A loan-modification company based in Southern California allegedly spent $70,000 a week on radio and television advertising for its sales force to generate 500 calls a day from desperate homeowners facing foreclosure around the country.
Employees reportedly manned 44 office cubicles, working staggered shifts in "a well-appointed telephone boiler room" to generate about $6.2 million in revenue for Anaheim, Calif.-based H.E. Servicing Inc. and related businesses, but helping only about one in 10 of the nearly 3,000 borrowers who paid up-front fees of $1,000 or more.
Those are among the preliminary findings in a report by a court-appointed receiver assigned to take over H.E. Servicing on July 9, after the company and dozens of others were shut down by state and federal officials this month.
The U.S. Federal Trade Commission said its coordinated effort with 23 state attorneys general targeting mortgage-rescue scams resulted in lawsuits against 178 companies accused of deceptive marketing of foreclosure-rescue and loan-modification services (see story).
H.E. Servicing Inc. was one of the aliases used by US Foreclosure Relief Corp., according to a lawsuit filed against the company by the FTC and the states of California and Missouri.
The case against H.E. Servicing sheds light on how one company’s attempt to avoid California’s restrictions on charging up-front fees for providing loan-modification services led to charges that it employed deceptive marketing practices.
‘Consumer deception’
Thomas McNamara, the receiver appointed to examine the operations and finances of H.E. Servicing and other businesses connected to US Foreclosure Relief Corp., said he found "multiple examples of zealous sales techniques, which, by any standard, crossed the line into express consumer deception."
California has imposed restrictions on the collection of advance fees for providing loan-modification services — only licensed real estate brokers with preapproval letters may engage in the practice — but those restrictions do not apply to lawyers or law firms (see story).
In his report, McNamara said defendant George Escalante had dissolved the operations of a previous loan-modification company after being contacted by the Orange County District Attorney’s Office in October 2008.
After locating a recent law-school graduate to partner with through an ad he placed on Craigslist.org, Escalante again began providing loan-modification services through H.E. Servicing, the report said.
The lawyer — and another who replaced him when Escalante’s original partner "expressed a desire to withdraw from the business as he saw it as high risk" — were paid a share of the fees collected from each client, totalling about $620,000, the report said. But McNamara found little evidence they performed any work.
"Despite defendants’ limited efforts to create the illusion, this was not a law firm … (but) Escalante’s business," McNamara’s report said. "He paid the rent, hired the employees, outfitted the offices, ran the finances, and ultimately controlled the operations."
The sales staff manning the phones at H.E. Servicing were instructed to claim that the company was "attorney based," and staffed by more than 100 workers who had achieved a 90 percent success rate in negotiating more than 10,000 loan modifications, the report said. …CONTINUED
In fact, the company had just eight loan negotiators working with lenders when it was shut down, and completed only 311 loan modifications on behalf of clients from November 2008 through July 8, the report said.
Of the the 2,960 applications for which the company collected fees of $1,000 to $2,500, only 11 percent had resulted in closed modifications by the time the company was closed down, the receiver said.
The company employed a sales force of 31 at the time it was shut down, McNamara found, and less than half as many employees engaged in negotiating loan modifications with lenders or processing related documents.
Employees in sales were typically paid a $450 commission when a client paid the full $2,500 fee up front, regardless of the outcome of the case. By contrast, eight staff negotiators earned $500 a week plus $75 for every loan modification they were able to negotiate.
Aftermath
Although H.E. Servicing had completed only 311 loan modifications, it had submitted another 791 applications to lenders and had another 1,051 "in various stages of preparation" for submission, the report said. More than 400 clients had received refunds after canceling their service.
On taking possession of H.E. Servicing’s Anaheim office under power of a temporary restraining order, McNamara said he sent the sales force home and placed a voicemail on the phone alerting callers that the company’s operations had been suspended. The message advises callers to contact their lender directly or contact the HOPE NOW coalition of loan servicers working with the Department of Housing and Urban Development.
After a hearing on July 17, the U.S. District Court for the Central District of California issued a preliminary injunction keeping the terms of the temporary restraining order in place. A hearing has been set for July 28 to consider options for assisting homeowners who contracted with the company, the California Attorney General’s office said in a press release.
About 80 percent of the company’s clients live outside of California, an obstacle to allowing H.E. Servicing to attempt to resume business in a lawful manner, McNamara said. Ohio, North Carolina, Indiana and Georgia have all subjected the company to cease-and-desist letters.
Although H.E. Servicing’s alleged practice of misleading consumers could in theory be corrected, McNamara said, the company’s business structure "has systemic flaws" related to its collection of advance fees. Lawyers are not allowed to split fees with non-lawyers, McNamara said.
Other than lawyers, only licensed real estate brokers with letters of approval from the California Department of Real Estate are allowed to collect fees in advance for providing loan modification services, the report noted.
McNamara called it "a challenge to precisely categorize" H.E. Servicing’s business model.
"It is not a law practice. It is not a licensed mortgage or real estate company," McNamara wrote. "Rather, I see this business as a high-pressure, cash-up-front telephone sales business targeting distressed homeowners."
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