Bogus Mortgage Relief Schemes Targeted by FTC

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The Federal Trade Commission is moving to stop bogus mortgage providers from taking millions of dollars in fees from homeowners without providing promised services in return.

The FTC issued the Mortgage Assistance Relief Services (MARS) Rule on November 19. The rule bans providers of mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or servicer that they consider acceptable. All provisions of the rule except the advance-fee ban will become effective December 29, 2010. The ban on advance fees will go into effect on January 31, 2011.

“These scammers, often armed with official looking documents and false claims of connection to government programs for homeowners, sell legal services they can’t—and don’t deliver,” said FTC Chairman Jon Leibowitz.

The Chairman added that scammers also tell homeowners not to pay their mortgage, resulting in consumers losing their homes. “Hundreds of thousands of consumers have lost hundreds of millions of dollars this way,” he said.

Under the MARS Rule, companies must tell consumers what their services will cost, and that they are not associated with the government or the consumer’s lender. They are also barred from advising consumers to stop communicating with their lender.

“It’s an enforcement tool with teeth,” Leibowitz said, adding that if companies don’t comply, then the FTC has authority to impose hefty fines.

The MARS Rule makes an exception for attorneys who are engaged in the practice of law, live in the state where the consumer or dwelling is located, and comply with state laws governing attorney conduct in relation to the rule. In addition, attorneys must place any fees collected into a client trust account.

Details regarding the MARS Rule appear here on the FTC website. Text of the rule will be reported in the CCH Trade Regulation Reporter.

Mortgage Relief Scheme Violated New Jersey Consumer Fraud Act

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

A real estate lawyer and his client engaged in a fraudulent mortgage relief scheme that violated the New Jersey Consumer Fraud Act (CFA) by misleading mortgage holders, according to the U.S. Bankruptcy Court in Trenton, New Jersey.

The mortgage holders filed for Chapter 13 bankruptcy in an attempt to save their home from foreclosure. They then entered into an agreement with the real estate lawyer’s client, Frederick Cleveland, to sell the house for $555,000. Cleveland was to pay off $510,000 on the two existing mortgages on the house and another $46,000 to the mortgage holders to pay for the Chapter 13 plan.

Instead, Cleveland borrowed $646,400 and took $100,000 for himself. The mortgage holders were unaware that the monthly payments they made to Cleveland were not being used to service the financing and did not understand that if Cleveland failed to pay the new lender, they could lose their home.

Misrepresentations

In preparing the closing documents, the real estate lawyer misrepresented the sale price and falsely told the mortgage holders that Cleveland was investing his own cash.

Although the mortgage holders were not going to receive any money, the real estate lawyer told them they would receive payments from a trust account. Cleveland eventually defaulted on the new loan and the lender initiated foreclosure proceedings.

The real estate lawyer and Cleveland violated the CFA by making false and misleading statements regarding a mortgage relief plan, according to the court. The CFA prohibits the use of any unconscionable commercial practice, deception, or fraud.

Sophisticated Consumer Exception

Although Cleveland argued that the mortgage holders could not avail themselves of the CFA because they were sophisticated parties and could not be misled, the court found that there was no statutory exception for sophisticated consumers.

Even if a business practice was not fraudulent or deceptive, that practice could nevertheless violate the CFA if it was unconscionable. Here, Cleveland found the mortgage holders in a very vulnerable position and took advantage of them for personal gain.

Damages, Attorney’s Fees

An award of actual damages, attorneys’ fees, and other appropriate equitable relief was available to the mortgage holders. The mortgage holders suffered an ascertainable loss because the new mortgage was $646,400, even though they had owed only $529,608. Thus, the damage award was over $350,000, treble the difference between the loss and what the mortgage holders actually received.

The court noted that the mortgage holders could submit proof of their attorneys’ fees and costs, as well as seek other equitable remedies. The real estate lawyer was held jointly liable for the damages, costs, and fees because he conspired with his client to violate the CFA.

The mortgage holders' lawyer stated that this was the first reported case in New Jersey concerning mortgage foreclosure rescue schemes.

The decision is In re O'Brien, CCH State Unfair Trade Practices Law ¶32,012.