TIME FOR COMPLIANCE WITH NEW FTC ADVANCE FEE RULE (FOR LOAN MODIFICATIONS, SHORTS SALES, AND DEED IN LIEU, ETC.) IS DRAWING NEAR. December 29, 2010 (general provisions)and January 31, 2011 (for advance fee rules).
NEW FTC RULE PROHIBITS COLLECTION OF ADVANCE FEES FOR LOAN MODIFICATIONS AND SHORT SALES
We have talked in great deal over the past couple of years about all of the loan modification scams and bogus loan mod companies and fraud artists who made tons of money pretending they were going to modify loans, when in fact, they were not doing much work at all. There was one attorney in particular that was disbarred after having made false statements regarding his firms services (ex. touting principle reductions etc.) and he collected over 11 million dollars before the FTC finally caught up with their dubious practices. Yes, the loan mod business brought out all the sharks, with a lot of false claims made to homeowners who are desperate for the "rescue" and willing to part with their hard earned money when a "sales pitch" says the right things.
We have had people asking us for years what our "success rate" is. We always tell them the same thing....every loan and lender is different and success rates cannot be predicted, and are unreliable and misleading. Many firms touted 99% success rates or something similar with little proof of any real results. Point is, the loan modification business was in shambles. In October of 2009, California state legislature stepped up with SB94 and said NO MORE ADVANCE FEES could be charged, collected, demanded, etc. (by anyone, including attorneys). This stroke of the Governor's pen effectively stripped a homeowners legal right to contract with a loan modification company to do what the homeowner may not have wanted to do (for example, call their lender Monday through Friday and hang on the phone line for 45 minutes waiting to discuss the status of their loan mod application).
Most loan modification companies (including foreclosure defense lawyers) are not likely to take a loan modification case if they cannot collect advance fees. Why is this? A few main reasons:
(1) Loan modifications are unpredictable, especially with so many securitized loans (estimated to be 60% of all loans), and pooling and servicing agreements can make modifications tough, if not impossible
(2) If we get a loan modification, it is not always certain the borrower will like the terms offered (especially when there is no principle reduction offered), if they don't like it, it will be tough to collect. We have been stiffed for legal fees several times, resulting in further action being required.
(3) Even if a borrower is happy with the loan modification, they may have other pressing bills and the client may put their other needs (ex. food, medical bills, credits card bills etc.) ahead of paying for the modification.
There are other reasons, but this highlights why most companies may not be willing to perform loan modifications, leaving the homeowner unrepresented against his or her lender or loan servicer.
The end result is that the homeowners generally end up representing themselves against the powerful lenders. It should come as no surprise that this is exactly what the lenders and their powerful lobbys want. You taking everything they say at face value, without legal representation. Our firm, for example, no longer represents California homeowners in loan modification services.
NOW ENTER THE NEW FTC RULE - Mortgage Assistance Relief Services (MARS) Rule OF 2010. THIS NEW LAW PROHIBITS THE COLLECTION OF ADVANCE FEES BY ANY MORTGAGE RELEIF COMPANY. CLICK ON THE LINK FOR THE FINAL RULE.
Some highlights of the Final Rule:
- No advance fees may be collected by any loan modification or mortgage rescue firm for the purposes of obtaining a loan modification
- Attorneys are exempt from the final rule if they practice law, and take clients only in the state where they are licensed to practice law, and if the out the funds collected in a trust accounting subject to trust account rules. Note, the attorney must also comply with any state law rules related to advance fees (for example, in California this means presently that even California foreclosure lawyers cannot accept an advance fee per SB94)
- For companies that do not collect advance fees, they must advise the Client that they have the right to reject any loan modification obtained, and to not have to pay if they reject the modification (yes, this makes it real tough, many times the homeowner is not 100% happy or content with the loan modification they receive and this gives them legal grounds not to have to pay for services rendered)
- Loan modification companies must make it clear in advertisements that they aren’t affiliated with the government (there was a problem with a lot of companies pretending to be "Federal Loan Mod Company" which mislead a good deal of consumers.
- If advance fees are collected, the fee must be disclosed
- The loan modification company cannot inform a borrower/client that they cannot speak to their lender or loan servicer (many scam companies did this so the borrower would not contact the lender for status updates and to see what was being done - or not done should we say - on the client's loan mod application.
- Prohibits material misrepresentations regarding the mortgage relief service company activities
WHO IS COVERED BY THIS LAW (WHO MUST COMPLY)? Generally speaking, any "for-profit" company aiding residential homeowners in a variety of loss mitigation efforts. Here is what the rule says:
B. Section 322.2: Definitions
1. Section 322.2(i): Mortgage Assistance
Relief Service
As discussed above, the Rule is
intended to regulate for-profit providers
of mortgage assistance relief services.
Section 322.2(i) of the Rule adopts,
without substantive modification, the
proposed rule’s definition of ‘‘mortgage
assistance relief service’’ (MARS) as
including ‘‘any service, plan, or
program, offered or provided to the
consumer in exchange for consideration,
that is represented, expressly or by
implication, to assist or attempt to assist
the consumer’’ in negotiating a
modification of a dwelling loan that
reduces the amount of interest,
principal balance, monthly payments, or
fees; stopping, preventing, or
postponing a foreclosure or
repossession; or obtaining one of several
other types of relief to avoid
delinquency or foreclosure. Sections
322.2(i)(3)–(6) define these additional
types of relief to include obtaining: (1)
A forbearance or repayment plan; (2) an
extension of time to cure default,
reinstate a loan, or redeem a
property; 106 (3) a waiver of an
acceleration clause or balloon payment;
and (4) a short sale, deed-in-lieu of
foreclosure, or any other disposition of
the property except a sale to a thirdparty
that is not the loan holder.107 The
Rule covers instances in which a third
party itself works with lenders or
servicers to obtain mortgage relief as
well as instances in which a third party
markets services to aid consumers who
themselves work with lenders or
servicers to obtain relief.108
Accordingly, § 322.2(i) is intended to
apply to every service MARS providers
offer,109 expressly or by implication, for
the purpose of obtaining loan
concessions, avoiding foreclosure, or
saving their homes.
AS WE HAVE BEEN TELLING PEOPLE FOR YEARS: MAKE SURE YOU DO NOT PAY ADVANCE FEES FOR LOAN MODIFICATIONS TO CALIFORNIA LOAN MODIFICATION COMPANIES, OR EVEN CALIFORNIA LOAN MODIFICATION ATTORNEYS AS SUCH IS PROHIBITED BY CALIFORNIA SB94.
IF YOU ARE IN A STATE LIKE ARIZONA WHICH STILL PERMITS ADVANCE FEES TO LOAN MODIFICATION LAWYERS, MAKE SURE THE LAWYER USES A TRUST ACCOUNT AND MAKE SURE YOU DO NOT PAY ADVANCE FEES TO ANY LOAN MODIFICATION COMPANY REGARDLESS OF WHAT STATE THE MORTGAGE RELIEF COMPANY MAY BE LOCATED IN. THE FTC RULE COVERS ALL COMPANIES ACROSS THE UNITED STATES. SO DO YOUR HOMEWORK BEFORE CHOOSING A FORECLOSURE COMPANY.
Here is a press release from the Federal Trade Commission (FTC) regarding the new rule.
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Don't forget to catch us on our Foreclosure Radio Show! Or seek foreclosure and bankruptcy strategies at http://www.ultimatebk.com or http://www.ForeclosureDefenseResourceCenter.com
If you want to have your options reviewed, fill out our loss mitigation form at http://www.AttorneySteve.net (Sorry, California and Arizona properties only). We are once again taking Wachovia and World Savings Pick-a-Pay and Option Arm loans (negative amortization loans) on a CONTINGENCY FEE BASIS. You can check out our profile on ContingencyCase.com.
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