FTC Proposes Rule for Combating Rogue Mortgage Assistance Relief Services

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Providers of mortgage assistance relief services—or MARS—would be prohibited from engaging in unfair and deceptive practices, under a proposed Federal Trade Commission rule announced today.

Among the prohibited conduct would be the unfair practice of charging up-front fees for foreclosure rescue and mortgage modification services.

In its notice for proposed rulemaking (NPR), the FTC is seeking public comment on a rule that would regulate for-profit providers of mortgage assistance relief services (16 CFR Part 322).

“Mortgage assistance services based on negotiating with the lender or servicer to obtain a loan modification or some other type of foreclosure relief have mushroomed in the past two years,” according to the Commission. During that time, the agency has filed 28 law enforcement actions against these providers.

Misrepresentation of Services, Results

In these enforcement actions, the FTC has alleged that MARS providers misrepresented the services that they will perform and the results they will obtain for consumers.

In addition, some providers misrepresented that they were closely affiliated with the government, various nonprofit programs, or the consumer’s own lender or servicer. Some have also claimed that they offer legal services, when attorneys were either not employed at the company or provided little or no legal work for consumers.

MARS Defined

The proposed rule would define a “mortgage assistance relief service” to include “any service, plan or program, offered or provided in exchange for consideration on behalf of the consumer, that is represented, expressly or by implication, to assist or attempt to assist the consumer” in negotiating a modification of any term of a loan or obtain other types of relief to avoid delinquency or foreclosure.

According to the FTC, the definition “is intended to apply to every solution that may be marketed by covered providers to financially distressed consumers as a means to avoid foreclosure or save their homes.”

Prohibited Representations

The rule would prohibit misrepresentations of any material aspect of any mortgage assistance relief service. A non-exclusive list of claims that could violate the proposed rule includes:

 Likelihood and time to provide services or obtain results;

 Affiliation with public or private entities;

 Payment and other obligations under existing mortgage loans;

 Refund and cancellation policies; and

 The completion of promised services.

Required Disclosures

MARS providers would be required under the rule to make clear and prominent disclosures in an effort to assist consumers in making decisions about mortgage assistance relief services. For-profit status would need to be disclosed. A disclaimer disavowing any affiliation with the government or the consumer’s lender would be needed. The total amount consumers would have to pay for the provider’s services would have to be disclosed.

In addition, providers would need to disclose that there was no guarantee that consumers’ lenders would agree to change their loan terms.

Prohibition on Collection of Advance Fees

The Commission proposes to ban MARS providers from requiring that consumers pay in advance for their services. A large number of those responding to the Commission’s s June 2009 Advance Notice of Proposed Rulemaking (ANPR) urged the Commission to propose a rule prohibiting or restricting the collection of fees for mortgage relief services until the promised services were completed.

“The Commission believes that requiring that consumers pay advance fees for mortgage assistance relief services meets the standard for an unfair practice under Section 5(n) of the FTC Act,” according to the NPR. The NPR noted that the Commission reached the same conclusion in the Telemarketing Sales Rule with respect to the charging of an advance fee for credit repair services, money recovery services, and guaranteed loans or other extensions of credit.

The FTC, however, did provide some alternatives to a ban on advance fees. The agency asked whether it should: (1) limit or cap advance fees instead of banning them outright; (2) allow MARS providers to use independent third-party escrow accounts to hold fees until they achieve the results; and (3) include a right of rescission.

Assisting and Facilitating

The rule would also reach those who furnish key support to MARS providers engaged in unlawful conduct. The proposed rule would prohibit any person from providing “substantial assistance or support” to a MARS provider if that person knows or consciously avoids knowing that the provider is violating any provision of the proposed rule.

The NPR is available here on the FTC website and will be published in the Federal Register. Further details will appear in the CCH Trade Regulation Reporter.