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Flurry of Foreclosure Rescue Litigation

Recent foreclosure rescue activity

April 8, 2009


photo of Patrick Crowley

Delinquent borrowers across the country are being rescued from foreclosure rescue companies. Among the most recent federal and state efforts, legal action was taken against firms in Florida, Missouri and Virginia.

The Department of the Treasury, Department of Justice, Department of Housing and Urban Development and Federal Trade Commission have come together in a new, coordinated effort to crack down on mortgage foreclosure scams, an April 6 statement said. State and local prosecutors and investigators are also involved in the effort.

Scammers have targeted the Making Home Affordable program by offering foreclosure rescue services that turn out to be criminal enterprises.

The joint effort includes "new initiatives to coordinate information and resources across agencies to maximize targeting and efficiency in fraud investigations, alert financial institutions to emerging schemes, step up enforcement actions and educate consumers to help those in financial trouble avoid becoming the victims of a loan modification or foreclosure rescue scam."

Financial institutions will receive "red flag" advisories about potential foreclosure rescue scams. And the FTC has sent warning letters to 71 companies "using deceptive tactics to market their" foreclosure relief services.

In the private sector, Chase Home Finance, SunTrust Mortgage, GMAC Mortgage, American Home Mortgage Servicing and others are distributing FTC consumer alerts that provide borrowers with tips for avoiding mortgage relief scams and direct them to free, legitimate counseling services for at-risk homeowners. The servicers will distribute the materials in monthly statements, in correspondence to delinquent borrowers, in counseling sessions, and on their Web sites.

As part of the new program, Neighborworks America announced it is working with federal officials on a national public education campaign "to make borrowers aware of how to avoid foreclosure prevention scam artists." The organization said in a statement Monday that borrowers at risk of foreclosure should seek help from HUD and other government agencies rather than paying for protection.

In March 31 testimony to Congress, FTC Chairman Jon Leibowitz testified that over the last year it brought eight cases targeting mortgage fraud rescue scams.

"In these cases, the commission alleges that the defendants promise to ... stop foreclosure in exchange for an up-front consumer payment ranging from $500 to $2,000, but fail to ... stop the foreclosure," Leibowitz said, according to a copy of the prepared testimony.

The crackdown appears to be necessary given that loan foreclosure scams continue across the country.

Missouri Attorney General Chris Koester filed a lawsuit on March 7 in Kansas City against U.S. Foreclosure Relief. The Anaheim, Calif., company is accused of charging upfront fees of $2,350 -- in violation of Missouri law -- and failing to provide foreclosure relief services. Koester noted that opportunists are preying on delinquent borrowers who "may feel that they have no other choice but to turn to these fraudulent companies."

Colin Connelly, 52, is going to prison for 18 months for his role in what the U.S. Attorney's Office for the Eastern District of Virginia federal described as a "mortgage rescue scheme," according to a March 24 statement. Connelly, of Hopewell, Va., was also ordered to pay nearly $377,000 to his victims.

Prosecutors claim Connelly worked with Walkwood Properties from February 2008 to November 2008 utilizing a "real estate purchase program" that promised to prevent foreclosures by selling the properties to "someone associated" with Walkwood. But he admitted that customers weren't given full information about how the program worked nor were they told that "a significant portion of the equity" in the houses was "skimmed."

"Connelly agreed that if the true nature of the transactions had been revealed to the mortgage lenders, the loans would have not have been approved," prosecutors said.

Florida Attorney General Bill McCollum has been busy taking actions against foreclosure rescue companies.

A settlement was announced on April 3 between Florida and Homestead Protection Services LLC. The Orlando company agreed to shut down, pay $20,000 in restitution to customers and reimburse the state $5,000 for the cost of its investigation.

Homestead allegedly charged upfront fees ranging from $997 to $3,500 for foreclosure rescue services that were not delivered, according to McCollum's statement. Customers were also denied refunds.

On March 26, McCollum announced he obtained an injunction from the Florida Circuit Court against Miami-based Mortgage Crisis Solutions LLC and owner Donald Gillettee. The company allegedly charged homeowners up-front fees as high as $2,995 for services but never provided the services.

On April 3, National Foreclosure Counseling Services Corp of Jacksonville and its owners -- Raymond Paulk and Robert Dallavia -- were sued by the state for charging fees but not delivering foreclosure rescue services, McCollum said in a statement. The Duval County Circuit Court was asked to issue an injunction against the company and prevent it from "demanding up-front fees from customers before providing services."

National Foreclosure -- which has also been sued by the attorney generals in Minnesota and Illinois -- allegedly required delinquent borrowers to sign a "working agreement" that included $2,000 in upfront fees, though it failed to perform the services following payment, the lawsuit says.

And in Illinois, Attorney General Lisa Madigan has been warning delinquent borrowers about foreclosure rescue companies that are really just scam artists that charge large upfront fees, according to a statement posted on her Web site.

Office of the Attorney General, Department of Legal Affairs, State of Florida, Plaintiff, vs. Donald R. Gillette, Flynn McCarthy, Mortgage Crisis Solutions Association, LLC, Property Solutions Specialists, Inc., One Source Vommunications, Inc., and Nationwide Financial partners, Inc., Defendants.
Case No. 09-23745CA05, March 25, 2009 (The Circuit Court of the Eleventh Judicial Circuit, In and For Dade County, Florida.

State of Florida, Office of the Attorney General, Plaintiff, v. National Foreclosure Counseling Services Corp., Raymond Paulk and Robert V. Dallavia D/B/A National Foreclosure Counseling Services and American Foreclosure Counseling Center, Defendants.
(Circuit Court of the Fourth Judicial Circuit in and for Duval County, Fla.)

Patrick Crowley is a feature journalist for He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: [email protected]

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