Loan modification companies, beware!

Now the Federal Trade Commission wants to ban up-front fees before services are provided – and the agency doesn’t even need to go through a pesty, time-draining protocol called Congress.

The commission Thursday proposed a rule with the ban and other requirements of for-profit loan modifications companies and consultants, and after a 45-day public comment period the FTC is expected to adopt the rule.

Along with 28 cases filed by the FTC against loan modification companies, the proposed rule is a strike against foreclosure rescue scams. Waves of troubled homeowners have complained about paying thousands of dollars up front to such firms but getting nothing in return.

Many states have such bans, including New York, but the rule would cover a lot of people who now don’t have such protections.

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“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” FTC Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

The rule would also shut down a loophole that had existed in some state bans of up-front frees, including New York until recently.

When New York lawmakers approved the ban in 2008, the legislation did not bar attorneys from charging money up front before getting a modification offer from the lender and did not expressly prohibit firms from charging fees and putting them in escrow.

This was how companies got around New York’s ban, pointing to attorneys connected to the company or saying the dollars were in escrow.

Now, under the state’s Mortgage Foreclosure Law signed into law in December, escrow accounts are out and so are attorneys collecting fees beforehand – unless they are providing services to the homeowners as part of their regular, legal practice.

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FTC’s rule would outlaw escrow money in these cases and let attorneys collect up-front loan modification fees only if they’re also representing the homeowners in bankruptcy cases or some other legal proceeding.

To collect a fee, the mortgage relief firm or consultant would have to show a documented offer from the lender or loan servicer, an offer that “lives up to the promises they have made.”

The federal rule also attempts to make other practices illegal:

-Telling consumers to stop communicating with their lenders and servicers. Many borrowers had no idea their loan modification firms and mortgage relief consultants had never contacted their lenders and servicers.

-Misleading clients about their affiliations with public and private entities. Some business had government-like sounding names or made it sound like they were approved by the government or a nonprofit.

-Misleading homeowners about mortgage obligations. Homeowners said they had been advised to stop paying their loans as a way of getting lenders’ attention or were told that lenders helped only when the borrower was delinquent.

There also would be a list of details the mortgage relief consultants and firms would have to tell consumers:
-The consultant or firm is a for-profit business.
-Total fee.
-Neither the government or the lender has approved the business’ service.
-There’s no guarantee that the lender will agree to change their loans.

The loan modification industry ballooned shortly after subprime borrowers began defaulting in mass numbers. The firms usually charge a percentage of the loan as a fee for negotiating with lenders to make the mortgage more affordable to the homeowner.

Each violation would be a $16,000 fine.