The state attorney general's office, working with other law enforcement and the State Bar, ratcheted up its mortgage fraud crackdown with the arrest of the owners and managing attorney of a Northern California law firm accused of scamming residents seeking loan help.
Co-owners Gregory Flahive and Cynthia Flahive and attorney Mike Johnson of the Flahive Law Corp. in Folsom face 19 felony charges, including grand theft by false pretense, conspiracy and false advertising. They are accused of charging homeowners in Placer, Sacramento, Butte and Yuba counties upfront fees of up to $2,500 each for loan modifications.
State law bans foreclosure consultants from collecting money for services before they are performed, and investigators said that in several instances, the Flahive Law Corp. never performed any loan reduction services for their clients.
In one case, a homeowner said he turned down his lender's offer at the urging of Gregory Flahive, who said his firm could secure a better interest rate and possibly get the homeowner's second mortgage eliminated.
Four months later, the victim lost his home to foreclosure, authorities said.
Investigators working on the state's Mortgage Fraud Strike Force arrested the Flahives and Johnson on Thursday. Bail was set at $50,000 each.
"Homeowners facing foreclosure are being targeted by predators, including those who use their law license to gain credibility and scam innocent Californians," Attorney General Kamala Harris said in a statement. "My office's Mortgage Fraud Strike Force is dedicated full-time to cracking down on these deceptive practices and protecting homeowners from fraud like this."
California has consistently ranked near the top among states with suspected mortgage fraud since 2002, the year the Treasury Department began reporting suspicious activity statistics, federal reports show.
The number of complaints tied to home loans has risen sharply since the 2007 crash of the housing market, said Susan Kagan, acting assistant chief trial counsel for the State Bar of California. In the last two years alone, the State Bar, which oversees licensed attorneys working in California, received a total 6,873 complaints accusing attorneys of mortgage scams and fraud.
Other reports mirror those complaints. Mortgage fraud suspicious activity reports filed by banks and other financial institutions from July to September 2011 [PDF] indicate California is a national leader in questionable home loans, with Los Angeles, Riverside, Santa Clara, Orange and San Bernardino counties among the areas with the highest number of suspected mortgage fraud cases, federal financial officials reported last week.
The State Bar's enforcement division initially received complaints about the Flahive Law Corp. in 2010, turning over evidence of possible criminal activity to the Mortgage Fraud Strike Force a year later.
Last August, the state mortgage fraud team, working with the State Bar and federal Office of the Special Inspector General for the Troubled Asset Relief Program, sued three law firms and 14 individuals, contending that they had defrauded homeowners across the country through the deceptive marketing of a "mass" lawsuit. State officials say the scam, which garnered up to $10,000 in fees from each victim, tricked homeowners into believing that by joining these lawsuits, they would stop pending foreclosures, reduce their loan balances or interest rates, and obtain monetary damages.
In December, mortgage fraud investigators arrested three officers of a Stockton real estate company who were accused of running a loan modification scam similar to the allegations against Flahive Law Corp.