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Federal Trade Commission Issues Final Rule to Protect Struggling Homeowners from Loan Modification Scams

Federal Trade Commission Issues Final Rule to Protect Struggling Homeowners from Loan Modification Scams

The Federal Trade Commission (FTC) issued the Mortgage Assistance Relief Services (MARS) Rule on November 19, 2010, which will protect homeowners from deceptive mortgage relief and foreclosure rescue companies.  As a result of the recent mortgage and foreclosure crises, scammers claiming to provide mortgage modification and relief services have targeted vulnerable homeowners throughout the country.

"The Lawyers' Committee commends the FTC on this Final Rule and extends sincerest appreciation to the FTC for its efforts to create a regulatory framework that will hinder the unfair and deceptive practices that are proliferating in the exploding mortgage assistance market," said Fair Housing and Fair Lending Senior Counsel Yolanda McGill.

As of January 31, 2011, companies that offer to help homeowners get their loans modified or sell them other types of mortgage assistance relief services are no longer allowed to charge up-front fees

History of Mortgage Assistance Relief Services (MARS) Rule

Bogus operations falsely claim that, for a fee, they will negotiate with the consumer's mortgage lender or servicer to obtain a loan modification, a short sale, or other relief from foreclosure. Many of these operations pretend to be affiliated with the government and government housing assistance programs. 

In response to a notice of proposed rulemaking, Mortgage Assistance Relief Services (MARS), 75 Fed. Reg. 10707 (proposed Mar. 9, 2010), the Lawyers' Committee for Civil Rights Under Law,  in its role as a leader of the Loan Modification Scam Prevention Network (LMSPN), a coalition of public and private local, state and federal organizations, submitted a comment letter to the FTC.  The Lawyers' Committee urged the FTC to enact a rule that would address the following issues, among others:

  • Prohibit MARS providers from collecting advance fees;
  • Ensure MARS providers confer an actual benefit on consumers before demanding and collecting compensation; and
  • Narrowly tailor any exemptions granted to attorneys, which will ensure that the rule's prohibitions focus on those who act in concert with scammers, and not legitimate legal services providers.

On November 19, 2010, the Federal Trade Commission issued Final Rule 16 C.F.R §322 (beginning on p. 166), also known as the Mortgage Assistance Relief Services (MARS) Rule. 


Summary of Final MARS Rule

The Final Rule, among other things, would:

  • Ban Advance Fees: MARS providers are prohibited from collecting advance fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable, and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer. The companies also must remind consumers of their right to reject the offer without any charge.
  • Restrict Representations by MARS Providers: MARS providers are prohibited from making false or misleading claims, such as, (i) misrepresenting the likelihood of obtaining relief, (ii) directing homeowners to stop communicating with their lenders, and (iii) falsely claiming an affiliation with the government.
  • Mandate Disclosures in Advertisements and Consumer Communications: MARS providers must inform homeowners that (i) homeowners could potentially lose their home and damage their credit rating if they stop making mortgage payments, (ii) homeowners can stop doing business with the MARS provider at any time, and (iii) the MARS provider is not affiliated with or approved by the government.
  • Prohibit Knowing Collaboration Among Scammers: It is a violation of this Rule for a person to provide substantial assistance or support to any MARS provider when that person knows or consciously avoids knowing that the provider is engaged in any act or practice that violates this Rule.
  • Regulate Certain Attorney Conduct, Including Fee Collection: Attorneys are generally exempt from the Rule if they meet three conditions: they are engaged in the practice of law, they are licensed in the state where the consumer or the dwelling is located, and they are complying with state laws and regulations governing attorney conduct related to the Rule. To be exempt from the advance fee ban, attorneys must meet a fourth requirement - they must place any fees they collect in a client trust account and abide by state laws and regulations covering such accounts. This will enhance existing restrictions that already prohibit attorney scammers from sharing legal fees for MARS-related services with non-attorneys, forming partnerships with non-attorneys in connection with offering MARS, or aiding MARS providers in engaging in the unauthorized practice of law, i.e., providing legal services without a license to do so.

All provisions of the Rule except the advance-fee ban will become effective December 29, 2010. The advance-fee ban provisions will become effective January 31, 2011.  The Final Rule applies only to entities within the FTC's jurisdiction under the Federal Trade Commission Act, which excludes, among others, banks, savings and loans, federal credit unions, common carriers and entities engaged in the business of insurance.


Anyone violating the new MARS Rule "with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule" is liable for civil penalties of up to $11,000 per violation.  The FTC obtains such penalties by filing a suit in district court.  In addition, the FTC may sue any person who violates a rule (irrespective of the state of knowledge) for injury caused to consumers by the rule violation.

State attorneys general or any other officer of a state authorized by the state also may bring an action pursuant to this Final Rule.  However, there is no private right of action under this Final Rule.

Lawyers' Committee and LMSPN Provide Valuable Data to FTC for Final Rule

The Lawyers' Committee and the LMSPN collect data on loan modification scam activity into its national database for use by enforcement officials.  The Lawyers' Committee also analyzes the data on a monthly basis and disseminates a report (sample) to a wide range of local, state and federal enforcement agencies, including the FTC. 

The Statement of Basis and Purpose (SBP) accompanying this Final Rule refers to LMSPN data in support of the following points:

  • Types of Promises Scammers Are Making to Consumers: The FTC staff reviewed 100 complaints in our database, and concluded that "[loan modification scammers] also commonly represent that there is a high likelihood, and in some instances a ‘guarantee,' of success." (SBP p. 19, n. 75).
  • Advance Fees Harm Consumers as Loan Modification Scams Remain Prevalent: "In addition to past law enforcement actions, the significant and growing number of consumer complaints about MARS providers strongly suggests that they are continuing to fail to deliver the results they promise. For example, one coalition of government and private groups that collects consumer complaints regarding MARS received 3,461 consumer complaints against MARS providers between April and August of 2010." (SBP p. 85-86, n. 294).
  • The FTC's Refusal to Grant a Blanket Exemption to All Attorneys: "The record shows that a substantial number of attorneys have engaged in the types of deceptive and unfair conduct the Rule prohibits. For example, approximately 22 percent of the complaints that a coalition of government agencies, nonprofits, and service providers has received from consumers about loan modification fraud involve some form of attorney participation." (SBP p. 126-7, n. 438).

In this time of unprecedented rates of foreclosure affecting millions of households, a disproportionate number of which are minority households, loan modification scams compound these losses in communities already suffering because lax oversight permitted predatory lending practices to push so many minority homeowners past the brink of sustainable homeownership.