Texas Loan Modifications

by tammy on July 19, 2010

One result of the collapse of the residential real estate market in 2008 was the emergence of an aggressive loan modification industry, which quickly devolved into a predatory industry. Although loan modification has always existed as an option for distressed home owners, after 2008 the concept was aggressively marketed by third party loan modification companies as a cure all solution to the problem of paying too high of a monthly mortgage payment. The aggressive marketers misrepresented the reality of loan modification, but were careful to solicit payment for services they could not deliver in advance; taking advantage of people trying to stay in their homes.

Realistically, all loan modification agreements are subject to the willing acceptance by the lender. Since any loan modification agreement is generally detrimental to the interests of the lender, it means that they will only agree to these kinds of arrangements if they determine that doing so amounts to a “lesser evil” than full foreclosure and reselling the property in question. Consequently, no loan modification agreement will be accepted by a lender if foreclosure represents a more profitable option, so all such proposals have to be designed to placate the interests of the lenders. The marketers of loan modification, on the other hand, promised clients all kinds of spectacular arrangements and implied that they had ways of “forcing” the lender to agree (typically by finding minor faults in the original mortgage loan via the use of forensic audits and the like); which was – quite simply – not true at all.

By 2009, the number of loan modification scams and victims had reached truly epidemic proportions and was noted by the Federal Bureau of Investigation as one of the fastest growing scams in the country. The federal government, however, failed to implement any sort of nationally binding legislation to place the loan modification industry under regulation, which left it in the hands of the states to do so.  Perhaps the best known state legislation meant to wipe out the predatory elements of the loan modification industry was the laws passed in California, which effectively ended most abuses and resulted in a well regulated and properly responsible loan modification industry.

Texas, like California, has also been severely hit by loan modification scammers and as a consequence Texas has introduced legislation to curtail their abuses. 81(R) S.B. 354 is currently working its way through the Texas legislature. Reflecting the generally conservative nature of Texas politics, the bill is nowhere near as comprehensive as the California legislation, but still provides a number of effective protections for distressed home owners. For example, the bill requires loan modification companies to provide clients with a written contract spelling out precisely all obligations, fees, and responsibilities of both parties (thereby eliminating the hidden fees and undefined obligations that characterize many of the scams) and prohibits the loan modification consultant (excluding properly authorized attorneys) from charging too much interest on loans, taking a personal interest in the property, or being under the influence of the lenders.

In view of all the abuses that have been well documented in Texas, it seems likely that this bill will pass and once it does so loan modification will be a much safer prospect for distressed borrowers in Texas. In the meantime, the loan modification scammers have gone into a frenzy to solicit new customers before this legislation is enacted. Therefore, unless the borrower is using a proper attorney, it is probably prudent for distressed borrowers in Texas to hold off on loan modification action until this new bill becomes law in Texas.

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