Bar News - June 8, 2007
Stopping Mortgage Loan Predators
By: Jonathan P. Baird
Editorís Note: An earlier version of this article was published in the May 19, 2007, Concord Monitor and other newspapers. Attorney Baird provided updated information to NH Bar News at the end of May.
Imagine this scenario: You are a homeowner who has fallen behind on your mortgage payments. You receive notice that your home will be subject to a foreclosure sale. You lack the money to catch up. As the date of foreclosure approaches, your desperation deepens. There seems to be no way out. You pray for some financial savior to appear at the 11th hour.
The growing frequency of this problem has spawned a new form of consumer fraud: foreclosure-rescue scams. The rescuer promises to save desperate homeowners. Instead of a rescue, the typical result is that the homeowners lose their home and are cheated out of all their equity.
Between the first quarter of 2006 and the first quarter of 2007, there has been a 95 percent increase in foreclosures statewide. We have gone from 639 to 1,247 foreclosures in the state. More alarming are the projections, with many experts forecasting that foreclosures will peak this summer and fall. New Hampshire Legal Assistance is seeing an increase in clients facing foreclosure and related scams. The scams come in several variants.
Probably the most common fraud is a bait-and-switch where the homeowner is not aware that the rescue actually means loss of ownership of the house. The homeowner thinks he or she is signing new loan documents to pay off missed payments on the mortgage. In fact, the documents give ownership to the rescuer.
The rescuer turns the homeowner into a tenant, sets oppressive rental terms and proceeds to evict the former owner. In the process, even though the total of the missed payments is relatively small, the homeowner-turned-tenant can lose hundreds of thousands of dollars of equity that has been built up over the years.
A variant of this scam is where the homeowner agrees to a sale/leaseback. The homeowner consents to transferring ownership in the belief that ownership will be regained at a later time. The homeowner ultimately finds out the rental terms are impossible to afford and ends up evicted.
A third variant is the foreclosure consultant who promises help in exchange for payment of exorbitant fees. A common result is that the consultant takes the money and runs. Or the consultant does some inconsequential and ineffective calling while promising help that never materializes.
Mortgage rescuers locate financially distressed homeowners through public foreclosure notices, which are widely accessible in newspapers or online. They make contact with seductive promises of saving the home.
Our state law is inadequate to address the new fraud schemes. Nor is any state agency equipped to handle the volume of likely claims. Because the forms of fraud are new, there is a need for new statutory remedies to protect the public against these predators.
The anti-regulatory tendency in New Hampshire is extremely problematic in this context. It encourages the con artists. The scams are multiplying at a time when foreclosures have essentially doubled within a year. More foreclosures probably mean more scams.
Fortunately, a bill sponsored by Claremont Rep. Tom Donovan, a Democrat, takes up the matter of foreclosure rescues. While the bill was originally drafted to form a study commission, there was strong bipartisan support on the House Commerce Committee to do something substantive now. Many legislators wanted action.
As a result, an amended version of House Bill 365 has been drafted and recently passed the Senate Commerce, Labor, and Consumer Protection Committee. UPDATE: It is on the calendar for the full senate vote on Thursday, May 31. If it passes the full senate, it goes back to the House since it passed the House as a study.
It contains strong rules prohibiting unfair transactions and requiring disclosures to homeowners. The bill allows remedies under the state Consumer Protection Act to deter the rescuers. It does its best to anticipate the growing variety of scams.
It is depressing enough that so many homeowners face foreclosure. It is even worse that there are people low enough to fleece homeowners when they are on the verge of losing their homes.
Fraud is as American as cherry pie. Foreclosure rescue scams have to be among the most insidious, heartless forms of fraud. While consumer protection law has not been an important part of the political agenda of either political party for a long time, it is encouraging to see legislators from different sides come together to tackle such an obvious wrong.
Jonathan P. Baird is a lawyer and lobbyist for New Hampshire Legal Assistance.