FTC May Limit Fees for Loan Modification Services

The Federal Trade Commission (FTC) is looking to clamp down on so-called "foreclosure rescue" scams by restricting or banning outright advance payments to loan modification services that offer to solve homeowner's mortgage problems for a fee.

The FTC is considering whether certain practices by some loan modification and foreclosure rescue companies are unfair or deceptive and should be reined in to protect consumers. In particular, the agency is focusing on complaints that some such businesses charge consumers several thousand dollars up front to renegotiate the terms of their mortgage, but never deliver on the promised service.

"Homeowners who are facing foreclosure or struggling to make mortgage payments shouldn't have the added burden of being misled by unscrupulous businesses promising assistance that never comes," said FTC Chairman Jon Leibowitz in announcing the initiative.

The FTC is accepting public comments on the proposed rule, called Mortgage Assistance Relief Services, through July 15.

Targets rising scams

The rise in foreclosures and delinquent mortgages following the collapse of financial markets last fall has also seen a rise in scams and frauds that seek to take advantage of vulnerable homeowners. While there are any number of legitimate businesses and attorneys that offer consumers assistance in negotiating their way out of financial difficulty, the field also attracts a large number of unscrupulous operators as well.

Foreclosure rescue and loan modification companies commonly advertise heavily through direct mail, the Internet, newspaper ads and even by telephoning or otherwise personally approaching at-risk homeowners they have identified. Consumer advocates say that what distinguishes the scam artists is that they charge large fees up front with no enforceable guarantee they will be able to renegotiate a homeowner's mortgage.

Homeowners urged to avoid up-front fees

Attorneys and others will often charge a retainer fee to engage their service, consumer advocates say, but these should be relatively modest. They say that any large fees, if any, should not be paid until after a successful loan modification is completed and satisfies clearly established standards agreed to in advance.

The public comment period is intended to help the FTC assess whether new rules would be useful in protecting consumers of these services. The FTC is particularly interested in receiving comment on the costs and benefits of prohibiting or restricting the payment of advance fees for loan modification and foreclosure rescue services.

The FTC rulemaking proceeding is required by Section 626 of the Omnibus Appropriations Act of 2009. In addition, the FTC is seeking comment on a second proposed rule, called Mortgage Acts and Practices, through July 30. That rule would address activities that occur throughout the lifecycle of a mortgage loan, including advertising and marketing; origination, including underwriting, loan terms, and disclosures; appraisals; and servicing