New FTC Rule Prohibits Loan Modification Companies from Charging Fees Up-Front

Upon reading the latest edition of the Florida Bar News, I stumbled upon an interesting article entitled "FTC bans mortgage modification companies from taking up-front fees".

The Federal Trade Commission took an important step in reaction to the massive amount of wrongdoing concerning mortgage modification companies by taking steps to implement the new MARS ("Mortgage Assistance Relief Services") rule. The purpose of this rule is to "combat widespread fraud by mortgage modification companies, which have victimized many desperate homeowners seeking to forestall foreclosures."

As was stated by FTC Chairman Jon Leibowitz, "At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millinois of dollars from homeowners without ever delivering results."

First and foremost, the new rule bans "mortgage assistance relief services" from collecting any fees in advance of delivering results. In order for the mortgage relief company to collect fees an offer of loan modification must be made in writing provided by the lender and this offer must be acceptable to the client; the offer must also detail any key changes (from the original mortgage) made by the loan modification offer. Finally, the client also has the right to reject any offer from the mortgage lender.

Second, the new rule also requires mortgage assistance relief agencies to provide certain disclosures to their clients. These companies must disclose that: (1) they are not associated with the government and that their services are not approved by the government or a consumer lender; (2) the lender may not agree to change the consumers mortgage loan; and (3) if the mortgage assistance relief service tells the homeowner to stop paying their mortgage they must tell the homeowner that they could lose their home and damage their credit rating. Furthermore, the company must disclose that the homeowner can terminate their services at any time.

Finally, mortgage assistance relief services are prohibited from making a number of claims. For example these companies are prohibited from making claims concerning the liklihood of getting results sought. There are many more prohibited claims, see the FTC website for more details.

Attorneys licensed in the state where the dwelling is located are generally excempt from this rule. Attorneys are, however, required to put any money advanced by the client for loan modification services into his client trust account.

The MARS rule is an extremely important step in curbing the level of fraud perpetrated by these unscrupulous companies. As I always say hire an attorney to represent you as we are knowledgeable of the law and are subject to rules and regulations of the state supreme courts where we are licensed.

The MARS rule goes fully into effect on January 31, 2011. For more information see the FTC webpage detailing the proposed rule. See also the Florida Bar News at their webpage.