penalties, or
triple the amount of the fee, the damages or triple the amount
of the fee.
But damages, you are going to get into a fight about
whether the person was going to lose their home anyway. So you
are not always going to get those damages. So, I would say
triple the amount of the fee.
Mr. Ellison. I see. Now again, Ms. Saunders, I want to ask
you, in your opinion, would a reporting requirement be useful?
And, if so, should--would a reporting requirement be useful?
And then, if you think so, then I have some follow-up for you.
Ms. Saunders. Okay. If you--in terms of the loan mod firms
reporting their data, what they are doing?
Mr. Ellison. Yes.
Ms. Saunders. I think that is something that States might
want to consider. I am not sure that it really works so much at
the Federal level.
I do have concerns about some of the State laws that have
gone down the licensing route, because we don't want to
legitimize these firms. On the other hand, if you tie that to a
heavy bond requirement and a requirement to actually report
data to the State agencies that can look at it, definitely at
the State level, I think that can be useful. I'm not sure it
makes sense in the Federal bill.
Mr. Ellison. Okay. You noted in your testimony that
California passed mortgage foreclosure fraud legislation back
in 1979. Yet we still have the problem. What do you think
caused the law to--why do you think we still have it? Was the
State law not strong enough? Do you think it was ineffective?
Do you think it helped some, but not enough? How do you see the
situation?
Ms. Saunders. It does help some. And I am actually a
California lawyer. I spent 15 years with a legal services
office in Los Angeles. And we used California's law, among
others, to go after the equity-stripping scams that were
prevalent back then.
It does have a number of exemptions. And, we have talked
about the problems that those create.
I also think it does allow certain fees that are not always
appropriate. Like I said, we recommended that the fees be tied
to results, both in State legislation as well as Federal.
Mr. Ellison. My time is up, so let me thank all the
panelists, and thank the Chair.
Chairwoman Waters. Thank you very much. Ms. Moore?
Ms. Moore of Wisconsin. Oh, thank you so much, Madam
Chairwoman, and I want to start out by thanking my colleagues
for remaining through this second panel, and really, really
delivering these--offering these very sage questions that
really are, I think, going to improve this legislation.
And so, with that, I am going to try to follow up on some
of the things that my colleagues have asked. And before I do
that, I want to single out Ms. Saunders for working with me and
with Chairwoman Waters on this legislation to try to perfect
it. And I also want to thank Mr. Drexel and Mr. Anderson, in
particular, for traveling and coming here with their great
examples of what is happening in their States.
The chairwoman started out, Mr. Drexel, by asking you about
the attorneys' fees. And I thought there was some really
important information that was conveyed there. She talked
about, in the case of a bankruptcy, that the fees are typically
approved by judges. And loan modifications are approved by
judges.
So, are you saying--and I don't know the answer to this
question, I'm not a lawyer--but that lawyers will enter into
this bankruptcy work, knowing that, as the process moves
forward, that the judge--it can start out pro bono, and that
the judge will approve monies that maybe they take from their
own accounts and pay--and reimburse them for work that they
have done? Is that what I need to understand?
Mr. Drexel. Well, my understanding is, Representative
Moore, that in bankruptcy proceedings, that the court does have
to approve all the fees that are paid, that monies that are
paid in advance go against the amount that the court approves.
But, in most cases, I don't believe that attorneys in
bankruptcy proceedings are allowed to get advance retainers.
So, I think the protection provided by the bankruptcy judge
or trustee, in reviewing the fees that are received, provides a
protection to the consumer that those--that the bankruptcy is
legitimate, and the fees that are charged by the attorney are
for services that are actually performed.
Ms. Moore of Wisconsin. So I mean, do people--do attorneys
get retainers from people or not in bankruptcies before they
are approved?
Mr. Drexel. In my experience, they--
Ms. Moore of Wisconsin. What we are trying to prevent
here--and I think Ms. Saunders mentioned it as well, I mean--we
were trying, when I was working with Ms. Waters, we were trying
to come up with a middle ground where we don't stop legitimate
activities. I mean, some of these people's homes may be able to
be saved, and we are not trying to prevent legitimate
activities of attorneys for being contracted for--you say your
folks are not getting any money, and you even said you are not
against that.
Mr. Drexel. Right.
Ms. Moore of Wisconsin. So, we are trying to craft
something that is going to make sense. So--
Mr. Drexel. To my knowledge, they do not.
Ms. Moore of Wisconsin. Okay. So, you're saying--so if my
legislation exempts attorneys, it wouldn't have any impact on
whether or not an attorney would get involved in stopping a
bankruptcy?
Mr. Drexel. It does not preclude them from doing that,
that's correct.
Ms. Moore of Wisconsin. Okay. Okay. Same thing--what about
stopping a foreclosure?
Mr. Drexel. Well, the same thing. Whether they can get a
retainer or not in advance does not preclude them from
performing services and for reaching an agreement with the
consumer as to what the fair compensation for the services they
provide.
Ms. Moore of Wisconsin. Okay, so--
Mr. Drexel. The problem with getting the money up front, of
course--
Ms. Moore of Wisconsin. Okay. So, Ms. Saunders--because my
time may expire--I want you to get involved in this a little
bit.
What I am trying to prevent, you know, I don't want to put
something in law, or in statute here, that would be so heavy-
handed that it would prevent these other activities that aren't
related to rescue scams.
In your opinion, if I did not exempt attorneys at all, did
not put any language in, would that have a chilling impact on
legitimate work that attorneys were doing?
Ms. Saunders. If there were no exemption for attorneys, and
no qualifications on that lack of exemption, yes, I think that
would be a big problem.
Without trying to write the language here--obviously we are
all trying to get to the same result, to try to figure out how
to define that middle line. Maybe there is something in terms
of how you define an advance fee with an exemption for a
retainer, an attorney who is acting in compliance with all
ethical rules of their State.
As you long as you carve out the non-attorneys who are
using the cloak of the attorney license, there may be ways in
which you can narrow that attorney exemption so that it doesn't
expand.
Ms. Moore of Wisconsin. Thank you--
Chairwoman Waters. Will the gentlewoman yield for--
Ms. Moore of Wisconsin. Absolutely.
Chairwoman Waters. Yes. As I understand it, your amendment
does exempt attorneys who are filing bankruptcies. And we
further modified that to make sure that they were not frivolous
lawsuits, or something like that.
So, are you asking about something beyond that?
Ms. Moore of Wisconsin. Well, I--you know, I want to make
sure that--okay, you accepted that amendment from me, but I was
wondering whether we should go further. And, if we were to go
further, would that have a chilling impact?
So, I am just trying to make sure we have the right
balance.
Ms. Saunders. Can I respond?
Ms. Moore of Wisconsin. It is up to the Chair, because my
time has expired.
Chairwoman Waters. Go right ahead.
Ms. Moore of Wisconsin. Okay.
Ms. Saunders. Okay. The concern about the language in the
amendment as offered last week is that it ties the exemption to
litigation, to being in court. And attorneys do things short of
going to court. Like I said, we review loan documents for a
fee. We don't promise to go to court. Others write demand
letters. Any good lawyer is going to try to resolve it out of
court before going to court.
So, if you make the line be you're okay if you go to court,
but you're not if you don't, that can be a problem.
Chairwoman Waters. Okay--
Mr. Drexel. Representative Moore, I wonder if I could--
Chairwoman Waters. If the gentlewoman would yield further--
Ms. Moore of Wisconsin. It is up to the Chair at this
point.
Chairwoman Waters. Yes. Who is it who wants to speak? Yes,
sir.
Mr. Drexel. I am sorry, I just wanted to make a comment. I
think the distinction here is between--I know part of the issue
was whether the receipt of fees should--or compensation should
be dependant upon results, you know, versus getting money up
front.
And I think, with attorneys, for instance, that the issue
should be whether they are being paid for services they have
already provided, not necessarily results, because sometimes
the--they can't get the results, but they have definitely
performed services--versus getting money up front.
In California, attorneys who get advance fees are not
required to place those fees in a trust account until they are
earned. And so, getting the money up front basically encourages
the fraud, encourages these loan modification consultants and
the like to try to hook up with attorneys, to get them to get
large parts of--large amounts of funds up front, which they
then share with them.
By allowing attorneys only to bill for services that they
have actually performed themselves after the fact, I think that
eliminates that problem, and does not require them to perhaps
not get paid if they are not successful in getting the loan
modification.
Ms. Moore of Wisconsin. So, in other words, if they found
some papers and it cost them $200 for a filing fee, they would
have to pay that out of their own attorney accounts and then
get reimbursement for it.
Mr. Drexel. Correct.
Ms. Moore of Wisconsin. But that would solve it. Okay. I
just have a comment. Would--
Chairwoman Waters. Please, go right ahead.
Ms. Moore of Wisconsin. One of my other colleagues who is
no longer here--a couple of them have made some really good
points, Madam Chairwoman, that--we were talking about the
limited capacity of servicers, and there was a--you know, I
think that 84.3 percent of the folk who got us into this mess
with poor underwriting were non-banking entities.
And so, those people have sort of disappeared from the
marketplace, you know, now. So now we are asking servicers and
banks to modify them, and they, in fact, may not have the
employees, and may have to hire them. Maybe we need to figure
out how to do that. But I do believe we need to give up on
volunteerism.
And Mr. Ellison made a point, that the penalties need to be
strengthened, and I just wanted to clarify that you thought
treble damages was the right balance?
Ms. Saunders. Yes.
Ms. Moore of Wisconsin. Okay.
Ms. Saunders. That is what is in some other statutes.
Chairwoman Waters. Thank you very much, Ms. Moore. We have
legislation that we are proposing to put something in law to
oversee and regulate servicers. This is an unregulated
industry. And we are taking a very, very close look at how to
do that.
Some of the people here today have testified that we need
to give more support to the housing counselors who are trying
to help homeowners. However, we have found--I convened housing
counselors. They, too, cannot get in touch with the servicers.
They have the same problems--calling the telephone numbers, not
getting answers, or getting a menu that does not work.
And so, it is not so much we need more counselors, as we
need the banks to hire--and the servicing companies to hire--
more people, make them more accessible, and be willing to
really do loan modifications with trained people. And we are
really taking a look at how to do that.
Thank you, ladies and gentleman, for your participation.
Ms. Capito, I understand you don't have any questions. Do you
have a statement?
Mrs. Capito. No, I don't. I have no questions. I just
wanted to thank the panel. I'm sorry I was in and out so much,
but I appreciate your input. Thank you.
Chairwoman Waters. Thank you very much. And, of course, we
may have additional questions, and the record will remain open
for 30 days for those members who would like to raise
additional questions about this hearing.
With that, this hearing is adjourned. We are going to go to
the Floor, where another important bill is on the Floor, and
see if we cannot participate in that. Thank you very much.
[Whereupon, at 11:57 a.m., the hearing was adjourned.]
A P P E N D I X
May 6, 2009
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