Early on there were numerous confidence schemes, e.g., a straw buyer, selling the house to another buyer and having that buyer sell it back in the future, promising fixing the loan via other creative activities and charging hefty fees with no assurances of performance, etc... It isn't long before the regulators start hearing about the abuses and then come up with new rules and regulations. Does that sound about right?
Now to the question at hand, "...How do they charge for their services..." They, in this case, refers to the modification companies. I have not been witness to this (yet), but I have had several clients go through the routine with some of the modification companies, and what they're forced to do is charge only after they've completed WORK, e.g., compiled the paperwork, submitted the file for review, logged so many hours of follow up, etc., and they are supposed to "bill" for the same with some form of accounting/documentation.