FTC Bans Advance Fees on Loan Modifications and Other Foreclosure Relief

November 19, 2010 No Comments »

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By year-end, so-called “mortgage foreclosure rescue” and loan modification firms will be prohibited from collecting fees until homeowners have a written offer from their mortgage lender or loan servicer that they deem acceptable.

The FTC today issued the “Mortgage Assistance Relief Services (MARS) Rule” to protect homeowners from “bogus operations” that falsely claim they’ll negotiate a loan modification, short sale, or some other form of foreclosure relief in exchange for a fee.

Per the rule, mortgage relief companies won’t be able to collect any fees until borrowers are happy with the offer they receive – consumers can also reject an offer without any charge.

Additionally, these companies must make it clear in advertisements that they aren’t affiliated with the government, that the mortgage lender may not agree to change the consumer’s loan, and if they advise homeowners to stop making mortgage payments, they must also inform them that doing so could lead to the loss of their home and/or credit score damage.

They are also banned from telling consumers to stop communicating with their lenders or servicers, and must also let consumers know that they can seize doing business with the companies at any time.

The amount of the fee must also be disclosed upfront.

Here’s the loophole:

Attorneys are generally exempt from the new rules if they meet three conditions:

– must be engaged in the practice of law
– must be licensed in the state where the consumer or the dwelling is located
– must comply with state laws and regulations governing attorney conduct related to the rule

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

The new rules take effect on December 29, 2010, minus the advance-fee ban provision, which becomes effective January 31, 2011.

Related: The Worst Loan Modification Companies

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