'Help' Can Be Costly

Beware up-front, nonrefundable fees of loan-modification pros

The implosion of the subprime mortgage market has been a boon to loan-modification consultants who promise to help borrowers refinance and get back on the road to financial stability.

Some advisers steer clients toward taxpayer-guaranteed refinance deals backed by the Federal Housing Administration. Others negotiate on borrowers' behalf with existing lenders.

The hazard is that distressed borrowers are often asked to make substantial up-front payments—as much as $5,000—which loan-modification firms keep, regardless of whether they successfully assist their customers.

USMAC in Aliso Viejo, Calif., near Laguna Beach, charges its clients a non-refundable $3,495 fee to negotiate with lenders. The company opened in August. Its proprietors are Christian Dillon, a real estate lawyer, and Scott Gimbel, president of Citywide Mortgage, a subprime lender that stumbled when the real estate market melted down last year. Loan modification has kept them busy, Gimbel says: "I got 1,700 calls [from potential clients] yesterday."

Dillon says that he has had a 52% success rate, which he considers impressive. Another way of looking at that figure, though, is that 48% of his clients have failed to get the relief they sought. But they still pay the $3,495 fee. Dillon says the difficulty many borrowers have dealing with banks, and his own long experience in the field, make his services worth the price. "I have a track record of knowing how to talk and get to people," he says.

Skeptics argue that borrowers are capable of negotiating directly—and for free—with their lenders. Several large banks have programs for that purpose. There are also nonprofit credit counselors who don't charge a fee. Michael Krimminger, an adviser at the Federal Deposit Insurance Corp., says: "People should be very wary about paying nonrefundable up-front fees."

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