New federal regulation is attempting to make it as difficult as possible for fraudsters to deceive homeowners.
The Federal Trade Commission has issued a new rule designed to ban the collection of fees by mortgage loan modification and other foreclosure rescue service providers until homeowners receive a written offer “that they decide is acceptable” from their lender or servicer.
The FTC Mortgage Assistance Relief Services rule is designed not simply to help mediate more suitable mortgage workout outcomes but also to help minimize fraud.
While the overall rule becomes effective on December 29, 2010, its advance fee ban provision will be effective January 31, 2011.
The rule’s stated goal is “to protect distressed homeowners from mortgage relief scams that have sprung up during the crisis.”
FTC chairman Jon Leibowitz expects the interdependence between the service fee and customer satisfaction will create a barrier that will stop “peddlers of so-called mortgage relief services.”
The FTC said the ban caters to industry and public concerns about bogus operations and fraudsters who for an advance fee promise to negotiate a modification, short sale, deed-in lieu or other option with the lender or servicer and also pretend to be affiliated with the government and its housing assistance programs.
The new rule was triggered by an up-tick in fraud cases. A CoreLogic 2010 Mortgage Fraud Trends Report found overall mortgage fraud has increased by 20% since fraud hit its lowest level in 2009. According to FTC in addition to hundreds of cases brought to the FTC's attention and prosecuted by the state and federal law enforcement partners, FTC alone has brought over 30 cases against such providers in the recent past.
Industry and FTC data show that fraudulent mortgage relief service providers “have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results.”
The new FTC advance fee ban rule requires that consumers communicate with their lender or servicer. After the lender-servicer delivers a written offer that is also accepted by the borrower, the lender or servicer also must deliver a second document that describes “the key changes” to the mortgage. Plus customers need to be notified of their right to reject the lender-servicer’s offer without a charge.
Disclosure requirements for these third party service providers also include informing the customer that they are not associated with the government, or approved by the borrower’s lender; that the lender may decline to change the loan; that if they stop paying the mortgage they could lose their home and damage their FICO score; before they disclose their fee amount requirement.
Going forward it is against the law for these companies to make misleading or false claims about: the costs of their services, savings associated with their assistance, affiliations, the availability or cost of other alternatives offered by nonprofits, or promising customers they will definitely get the results they seek.
It also bans indications that customers can stop communicating with their lender or servicer, and are required to provide reliable evidence to back up any of their claims.
Attorneys are exempt from the rule if they meet these three conditions: they are licensed in the state where the customer or the dwelling is located, they are actively practicing law and they comply with state attorney conduct requirements. Plus they must place collected fees into a client trust account as required by state law.
