Despite changes in law, loan ‘auditors’ flourish

By Peter Vieth
Published: October 27, 2008

While new legislation passed in January has cut into the rate of mortgage foreclosure “rescue” scams in most of Virginia, a new variation of homeowner rip-off appears to be thriving in Northern Virginia.

A legal aid lawyer in Fairfax says her agency is considering legal action against loan “auditors” who charge huge fees to look for loopholes for homeowners facing foreclosure.

Kristy Cahoon with Legal Services of Northern Virginia said Hispanic homeowners are being victimized by paying exorbitant fees for what amounts to bad legal advice from non-lawyers.

The “loan audit” scam is just one example of a variety of foreclosure rescue schemes that flourished in Virginia prior to July, when a new law outlawed many of the common rip-offs. The legislation has slowed, but not halted the scams, said experts.

“Over the last several years, this cottage industry has grown significantly,” said Len Bennett, a consumer rights lawyer in Newport News who monitors foreclosure rescue scams. “Foreclosure rescue is one of the few booming businesses out there.”

It’s a business that has different faces depending on whether you’re in Northern Virginia or in the rest of the state.

In the Richmond and Tidewater regions, the typical scammer would prey on elderly homeowners with a lot of equity in their homes.

The unscrupulous “rescuers” would offer to pay off the mortgage payments in arrears and set up a payment plan to let the distressed homeowners keep their homes. In the fine print, however, the scammer takes ownership of the home, with a lease-back provision and an option to buy. The terms are stacked against any chance of the homeowners actually getting their home back. The scammers end up owning the house at a bargain price, and the original homeowners face eviction.

Easy mortgage money in many Northern Virginia communities has led to a different type of trap for homeowners under stress. “In Northern Virginia, because homes no longer have any equity, scammers are getting a lot more creative,” said Cahoon.

The Hispanic immigrant population is frequently the target. “They’re the most vulnerable, they lack education, and the scammers figure that they’re scared to speak up,” Cahoon said.

Cahoon said some of the loan auditors would charge $500 up front for a cursory review of a loan. They would then tell the homeowner that they had found violations that might stop foreclosure, but they would need $5,000 for a more thorough audit of the loan.

Cahoon said that she has filed a bar complaint against one such loan auditor for the unauthorized practice of law. She expected to file lawsuits accusing other loan counselors of fraud.

At the Virginia State Bar, which enforces laws against unlicensed legal practice, ethics counsel James M. McCauley said he was unaware of any current complaints about unlicensed loan counselors. “I imagine it will be on our radar screen before long,” he said.

The 2008 General Assembly passed legislation to try to halt both common forms of foreclosure rescue scam. The new law bans collecting fees before services are performed. It requires that any rent paid to the “rescuer” must be applied to the mortgage.

It requires notice of any right-to-repurchase agreement. It also forbids advertising of any of the prohibited services.

Bennett favored an even stronger law. He explains that language was added to allow the “option-to-repurchase” agreement, as long as it was in writing. An earlier version of the bill would have banned any option-to-repurchase deals when the scammer intended to commit fraud.

Still, one consumer advisor said the legislation was effective. “We fixed about 90 percent of the problems,” said Helen O’Beirne, director of the Center for Housing Leadership at the non-profit Housing Opportunities Made Equal.

One of the bill’s sponsors, Del. Sal Iaquinto, R-Virginia Beach, is not sure the legislation has completely eliminated foreclosure rescue fraud because the advertising continues. “I still see signs on the side of the road. That makes me think they’re still out there,” he said.

Virginia Lawyers Weekly

Despite changes in law, loan ‘auditors’ flourish

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