Federal Trade Commission’s new rules limits up-front fees for loan modification services

federal-trade-commissionOn November 19, 2010, the Federal Trade Commission (FTC) issued 16 C.F.R.  Part 322, the Mortgage Assistance Relief Services Rule (MARS) concerning providers of mortgage relief service.  While many relief providers are legitimate, “At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results,” FTC Chairman Jon Leibowitz said.  Unlike an attorney assisting a client  in a loan modification or short sale effort, many mortgage relief services do not have a good understanding of the consistently changing rules and laws (both state and federal) involving mortgages and foreclosures and are not subject to code of ethics.

The MARS Rule is designed to protect distressed homeowners from these mortgage relief scams.  The most significant new rule under MARS is that non-attorneys offering mortgage relief services may not collect any fees until:

  1. The company has provided the consumers with a written offer from their lender or loan servicer that the consumer decides is acceptable.


  1. The company has provided the consumers with a written from the lender or loan servicer describing the key changes to the mortgage that would result if the consumer accepts the offer.


  1. The company must remind the customer of their right to reject the offer without charge.


The MARS Rule also requires mortgage relief services to disclose key information to customers, including that the company is not associated with the government or the customer’s lender and that the lender may not agree to change the customer’s loan.   In addition, it the company tells the consumer to stop paying their mortgage, they must inform the consumer that this could cause them to lose their home and damage their credit rating.

In addition to the mandatory disclosures, the MARS Rule prohibits mortgage relief companies from making false or misleading claims about services, including claims about:

  • the likelihood of consumers getting the results they seek;
  • the company’s affiliation with government or private entities;
  • the consumer’s payment and other mortgage obligations;
  • the company’s refund and cancellation policies;
  • whether the company has performed the services it promised;
  • whether the company will provide legal representation to consumers;
  • the availability or cost of any alternative to for-profit mortgage assistance relief services;
  • the amount of money a consumer will save by using their services; or
  • the cost of the services.

In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers. Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Attorneys are exempt from this new rule as long as they are engaged in the practice of law, licensed in the state in which the consumer or home is located, and comply with the State’s ethics rules.  These are requirements that any practicing attorney should meet anyway.  In addition, and fees attorney’s collect will be placed in a client’s trust account and only withdraw for work performed in accordance with the retainer agreement the client has signed.

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.



Important things to keep in mind when facing foreclosure

BSpencerhomeIn a recent case, the issue arose as to what options a party has when their home has already been foreclosed upon, and sold in a trustee’s sale.  Washington’s Deed of Trust Act provides direction for this issue in RCW 61.24.130.

As interpreted in In re Marriage of Kaseburg,126 Wash.App. 546, 108 P.3d 1278 (2005), a party waives the right to post-foreclosure-sale remedies under the Deed of Trust Act where the party:

  1. received notice of the right to enjoin the sale;
  2. had actual or constructive knowledge of a defense to foreclosure prior to the sale; AND
  3. failed to bring an action to obtain a court order enjoining the sale

This Act provides a the only manner in which ANY party may prevent or restrain a trustee’s sale on any proper ground, once the foreclosure has begun with a “receipt of the notice of sale and foreclosure.”  Id. at 236.

It would seem that the safeguards required before a trustee’s sale can go through, influenced what that legislature allows in post-foreclosure-sale remedies.  In other words, even if there is a valid reason to undue a trustee’s sale, you must take those steps prior to the sale.  IF, of course, you did not receive proper notice and were not aware of the sale, you are NOT barred from bringing an action to stop the sale.

To be safe, if one is facing a foreclosure and his/her home has a scheduled trustee’s sale date, the best thing is to hire an attorney to initiate the legal process.  At a minimum, therefore, the home owner is not guilty of waiving his or her rights to post-foreclosure-sale remedies and can forestall the process before it is too late.

Loan modification options for property investors (non owner-occupied properties)

The Obama legislation, which passed in March, aimed specifically to assist those in danger of losing their primary residence to foreclosure.  It was thought that individuals purchasing property for investment (namely those acquiring property then leasing it out) would not be eligible under the new law.
While that has not changed, our office has seen some interesting movement by banks and loan servicers regarding investment properties.  Under many circumstances, even the investor may gain some relief through loan modification.

Seattle_-_Belmont_Pl_E_01Banks/servicers largely follow the same pattern as the owner-occupied loan modifications.  First, they require a signed forbearance agreement, then they require an extensive disclosure of the investor’s financial status in the form of a “Hardship Packet”.  When they have those two things in hand, the servicer/bank will decide whether to modify the loan.  The following is what is most often required:

1.  Letter describing hardship

2.  Last two pay stubs

3.  Length of time at current employer

4.  One month’s complete bank statement

5.  Most recent tax return

6.  Statement of your complete income (including family members residing with you)

7.  Proof of paid property taxes, homeowners insurance, and HOA fees

8.  (If self-employed): (a)  Profit/loss statements; (b)  three pay stubs; (c)  last two years tax returns; and (d)  business and personal bank statements.

Loan modifications – Seven things you need to know

Wells_Fargo_Bank_Plaza,_Houston,_from_baseThe US News and World Report online provides a dynamic breakdown of the basic components of the federally-backed loan modification program. 

According to the article, here are “Seven things you need to know” about a loan modification:

1. The plan focuses on payments made to lenders rather than the price of the loan.  Experts believe that even if the value of the home possesses little or no equity, if the modified loan payment is affordable, the homeowner will continue making payments.

2.  The plan would seek to reduce the mortgage payment to 31 percent of the borrower’s gross monthly income.  “To that end, the administration’s plan requires participating loan servicers to reduce monthly payments to no more than 38 percent of the borrower’s gross monthly income. The government would then chip in to bring payments down further, to no more than 31 percent of the borrower’s monthly income. In lowering the payment, the servicer would first reduce the interest rate to as low as 2 percent. If that’s not enough to hit the 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that’s still not enough, the servicer would forebear loan principal at no interest.” 

3.  The plan would then encourage loan servicer participation by providing cash incentives:  “To encourage participation, servicers will be paid $1,000 for each modification and will get an additional $1,000 payout each year for as many as three years, as long as the borrower continues making payments. Borrowers, meanwhile, can get up to $1,000 knocked off the principal of their loan each year for as many as five years if they make their payments on time. Neither party can receive the cash incentives until the modified loan payments have been made for at least three months.”

4.  The plan would only apply to those under financial hardship.  Only owner-occupied residences with an outstanding balance of $729,750 or lower would be eligible.  (Sorry, no speculators.)

5.  The plan will require the loan modification to meet the net present value test.  What this means is that the lenders would compare the expected cash flow of the proposed modified loan with the expected cash flow of the loan unmodified.  If the modified loan would create more cash flow, then the loan will be modified and or restructured. 

6.  The plan will offer loan servicers with incentives to extinguish second lienslike home equity lines of credit. 

7.  The plan may or may not work.  (Not the most satisfying conclusion, I know).  

2008_05_07_-_Baltimore_-_Bank_of_America_1Please refer to the full US News and World Report  article by Luke Mullins here