It turns out, however, that some just went right back into their old line of business, sort of. The New York Times reports that former subprime lenders are making a killing by running loan modification companies that — surprise! — rip people off instead of reworking their mortgages.

From the ninth floor of a downtown office building on Wilshire Boulevard, Jack Soussana delivered staggering numbers of mortgages to homeowners during the real estate boom, amassing a fortune.

By Mr. Soussana’s own account, his customers fared less happily. He specialized in the exotic mortgages that have proved most prone to sliding into foreclosure, leaving many now scrambling to save their homes.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.”

Mr. Soussana’s partners at FedMod, as the company is known, were also products of the formerly lucrative world of high-risk lending. The managing partner, Nabile Anz, known as Bill, previously co-owned Mortgage Link, a California subprime lender, now defunct, that once sold $30 million worth of loans a month.

Jeffrey Broughton, one of FedMod’s initial partners, served as director of business development at Pacific First Mortgage, a lender that extended so-called Alt-A mortgages for borrowers with tarnished credit for Countrywide Financial, which lost billions of dollars on bad mortgages before being rescued in an acquisition.

The only problem here is that these financial geniuses aren’t exactly delivering on their loan modification promises, according to The Times.

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company.

The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees. The suit seeks an end to FedMod’s practices, and compensation for customers.

“Our job was to get the money in and then we’re done,” said Paul Pejman, a former sales agent who worked out of FedMod’s two-story headquarters in Irvine, Calif. He recounted his experience, he said, because “I really feel bad.”

“I had people calling me crying, and we were telling them, ‘You can pay me or you can lose your house,’ ” Mr. Pejman said. “People were giving me every dime they had, opening credit cards. But I never saw one client come out of it with a successful loan modification.”

No surprise here.

Mark Thoma at Economist’s View has the best take on all of this:

See, the anti-regulation types are right. A Consumer Financial Protection Agency might stifle valuable innovation like this and prevent these companies from giving consumers the value that they pay for.

I might have that backwards.

Yes, how elitist to suggest consumers should have some protection from these predators. Chalk this one up to yet another lesson not learned from the financial crisis.

Are consumers “protected” when they are denied the opportunity to buy products and services that are available to others? Is that what consumers want? Does it matter what they want?

Well, yes it does, actually. I’d say, as a consumer, that I don’t want to go to my loan closing and find out the terms I thought I agreed on for my loan had been altered. I don’t want to pay my mortgage broker for bringing my loan in at a higher rate than what I qualified for — and if I do have that pay that broker, I want it disclosed at settlement. Generally, I don’t want to be steered into a higher rate loan simply because I’m a minority borrower. And when it comes to my credit card, I don’t want my interest rate arbitrarily hiked because I took out another loan somewhere else. If there’s an agency created to make the lending industry stop those practices and offer clearer and more detailed disclosures, I would think it’s a good idea, and there’s nothing elitist about that.

I’ll defer here to James Kwak at Baseline Scenario, who offered a more detailed critique:

Among them:

Can the President bring himself to state in public the obvious: The extent of political influence in the hands of our financial system – large banks in particular, but small banks also in some instances – is out of control and dangerous?  Where is the administration’s reform agenda on this crucial point?  To those of us who frequent Capitol Hill, it looks very much like business as usual, albeit with higher political market share for the big banks that remain in business.

That’s an excellent point. As TWI noted, Congress has already stalled on overhauling mortgage lending, despite the predatory practices that led to the crisis. What assurances do we have that Obama’s agenda has a chance of passage, without being totally watered down?

Here’s more:

Does he state plainly and unequivocally that the way the financial system has been run – and continues to be run – has damaged the national interest of the United States and pushed millions of people, both here and around the world, closer to poverty?

That’s a point few in Congress or the administration have addressed — the global effect of the U.S. meltdown. I doubt they’ll pick up on it at this point, however. The global poverty argument often doesn’t play all that well at home. People are more wrapped up in their own financial crises. Still, it’s worth thinking about, if only to understand the reach of this crisis and the need for reform.

And finally, there’s this concern, which I just raised:

Most important, does the President stress the need to protect consumers from the financial industry going forward, specifically with a strong Financial Products Safety Commission.  Messrs. Geithner and Summers seem, at best, lukewarm to this idea – in fact, we have no clear indication that they buy into the idea of consumer protection at all.  The President’s position on this issue will be decisive.

It’s not just making the announcement of the overhaul that’s important — it’s how, exactly, the announcement is made. Look to see whether Obama addresses these kinds of concerns, to decide how serious the administration will be about regulatory reform.

The idea has picked up steam in recent months. But the Obama administration proposal offers new details of exactly how it might work, including tackling one of the most vexing consumer problems: figuring out exactly what’s in all that paperwork at real estate closings.

The agency would have broad authority to overhaul a tangled mess of federal regulations, such as the various laws that compel lenders to give mortgage borrowers a massive stack of paperwork at closing that includes several calculations of the true cost of the loan itself.

Another idea: Making it standard practice to offer consumers a 30-year, fixed rate loan — the normal, plain vanilla mortgage. If the borrower wanted a more exotic product, such as an adjustable rate loan, they would have to opt out, signing a waiver saying they were deliberately choosing a non-standard loan.

Based on the leaked draft of the administration’s proposal obtained by The Post, all this must sound great to consumer activists, who have been pushing for more consumer protections for years. But not so fast.

While the idea sounds great on paper, the agency’s effectiveness will be determined by how much power it truly gets. Lobbyists and special interest groups will likely work hard to limit the scope of its authority. And its structure will be crucial, as well — for example, will it have the ability to approve or prohibit products before they hit the market, or will the agency have more limited recall authority, once products are on the market and run into trouble?

How much funding will the agency get? How strong will its political support be? Who will be appointed to the agency — and what interests will they represent?

These are all legitimate questions. Yes, it’s encouraging to consumer advocates to finally see a proposal like this get administration backing. But it’s only beginning. There’s still a long and difficult road ahead before such an agency becomes a reality. And even then, whether such an agency makes a difference to consumers or not will depend in great measure on just how much power Congress and the administration grant it so that it can truly protect consumers.

But the most unusual twist is a new financial reform proposal in the works from the GOP. According to Reuters, which cites draft documents of the idea, congressional Republicans are close to coming up with a proposal to rein in the Federal Reserve and expand the bankruptcy code.

Here’s the best part: The Republicans apparently want to create an advisory board of regulators – which would have absolutely no enforcement or oversight powers. Now that’s putting teeth into reform! Clearly, the Republicans are alone in finding that the financial crisis must have been caused by regulators with too much authority on their hands.

The Republican draft package opposes giving systemic risk authority to the Federal Reserve, an idea that sources have said the administration favors, but many lawmakers distrust.

Instead, the Republicans call for creating a board of regulators and outside experts, chaired by the Treasury secretary, to study systemic risk and report quarterly. The board would have no enforcement or supervisory powers.

Another high priority of the Obama administration is empowering an agency, probably the Federal Deposit Insurance Corp (FDIC), to seize and unwind troubled non-bank financial institutions. The idea is to avoid on-the-fly bailouts in the future like that of American International Group.

But Republicans, in a sharp repudiation of the bailout policies begun under former President George W. Bush, say in the draft document that they oppose such “resolution authority” and, instead, favor adding a new chapter to bankruptcy law.

I’m sure you feel much better about the stability of the financial system now. This reminds me of when the Republicans unveiled their alternative budget — with no details.

Maybe this new proposal for financial reform will come with charts as well.

The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.

The 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, has seen its reputation tarnished as some lawmakers blamed it for missing the incipient financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme. Any move to rein in the agency is likely to provoke a battle in Congress, which would need to approve the changes, and draw the ire of union pension funds and other advocates for shareholders.

In addition to the SEC proposal, the Obama administration also is considering creating a regulatory commission with broad authority over consumer financial products such as mortgages and credit cards, according to The Washington Post.

That idea mirrors a proposal of top TARP watchdog Elizabeth Warren, who has long argued for the creation of a Financial Products Safety Commission. The purpose of such a commission would be to provide safeguards so consumers would understand exactly what they were getting into when they signed up for mortgages and credit cards.

As Bloomberg noted, financial regulatory overhaul is likely to spur a tough turf battle, as agencies like the SEC or the Office of Thrift Supervision lose some powers or mergeinto other agencies.  And as TWI has pointed out, Warren has become a lightning rod for right-wing critics, who see her as too biased on behalf of consumers.

The fact that the Obama administration is seriously considering her pet project provides a glimpse of which way those in power already are leaning. Score one for Warren, in the long financial regulatory turf war to come.

At Naked Capitalism, Yves Smith notes how the right wing increasingly has turned on Warren:

The move to clip the wings of TARP overseer Elizabeth Warren was predictable. The fact that it took so long, and the angle is that she is anti industry (as opposed to anti industry bad behavior, a distinction that will hopefully be lost on the masses) and it took comparatively long to mount the salvo (Warren has been a critic of predatory lending for a long time, and hasn’t been too happy with the Treasury’s handling of the TARP since she first took an official look) suggests that attempts to find real dirt on her did not pan out.

Given that banks have an increasingly bad name in mainstream America, this effort to denigrate her may not stick. But the attempt to paint her as biased is nevertheless a nasty bit of work.

Here’s the conservative argument against Warren, according to Politico:

While the bubbly and brilliant 59-year-old professor is a darling of Democrats, Warren has become the scourge of conservative Republicans, who question her panel’s exploration of more-liberal approaches such as nationalization and bank liquidation.

Financial services lobbyists, who’ve long disliked Warren for highlighting predatory lending and abusive credit card fees, argue that she’s using her post to push her own, anti-industry agenda.

“A number of people wonder if this is the new Warren commission or the congressional oversight panel,” said Wayne Abernathy, executive director for financial institutions policy at the American Bankers Association. “It’s looking more like the former than the latter.”

I think the anti-Warren movement is growing in response to the popularity of some of her ideas. Warren has long pushed for a Financial Products Safety Commission, modeled after a commission for consumer products. Her idea is to provide safeguards so consumers would more clearly understand what they might be getting into when they buy financial products from mortgages to car loans. President Obama has publicly expressed his support for the idea. Bills have been introduced in both the House and Senate to implement it.

It’s been a long time since consumer advocacy has had such a high profile. But it’s important to remember that Warren didn’t suddenly become an advocate in response to her new role. These are issues she’s always pushed – from highlighting credit cards with sky-high interest rates to chronicling the rise of consumer debt.

Maybe it’s just easier these days for critics to call Warren biased, then to listen to the substance of her complaints about TARP. In particular, her concern that banks may need to be nationalized is fueling much of the controversy. Warren is among a group of economists who worry that the United States could end up in the same situation as Japan did, propping up ailing banks for years as the economy stagnates.

It would be helpful if those kinds of questions dominate today’s hearing, and it will be illuminating if Warren and Geithner have a useful debate about about TARP’s goals and its effectiveness. But given the way right-wing critics have already politicized Warren’s position, expect her to become an even bigger target if she tries to take on those kinds of substantive concerns.

–

TWI is on Twitter. Please follow us here.