For-profit companies that provide "foreclosure rescue" and loan modification services will be barred from collecting fees in advance beginning Jan. 31 under new rules issued by the Federal Trade Commission.
The FTC’s Mortgage Assistance Relief Services (MARS) rule prohibits for-profit mortgage-relief companies from collecting fees for their services until homeowners have received a written offer from their lender or loan servicer that the borrower deems acceptable.
The offer must be accompanied by a document from the lender or loan servicer describing the changes to the borrower’s mortgage that would result if they accept the offer.
The FTC has brought more than 30 cases against companies that have allegedly made false claims about their ability to negotiate loan modifications, short sales or other foreclosure relief — if they provided any service at all.
In some cases, mortgage relief companies have tried to make it appear they were affiliated with the government and government housing assistance programs, the FTC said.
"By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams," FTC Chairman Jon Leibowitz said in a statement.
At least 30 states and Washington, D.C., already have similar laws or regulations on the books, the FTC said in a Federal Register notice, including Arizona, California, Colorado, Florida, Illinois, Massachusetts, Michigan, Minnesota, Nevada, North Carolina, Virginia, Washington and Wisconsin.
The MARS rule does not apply to nonprofit counseling agencies, and attorneys are generally exempt from the rule if they are licensed in the state where the consumer or the consumer’s property is located and they place any fees they collect in a trust account.
The MARS rule also includes new disclosure requirements for mortgage relief companies and prohibitions on false or misleading claims which take effect Dec. 29.
In advertising and communications directed at individual consumers, such as telemarketing calls, mortgage relief companies must make it clear that they are not associated with the government, and that lenders may not agree to modify the consumer’s loan.
Companies that advise consumers to stop paying their mortgage must also inform consumers they could lose their home and damage their credit rating.
Mortgage relief companies will also be explicitly barred from making false or misleading claims about their services, including the likelihood of consumers getting results, the consumer’s payment and other mortgage obligations, and the company’s refund and cancellation policies.
The FTC announced that it was considering such a rule in February, and received 75 comments on its proposed rule from mortgage relief companies, state law enforcement officials, and consumer and community groups.
In comments submitted March 29, the National Association of Realtors said it "broadly supports" effort to ensure that mortgage relief services "truly benefit consumers."
But the group expressed concerns about the proposed rule’s implications for real estate professionals engaged in short sales and other transactions.
If they are not collecting upfront fees or holding themselves out to be a provider of mortgage relief services, NAR said, real estate professionals should be excluded from the definition of MARS providers.
In addition, real estate professionals engaged by potential short sellers on the advice of MARS providers "should not face a presumption that they know or are consciously avoiding knowledge of the provider’s possible unlawful activity," NAR said.
In a Federal Register notice detailing the rationale for the final rule, the FTC agreed with NAR that real estate agents engaged in short sales are not MARS providers, but said an explicit exemption from the rule for real state agents "is not necessary."
"Real estate agents customarily assist consumers in selling or buying homes and perform functions such as listing homes for sale, showing homes, and finding desirable homes for consumers," the FTC said. "The commission is aware that real estate agents may perform these functions when properties are bought or sold through a short-sale transaction, but does not consider these services to be MARS."
However, the FTC said that if real estate professionals, or anyone else working with MARS providers, become aware of information "that reasonably calls into question the legality of the MARS provider’s practices, they will be liable if they continue to assist and support that provider."
