Federal Trade Commission Bans All Up-Front Debt Relief Fees

In an attempt to create protection for distressed homeowners who are susceptible to less than scrupulous firms promising to deliver loan modifications, the Federal Trade Commission (FTC) has recently passed the new MARS ruling (Mortgage Assistance Relief Services). This ruling is designed to protect distressed homeowners from mortgage relief scams. Explaining the ruling, FTC Chairman Jon Leibowitz said, “At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage debt relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners drp without ever delivering results. By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

Potential Over-Regulation

The Federal Trade Commission’s quest to regulate the debt relief industry became official since the Federal Trade Commission has officially banned debt settlement companies from taking any advanced fees back on October 27, 2010. As a result, debt settlement firms may not charge any upfront or enrollment fees when hired to settle the unsecured debts of the consumer. To be sure, it is no easy task to unravel a credit card debt that has taken years, even decades to accumulate. And, clearly, much work goes into contacting, managing and negotiating with the consumer debt creditors. Yet, so many unscrupulous firms have forced state enforcers to bring nearly 300 cases to stop abusive and deceptive practices by debt relief providers that have targeted consumers in financial distress.

Our firm has counseled thousands of distressed consumers, and we have experienced first-hand that it is no picnic in dealing with lender servicers. Of course, we do not intend on defending the loan modification firms that took hard-earned money and never intended on delivering a final product to the distressed homeowner. The reality of programs such as Home Affordable Modification Program (HAMP) is that the mega-servicers who are entrusted to proactively offer loan modification solutions to homeowners do not have the technology and service provider models that can create an effective program that allows a majority of delinquent homeowners to at least apply for a loan modification directly with the lender servicer, and not feel compelled to throw up a “hail Mary” and pay third party loan modification firm to negotiate a loan modification.

Servicers have inadequately methods in the way they contact and manage the borrower in order to determine whether the borrower qualifies for a loan modification. With so many consumers giving up in the face of delinquent mortgage, and unsecured credit debt, a growing number of homeowners simply cannot stomach the stress of dealing with high pressure collection agents.

Since a majority of the Servicer’s staff is buried in chasing consumers that are delinquent with literally hundreds of phone calls during the course of the year to try to collect on past due payments, there is no way they can also offer a proactive approach in helping the borrower apply and secure loan modifications on any scale.

Unfortunately, the lender servicers are clearly not doing their part which is a big reason that distressed homeowners have felt compelled to seek third parties to negotiate a loan modification. I recently spoke to a pier at one of the large Servicers who shared with me that out of the last 10,000 Home Affordable Modification Program (HAMP) packages sent to homeowners that only 200 of those packages resulted in a completed loan modification. In fact, according to the Amherst Securities Group, the Fannie Mae servicers had completed approximately 300,000 modifications including 160,000 restructurings that meet Home Affordable Modification Program (HAMP) specifications out of nearly two million delinquent homeowners that should to be eligible for loan modifications, a truly abysmal track record.

Real estate professionals are now also impacted by the new Mars ruling, not just loan modification or short sale negotiating firms. In addition to requiring real estate agents to make strong disclosures upfront to their clients engaged in a short sale who and prohibits all agents involved in the negotiation of a short sale from taking upfront fees.

Companies that provide loan modification services to distressed homeowners were given a final blow when In the Federal Trade Commission passed the Mortgage Assistance Relief Services final rule (“MARS rule”) in November of 2010. According to Metrotex, “the MARS rule requires that the MARS provider make certain disclosures to consumers. In addition, the MARS rule bars advance fees paid to a MARS provider, prohibit certain representations, and imposes record keeping requirements (must retain for 2 years all MARS advertisements, sales records for covered transactions, customer communications, and customer contracts). MARS providers can only receive payment if the consumer’s loan is modified by the lender.”

Just as in California where regulators banned up-front fees for all loan modification companies (SB 94, passed in early 2009), the MARS ruling now banns any upfront fees for all short sale and loan modification services nationwide. Loan modification services that previously require up to thousands of dollars in upfront fees has literally evaporated over night. The inherit problem with blanket regulation such as the MARS ruling, however, is that legitimate debt relief firms that are doing the hard work of negotiating, packaging up financial information, tax returns, income information and profit and loss statements while chasing down the lender servicers on the behalf of distressed homeowners, have been forced to flee the industry because it is impossible to pay the infrastructure costs of running a business that requires sales people, negotiators, processors and management staff if all revenue must be earned after the service is completed. And, while the lender servicers have failed miserably in bringing debt relief options to distressed consumers, the recent FTC ruling, while it will protect some consumers from rogue firms, will most certainly force some debt relief firms that are good consumer advocates that truly help consumers out of business.

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