Loan Modification Firms Cannot Collect Upfront Fees

On October 11, Governor Arnold Schwarzenegger signed Senate Bill 94 which took effect immediately. This bill bars loan modification firms, attorneys and other brokers from asking for upfront fees when working with struggling borrowers to get their mortgages modified. This ban expires on January 1, 2013.

This action was a swift follow up to massive numbers of complaints to the California Department of Real Estate from consumers who said they paid up to $4,000 upfront to firms that often abandoned them, or never started the process at all.


The new law also specifies that loan modification firms must tell potential clients they can get the same services for free from government-approved nonprofit mortgage counselors. The firms cannot receive payment until they have performed all services promised in a contract with the borrower. Borrowers must pay the loan modification firm for services provided, even if the firm can’t get the loan modified.


What I have personally witnessed (prior to this bill) is a double-whammy with lawyers pressing scared borrowers to pay a retainer to sue their lender in a “produce the note” strategy coupled with a second retainer to work on a loan modification while the lawsuit was pending. This hit would cost a desperate borrower at least $6,000. The rub? The lawyers never reviewed their client’s financial situation to see if a loan modification was even possible. Banks have several criteria for granting a loan modification, and if a borrower has an excessive debt load, or is unemployed, a loan modification may not even be possible at all, no matter the amount paid to a lawyer.

Personally, I am thrilled that this bill passed. I hate seeing these sharks taking advantage of people.

If you are interested in scheduling a no-fee, no obligation appointment with me to review your financial situation and see if a loan modification might work for you, give me a call at 661-242-2636!