FTC Proposes Crackdown on Loan Modification Services
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- Peter King | February 08, 2010
Seeking to protect homeowners from fraudulent mortgage modification schemes, the FTC has proposed a rule that would prohibit charging in advance for foreclosure prevention services.
Under the proposed rules, companies could not charge for loan modification or foreclosure prevention assistance until after the service had been provided. The rules would also require such companies to disclose to customers what the total cost of the services will be and prohibit them from providing certain types of misleading information.
"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 Chair Jon Leibowitz said. "The proposed rule would outlaw up-front fees so companies can't take the money and run.”
Targets for-profit foreclosure prevention services
The decline of the housing market and the economy have given rise to a growing industry of for-profit foreclosure prevention services that promise to help homeowners obtain loan modifications or otherwise restructure their debt in order to avoid foreclosure. These companies often charge fees amounting to several thousand dollars for this service, often requiring payment in advance.
The FTC, federal law enforcement agencies and state attorneys general have brought hundreds of cases against for-profit loan modification services for failing to deliver promised services that consumers paid for, as well as for misrepresenting themselves as being affiliated with government agencies and services, including the Making Home Affordable Program.
'Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered," said Treasury Secretary Timothy Geithner. "I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices."
New disclosure requirements
Among other provisions, the proposed rule targets several practices that have been deemed abusive, including telling clients to stop communicating with their lenders or mortgage services. The rules would also prohibit loan modification from misleading consumers about the likelihood of obtaining results, their affiliation with public or private entities and refund/cancellation policies.
The new rules would also require that such providers disclose that they are a for-profit business, the total amount charged for their services and that there is no guarantee they will be able to negotiate a loan modification or other foreclosure rescue with their lender.
The rules would apply to for-profit companies that offer to help consumers renegotiate their mortgages with their lenders in return for a fee. The rules would not apply to mortgage lenders or servicers, and would have a limited exception for attorneys representing a consumer in a legal proceeding.
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