Hearing of the Subcommittee on Housing and Community Opportunity of the House Committee on Financial Services - Legislative Solutions for Preventing Loan Modification and Foreclosure Rescue Fraud

HEARING OF THE SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY OF THE HOUSE COMMITTEE ON FINANCIAL SERVICES

SUBJECT: LEGISLATIVE SOLUTIONS FOR PREVENTING LOAN MODIFICATION AND FORECLOSURE RESCUE FRAUD

CHAIRED BY: REP. MAXINE WATERS (D-CA)

WITNESSES PANEL I: JAMES FREIS JR., DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK, DEPARTMENT OF THE TREASURY; PEGGY TWOHIG, ASSOCIATE DIRECTOR, DIVISION OF FINANCIAL PRACTICES, BUREAU OF CONSUMER PROTECTION, FEDERAL TRADE COMMISSION; MARTHA COAKLEY, ATTORNEY GENERAL OF MASSACHUSETTS; PANEL II: LAUREN SAUNDERS, MANAGING ATTORNEY, NATIONAL CONSUMER LAW CENTER; ROBERT E. STORY JR., CHAIRMAN-ELECT, MORTGAGE BANKERS ASSOCIATION; JOHN ANDERSON, VICE CHAIR, FEDERAL HOUSING POLICY COMMITTEE, NATIONAL ASSOCIATION OF REALTORS; SCOTT DREXEL, CHIEF TRIAL COUNSEL, STATE BAR OF CALIFORNIA

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REP. WATERS: (Sounds gavel.) This hearing of the Subcommittee on Housing and Community Opportunity will come to order.

Good morning, ladies and gentlemen. I'd like to thank our ranking member, Shelley Moore Capito, and the other members of the Subcommittee on Housing and Community Opportunity for joining me today at this hearing entitled "Legislative Solutions for Preventing Loan Modification and Foreclosure Rescue Fraud."

I believe that this hearing is critical, given the emergence of a new type of criminal actor in the housing market. At a time when the U.S. economy is still reeling from subprime meltdown, we are witnessing homeowners being taken advantage of by predators claiming they can modify their loans or prevent foreclosure.

Today's hearing will help identify legislative solutions to put an end to loan modification and foreclosure rescue fraud. These scam artists portray themselves as foreclosure consultants and offer to rescue or help struggling homeowners stay in their homes through aggressive marketing campaigns. For a fee, these individuals or entities promise to help save homes from foreclosure but either charge an excessive fee for services that can be obtained for free from a qualified nonprofit counseling agency or deliver little or nothing for the money received.

In addition, loan modification consultants are also entering the market claiming to have established relationships in the mortgage industry which will enable them to negotiate better loan modification terms than what borrowers could do for themselves. They can charge as much as 2 percent of the loan amount to negotiate with the homeowner's mortgage servicer but often deliver either nothing or a higher payment than the homeowner was paying before contacting these companies. These companies often use terms such as federal or TARP to mislead borrowers into thinking they're official U.S. programs.

In response to this growing crisis, federal agencies have begun to take action. Earlier this month, Treasury Secretary Timothy Geithner announced the establishment of the multiagency task force to address foreclosure rescue and loan modification fraud, including the Department of Justice, HUD and the FTC, state investigators and prosecutors, civil enforcement authorities and the private sector.

States are also taking action to protect their citizens and stop these criminal actors. I commend those states that are aggressively addressing foreclosure rescue scams. For example, earlier this month, Massachusetts' attorney general, the Honorable Martha Coakley, a witness at our first panel, filed lawsuits against four individuals claiming to be loss mitigation specialists who are falsely claiming to be one of 14 firms recruited by the government to provide foreclosure prevention services.

Although a number of states have enacted foreclosure rescue fraud statutes that would prohibit advance fees and/or require written contracts for all foreclosure-related services, many of these statutes exempt attorneys or real estate brokers. Because attorneys are allowed to charge up-front fees, fraudulent loan modification companies contract with law firms to use their names. For example, the Federal Loan Modification Loss Center was able to skirt California law by contracting with lawyers so they could receive up-front fees.

During the Financial Services Committee markup of H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act, I worked with Congresswoman Gwen Moore on an amendment she offered and withdrew which was similar to her bill, H.R. 1231, the Foreclosure Rescue Fraud Act of 2009, that would prevent the worst practices of foreclosure consultants, such as charging up-front fees for services, acquiring interest in the property or receiving a lien in the property. In addition, Ms. Moore's amendment removed the exemption for attorneys except for those filing non-frivolous bankruptcy petitions or proceedings to prevent a foreclosure.

As this bill moves through Congress, we want to make sure that it will effectively put a stop to the deceptive practices of foreclosure rescue and loan modification scam artists. That is why this hearing is so important today.

Again, I look forward to hearing the witnesses' views on this very important issue and would now like to recognize Ranking Member Capito for her opening statement.

REP. SHELLEY MOORE CAPITO (R-WV): Thank you.

I'd like to thank Chairwoman Waters for recognizing me.

I'd also like to ask for unanimous consent to submit for the record the written testimony of Florida Attorney General Bill McCollum on this very topic --

REP. WATERS: Without objection, such is the order.

REP. CAPITO: Thank you.

While many Americans across the nation continue to struggle with meeting their obligations, there are those in our society who, unfortunately, are taking advantage of families who are already stressed, which I believe is unacceptable. The actions of these unscrupulous individuals are an example of the worst in human nature and they should be held to the most stringent criminal procedures and penalties.

According to the Mortgage Bankers Association's most recent national delinquency survey, a record number of borrowers are delinquent on their mortgages and entering foreclosure. Given the recent uptick in distressed borrowers facing delinquency, some borrowers have fallen victim to foreclosure prevention and loan modification fraud scams.

On February 10th of 2009, the Treasury secretary announced a series of plans intended to help struggling homeowners. As a follow- up to increased reports of fraud on April 6th, 2009, the U.S. Department of Treasury Financial Crimes Enforcement Network, FinCEN, issued guidance to financial institutions on filing suspicious activity reports regarding loan modification foreclosure rescue scams. In addition, states like Florida, as the chairwoman noted, Nevada, California, Illinois, Maryland and Minnesota have all taken action to combat mortgage and foreclosure assistance fraud.

Following the FinCEN announcement of guidance on April 6th, the regulators must continue to utilize existing authority to protect consumers and maintain the safety and soundness of home financing. One key aspect that will aid in this are the national licensing standards and registration database for all mortgage originators that was signed into law last year. This will help in preventing bad actors from preying on borrowers and homeowners by providing greater accountability and professionalism in the industry, but it is critical that Congress exercise rigorous oversight to ensure these abusive practices are halted and those responsible for carrying them out are punished.

I would like to thank the chairwoman for holding this hearing.

I'd also like to thank Ms. Moore for offering her legislative proposal on foreclosure, H.R. 1231.

I look forward to hearing from our witnesses and learning their thoughts on how Congress and regulators can prevent further abuse and fraud.

And I yield back.

REP. WATERS: Thank you very much.

Mr. Lee, no opening statement? Thank you very much.

Then we'll go right to our panel.

Our first witness will be Mr. James Freis, director of the Financial Crimes Enforcement Network at the U.S. Department of the Treasury.

Our second witness will be Ms. Peggy -- I think that's Twobig (sic).

Twohig? When you come, you can correct me -- associate director in the Division of Financial Practices at the Bureau of Consumer Protection at the Federal Trade Commission.

And our third witness will be the Honorable Martha Coakley, attorney general of Massachusetts. Would you please come forward? There you are. Thank you very much. (Laughs.)

And Ms. Peggy Twohig, would you please tell me the correct pronunciation of your name?

MS. TWOHIG: "Too-ey"

REP. WATERS: "Too-ey." All right. Thank you.

We'll start with Mr. Freis.

Is that the correct pronunciation of your name?

MR. FREIS: That is correct.

REP. WATERS: Thank you.

MR. FREIS: Good morning, Chairwoman Waters, Ranking Member Capito and distinguished members of the subcommittee. I am Jim Freis, the director of FinCEN, and I appreciate the opportunity to appear before you today to discuss our work in combating mortgage loan fraud and our role in the administration's efforts to address the current foreclosure rescue fraud problem.

FinCEN has unique authorities to make contributions in this regard. What we've been given by Congress placed us at the intersection of law enforcement and the regulatory communities as well as the financial industry. FinCEN's basic purpose is to safeguard the financial system from the abuses of financial crime. Pursuant to the Bank Secrecy Act, FinCEN issues regulations, notably including requirements that financial institutions monitor for and report suspected fraudulent activity. FinCEN analyzes these suspicious activity reports, also known as SARs, in support of its regulatory and law enforcement functions.

FinCEN first focused on analyzing trends and patterns related to mortgage fraud back in 2002. It has since become apparent that SAR data was a leading indicator that mortgage loan fraud was a serious, escalating problem. In November 2006, FinCEN published the first in a series of analytical reports in an effort to provide the financial industry with red-flag indicators that could help them protect their financial institutions and their customers from being victims of fraud. We greatly value our partnership with the financial industry to advance our shared goals of protecting against abuse of the financial system.

Subsequent FinCEN mortgage fraud studies have focused on the role of complicit insiders, how fraud can be uncovered during foreclosures and how criminal activity is interconnected, transcending multiple financial sectors. In addition to the published analytical reports, FinCEN provides both strategic and tactical support to the federal and state law enforcement and financial regulatory communities to investigate and prosecute fraud.

FinCEN has a long history of supporting law enforcement efforts to root out fraud, waste and abuse in government programs. Recently, FinCEN joined the multiagency task force headed by the special inspector general for the Troubled Asset Relief Program, the SIGTARP, as part of a proactive initiative to deter, detect and investigate instances of fraud in some of the administration's programs under the financial stability plan.

Broad new policy initiatives must be accompanied by increased vigilance to protect against criminal abuse that could undermine them. On April 6th, Secretary Geithner, along with Attorney General Holder, Secretary Donovan, FTC Chairman Leibowitz and Illinois Attorney General Madigan announced a major interagency effort to combat foreclosure rescue scams. This included two specific FinCEN initiatives. First, FinCEN issued an advisory with red flags to help financial institutions spot and report questionable schemes that may indicate a loan modification or foreclosure rescue scam. Second, Treasury Department announced an advanced targeting effort, coordinated by FinCEN, to combat fraudulent loan modification schemes.

FinCEN is marshaling information from the financial industry and participating agencies to identify possible loan modification fraud suspects and to refer them to appropriate enforcement authorities for civil and criminal investigations. By serving as a networking and de- confliction center, FinCEN is also helping law enforcement agencies streamline and coordinate their efforts.

While federal criminal investigators and prosecutors are committed to pursuing the most egregious organized criminal actors, it is critical that we involve our state and local partners to avoid letting criminals slip below the radar screen. FinCEN can play a natural role here through its relationships not only with all major federal law enforcement agencies, but also FinCEN's long-standing support of law enforcement in all 50 states. Collectively, we must send a strong deterrence message to criminal opportunists tempted to prey upon struggling homeowners.

On behalf of the just over 300 men and women of FinCEN, we are proud to play our part in supporting the administration's and the Treasury Department's broader efforts under the Financial Stability Plan, including the Making Home Affordable programs. At least as important as our law enforcement efforts to hold criminals accountable are efforts to prevent this illegal activity from happening in the first place.

We can promote this goal by educating financial institutions and homeowners about risks and vulnerabilities, and, where possible, using regulatory authorities to help mitigate risk.

Thank you for raising awareness of this important issue. I'm happy to answer your questions.

REP. WATERS: Thank you very much.

Ms. Twohig.

MS. TWOHIG: Chairwoman Waters, Ranking Member Capito and members of the Subcommittee, I am Peggy Twohig, associate director of the Division of Financial Practices of the Federal Trade Commission. I appreciate the opportunity to appear before you today to discuss the FTC's efforts to protect consumers from foreclosure rescue and loan modification scams.

With the rapid increase in mortgage delinquencies and foreclosures, the commission has intensified its efforts to halt the proliferation of, and to warn consumers about, these types of scams. Today I will briefly describe the FTC's recent law enforcement, consumer education and policy development efforts to protect financially distressed homeowners from mortgage relief scams.

There are many varieties of mortgage relief scams, but, in most cases, the perpetrator makes misleading promises that they will be able to stop a foreclosure or obtain a loan modification. These scams often share these characteristics. First, they use terms like "guarantee" or "97 percent success rate" to mislead consumers about their chances of getting what the company is promising. Second, they charge large up-front fees, as high as a thousand to several thousand dollars, for these promised services. Third, after collecting the fee, they typically do little or nothing to help consumers obtain a loan modification or stop foreclosure.

Some of these companies use copycat names or look-alike websites to appear to be affiliated with a nonprofit or government entity when in fact they are not.

The commission's latest case illustrates this tactic. The FTC alleged that the Federal Loan Modification Law Center misrepresented through its advertising that they were affiliated with or endorsed by the United States government.

The commission also alleged that they misrepresented that they could obtain a loan modification or stop foreclosure in all or virtually all instances. On April 24th, the court issued a preliminary injunction prohibiting the company from making misleading claims and collecting up-front fees.

In a little over a year, the FTC has brought 11 cases targeting foreclosure rescue or loan modification scams. In our law enforcement programs, we are working closely with other federal agencies, such as FinCEN, as well as state law enforcers who are also actively pursuing these scams.

In addition to its recent enforcement actions, the commission announced a new consumer outreach and education initiative to reach homeowners directly with the help of other government agencies, nonprofit organizations and mortgage industry members.

Through this initiative, nonprofit organizations -- through this initiative, homeowners are receiving materials such as this flyer about how to spot and avoid mortgage rescue scams. Most recently the commission provided mortgage servicers and others with an audio public service announcement from the FTC that they can use when consumers call. These announcements warn consumers about mortgage foreclosure scams and provide tips on how to avoid them.

The FTC also will be considering what rules are warranted to more comprehensively protect consumers in this marketplace. The Omnibus Appropriations Act of 2009 authorized the FTC to issue rules to prohibit unfair or deceptive practices with respect to mortgage loans.

Using this new rulemaking authority the commission intends to address unfair or deceptive practices by those selling mortgage loan modification or foreclosure rescue services.

New federal rules have the potential to greatly increase the protection the FTC can provide to financially distressed homeowners.

In conclusion, the commission is committed to protecting consumers throughout the credit life cycle, including preventing harm to the many American consumers who struggle with mortgage debt. And the FTC is employing all of its tools: enforcement, consumer and business outreach, and policy development to protect consumers from mortgage relief scams.

Thank you for this opportunity to testify at this hearing today.

REP. WATERS: Thank you very much.

Coakley -- Attorney General Coakley?

ATTY GEN. COAKLEY: Thank you. Good morning, Chairman Waters and Ranking Member Capito and members of the subcommittee, my federal colleagues here this morning.

I am Martha Coakley and I serve as the attorney general of the Commonwealth of Massachusetts. I just want to note that my colleague in Florida, Attorney General McCollum, has been a leader on this issue, as have many of us at the state level looking at the problems coming out of predatory lending.

I appreciate this opportunity to testify this morning on H.R. 1231 and the important issue of protecting homeowners from fraud related to specifically loan modification and foreclosure rescue.

While we have some concerns about H.R. 1231 as originally filed, we support the amendment offered by Congresswoman Gwen Moore and we urge you to adopt it so that consumers will be further protected from foreclosure rescue fraud.

Let me note it's been apparent to me that there are few times when homeowners will be more desperate or more vulnerable when they are facing losing their homes or it has already occurred. In fact, it is the reverse of the American dream and it has been most unfortunate and it continues.

In Massachusetts, as in many parts of the country, we've experienced a dramatic surge in home mortgage foreclosures, due in large measure to unsound and predatory lending practices.

Many foreclosures and delinquencies have resulted from loan practices and products that were in fact destined to fail, which is important to understand when you look at this crisis.

In response to the situation, our office has sought accountability through regulation under our powers under Chapter 93a, through litigation and other advocacy, both with our fellow attorneys general and with federal partners.

For instance, in June of 2007, our office enacted an emergency regulation under our Chapter 93a for unfair and deceptive practices around foreclosure rescue schemes. We issued other regulations after hearing, but we felt that the issues around kinds of schemes I'm going to discuss in a minute were so apparent that it was important to issue the emergency regulation.

In addition, we have brought litigation around and against attorneys, brokers, and loan modification assistance companies who have preyed upon homeowners facing foreclosure. We have brought suits against subprime lenders who promoted and originated risky loans and, finally, against mortgage professionals who engaged in loan application fraud.

For instance, our office filed suit against two major subprime lenders, Fremont Investment and Loan -- Fremont General -- and H&R Block, owned by Option One Mortgage Corporation, for predatory lending practices. In Option One we also brought a claim that minority borrowers were targeted for subprime lending.

In both actions we were able to obtain injunctions -- injunctive relief that restricted foreclosures on certain loans because of the specific combination of ultra-risky loan features and, most importantly, allowed us to essentially freeze those loans in time so that they either had to be modified or come back before us before the holders were able to foreclose.

That has been our goal, in addition to enforcement, obviously, is to try and seek loan modification. So it is most disturbing to see the kinds of fraud that have arisen around those people who are already in trouble and who, once again, are victims of predatory action.

We've seen an increase in that and we think it will continue. I want to just say we have seen two specific types of fraud. They include those who attempt to convince desperate homeowners to transfer ownership of their homes. That was really the first wave that we saw in '06 and '07 and really was our entree into looking at regulating predatory lending issues.

The second, which is what we see more frequently now, is those who charge up-front fees with faulty promises to help homeowners obtain loan modification, often with little or no qualifications to do so or ability to do so.

That first scheme claims to assist consumers facing foreclosure by promising replacement mortgage financing. Owners would turn over title to their home. They would essentially become renters in their own home but then couldn't pay the rent, either, and would be evicted, so they would lose not only their home, their equity and any chance of recovery.

More frequently we've seen the fraudulent loan modification scheme that allows people, we believe, to make a quick profit by claiming to help consumers obtain loan modifications.

It's been apparent to us that by issuing these regulations in our state it has allowed us to give quick and effective relief, particularly because these practices now are known to be illegal and so we believe it's had a deterrent effect, and when it has not, we have been able to act quickly in court by seeking injunctive relief, which is really what's necessary in these situations.

Particularly for the federal legislation, we think that it will be effective to do it and that federal legislation will provide that kind of consistent federal deterrent, as well as allow for state enforcement. The preemption issue is paramount for many of the attorney generals and this allows us to continue to enforce our own state regulations as well as this one.

We believe that many of the features of this would be very effective in the issues that we have seen and so we support it. We think it's particularly important that you not exempt brokers and attorneys. Many of the schemes that we have seen involved attorneys and brokers and they are the very group of people who are most able to, frankly, unfairly and deceptively advertise and get business along these lines.

If I could make one other note, we would ask that you look, at least, at the allowable fees foreclosure cap. Our concern it that, in our experience, for instance, that would allow, on the second prong, the sum of two monthly mortgage payments, as much as $6,000.

We would observe that if a homeowner facing foreclosure is unable to make their monthly mortgage payments or they're in imminent danger of falling behind, they will likewise be unable to afford two months' payment, and indeed, we are concerned that that cap might become a floor for what people would charge. So we would just ask that you visit that.

We think it's crucial, as I mentioned, that states be allowed to bring these actions. We believe we have had success in Massachusetts in doing that and we think that this trend of predatory loan foreclosure schemes will continue, but this would provide a very effective deterrent and effective way to enforce.

I appreciate today's opportunity and we look forward to working with you, as I know my other colleagues do, on any other issues that arise around this legislation or this issue.

Thank you.

REP. WATERS: Thank you very much.

I'll recognize myself for five minutes.

I thank you for coming today to give us testimony on this very important amendment that was offered by my colleague Ms. Moore. And I think you can be very helpful to us in strengthening this amendment to make sure that we accomplish what we would like to accomplish.

There are several things I'd like to get a better handle on.

Lawyers -- as you know, lawyers are basically exempted in the amendment. And because they're able to charge fees for their services not directly related to loan modification, they are in the position of being able to offer services, as any lawyer could offer various kinds of services, on loan modifications.

But I, too, have discovered that they're the -- they're responsible for most of the problems we're having. As I was in -- I think it was Detroit, Michigan recently, where I learned about what some lawyers were doing.

And of course, I've been paying a lot of attention to the federal loan modification well-advertised program on TV, where I took the opportunity to call late one night and made up a case for needing a loan modification. And of course, they did what these fraudulent representatives do. After playing a little music after hearing my story, they came back and told me how lucky I was that they would accept me for a loan modification and asked me for $3,500.

These are the same people who had a blog that had me in the blog, having picked up some testimony, that made it appear that I was supporting them. And then of course, there's another blog with the president in it, making it look as if the president is supporting. One is the United Law Group and the other (arrives ?) from the federal home loan modification. I understand the founder of the federal loan modification group is a lawyer.

So the question becomes, what do we do about lawyers? Some states have already exempted them. I attempted to offer a modification to Ms. Moore that was accepted that would deal with frivolous lawsuits, but I'm not so sure that covers it all.

Do you have any thoughts about that? Let me start with SinFEN (sic) -- FinCEN. (Laughs.)

MR. FREIS: Thank you, Chairwoman.

FinCEN has certainly seen with respect to mortgage fraud problems more broadly that insiders to the industry, including lawyers, have often been a part of the problem.

I hope to say, and I believe it's true, that that's the exception rather than the rule -- that most lawyers do seek to serve their clients in productive ways, but I certainly agree with you that certain lawyers have been bad apples.

But in terms of the aspect of how to exempt them, I defer to my colleagues that are responsible for the enforcement and the prosecution side with how it would affect them in the individual cases. But FinCEN does have broader familiarity with this issue under the aspect of our Bank Secrecy Act regulation.

REP. WATERS: I appreciate that, but I want to focus right in on lawyers and this amendment. This is an important amendment that could do a lot of good. We don't want to have a big loophole in there, though.

How do you feel about the exclusion of everybody that do not fit the qualifications that are being identified?

Ms. Twohig?

MS. TWOHIG: In terms of attorneys -- as you noted yourself, one of the primary defendants in the Federal Loan Modification Law Center case that we've brought was an attorney. And so we've seen it firsthand in our law enforcement actions that some attorneys are trying to use their bar license to basically set up shop as a mortgage relief company and in the process, we think -- we've alleged -- deceiving consumers about the services they're going to get.

So I think to the extent that there's any exemption for attorneys, it needs to be very narrowly drawn.

They should not be able to exempt their telemarketers -- the folks that you called when you called their number. There's no reason why those employees on the other end of the line should be exempt.

So I think there could be ways to carve out a narrow exemption -- pro bono work likely should be carved out, but I think it needs to be very carefully considered so that there's not a loophole that attorneys can drive through.

REP. WATERS: Attorney General Coakley?

ATTY GEN. COAKLEY: We have considered that and it's our belief that competent and ethical attorneys can be a valuable asset for homeowners trying to avoid foreclosure. Many people do employ attorneys for filing for bankruptcy or representing them in connection with court proceedings.

But we have also found that many of the scams that we have investigated and prosecuted -- for instance, one recently was called, "loan mods by lawyers." And that was -- that goes to the point that lawyers carry with them the authenticity that they will do this fairly and correctly.

I think the key is to stress that this does not prohibit in Massachusetts someone from taking a retainer, for instance, that then may be charged against services that are incurred -- time (occurred ?) or other valuable service.

What is concerning to us is that lawyers and others take a fee up front -- 1,000, 15 -- as you indicated -- and that is an entry fee. That is -- does not go to anything that is useful or beneficial, particularly when there are lots of nonprofits around to help people. People are getting more success now in trying to modify their own loans. That's the advice we give to folks.

We believe lawyers, frankly, would have a problem of their own if they continue to take these fees without providing services. And so we had no problem in Massachusetts saying we're going to declare for everybody, you cannot take a fee up front. It does not prohibit an ethical lawyer from, again, charging a retainer for which services would be -- afterwards could be charged against it, but the fee for frankly no service involved, we've determined to be unfair and deceptive in Massachusetts.

REP. WATERS: Thank you very much.

Ms. Capito:

REP. CAPITO: Thank you, Madame Chair.

I want to start with the attorney general. I think you covered this in your statement, but I'm curious to know -- for the states who had existing laws that deal with mortgage and foreclosure fraud on the books and this particular bill -- I think you stated that there isn't a conflict and that your state's statutes would still hold up and the federal statute wouldn't take over. Could you explain that to me a little bit, please?

ATTY GEN. COAKLEY: My understanding is that this statute, unlike many other federal statutes, does not preempt current state law and so that a state, for instance, that had higher measures or higher standards around this could still enforce those.

I think the nice piece of this is that these standards, though, will be consistent across the states so that they can be enforced either by the federal government, or in a state, for instance, where there has not been legislation passed, an attorney general could enforce this in a way, again -- particularly in this area, I think would have a huge deterrent effect on this activity.

And so we see it as a complement to federal legislation. It's not duplicative and it does not disadvantage the states by preempting us from the field.

REP. CAPITO: All right. Thank you.

Just an informational question: With these -- are you finding in your investigations of -- or -- when you're bringing suit that a lot of these fraudulent scam artists -- we'll put it that way -- are they national in nature? Are they targeted at, say, Florida or Massachusetts or Nevada or California? You know, what's the nature of that?

And my additional question is, we know that this exists; just for my own information, are there legitimate businesses that actually carry forth this business of helping people prevent foreclosure that exist throughout the country?

I'm sure people have assistances, but are there businesses created just for this?

MS. TWOHIG: I could take that one. Starting with your first question, clearly some of these companies are national. Federal Loan Modification Law Center had nationwide advertising on TV, radio, Internet, and they were nationwide.

Some are not. Some are more local in nature. I think in the old days we used to see people knocking on doors, literally going door to door. I think more often now they're using the Internet and telemarketing and telephones to reach out more broadly. And I think what is true is almost always they're clearly crossing state lines. So that's the picture that we see.

And in terms of your second question --

REP. CAPITO: Are there legitimate businesses created on a national level, more interestingly, that are playing by the rules, although there are really no rules for this?

MS. TWOHIG: I think that's a hard one for -- from the Federal Trade Commission's perspective to answer because, of course, we zone in on the one's we think are problems. And so we see the bad practices and the bad actors. You know, we spend our time there. And so from what we see, we see very troubling practices.

I will say, though, that there are some things that I don't -- no one can legitimately promise. No one can guarantee that you will get a loan modification. No one can guarantee that they will stop a foreclosure. So no one can legitimately do that. That's just not possible to promise that.

REP. CAPITO: Mr. Freis?

MR. FREIS: Ranking Member, if I can add in response to your first question about the national nature -- first it must be said that we have seen schemes that cross the entire country from California to Massachusetts, from Washington state to Florida and multiple places in between.

With respect to the targeting effort that we've ramped up in the past month, one of the successes that we've had is initial basis is the ability to bring together the attorneys general from different states with respect to specific actors that are operating in multiple states.

And more broadly, with respect to the mortgage fraud issue that we've been focusing on for years, we do indeed see national organized criminal groups.

REP. CAPITO: Just in closing I would like to reiterate something the attorney general said, that at least we've had this in our committee several times trying to get help, you know, Hope for Homeowners and all the assistance to help people really figure their way out of this problem. There are a lot of great nonprofits all across this country that are daily trying to help folks figure out a way to stay in their home and keep their home.

And additionally, I would say that if there's anybody out there who has an 800 number that advertises, the chairwoman will be calling you -- (laughter) -- in one of her sleepless nights, because she's always got them on -- on speed dial, I think.

So I yield back. Thank you.

REP. WATERS: Thank you.

Mr. Lynch?

REP. STEPHEN F. LYNCH (D-MA): Thank you, Madame Chair. I want to thank you for holding this important hearing.

And also I want to thank our witnesses, especially my own attorney general from the state of Massachusetts, Martha Coakley.

I appreciate the work that you've been doing on this, all of you.

A while back we had a -- in my district the town of Randolph was kind enough to give me the high school auditorium and we did a foreclosure prevention workshop. We expected maybe 100 people to show up. We got over 400 families coming in.

And the one thing that I did like was the fact that we had already vetted a group of banks, mortgage companies, nonprofits to come in and help with these workouts. Would that type of model, you know, if we had -- and I know in Massachusetts we've got -- at least in Brockton we've got some good groups that are nonprofits that will work and help families out of this and to work with banks to get these modifications accomplished. Is there a way that we might intervene -- do these town meetings, bring in the legitimate folks to conduct these or assist with these modifications the way they should be done, as opposed to just trying to fly the red flag about these are they guys you need to watch out for?

ATTY GEN. COAKLEY: If I can answer that, I think they're not mutually exclusive and I think they complement each other. On the one hand, you need to make those folks who need help aware of what the resources are and I know we do that through our website. I know there are lots of other organizations that have tried to do that -- bar associations that do volunteer work.

But it still is the individual who doesn't pay attention to that until they get the notice in the mail and then they panic. And then they're going to be victimized, potentially, by one of these e-mails, faxes, telephone calls.

And I agree with the assessment -- they're national but they're also very local. Our first case was against an individual in one of our communities who frankly preyed upon his neighbors and friends and church members and took all the titles to their homes. And it was pretty discouraging to see that happen.

Obviously with the economy and with brokers out of work and attorneys looking, this is a scam that can be lucrative with quick hits on the small level and on the national level.

So I think we continue -- we need to continue to advise people of how they can get loan modification. And banks have been being a little better about trying to do that without help, but with not-for- profits available, that's the route to go.

And for someone to say, I can guarantee you that I will help you modify your loan, it's too good to be true, so it isn't.

REP. LYNCH: All right.

Mr. Freis, yes.

MR. FREIS: I concur with the attorney general that the education aspect is critical and must underline the administration's commitment as part of the Making Home Affordable Program, to promote the work of financial institutions to help homeowners who have a legitimate ability to modify their loan.

But, of course, bringing in some of the banks only gets at part of the parties involved. You need to ultimately bring in the servicers with respect to the individual homeowner's loan, and once again I think that needs to be a national effort. We know that the mortgage market is no longer just on a local basis.

REP. LYNCH: Director, let me ask you, I work with FinCEN a lot, as you know. We just worked on opening the financial intelligence unit in Morocco about three weeks ago. It's tough to get my head around the fact that you're dealing with all that, you know, anti- terrorist financing -- I happen to co-chair the task force on terrorist financing and nonproliferation -- and you're also doing this.

I can only imagine the volume of, you know, suspicious activity reports and cash transaction reports that you're getting from banks, you know, under the Bank Secrecy Act and all the other statutes that are steering information through your office, and now you're dealing with this, which is a more generic and homegrown, insidious, nonetheless -- but how are you handling it as an agency within Treasury? How are you handling the responsibility of screening all this? And is this something that's coming to you regularly? And how do you deal with that from a workload perspective?

MR. FREIS: Congressman, let's first, let me thank you. You have been a great supportive of FinCEN and, in particular, in reintroducing the reauthorization act. We appreciate that ongoing support for all the work that we do.

Basically, with respect to your question, it's true. FinCEN's a very small agency of a little over 300 persons with a broad mandate. And basically it's all about following the money. Criminals, they don't respect the law, they certainly don't respect the borders. So one unique authority that Congress has given us is the ability to go beyond the jurisdictional limits that constrain some of the work of our law enforcement partners, and to reach out to our counterpart agencies around the world, exactly as you mention, the financial intelligence units. Now we have relationships with more than 100 countries.

So in the past, when a criminal sends money abroad, and we've seen multiple instances, including suspects involved in mortgage fraud, that have shuttled money out of the country. That's detailed in the March 2009 report that we published. We have the ability to reach out to our counterpart agency and not lose that trail. In other cases, agencies, literally, they give up. They say it gets too hard for us to follow the money when it leaves the country, and we have an ability to extend that effort along the continuum.

In terms of the resource issue, focusing on domestic fraud has been a core part of FinCEN's mission from its very inception. And next to all the work that we're doing with respect to mortgage fraud, loan modification schemes and the like, the next biggest area where we're working on is the Southwest border and Mexico related threats from the homeland.

REP. WATERS: Thank you very much.

Mr. Driehaus?

REP. STEVE DRIEHAUS (D-OH): Thank you, Madame Chair, and thank you very much for conducting this hearing on, as Mr. Lynch indicated, a very important matter. And I want to thank Ms. Moore for her efforts in this area as well.

As I've heard each of you testify and read your testimony, I'm pleased with the fact that we are moving in the right direction in terms of cracking down on some of these fraudulent schemes. But I continue to be very concerned about local enforcement and the resources going into local enforcement. You know for years we have seen these predatory activities.

And even when we knew that fraud was occurring and prosecution could take place under existing state law, it didn't happen. And it didn't happen in many cases because it was either not on the radar screen of the attorneys general in the various states that we represent -- I happen to be from Ohio. And certainly it wasn't on the radar screen of local county prosecutors who are worried about robberies and murders and things of that nature.

How do we, you know, in your experience, how do we better help local prosecutors and attorneys general to become aware of the issues regarding mortgage fraud, and how do we get them the resources, and what types of resources do you think they need in order to fully investigate and prosecute this type of behavior?

I appreciate the testimony, Ms. Coakley, about what you are doing and what some of your colleagues are doing in the various states, but I'd like your opinion on whether or not we're going nearly far enough, given the scope of the problem.

ATTY GEN. COAKLEY: I think in this particular area, which is limited appropriately to these kinds of frauds, I think this is -- in fact goes far enough and will be very helpful, in general, and it's a bigger issue than I think we can address today. Many of the states attorneys general have been held back because they specifically have been preempted from taking action for banks and other areas. So we have in beginning this effort been limited to those companies over which we had jurisdiction and weren't preempted from. For instance, we have no ability to look at credit card interest rates because we're totally preempted from that. So I just used that as an example.

We could always use more resources, everybody could. In Massachusetts it is the DAs who, as you indicated, do the violent crime; we try to focus on both civil and criminal, on these kinds of issues. But I guess I feel that this particular problem was one that caught everybody on Wall Street, Main Street, Elm Street, AG's office, federal level, we all kind of saw it coming, but we didn't, and to the extent we were able to start to identify pieces of it, we did what we could where we were not preempted.

And I would just ask for this committee, as we go forward, to look at this model and this bill, which says we're not going to preempt states, we want a consistent model, we will let states enforce the federal model, which I think is a workable way to go about this issue.

But we are the ones who do see these problems first. They start out small often and we see them in some states and not in others, well before they reach the level that Washington can respond to them. And it is incredibly important, I think, as the AGs have worked together on many of these issues, that we can, and I'm hopeful that we will, work more closely with the federal government in ways that we do not duplicate these kinds of actions, that we have consistent standards for those that we are going to regulate, and that we complement both the deterrent effect that the legislation or regulations have and our ability to enforce violations of them.

MR. FREIS: Congressman, certainly we see everyday the resource limitations that the state and local have in terms of going forward with enforcement actions, particularly in this economic environment. But I think one of the critical things that we can do and what FinCEN has always tried to do is serve a multiplier effect in leveraging resources.

We do that in a number of ways. We have relationships in every state with the state law enforcement coordinator, such as the Commonwealth Police Department in Massachusetts which operates a fusion center together with other local entities in Massachusetts. We provide them with information and we provide them with leads in areas such as this with respect to loan modification fraud. Another thing that we actively do is try to share expertise. We go out there and we train them as to what are the modus operandi that are following -- that the criminals are following? What are some of the successful ways we've been able to do that in law enforcement?

Basically what we're trying to do is move away from the compartmented model so that every single field office, every single state entity has to reinvent the wheel with a recurring problem. I think that's been very successful. We'd like to do more. And with respect to this effort in particular, we've established relationships with 38 states attorney general; every one of those is multiplying and building off of successes upon another.

REP. WATERS: Thank you very much.

Mr. Ellison?

REP. KEITH ELLISON (D-MN): Thank you, Madame Chair, for this very important hearing; appreciate it. As usual, you're leading the way.

Ms. Twohig, how would H.R. 1231 enhance the FTC's enforcement powers with respect to stopping these fraudulent actions?

MS. TWOHIG: I think what it would do would establish some federal standards, some federal rules of the road, if you will, that would help us protect consumers. Without that, we are using the tools we have now, which is primarily the Federal Trade Commission Act, which prohibits unfair and deceptive acts and practices. And that is what we are using to go in and charge the companies with deceptive practices when they promise things that they can't deliver to consumers -- loan modification or rescuing them from foreclosure. But with that said, it would be helpful in my view to have some standards in place that would outline exactly where the lines are, what's legal, what's not, and to rein in and prevent some of the practices such as the taking fees up front.

REP. ELLISON: Does the FTC have adequate staff to carry out the new clarifying powers it would have?

MS. TWOHIG: We've stepped up our efforts in this area considerably, both enforcement, and we have new authority under the Omnibus Appropriations Act to do rulemaking with respect to mortgage loans. So the commission has said it intends to use that authority to also see what it can do under that authority to put some rules in place.

REP. ELLISON: Do you have enough staff?

MS. TWOHIG: Yes.

REP. ELLISON: Now, would the FTC essentially do the investigative work and then refer the case for prosecution to the U.S. attorney?

MS. TWOHIG: The cases we do we bring ourselves --

REP. ELLISON: Okay.

MS. TWOHIG: -- in federal court. We have to refer to the Department of Justice if we are seeking civil penalties under a particular statute. But under the Federal Trade Commission Act, we file the suit in the name of the Federal Trade Commission directly ourselves in federal court.

REP. ELLISON: Okay. So for the cases that you might refer to Justice, in your view, do you have any view on whether they're adequately staffed to handle the cases you might refer to them?

MS. TWOHIG: Well, right now in this area, we are bringing them under the Federal Trade Commission Act. So right now that's not an issue in this area.

REP. ELLISON: Okay. One of the issues that's come up quite a bit -- well, let me ask you this: In your written testimony you state that the FTC has rulemaking authority that prohibit unfair and deceptive practices with respect to mortgage loans and is working on a rule to restrict foreclosure consultants.

What is the FTC's progress on the rule? And when will a proposed rule be issued?

MS. TWOHIG: We just got that authority recently in the Omnibus Appropriations Act. And so we are currently busily formulating a recommendation to make to the commission, which would get that rulemaking process started. We expect that to be very soon.

REP. ELLISON: You know, in some of my conversations in my own district in Minneapolis and the surrounding suburbs, we've heard people complain about high re-default rates after there's been a loan modification.

How is this foreclosure prevention fraud related to re-defaults, or is it?

MS. TWOHIG: I think it's really two separate issues.

The issue that we've been focusing on, that the testimony focuses on is the segment of the marketplace that's trying to prey on consumers who are desperate -- in desperate straits and reaching out for an answer. And they're falling victim to the companies that are promising them something they just can't promise.

REP. ELLISON: I understand.

MS. TWOHIG: I think a whole separate issue is when the mortgage servicers themselves and the legitimate non-profit sector are obtaining actual modifications for consumers and whether -- what the standards are there, and whether they're actually succeeding.

REP. ELLISON: So these companies engaging in fraud are not setting people up to re-default?

MS. TWOHIG: Mostly, from what we've seen, they're not getting the modifications at all.

REP. ELLISON: Okay. I got it.

ATTY GEN. COAKLEY: Exactly. I agree with that, that they've been totally ineffective in any way. They're not -- the re-default loan rate is due to something else rate is due to something else.

REP. ELLISON: They don't even get to re-default, because they never even get the modification.

ATTY GEN. COAKLEY: Correct.

REP. ELLISON: I think that's all my questions, Madame Chair.

Thank you very much.

REP. WATERS: Thank you very much.

Without objection, Representative Moore will be considered a member of this subcommittee for the duration of this hearing.

And we thank Ms. Moore for her amendment and the work that she has done. And I will recognize Ms. Moore for questioning.

REP. GWEN MOORE (D-WI): Thank you so much, Congresswoman Waters.

And you promised me early on that even though I'm not a member of this subcommittee that you would honor me when I came. And I thank you so much.

I do want to thank Congresswoman Waters publicly for all the work that she has done on this.

California, of course, passed a law back in 1979 with respect to mortgage fraud problems.

Were you in the state legislature then, in '79?

REP. WATERS: Yes. I was there.

REP. MOORE: Yes. And so I appreciate all of the sage experience that she's had. And of course, being the subcommittee chair she's worked very closely with me on this issue of exemptions, in particular for attorneys. And given her two-and-a-half-hour-long vigils on the phone, she has really been a point person and known up front the toxicity of this problem.

And I can tell you that while this has been a problem all along with the mortgage meltdown, this has just created an environment where there's an 800 percent increase. So I can appreciate questions like the one Ellison has made with respect to whether or not there are enough resources to do that.

And I might just add, knowing that I'm consuming my time, Madame Chair, that what I continue to hear is that legitimate help, like with HUD-sponsored counseling, homeowners counseling -- it's very, very underfunded. And perhaps that's an avenue for putting a lot of these folks out of business -- to make sure that we take seriously that.

When I bought my first home I had a certified HUD counselor, and I just took that for granted, that people would have those kinds of services available to them.

I also want to thank Ms. Twohig from the FTC for helping us work on developing this bill, and appreciate your having stepped up.

Now, let me ask some questions.

Ms. Twohig, the authority that you've gotten through the omnibus, with respect to mortgage fraud, is that for just non-banking institutions, or for all financial institutions?

MS. TWOHIG: It was --

REP. MOORE: Because I noticed in your testimony that you were recommending that you have power over, you know, banking mortgage, as well as the -- your current stewardship over non-banking activity.

MS. TWOHIG: Right now the authority would have -- we would have would be the same authority we have under the FTC Act, which is non- bank entities. So under the FTC Act we do not have authority over banks.

In this area, however, I would say that the foreclosure rescue and loan modification services that we're concerned about, the ones that are taking advantage of consumers, are in the non-bank sector. So we believe we can cover pretty much what needs to be covered there.

REP. MOORE: Okay. I'm only asking that because I noticed in your testimony that you were seeking authority over all financial institutions. And I was wondering if you thought that that was important toward ending this activity, or was that just a suggestion for some other point?

MS. TWOHIG: Right. I think what you're referring to is the commission's views that in the larger scheme of things, when it comes to broader-based financial services regulatory reform, that if those issues are considered and a new agency is thought to be needed that the commission be considered and consulted in that calculation.

On this area I think it's -- as I said, I think we could basically cover what needs to be covered with our jurisdiction, because it's non-banking entities that are taking advantage of consumers.

REP. MOORE: Okay.

Ms. Coakley, I believe that you spoke to us about the caps on fees, and I guess I -- you said that 1 percent, or two monthly payments would be too much. And so I was wondering, number one, what you thought would be appropriate, and also would like -- because I see my time is expiring -- you to make a little bit more clarification about the exemption for attorney fees.

And you know, what -- the problem we ran into in trying to craft the perfect amendment is that we don't want to stop attorneys from helping people with legitimate work regarding, you know, filing for bankruptcy and so on.

And so, please, Madame Chair, with your indulgence, can she answer?

REP. WATERS: Yes.

REP. MOORE: Thank you.

ATTY GEN. COAKLEY: Let me answer it this way, because we agree with you; we want attorneys who do the work, who are qualified, and people certainly entitled to engage attorneys for that work. But attorneys have a way in which they either bill their time or enter into a contingency fee agreement. This is neither of those. This is an up-front fee, basically as an entry fee that doesn't go towards the result.

And so we firmly believe -- and frankly, when we issued this regulation in our state we did not hear from the bar. We did not have problems that lawyers felt that this was unfair, because we think that those who are competent and ethical and who do play by the rules -- and again, they can take a retainer if the party agrees and the lawyer agrees.

But the retainer has to then be counted against time that the attorney has spent on the process, as he would -- he or she would bill any client for work done.

So I --

REP. MOORE: So the question is, okay, as I kept thinking now -- what we want to do is regulate the relationship between the attorney and non-lawyers. So if I'm a delivery service delivering stuff to the court, because I'm filing some papers, the attorney might need to pay me to do that. So what we're trying to do is regulate that relationship without stopping the attorney from doing it.

So we do need help in the rulemaking process, Ms. Twohig, to narrow it, as you suggested it, but still keep the normal, Madame Chair, legal relationships intact.

And just, very quickly, the other question that I asked about the caps.

ATTY GEN. COAKLEY: Oh, I talked with our folks yesterday about this, because our experience -- at least in Massachusetts, and it may differ in states -- is that these fees have been around, you know, ($)1,000, $1,500, but with this cap it could be as high as $6,000. We think that second prong, two months of a payment, would essentially become a floor that people would start to charge.

And so I'm afraid I don't have an absolute, but just to consider whether there may be a lower cap in terms of a dollar amount or a percentage. And I would assume my colleague may be able to help with that also. But that seemed high to us given our experience in the field.

REP. MOORE: Okay. Thank you.

Thank you so much. My time has expired. I'd love to continue, but I don't want to get gaveled. You've been very generous --

REP. WATERS: Thank you.

REP. MOORE: -- Madame Chair.

REP. WATERS: Thank you very much. And let me thank my witnesses, particularly the attorney general who's done so much work in Massachusetts on this.

And of course, the Federal Trade Commission that we have turned to and you have been very effective in shutting something down, but we want to remind you that the blog keepmyhouse.com is still up, even though the federal loan modification website is not connected to it any more. So stay on top of them. And we're going to do everything we can, working with Ms. Moore to give you more help.

And thank you all very much for being here today.

We'll get our second panel up.

The chair notes that some members may have additional questions for this panel which they may wish to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place their responses in the record.

Again, I dismiss this panel and call on our second panel.

Our first witness will be Ms. Lauren Saunders, managing attorney at the National Consumer Law Center.

Our second witness will be Mr. Scott Drexel, chief trial counsel at the State Bar of California.

Our third witness will be Mr. Robert E. Story, chairman-elect at the Mortgage Bankers Association.

And our fourth witness will be Mr. John Anderson, vice chair of the Federal Housing Policy Committee at the National Association of Realtors.

Without objection, your written statement will be part of the record, and I will recognize each of you for five minutes, beginning with Ms. Saunders.

Thank you for being here.

MS. SAUNDERS: Thank you. Thank you, Chairman Waters, Ranking Member Capito and members of the subcommittee. I appreciate the opportunity to testify for you today.

Yesterday's home equity strippers have become today's loan modification specialists charging thousands of dollars for work, if any, that often leads nowhere and leaves the closer ever (sic) to foreclosure.

Lead generators are selling the names of homeowners who are 30, 60 or 90 days late to loan mod mills. Firms are springing up from and recruiting among the ranks of the same people were offering subprime loans and no-doc loans of the type that led us into this crisis.

The primary qualification for the jobs that are being advertised on the Internet seems to be the ability to "close," the ability to pressure a reluctant homeowner into agreeing to the contract.

Many of the loan mod firms are outright crooks who have no intention of doing anything. But others are operating in a gray zone, perhaps making some unsuccessful efforts to contact the lender. But from the homeowner's perspective, there's really no difference between a crook who takes the money and run and somebody else who says, "Sorry, I tried, but you can't have your money back."

The sheer number of people in foreclosure is an obvious attraction to the scammers. But loan mods are flourishing because, as the chairwoman well knows, servicers have been unresponsive. And homeowners are not able to get loan modifications directly.

I will get to the scams in a moment, but I'd be remiss if I didn't point out that the most important work that Congress can do to prevent these scams is to attack the servicing problem. You know, the chairwoman, of course, has been a lead on this issue.

And the mandate access to a decision maker at the servicer -- somebody who has the information and the authority to actually deal with a loan modification -- and to require that the servicers engage in reasonable loss negation efforts before they foreclose. People are going to these middlemen because they can't do it directly. And if they could do it directly, I think a lot of this would go away.

Regarding the scams themselves, many states have been active in passing laws to address them. Others have been slower. As long as stronger state laws are not preempted, as they are not under this bill -- federal legislation can be helpful as long as it creates strong, substantive protections, as H.R. 1231 does, and not just disclosure hoops for scammers to jump through.

Any law or rule would do more than harm than good if it simply is sanitizing the websites but allowing the operations to continue.

Effective legislation should prohibit up-front payments for foreclosure consultants. And setting aside the lawyers for a moment, I think that should include taking money and putting it in escrow but then charging against it.

Second, it should require results. The fee should not be earned unless and until the homeowner receives an affordable, sustainable loan modification. And that gets to, I think, Congressman Ellison's point about, you know, the re-default -- a loan mod that, you know, increases your payment isn't worth paying for.

The level of the fee should be tied to the results achieved. And I agree with the concerns about the two-month standards as being too high. I would urge that you look to Illinois, which has capped the fees at 50 percent of the monthly payment, unless the modification results in a reduction for five years, in which case it can go up to 100 percent -- a full month.

And we need to avoid unnecessary exemptions that open wide loopholes.

I don't think legitimate mortgage brokers and real estate brokers need an exception for advanced fees, because they're not normally paid until they sell a house or obtain a mortgage. But if they're operating outside of the scope of their traditional activities, the mere fact that they possess a license, you know, should not insulate them.

Lawyers are a trickier case. I full (sic) recognize that, you know, lawyers are part of the problem. I support the efforts of the FTC to crack down on those lawyers who are engaging in deceptive conduct. But I am concerned that we not, you know, go too far and stop being the work of the front-line people who are actually helping the homeowners who are confronted with foreclosure rescue scams or predatory mortgages.

I, you know, note that Attorney General Coakley interprets her regulation to permit a retainer. But we don't want, you know, that loose standard to infect the rest of the bill as well.

My own office offers a paid consulting service, even though we're a non-profit, where other lawyers can pay us to review loan documents and advice on claims. Certainly, legitimate lawyers may send a demand letter and engage in activities short of litigation, and they should be able to charge for those.

So on the other hand we do want to crack down on the lawyers who are offering the cloak of their license to shield the work of non- lawyers whether it's, you know, a loan mod firm that contracts with an attorney or an attorney who's running a large mill operation which really has nothing to do with the practice of law.

To the extent that the FTC adopts rules in this area, we think it's essential that they use their unfairness authority to ban up- front fees and fees with no results and not merely its deception authority to, you know, require disclosures or sanitize websites.

Finally, Congress does need to increase funding for the HUD- approved counseling agencies, which are really the best next step, after the servicers themselves, to get home lender the help they need.

Thank you for inviting me to testify. And I welcome (sic) to answer your questions.

REP. WATERS: Thank you very much.

Mr. Scott Drexel.

MR. DREXEL: Thank you, Madame Chairwoman, Ranking Member Capito and members of the subcommittee. I'm the chief trial counsel of the State Bar of California.

California has a total of more than 225,000 attorneys, more than 165,000 of whom are active members and entitled to practice law in our state. Approximately one of every seven attorneys in the United States is a California attorney.

My office is responsible for the investigation of complaints against California attorneys and for the disciplinary prosecution of those attorneys who have violated our rules of professional conduct or our State Bar Act.

Since approximately November 2008, we have received an average of more than 900 telephone calls per month to our 1-800 complaint line an annual rate of more than 10,000 telephone calls on the subject of mortgage foreclosure scams and loan modification scams alone.

Clearly, this is a problem of significant if not crisis proportions in California. The problem is so serious that in February 2009, our Committee on Professional Responsibility and Conduct issued an ethics alert to all California attorneys and to the public about the dangers of foreclosure -- loan modification and foreclosure rescue fraud, warning attorneys about the possible ethical implications of their involvement in these sorts of activities.

In response to the large number of written complaints received by my office on this subject, we have created a staff task force to focus solely on complaints of foreclosure rescue and loan modification fraud. We are working extensively with other agencies to address the issues, especially the California Department of Real Estate, which regulates mortgage foreclosure consultants in California. We have tried to be proactive in our response to suspected involvement of California attorneys in this area. Pursuant to our statutory authorization, in March 2009, we successfully petitioned a California superior court to assume jurisdiction over the practice of a California attorney who was engaged in loan modification fraud. Pursuant to court order and with the assistance of local law enforcement, we seized more than 2,300 of the attorney's files, downloaded records from his computers, froze his bank accounts -- both his client trust account and office accounts -- and redirected his telephones and mail to the state bar offices. We're in the process of returning files and advanced fees to the attorney's clients and assisting them in obtaining services from legitimate practitioners.

We've also attacked the accuracy and propriety of advertisements by attorneys in this area. Under our rules of professional conduct, attorneys are prohibited from making false, misleading or deceptive statements in advertisements and can neither guarantee success nor advertise past successes without appropriate disclaimers. We have therefore been demanding copies of the attorneys' advertising and demanding documentation to substantiate the claims made in their advertising.

Our goal is to force the removal of all false and misleading advertisements from the media, thereby making it more difficult for these unethical practitioners to prey upon members of the consuming public. We've initiated more than 175 active investigations of attorneys suspected of engaging in these activities, and we are especially targeting those practitioners against whom we have received multiple complaints or who appear to be particularly egregious in their victimization of consumers. Tomorrow morning in Los Angeles, I will be meeting with representatives of the United States attorney's office, the California attorney general's office, the Department of Housing and Urban Development, the Federal Trade Commission, the Department of Real Estate, and local DA representatives to work cooperatively and to try to develop a plan for attacking these loan modification fraud schemes in our state.

H.R. 1231, in my opinion, will provide significant assistance in preventing foreclosure rescue fraud by prohibiting foreclosure consultants from demanding or receiving advanced payments from homeowners, and by requiring loan services to notify homeowners of the dangers of these fraudulent activities and to direct them to the Department of Housing and Urban Development and others for assistance in avoiding foreclosure.

H.R. 1231 currently excludes attorneys, as does our California statute. California, as Representative Moore has indicated, has had regulated mortgage foreclosure consultants since 1979. However, attorneys are excluded from the definition of mortgage foreclosure consultant. Currently in California, there is pending a bill, Senate bill 94, which would extend the prohibition upon advanced fees to attorneys as well as to others. The board of governors of the state bar will be considering next week at their meeting whether they support of oppose that legislation. However, as an independent prosecutor, I have already gone on record as supporting that measure and that limitation upon attorney's fees. Attorney fees in California are regulated in other areas. In medical malpractice actions, attorney's fees are limited by statute; in worker's compensation, probate proceedings and the like, attorney's fees are regulated. I see no reason why they cannot and should not be regulated here. I therefore personally support Representative Moore's proposed amendment.

And again, thank you for the opportunity to appear today.

REP. WATERS: Thank you very much.

Mr. Robert Story.

MR. STORY: Chairwoman Waters, Ranking Member Capito and members of the subcommittee, thank you for inviting me and the Mortgage Bankers Association to discuss the very important issue of foreclosure rescue scams. I am here today because MBA shares your concerns about the rapid rise in these scams. There is no doubt we need to better protect innocent homeowners.

Those committing fraud prey on people at the end of their financial rope. Their scams start with a phone call, a mailing or an advertisement promising help. These scammers are difficult to distinguish from organizations offering real help. They even use similar names. They are all designed to achieve one thing and one thing only: to lure the person who is desperate for help.

When a fraudster makes contact, the borrower is told that their situation is dire and they're going to lose their home. The scammer does everything possible to raise the anxiety level of the borrower. When the borrower is at their lowest point, the scammer says there may be a solution. But the solution comes with a price. The borrower must agree to cooperate, and the borrower is told to cease any communication with their lender, to avoid being detected. These scams take many forms. Scammers promise to complete paperwork and obtain the loan workout in exchange for fees that can escalate into thousands of dollars. Then the scammers either don't follow through, or perform menial tasks that a servicer or HUD-approved counselor could complete for free. Scammers convince homeowners that they can save their homes from foreclosure through deed transfers and promises to lease or sell back the property, which never happens. In extreme instances, scammers sell the home or secure a second loan without the homeowner's knowledge, stripping the property's equity for personal gain.

So what can be done to stop these cruel practices? First and foremost, borrowers need to turn to the right sources for help. MBA encourages borrowers in financial trouble to call their mortgage servicer right away. Mortgage servicers want to avoid foreclosure. They have an economic incentive to do so. Servicers have the legal authority to create repayment plans, refinance or modify a mortgage. Borrowers should contact trustworthy sources for advice and counseling. The "hope" hotline at 1-888-995-HOPE or a HUD-approved counselor are trustworthy resources. State and local governments across the country have also set up hotlines.

Raising consumer awareness of scams is a vital function of government and industry efforts. The Treasury Department and banking regulators have issued alerts for consumers, and the FTC has produced a fact sheet warning consumers about services that promise to stop the foreclosure process. We also need to redouble our efforts to go after those who prey upon vulnerable homeowners. The legal tools needed to investigate and prosecute fraud are already in place. The federal mail and wire fraud laws resolve possible varieties of foreclosure rescue fraud. What's missing are the resources.

MBA has asked Congress to appropriate additional funding for the FBI to investigate and prosecute fraud. The funding will pay for new FBI field investigators. It would also allow the Justice Department to hire additional prosecutors focused on this area. The funding would also support the operations of the FBI interagency task force in the 15 areas with the worst problems. MBA is particularly pleased that today the House is taking up S. 386, the Fraud Enforcement and Recovery Act. This bill includes $245 million for law enforcement to crack down on financial fraud, including foreclosure rescue fraud.

On behalf of the MBA, I'd like to thank the subcommittee for the opportunity to testify today. Foreclosure rescue fraud is a growing problem that's becoming more expensive for homeowners and lenders. MBA believes increased enforcement, better communication and the further innovation is required to adequately protect borrowers from the cost of foreclosure rescue fraud. Thank you.

REP. WATERS: Thank you very much.

Mr. Ellison, will you introduce our next witness?

REP. ELLISON: Thank you, Madame Chair.

Madame Chair, members, John Anderson has been a licensed realtor with Twin Oaks Realty in Crystal, Minnesota as a salesperson and broker since 1980. He is the present owner of the family business started by his father in 1961. John assisted and counseled thousands of buyers and sellers over the years as primarily a residential broker. He has also been active in the industry, serving as a volunteer on national, state and local levels of the realtors' association. One of his keys interests because of his personal involvement has been in the area of government financing, specifically FHA, VA mortgages and their importance to the customer. He has been recognized as realtor of the year on both local and state levels and has been named as, quote, "super real estate agent," unquote, by Mpls.St.Paul Magazine every year since 2003. He's married and has three children.

Thank you and welcome.

MR. ANDERSON: Thank you, Representative Ellison.

Thank you Chairwoman Waters, Ranking Members Capito and members of the subcommittee. I want to thank you for the opportunity to testify today on foreclosure rescue scams and the need for mortgage reform.

I am testifying on behalf of NAR's 1.2 million members. I can tell you firsthand that the more lending abuses we see the higher the prevalence of foreclosures. Foreclosures are like mold: Once they start, it's difficult to get rid of them. Foreclosures lead to families losing their homes as well as their savings and can cause all homes in a neighborhood to lose value. Foreclosure rescue scams and loan modification scams are becoming more and more prevalent.

One of the most pervasive foreclosure rescue scams that I have seen is the "reconveyance." In this situation, a so-called foreclosure counselor tells the homeowner that in exchange for paying the mortgage debt, the homeowner will sign a quitclaim deed and can remain in the house as a renter. The scammer says the homeowner can make lower monthly payments to the scammer's company, and the payments will be credited to the principal of the original mortgage. While the homeowner is making these payments, the scammer is keeping the money and often using a home equity line of credit to suck out any remaining home equity. Soon, the homeowner learns that he or she is in further debt and has added the burden of new liens from the scammer's home equity loans on the house. In almost every case where there is no legal intervention, the homeowner loses the home to foreclosure, all the money paid to the scammer as rent, and home equity that has built up over the years.

Based on our experience, realtors would like to share six recommendations on how to prevent foreclosure scams. First, we recommend that Congress enact legislation that puts disclosure requirements and minimum levels of service on people who offer to rescue homeowners from foreclosure. My home state of Minnesota passed such a law in 2004, which has proven successful and resulted in 12 lawsuits against predatory programs in just the last year.

H.R. 1231 creates a fair balance between legitimate housing counselors and consultants that provide beneficial services to struggling homeowners and those predatory practices that take advantage of families who are facing foreclosure. As introduced, this bill provides an exemption for licensed real estate professionals, similar to the 2004 Minnesota bill. Exempting these professionals when they are engaged in their normal business practices will allow realtors to continue to offer these valuable services to their clients. Consumers rely on realtors for their professional service and trust their code of ethics. We urge passage of this important legislation.

Second, lenders and servicers should be more aggressive in helping distressed homeowners. Too often we hear from realtors that borrowers seeking help from a lender are told that nothing could be done until they are at least 90 days delinquent. We believe this increases the chance that a homeowner may turn to a mortgage rescue scam in order to get help.

Third, realtors believe legitimate foreclosure prevention options need to be widely advertised, especially in areas where rescue scammers like to operate.

Fourth, the process for closing a short sale needs to be considerably shortened. NAR hears every day from members frustrated that servicers take months to even consider a short sale. Potential buyers, in the meantime, get frustrated and give up, while homeowners become even greater prey for scammers.

Fifth, the private sector should be actively educating homebuyers about today's safer, affordable mortgage products.

And finally, NAR believes that the government needs to increase funding for financial counseling and consumer education programs to help borrowers avoid foreclosure.

In conclusion, realtors across the nation believe anti-predatory lending reforms are required to restore consumer confidence in the housing industry and avoid another housing crisis in the future. Historically low mortgage interest rates and significant tax credit for first-time homebuyers have enticed consumers back into the housing market. However, we believe that wholesale reform of the mortgage lending sector will give consumers the protections they need and will remove the last impediment to a housing recovery. NAR supports lending reforms that protect the consumer but ensures them reasonable access to mortgage capital, so that the American dream of sustainable homeownership can still be available.

Thank you very much for your time, and I look forward to any questions.

REP. WATERS: Thank you all very much for your testimony. I recognize myself for five minutes.

Let me first say to Mr. Scott Drexel, chief trial counsel of the State Bar of California, I really appreciate your no-nonsense attitude. And we do have a copy of the ethics alert that you did, which I think was very, very good, and it certainly should have put everybody on notice. But I guess there are some people who just don't believe, as the old folks would say, fat meat is greasy.

So we're going to have to do what is necessary to avoid the opportunity for these scam artists to continue to harm our would-be homeowners that find themselves in foreclosure problems. And so I am opposed to exemption for anybody. I think that it is very, very hard to nuance it so that you can track it. Now, I do have some sympathy for -- or some questions about the filing of bankruptcy. That's legitimate work for lawyers. And in the filing of bankruptcy, if it is considered that in that work it is loan modification, and it would prevent the lawyer from proceeding when legitimate bankruptcy works, then I think that needs to looked at.

So, Mr. Drexel, could you help me to understand whether or not we have a problem exempting lawyers, if in fact they are involved with -- we have a problem trying to protect lawyers so that they can do this work, if in fact they do do this work by way of bankruptcy?

MR. DREXEL: Well, Madame Chairwoman, I would not have a problem with that. The fees charged by attorneys in bankruptcy proceedings are reviewed and approved by a bankruptcy judge or trustee and so that provides some measure of protection to the consumer. My concern is that with receiving fees in advance, even in the load modification area, attorneys are free to provide services for clients; the preclusion would simply be upon getting money up front. And so we would look to find ways to encourage attorneys, and many attorneys do on a pro bono basis assist people in this area. But even on a compensated basis, we're not seeking to preclude them performing the services but simply from receiving money up front for that, but rather charging it as they perform the services.

REP. WATERS: And isn't it true that in the final analysis, when you have foreclosure that would end up in bankruptcy, that -- if our bankruptcy legislation is signed by the president, in the final analysis, isn't it the judge that's determining whether or not there's going to be a write-down of principal or a deduction of interest? And they indeed are the ones who are doing the modification?

MR. DREXEL: That's my understanding.

REP. WATERS: All right. So having said that, you're sitting next to the realtors who thinks that they have some special knowledge and concern, certainly in this area. Should they be exempted?

MR. ANDERSON: Thank you for the question. You know what, on a daily basis --

REP. WATERS: I was asking Mr. Drexel.

MR. ANDERSON: Oh, I'm sorry.

MR. DREXEL: I'm sorry. No, Madame Chairwoman, I do not. And in California, real estate brokers and salespeople are not exempted. They are not permitted to receive money in advance of performing the services, and it's been that way for the last 30 years now.

REP. WATERS: And so, Mr. Anderson, what do you think about that?

MR. ANDERSON: Well, and I would agree. I believe right now realtors don't get any fees up front. I would be very cautious of any type of exemption that would be broad-based, and the reason being is I (know ?) right now on a daily basis I am meeting with people because they trust me and they come to me and ask me for advice. So anything that would tie my hands I would be very concerned about. So I guess we would have to go and discuss that, you know, if the exemption came through. But we would agree with the up-front fees because right now we don't collect up-front fees.

REP. WATERS: Let me just also say before my time is up that this problem really lies with the servicers. The servicers, whether they are independent or whether it's a servicing company such as the one that's owned by Wells Fargo, who have their own servicing company, it seems to me our responsibility is to make sure that they have adequate numbers who are servicing, that they have ways by which people can reach them more easily than they are able to do now, having enough telephone lines, having competent, trained servicers. They're the ones who are holding this paper. They're the ones who are initiating these foreclosures, these loan initiators, and we've just got to make them do what they're supposed to be doing.

All right, thank you.

And with that, I will turn to, I suppose, Mr. Cleaver, for five minutes.

REP. EMANUEL CLEAVER (D-MO): I just wanted to express my appreciation to my colleague, our colleague Ms. Moore for introducing this legislation. And when you consider that mortgage fraud is up 26 percent from last year, it shows that people will take advantage of anything. And I appreciate those of you who come today to provide us with information.

I yield back the balance of my time.

REP. WATERS: Thank you.

Mr. Green, for five minutes.

REP. AL GREEN (D-TX): Thank you, Madame Chair.

I would like to associate myself with the remarks of Mr. Cleaver and the chairlady. I think that we do have a problem in terms of servicers having a limited amount of capacity. And I think that that capacity is what allows these fly-by-night businesses to do what they do. I would like, if I may, to ask someone, anyone of you, how can we, in your opinion, enhance the capacity -- as the chairlady has said, it is a problem. How do you perceive us enhancing that capacity?

And I'd like for Ms. Saunders, if you would, to give your opinion.

MS. SAUNDERS: Enhance the capacity among the servicers?

REP. GREEN: Yes, ma'am.

MS. SAUNDERS: By telling them to do it. I mean, for years we have been trying to (rely ?) on voluntary efforts, and they are not working. We have new program after new program and say, "Aha, this one is going to give them the incentive to participate." "Well, maybe this one will give them the incentive." And it's time to give up on voluntary efforts and say you have to give somebody a contact person who you can reach, who's got the authority and the information you need, and you've got to go through this process to consider a reasonable loan modification before you can embark on foreclosure.

REP. GREEN: Mr. Story.

MR. STORY: Well, I think we all agree that it's unfortunate that there is a capacity issue or there has been a capacity issue with servicers. But there's a financial incentive for servicers to make sure that they can modify loans that are able to be modified. So the servicers are actively trying to do this as quickly as possible.

They're hiring more people, they're putting in sophisticated technology in their telephone systems in order to get to the customer as soon as possible when they call. So there's a big effort out there that -- it could always be better, but there's a true incentive for them to get this done as quickly as possible.

REP. GREEN: Mr. Anderson.

MR. ANDERSON: You know, it's interesting that we've given them the money in order to shore them up. But I can tell you from someone who meets with these consumers every single day, the reason why -- that they are struggling so badly is that they call their lenders, they call the loan servicers, and they don't get any help. And then I'll get on the phone with them, I will try to assist them. And someone asked the question previously about why loan modifications go back into foreclosure again. The reason being is that they don't modify it enough. And if they really, truly want to keep them in homes, then they need to say we're willing to take something and cut it right now in order to keep people in homes, because it's not just good for them, it's good for their neighborhoods. I work in Mr. Ellison's neighborhood; I work in -- all around there. And we need to help these people be able to get in contact and get reasonable amount of time to get answers back on modifications, short sales and advice.

REP. GREEN: Mr. Drexel?

MR. DREXEL: Representative Green, with all due respect, I don't feel qualified to intelligently respond to your question, since my area is more the regulation of attorneys.

REP. GREEN: Let me just have one follow-up. Do you think that the $1,000 incentive, the incentive that we've given to maintain a loan, that those things are helping to some extent, Ms. Saunders?

MS. SAUNDERS: The numbers are getting better, but they're just not there yet. And sure, every little incentive helps a little bit. But I think it's, you know, time to stop with, you know, the carrots, and we need some sticks, too. You know, the numbers still are that even for the people who get loan modifications, only about half of them are getting a reduction in payment. About, you know, half of the loan modifications are ending up in foreclosure. You know, we need to say this is what you got to do. You've got to consider it and it's got to meet these standards. And by the way, the standards need to be transparent. That's one of the things that we're asking for in the administration plan, is that everybody ought to know, what is the formula, what do you have to do to qualify, so we can, you know, hold them to it.

REP. GREEN: Mr. Story, is it helping at all?

MR. STORY: I think that the $1,000 is not necessarily an incentive, but it's helpful in covering the costs. And there are areas where -- I mentioned HOPE NOW in my talks, and we've seen over 3 million modifications with that organization. So there is some modification --

REP. GREEN: Just one follow-up with you, Mr. Story. You are among the first to tell me this, that you -- did you say 3 million?

MR. STORY: Right.

REP. GREEN: Do you have any empirical evidence to support the premise?

MR. STORY: I don't have it with me today, but I can get you that information.

REP. GREEN: Okay. And if you would in so doing give me the definition of modification you're utilizing.

MR. STORY: Sure. No problem.

REP. GREEN: Thank you.

I thank you, Madame Chairwoman. I'm going to yield back.

REP. WATERS: Thank you very much.

Next we have Mr. Ellison.

MR. ELLISON: Thank you, Madame Chair. Thank you Madame Chair, very much.

Mr. Anderson, I'd like to ask you a question about, you know, our Minnesota approach. Thanks for discussing the foreclosure reconveyance statute in our home state. Can you talk to us today about how that statute defines "foreclosure consultant," and how does that differ from the scope of H.R. 1231?

MR. ANDERSON: Thank you. Actually, it is very close in relationship -- the two bills. And it does exempt realtors and those who are legitimate type of organizations that are trying to give advice. It prohibits up-front fees. It prohibits an automatic conveyance to the person that is, you know, the provider, and so forth. So the Minnesota bill did a terrific job and went a long ways, and I think this bill likewise does a terrific job and matches up very closely in lots of ways.

REP. ELLISON: Do you feel it's hard a chance to demonstrate some results? I mean, you think it's working?

MR. ANDERSON: I think it is working, and the statistics prove that it's working. I think what the federal bill will do it will help in a broader scope because I know that one of the large companies that our attorney general went after just recently was out of Florida. And so it does cross state lines. And so I think the federal bill, then, I think will assist state attorneys general in doing this.

REP. ELLISON: Thank you.

Ms. Saunders, do you think that the foreclosure prevention fraud legislation should only cover foreclosure consultants and loan modification specialists? Should we cast the net a little wider?

MS. SAUNDERS: Are you talking about the sale/leaseback transactions, or what are you getting at in terms of --

REP. ELLISON: I'm talking about the scope of H.R. 1231.

MS. SAUNDERS: Okay. I think the scope is appropriate, and frankly, my concern from the attorney perspective is how broad it is. You know, we all have in our mind what these loan mod firms look like, but the language, of course, is written more broadly to, you know, govern a variety of services that are represented will help with foreclosure. And so I think you need that flexible language in order to address, you know, the variations that these schemes can take. I mean, this bill is patterned after state legislation that was written long before anybody had heard of a loan modification. And yet, you know, it's useful. But to the extent you do have a broad definition, you've got to be careful about what you're catching within that. You know, a lawyer who looks at a predatory loan and, you know, charges the fee to review the documents and identify claims and write a demand letter, well, they're doing that to try to stop a foreclosure. But we don't want to stop that.

So yes, I think the scope is appropriate, but we need to be careful about how it relates to legitimate attorney services.

REP. ELLISON: Do you think that the penalties in H.R. 1231 are sufficient?

MS. SAUNDERS: I would recommend strengthening them. I think, you know, simply returning the fee isn't much of a penalty. You know, you get a lot of fees from 1,000 people and if a couple of them speak up and squawk, well, that's the cost of doing business. So, you know, I would say, you know, double or treble damages would be more appropriate.

REP. ELLISON: You know, I just want to observe that if you're talking about a realtor -- a licensed realtor or an attorney -- if they do something that's unethical, they're going to have to deal with much more than just returning a fee. But for people who are -- don't fit in either category, who do operate in this area, all they're doing is returning the fee so the incentive to stop it is not as strong.

What would you recommend in addition to what's in the bill?

MS. SAUNDERS: You could add in, you know, statutory penalties or treble the amount of the fee, you know, the damages or treble the amount of the fee. The damages, you're going to get into a fight about whether the person was going to lose their home anyway. So you're not always going to get those damages. So I would say treble the amount of the fee.

REP. ELLISON: I see. Again, Ms. Saunders, I want to ask, in your opinion, would a reporting requirement be useful? And if so, should -- would a reporting requirement be useful, and then if you think so, then I've got some follow-up for you.

MS. SAUNDERS: Okay. In terms of the loan mod firms reporting their data of what they're doing?

REP. ELLISON: Yeah.

MS. SAUNDERS: I think that's something that states might want to consider. I'm not sure that it really works so much at the federal level. I do have concerns about some of the state laws that have gone down the licensing route because we don't want to legitimize these firms. On the other hand, if you tie that to, you know, a heavy bond requirement and, you know, a requirement that you report data to the state agencies that can look at it, you know, definitely at the state level I think that can be useful. I'm not sure it makes sense in the federal bill.

REP. ELLISON: Okay. You noted in your testimony that California passed the mortgage foreclosure fraud legislation back in '79, yet we still have the problem. What do you think caused the law to -- why do you think we still have it? Was the state law not strong enough or do you think it was ineffective? Do you think it helped some but not enough? How do you see the situation?

MS. SAUNDERS: It does help some. And I'm actually a California lawyer. I've spent 15 years at the Legal Services Office in Los Angeles, and, you know, we use California's law, among others, to go after the equity-stripping scams that, you know, were prevalent back then.

You know, it does have a number of exemptions and, you know, we've talked about the problems that those create. I also think it does allow, you know, certain fees that are not, you know, they're not always appropriate. Like I said, we recommended that the fees be tied to results, both in, you know, state legislation as well as federal.

REP. ELLISON: My time is up, so thank you. Let me thank all the panelists and thank the chair.

REP. WATERS: Thank you very much.

Ms. Moore?

REP. MOORE: Thank you so much, Madame Chair. And I want to start out by thanking my colleagues for remaining through this second panel and really, really delivering these -- offering these very sage questions that really are, I think, going to improve this legislation. And so with that, I'm going to try to follow up on some of the things that my colleagues have asked.

And before I do that I want to single out Ms. Saunders for working with me and with Chairwoman Waters on this legislation and to try to perfect it. And I also want to thank Mr. Drexel and Mr. Anderson in particular for traveling and coming here with their great examples of what's happening in their states.

The chairwoman started out, Mr. Drexel, by asking you about the attorney's fees and I thought there was some really important information that was conveyed there. She talked about, in the case of a bankruptcy, that the fees are typically approved by judges, and loan modifications are approved by judges.

So are you saying -- and I don't know the answer to this question, I'm not a lawyer -- but that lawyers will enter into this bankruptcy work knowing that as the process moves forward, that the judge that can do it start out pro bono and that the judge will approve monies that maybe they take from their own accounts and pay and reimburse them for work that they've done? Is that what I need to understand?

MR. DREXEL: Well, my understanding is -- Representative Moore -- that in bankruptcy proceedings that the court does have to approve all the fees that are paid, that monies that are paid in advance go against the amount that the court approves. But in most cases, I don't believe that attorneys in bankruptcy proceedings are allowed to get advance retainers.

So I think the protection provided by the bankruptcy judge or trustee in reviewing the fees that are received provides a protection to the consumer that those -- that the bankruptcy is legitimate and the fees that are charged by the attorney are for services that are actually performed.

REP. MOORE: So, I mean, do people -- do attorneys get retainers from people or not in bankruptcies before they're approved by judges?

MR. DREXEL: In my experience they --

REP. MOORE: What we're trying to prevent here -- and I think Ms. Saunders mentioned it as well -- I mean, we were trying -- when I was working with Ms. Waters we were trying to come up with a middle ground where we don't stop legitimate activities. I mean, some of these people's homes may be able to be saved and we're not trying to prevent legitimate activities of attorneys for being contracted for.

You say you're for folks not getting any money, and you even said you're not against that. So we're trying to craft something that's going to make sense.

MR. DREXEL: To my knowledge, they do not.

REP. MOORE: Okay. So you're saying if my legislation exempts attorneys, it wouldn't have any impact on whether or not an attorney would get involved in stopping a bankruptcy?

MR. DREXEL: It does not preclude them from doing that, that's correct.

REP. MOORE: Okay. Okay. The same thing -- what about stopping a foreclosure?

MR. DREXEL: The same thing. Whether they can get a retainer or not in advance does not preclude them for performing services and for reaching agreement with the consumer as to what the fair compensation for the services they provide.

REP. MOORE: Okay, so --

MR. DREXEL: The problem with getting the money up front, of course --

REP. MOORE: Okay.

So, Ms. Saunders -- because my time may expire -- I want you to get involved in this a little bit -- what I'm trying to prevent -- you know, I don't want to put something in law or in statute here that would be so heavy handed that it would prevent these other activities that aren't related to rescue scams.

In your opinion, if I did not exempt attorneys at all, did not put any language in, would that have a chilling impact on legitimate work that the attorneys were doing?

MS. SAUNDERS: If there were no exemption for attorneys and no qualifications on that lack of exemption, yes, I think that would be a big problem. You know, without trying to write the language here -- obviously we're all trying to get to the same results, try to figure out how to define that middle line. You know, maybe there is something in terms of how you define an advance fee with an exemption for a retainer, an attorney who is acting in compliance with all ethical rules of their state.

You know, as long as you, you know, carve out the non-attorneys who are using the cloak of the attorney license, you know, there may be ways in which you can, you know, narrow that attorney exemption so that it doesn't expand.

REP. WATERS: Will the gentlewoman yield? Will the gentlewoman yield for --

REP. MOORE: Absolutely.

REP. WATERS: Yes. As I understand it, your amendment does exempt attorneys who are filing bankruptcies and we further modified that to make sure that there were not frivolous lawsuits to something like that. So are you asking about something beyond that?

REP. MOORE: Well, I -- you know, I want to make sure that -- okay, you accepted that amendment from me, but I was wondering whether we should go further. And if we were to go further, would that have a chilling impact? So I'm just trying to make sure we have the right balance.

MS. SAUNDERS: Can I respond?

REP. MOORE: It's up to the chair, because my time has expired.

REP. WATERS: Go right ahead.

REP. MOORE: Okay.

MS. SAUNDERS: The concern about the language in the amendment that was offered last week is that it ties the exemption to litigation, to being in court, and attorneys do things short of going to court. Like I said, we review loan documents for a fee. We don't go to court -- promise to go to court. Others, you know, write demand letters.

Any good lawyer is going to try to resolve it out of court before going to court. So if you make the line be, you know, you're okay if you go to court but you're not if you don't, you know, that can be a problem.

REP. MOORE: Okay.

MR. DREXEL: Representative Moore, I wonder if I could --

REP. MOORE: This is up to the chair at this point.

REP. WATERS: Yes, who is it that wants to speak? Yes, sir.

MR. DREXEL: I'm sorry. I just wanted to make a comment. I think the distinction here is between -- I know part of the issue was whether the receipt of fees should -- or compensation should be dependent upon results, you know, versus getting money up front. And I think with attorneys, for instance, that the issue should be whether they are being paid for services they've already provided, not necessarily results, because sometimes they can't get the result but they have definitely performed services versus getting money up front.

In California, attorneys that get advance fees are not required to place those fees in a trust account until they're earned. And so getting the money up front basically encourages the fraud -- encourages these loan modification consultants, and the like, to try to hook up with attorneys to get them to get large parts of -- large amounts of funds up front which they then share with them.

By allowing attorneys only to bill for services that they've actually performed themselves after the fact, I think that eliminates that problem and does not require them to perhaps not get paid if they're not successful in getting the loan modification.

REP. MOORE: So, in other words, if they file some papers and it costs them $200 for a filing fee, they'd have to pay that out of their own attorney account and then get reimbursement for it.

MR. DREXEL: Right.

REP. MOORE: That would solve it? Okay.

I just have a comment. Would --

REP. WATERS: Please go right ahead.

REP. MOORE: One of my other colleagues who is no longer here -- a couple of them have made some really good points, Madame Chair. We're talking about the limited capacity of servicers and there was a -- you know, I think that 84.3 percent of the folk who got us into this mess with poor underwriting were non-banking entities. And so those people have sort of disappeared from the marketplaces, you know, now.

So now we're asking servicers and banks to modify them and they, in fact, may not have the employees and may have to hire them. Maybe we need to figure out how to do that, but I do believe we need to give up on volunteerism.

And Mr. Ellison made a point that the penalties need to be strengthened and I just wanted to clarify that you thought treble damages what the right balance?

MS. SAUNDERS: Yes.

REP. MOORE: Okay. Thank you.

MS. SAUNDERS: That's within some other statutes.

REP. WATERS: Thank you very much, Ms. Moore.

We have legislation that we are proposing to put something in law to oversee and regulate servicers. This is an unregulated industry and we are taking a very, very close look at how to do that. Some of the people here today have testified that we need to give more support to the housing counselors who are trying to help homeowners. However, we have found -- our convened housing counselors, they too cannot get in touch with the servicers.

They have the same problems calling the telephone numbers, not getting the answers. They're getting a menu that does not work. And so it's not so much we need more counselors, as we need the banks to hire -- and the servicing companies to hire more people, make them more accessible and be willing to really do loan modifications with trained people. And we're really taking a look at how to do that.

Thank you, ladies and gentlemen, for your participation.

Ms. Capito, I understand you have any more -- you don't have any questions. Do you have a statement you'd like to make?

REP. CAPITO: No I don't. I have no questions. I just wanted to thank the panel. I'm sorry I was in and out so much, but I appreciate your all's input. Thank you.

REP. WATERS: Thank you very much. And of course, we may have additional questions and the record will remain open for 30 days for those members who would like to raise additional questions about this hearing.

With that, this hearing is adjourned. We've got to go to the floor, where another important bill is on the floor and see if we can't participate in that.

Thank you very much.

MR. ANDERSON: Thank you.

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