What if you had a home modification law that everyone ignored? In its 2009 legislative session the State of Nevada passed a law requiring loan modification companies to be licensed. The law, which recently took effect, not only required a license but the companies were also required to post a $75,000 surety bond. It seemed like a good idea at the time. (article)
At the top of the foreclosure rankings for practically the entire housing crisis, it made perfect sense that it would be a hotbed for loan modification companies. Unfortunately that also lured the scammers. According to the Nevada Attorney General’s office, loan modification scams account for 88% of all housing related fraud cases in the state (article). It was a statistic that ensured that the legislature would act.
The Best Laid Plans
It seems that a funny thing happened on the way to regulation. As usual, the legislature didn’t foresee what might happen when it wrote the law. It’s no surprise that the scam artists would ignore the law as they continued to operate. The new regulations give the government a way to shut these predators down and protect homeowners desperate to save their homes. There’s certainly nothing wrong with that.
But what about legitimate companies that are trying to comply with the law but are finding it difficult to do so? As the licensing deadline approached the state’s mortgage division was processing about 50 applications for loan modification licenses. However, none had posted the required surety bond which means the licenses won’t be approved. Does that mean the end of loan modification companies? Not likely.
What Went Wrong?
To invoke a line from Cool Hand Luke, What we have here is a failure to communicate. It seems that many feel the government did a poor job in relating the new requirements to the industry. The loan modification bond requirements went into effect along with another law that required mortgage brokers to post a similar bond. Many operators of loan modification companies are also mortgage brokers and made the assumption than one bond would be good for both, it isn’t. Many consumer credit counselors are also doing loan modifications and assumed that bonds required for that industry also covered loan modifications, they were wrong as well.
Most small and start-up companies, even if legitimate, are not in a position to put up $75,000 just to do business. That means that they need to purchase a bond from a surety company. Problem number one is finding a company willing to post a bond for a high-risk industry. Problem number two is affording it if they can find one. A surety bond can easily cost 10% or more of the face amount. A lot of companies simply don’t have the money. Many of them will continue to operate and risk running afoul of the law.
It will be interesting to see how the mortgage division handles the issue. For sure there will be some sort of grace period since the regulations weren’t as clear as they could have been. Beyond that it remains to be seen whether they go after all companies who haven’t complied or just those that receive complaints.
Laws are like sausages, it is better not to see them being made. – Otto Von Bismark
Photo Credit: Nevada TumbleweedNevada’s Home Loan Modification Law Ignored by Richard Warren