WHEN DESPARATE HOMEOWNERS BECAME PREY FOR FORECLOSURE CONSULTANTS

Prior to 2006, the real estate industry was plagued with high-risk mortgage originators who issued low down payment mortgage loans to homeowners who could not make the monthly loan payments. Families signed mortgages with little down payment and a first year “teaser rate” that required minimal monthly payments. Once the first year “teaser rate” was completed, the families faced such high monthly payments that foreclosure often soon followed. The originators didn’t care about the foreclosure, because they already had sold the mortgage to unwitting mortgage investment pools that ended up holding the debt.

What did that mean for Minnesota? The number of foreclosures in Minnesota nearly doubled from 2005 to 2006, and nearly quadrupled from 2005 to 2007. In 2006 there were over 11,000 foreclosures in Minnesota, up from about 6,000 in 2005. By 2007 the number of rural foreclosures grew to more than 20,000. The peak of the foreclosure crisis occurred in 2008, when 26,000 homes and farms went into foreclosure.

After the Great Recession crushed the real estate market, some of the mortgage originators who previously made predatory loans to homeowners became “foreclosure consultants.” These “consultants” charged homeowners in foreclosure an upfront fee to renegotiate the terms of the mortgage with the lender. The huge number of foreclosures created a target rich environment for fraudulent “foreclosure consultants.” Once the homeowner paid the “consulting” fee, usually about $2,000 to $3,000, the “foreclosure consultants” often did little to nothing to assist the desperate homeowner.

In December of 2007 Attorney General Swanson filed the first of many lawsuits against companies claiming to be “foreclosure consultants.” The lawsuits alleged that the companies used websites, targeted mailings, and telephone solicitations to offer their services in supposedly dealing with the mortgage company to bring help to the homeowner, in exchange for a prepaid fee. Once the fee was paid, the companies ignored the plight of the homeowners. Swanson succeeded in getting injunctions to stop the companies from operating in Minnesota.

In April of 2008 Attorney General Swanson filed more lawsuits against six companies that abused families who were trying to keep their home out of foreclosure. All of the companies were out of state, had little or no connection to Minnesota, and used high minded names as part of the scheme to defraud the homeowner: National Foreclosure Relief (Nevada), The Stop Foreclosure Center (Alabama), D.R. Financial and Superior Home Loans (California), American Foreclosure Specialists (Oklahoma), Mortgage Default Assistance (Florida), and Home Assure (Florida), an LLC. Once again, after receiving these upfront fees, the loan modification and foreclosure rescue companies had little incentive to provide any meaningful service to homeowners.

In August of 2008 Swanson sought and obtained injunctions against two more companies: Law & Associates (Florida) and Davis Mitigation (New Jersey).

In January of 2009 Swanson expanded the litigation to include two more companies, IMC Financial (Florida) and American Financial Corp. (Florida). By this time Swanson had filed lawsuits against a dozen of these companies. She warned that she would expand the litigation to include other companies if they tried to dupe Minnesota homeowners in foreclosure.

Many of the companies tried to skirt the statutory prohibition on prepaid fees by claiming the payment was simply an escrow deposit. Other companies simply folded up and stopped further marketing in the state. The widespread proliferation of these scams led Swanson to push for federal legislation on the issue. In August of 2007 Swanson testified in support of federal legislation to address the issue. In July 15, 2009 Swanson filed comments with the Federal Trade Commission which urged the FTC to promulgate a rule which required that the loan modification agreement be in writing, that the services be clearly disclosed, and, most important, that upfront fees to these consultants be prohibited. She also proposed that the FTC adopt a rule to prohibit the “foreclosure consultant” from acquiring title to the property. She proposed that the FTC should make the rule applicable to non-profit agencies, for profit companies, mortgage brokers and originators, and attorneys.

The foreclosure crisis was devastating to families. That unscrupulous companies that took advantage of desperate homeowners was deplorable.

The Drum Major Institute was founded by Martin Luther King Jr. Its mission has been to drive social progress and to improve citizen participation in our democracy. In October of 2007 the Drum Major Institute highlighted Lori’s efforts as one of the ten best public policy actions that year.

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