The Federal Trade Commission has created a new rule designed to protect homeowners from unscrupulous mortgage relief companies.

The Mortgage Assistance Relief Services Rule announced Friday includes a ban on collecting advance fees. 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.

Bogus operations commonly 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.

The FTC has brought more than 30 cases against operations like these, and state and federal law enforcement partners have brought hundreds more. The FTC announced several last week, see story.

"At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results," says FTC Chairman Jon Leibowitz. “By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

The new rule further 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), the companies must disclose that:

  •   Tthey 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.

The 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.

In addition, the rule bars mortgage relief companies 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.

All provisions of the rule except the advance-fee ban will become effective Dec. 29, 2010. The advance-fee ban provisions will become effective Jan. 31, 2011.

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