New Rules for Loan Modification Companies

As of January 31, 2011, the Federal Trade Commission enacted a regulation that prohibits a loan modification company from charging any upfront fees.  They cannot charge for their services until they secure a loan modification for their customer.  This regulation is designed to protect distressed homeowners from the promoters of bogus foreclosure rescue and mortgage modification services.  Attorneys can be exempt from the new advance fee ban if they represent consumers in a bankruptcy or other legal proceeding.  Otherwise, attorneys will not be able to collect an upfront fee. 

“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 Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

Historic levels of consumer debt, increased unemployment, and an extraordinary downturn in the housing and mortgage markets have contributed to high rates of mortgage loan delinquency and foreclosure.  This mortgage crisis has launched an industry of companies charging a fee for mortgage loan modifications or other relief for consumers facing foreclosure.  Some of these companies are legit and others were charging a fee upfront and then disappearing.  This new regulation should make it cut and dry for the consumer.  If a loan modification company is trying to collect money upfront, they are not a legitimate modification company and are breaking the law. 

“Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered,” Treasury Secretary Timothy Geithner said. “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.”

Under the new rule, it is illegal for modification companies to misrepresent, either expressly or by implication, any material aspect of their services.  This includes any information that will sway a consumers decision to use a service over another.  Here are some material claim examples:

• mortgage relief and the likelihood of being able to get, negotiate, or arrange
• a time period for getting the advertised mortgage relief
• the affiliation with the government, public programs, lender, and servicers
• the terms, conditions,  and payments of homeowner's mortgages
• refunds and cancellation policies
• whether homeowners will be getting legal services
• For-profit MARS providers alternatives costs / benefits
• Savings for homeowners that use your service
• Total cost of service
• a time frame for how much time a homeowner has to accept an offer from their lender including terms, conditions, or limitations of that offer.

In addition, the new rule would require loan modification companies to tell consumers that they are for-profit businesses, the total amount of fees paid by the customer, that their services are not approved by the government nor the consumer’s lender, and that there is no guarantee that the lender will be able to make changes to their loan.

After reviewing the new rules, I do see one area that can cause some confusion and frustration for consumers.  Loan modification companies will not be able to charge money upfront but they will be able to charge their full amount due once the consumer agrees to the terms of a trial modification from their lender.  Typically, the trial modification payments will be made for three months to over a year before the borrower is given the final modification.  During the trial modification period, the borrowers situation can change and they will be required to send new paystubs, bank statements, and other financial documents to their lender throughout the process.  If the borrowers situation changes during the trial modification, they are at risk of not being able to finalize their modification after paying hundreds of dollars to a modification company.  The new rules for modification companies don't address the issue of how much they can charge, so customers could potentially pay thousands of dollars for a modification that they never got.