What Are the Risks of Hiring a Loan Modification Company?

Homeowners who are trying to be approved for a loan modification but aren’t having success usually aren’t sure where to turn next. Is it their bank? A legal service? A government program?

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It’s hard to know when you’re getting mixed messages from the media and your lender who is telling you not to pay for any service related to loan modifications. The media does so because of the scammers out there, and the banks do it as a form of control.

Loan modification companies exploded on the scene after the housing crisis in 2008. And, unfortunately, many companies with bad intentions took advantage of homeowners in their time of need.

In 2010, the Federal Trade Commission (FTC) issued a rule that banned loan mod companies from charging upfront fees. This put many of those bad actors out of business (but also many of the good ones, too), and what was left were law firms exempt from this new rule.

From the FTC:

Attorneys are generally exempt from the rule if they meet three conditions: they are engaged in the practice of law, they are licensed in the state where the consumer or the dwelling is located, and they are complying with state laws and regulations governing attorney conduct related to the rule.

Today, it’s perfectly OK to pay a reputable attorney to help you with your loan mod negotiation, but not anyone else upfront.

But the issue goes deeper than just the upfront fee, unfortunately. In fact, that was never really the problem. The problem is that scammers exist, and are still finding ways to get around the current rules and regulations.

That said, you should absolutely do your due diligence before hiring a company to help you with your loan modification. Let’s look at the biggest risks of working with a potential bad loan mod company.

6 Risks of Hiring a Loan Mod Company

What are the real risks of hiring a loan mod company? Worst case scenario, here’s what could happen if you don’t choose the right one:

  1. You could pay a company hundreds or thousands of dollars and not get any results, and lose that money.
  2. You can lose precious time (months or even years), which can cause you to fall further behind, putting your home at risk of foreclosure.
  3. You could further damage your credit the more you fall behind. For example, if you’re two months behind in your payment when you start the process, and the company you are working with drags it out, your credit report takes the hit for the entire timeline.
  4. You might be asked to transfer the title of your property by a dishonest loan mod company, thus causing you to lose ownership of your property. You should never have to do this.
  5. You are put in the middle of a time-consuming process when you have to follow up with the bank to make sure the loan mod company is doing its job, and you need to follow up with the loan mod company to do the same.
  6. You get involved with a company that is shut down by authorities, causing you to pick up the pieces and start over with the loan mod process.

How to Avoid Loan Mod Scams

Not all companies that are trying to help you with your loan modification are scams. You just need to make sure you evaluate the companies you are considering. Easier said than done, right, when there isn’t a lot of useful information out there that exists to help you do so?

Here are a few ways we advise homeowners to evaluate the company they are considering:

  1. If you are going to go with a loan mod service, make sure it’s attorney-based, meaning they have an attorney physically in their office. Get the name of the attorney and check out the attorney’s record with the state bar association in any given state.
  2. Ask about the company’s track record of success, and weigh that track record against the number of negative reviews you may have seen about the company (remember, no company has zero negative reviews, and it’s important to see what the nature of the complaints were, how many and how the company handled them).
  3. See that they have been in the loan mod business for a while (years, preferably), so you know they are experts. If they are new to the scene, find out why. Some see the industry as an opportunity, and while they may be qualified, you might be their first test case. Also, do a little digging on the history of the founders to be sure they didn’t get shut down prior and reopen as a new company with a clean slate.

Lastly, any company that starts to become defensive as you are asking questions or for credentials should raise a red flag for you. Any company should be happy to give you the information you need to make a good evaluation. Your best interest should be their No. 1 priority.

I share a lot more ways you can verify the companies you are considering in this post on how to avoid loan mod scams. It’s worth reading if you or someone you know is in the evaluation process.

The bottom line is that, yes, there have been numerous loan modification scams. The government’s response has been to increase regulation, fines and penalties for those not in compliance.

The issue is that is has forced a lot of good companies out of this space, and has labeled even the good ones bad, and there are millions of homeowners struggling right now and in need of help but aren’t getting it from their banks.

A good loan modification company can save you time, stress, effort and money. But do your due diligence because good ones are few and far between.

About Brett Robbins

Brett Robbins is the founder and CEO of The Homeowner Defense Network. The HDN offers systems that help homeowners discover what programs they may or may not qualify for and why in less than a week. The HDN also has a trusted network of mortgage relief service providers, and offers a proven credit education program.

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