Monday, December 13, 2010

Loan Mod Scams: Landing on MARS

On November 11, 2010, the Federal Trade Commission issued its Final Rule to Protect Struggling Homeowners from Mortgage Relief Scams Rule, which outlaws advance fees and false claims, while requiring clear disclosures.

The new rule, known as the Mortgage Assistance Relief Services (MARS) Rule, published in the Federal Register on December 1, 2010, seeks to protect distressed homeowners from mortgage relief scams that have sprung up during the mortgage crisis. For instance, bogus operations falsely claim that, for a fee, they will negotiate with the consumer's mortgage lender or servicer to obtain a loan modification, a short sale, or other relief from foreclosure. Many of these operations pretend to be affiliated with the government and government housing assistance programs.

Essentially, the FTC seeks to ban 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 - the homeowners - decide is acceptable.

NOTE: the Final Rule applies only to entities within the FTC's jurisdiction under the Federal Trade Commission Act, which excludes, among others, banks, savings and loans, federal credit unions, common carriers, and entities engaged in the business of insurance.

Effective Dates

December 29, 2010: All provisions of the rule, except the ban on advance fees.
January 31, 2011: The ban on advance fees provision.



Ban on Advance Fees
Under this provision, mortgage relief companies may not collect any fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable, and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer. The companies also must remind consumers of their right to reject the offer without any charge.


The MARS Rule requires mortgage relief companies to disclose key information to consumers to protect them from being misled and to help them make better informed purchasing decisions.

In their advertising and in communications directed at individual consumers (such as telemarketing calls), these companies must disclose that:

• they are not associated with the government, and their services have not been approved by the government or the consumer's lender;
• the lender may not agree to change the consumer's loan; and
• if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

Companies also must explain in their communications to consumers that:
• they can stop doing business with the company at any time;
• can accept or reject any offer the company obtains from the lender or servicer, and,
• if they reject the offer, they don't have to pay the company's fee.

The companies also must disclose the amount of the fee.


Prohibited Claims
The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

  • the likelihood of consumers getting the results they seek;
  • the company's affiliation with government or private entities;
  • the consumer's payment and other mortgage obligations;
  • the company's refund and cancellation policies;
  • whether the company has performed the services it promised;
  • whether the company will provide legal representation to consumers;
  • the availability or cost of any alternative to for-profit mortgage assistance relief services;
  • the amount of money a consumer will save by using their services; or
  • the cost of the services.

Furthermore, mortgage relief companies are barred from telling consumers to stop communicating with their lenders or servicers.

Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.


Attorney Exemption
Attorneys are generally exempt from the rule if they meet three conditions:

  • they are engaged in the practice of law,
  • they are licensed in the state where the consumer or the dwelling is located, and
  • they are complying with state laws and regulations governing attorney conduct related to the rule.

To be exempt from the advance fee ban, attorneys must meet a fourth requirement - they must place any fees they collect in a client trust account and abide by state laws and regulations covering such accounts.


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FTC: Mortgage Assistance Relief Services - Final Rule
Federal Register: 75/230
December 1, 2010


LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.