FTC outlaws upfront payments for mortgage modification
You've probably seen the pitches on TV and the Internet or found them stuffed in your mailbox: official-looking communications complete with logos and letterheads that look vaguely like those used by the Treasury, Internal Revenue Service and other federal agencies.
The promoters have names that resemble those of well-known, legitimate federal foreclosure-intervention programs such as Making Home Affordable or Home Affordable Modification. Some even use photos of President Obama or the Great Seal of the United States.
They are instead criminal enterprises posing as do-gooders who promise to get you out of the mortgage jam you're in, whether you're severely delinquent or deeply underwater. They claim they can persuade your lender to cut your monthly payments, forgive all penalties, slash your interest rate and even get your loan balance reduced. If your lender won't cooperate, they say, they will perform "forensic audits" on your mortgage and persuade a court to cancel your loan transaction because of technical mistakes in the paperwork.
Bogus firms always insist on getting your money upfront - often thousands of dollars - and then do little or nothing. But now the Federal Trade Commission is cutting off the main fuel supply for mortgage-modification scammers. Under new rules outlined on Nov. 19, the agency plans to ban virtually all upfront payments, institute mandatory disclosure rules and clamp new federal restrictions on lawyers who participate in mortgage-modification schemes.
Under these rules, companies offering mortgage relief will have to contact your lender or servicer and present you with a written proposal describing the key changes to your mortgage terms that the note holder is willing to make before any money can be collected in advance.
Modification companies also will be required to make clear that they have no connection to any government agency or program, and that customers are free to reject any offer from the lender, with no requirement to pay a fee.
The rule also prohibits modification firms from using one of their most common and destructive ploys: instructing clients to stop communicating with their lender or servicer. Many scammers not only urge unwary consumers to let them handle all negotiations but also direct them to stop sending in payments - or worse, tell them to send all payments to a modification company. Typically that has the effect of rendering any ultimate modification with the lender or servicer even less likely.
The FTC estimates that bogus modification companies have stolen millions from unwary homeowners in the past two years. Ironically, there has been a huge increase in the number of abusive schemes in the wake of the federal government's efforts to create legitimate foreclosure-relief programs. The FTC has brought more than 30 cases against these operations, but until now the agency has had no way to control the pervasive advance-fee requirements that cost consumers so much.
Now, when that portion of the new rule takes effect on Jan. 31, the FTC will be able to proceed against any firm that collects upfront fees without obtaining the required written proposals at no charge from lenders. It will be a litmus test: If a firm seeks to charge anything or collects money upfront, it will be in violation of federal law and subject to harsh civil penalties.
The only exception will be for lawyers, who typically require retainers before they begin negotiating on a client's behalf. They will be permitted to collect retainer fees for modification efforts but only if they deposit the money into "client trust accounts" under state bar regulations. Lawyers who charge advance fees also must be licensed by state authorities and be in compliance with state laws and regulations governing professional conduct.
Joel Winston, the FTC's associate director of financial practices and a lawyer himself, said in an interview that "a disappointingly high percentage of fraudsters [in FTC loan-modification cases] have been lawyers - they're just fraudsters with law degrees." Nonetheless, Winston said, the agency recognizes that "legitimate practitioners" can play a valuable role in negotiating modifications for consumers, and the FTC doesn't want to cut this off by banning upfront retainer payments outright.
Some states, such as California, have moved against lawyers running loan-mod scams, he said, but once the new FTC rule takes effect nationwide, every state will get "federal teeth" behind their efforts to crack down on law firms that abuse homeowners in mortgage trouble.
"You won't be able to fly under the radar anymore hoping that state disciplinary boards won't spot you," Winston said. "Now [fraudster lawyers] are going to have the federal government to contend with - and we will be looking for them."