Here comes BIG government trying to “help” and save us from ourselves again!! – Jason Hartman
Formally, it’s called Title 16 – Code of Federal Regulations, Part 322, for Mortgage Assistance Relief Services. Informally, it’s called MARS. And for mortgage brokers engaged in helping homeowners obtain loan modifications, it’s pretty much the end of the line… nationwide.
Attorneys, however, are largely exempted from the new rule.
The Final Rule therefore permits attorneys who provide MARS as part of their provision of legal services to collect advance fees if, in compliance with applicable state laws and licensing regulations, the attorney deposits such payments into a client trust account and draws on them as work is performed.
In fact, in California specifically, where there is already a state law governing advance fees, known as SB 94, lawyers will see very little change when the new FTC rule takes effect at the end of this calendar year. The new rule allows lawyers to accept an advance fee, but mandates that the amounts be placed in the attorney’s trust account and only withdrawn as earned, and that does represent a change, although I would think, not an insurmountable one.
The California State Bar has interpreted SB 94 to prohibit the use of trust accounts in conjunction with the acceptance of advance fees as related to providing loan modification services, and it doesn’t appear that the FTC’s new rule will do anything to preempt that interpretation.
Actually, it gets a bit complicated. The FTC’s new rule says the exemption to the rule for attorneys is subject to state laws, and the State Bar’s interpretation of SB 94 is not actually a law, but with the penalty for non-compliance being a criminal matter, no one has tested the Bar’s interpretation in a court of law. So, for now… suffice it to say that attorneys will continue to practice in this area as they have been since SB 94 was signed into law on October 12, 2009.
As far as mortgage and real estate brokers in California are concerned, the new FTC rule just makes a bad situation much worse. There aren’t many real estate and mortgage professionals offering to assist consumers with loan modifications, as SB 94 made it illegal to accept payment for services until a loan modification has been obtained, or the homeowner is formally denied by the lender, I suppose, and that can mean not getting paid for an awful lot of work for up to and even beyond a year in some cases.
As you might imagine, that’s a pretty effective deterrent to California’s mortgage and real estate brokers being that business, but the new rule goes even further, and applies to all non-attorneys nationwide, prohibiting payment for services until the homeowner receives a written offer to modify his or her loan from the lender or servicer, and the homeowner ACCEPTS the deal. Under the new rule, if the homeowner says “no thanks,” the mortgage or real estate broker gets nothing.
I’m sorry, but it’s kind of funny when you think about it. Since no one in this country can predict what any of the banks are going to do tomorrow, let alone six months or a year from now, and when you consider the percentage of homeowners that are likely to be dissatisfied with the bank’s offer and therefore say no in the end, and then factor in the percentage of homeowners who won’t or can’t pay the bill at the end of the process for whatever reason… the only way the business makes any sense is if you were to charge something like $100,000 for the modification and then be ready to file a law suit to collect, and perhaps… at best… end up with a lien on a property that is, by definition, seriously underwater. Yeah baby… sign me up for that on Career Day.
In the summary to the Commission’s Final Rule and Statement of Basis and Purpose, it states that it governs “the practices of for-profit companies that, in exchange for a fee, offer to work on behalf of consumers to help them obtain modifications to the terms of mortgage loans or to avoid foreclosure on those loans.”
It also states that, among other things, the Final Rule:
1. Prohibits providers of such mortgage assistance relief services from making false or misleading claims;
2. Mandates that providers disclose certain information about these services;
3. Bars the collection of advance fees for these services;
4. Prohibits anyone from providing substantial assistance or support to another they know or consciously avoid knowing is engaged in a violation of the Rule;
5. And imposes recordkeeping and compliance requirements.
The FTC’s Final Rule will go into effect on December 29, 2010, with the exception of § 322.5, which is the section that bars the collection of advance fees, or as described in the text of the new rule: Prohibition on Collection of Advance Fees and Related Disclosures. That aspect of the Final Rule doesn’t take effect until a month later on January 31, 2011.
I read the 180-page document three times… see what I go through… and as I read, I got the impression that the rationale behind the advance fee ban not becoming effective until a month after the rest of the rule takes effect is to provide companies with a little extra time to comply with the various requirements, such as the new disclosure and record keeping requirements. Then towards the very end, I found this:
The Commission is providing MARS providers an additional month after the effective date of the other provisions of the Rule because compliance with the advance fee ban may entail substantial adjustments to many providers’ operations.
This is hysterical, in terms of its real life impact, because I cannot imagine even a single non-attorney staying in business under the new rule. As a result, the only impact of the extra month is likely to be an extra month for scammers to rip-off homeowners. But I digress.
Look, I’ve met two of the key guys at the FTC related to this issue, Tom Pahl and Joel Winston. In January of 2010, I was a speaker, alongside Tom Pahl of the FTC, on a panel at the American Bar Association’s Conference on Consumer Financial Services. And I’ve spoken with them on several occasions post-conference. They’re not bad guys. They’re trying to help prevent homeowners from being ripped off primarily by unscrupulous mortgage brokers whom, they would say, as a group have proven themselves to be oftentimes, shall we say, less-than-trustworthy.
They don’t exactly have a rock solid grasp on exactly what’s happening in real life in communities throughout this country, they don’t get to see the “good guys” that are undeniably out there, and they don’t have unlimited resources that can be directed at solving the problem. Also, in my view anyway, they’re probably a bit too influenced by the financial industry’s influence peddlers… but nowadays, who in Washington D.C. isn’t?
So, when faced with the problem of creating a rule to protect distressed homeowners from being ripped off, they did what they could do… stopped the ability for non-attorneys to get paid until the homeowner is happy and all warm and safe, tucked in bed. It’s a shame for the legitimate providers of loan modifications services who have without question helped many thousands of homeowners get loans modified. But, at the end of the rule making process, the FTC accepted this loss in favor of protecting homeowners from the other kind of loss… getting scammed by someone who promises and then delivers nothing.
And, even though I hate to see the number of legitimate sources that homeowners have to turn to for help with loan modifications decrease, I hate the idea of desperate homeowners getting conned out of thousands of dollars even more.
At least the Final Rule does not apply retroactively, so the advance fee ban doesn’t apply to contracts with homeowners executed prior to the effective date. California’s SB 94 was retroactive and it was a huge problem for many in the industry.
I couldn’t find the penalty for noncompliance with the new rule anywhere in the 180-page document, so I called Julie Greenfield, who is both a close friend of mine, and a highly experienced mortgage banking compliance attorney who now represents homeowners seeking modification of loans. In response, Julie sent me the following: “Under the FTC Act, violations of a final FTC Order can impose a civil liability of $11,000 per day.”
That’s $11,000 a day that you are found to be out of compliance with the new rule… that is to say that each day is considered a separate violation and carries its own $11,000 fine. Out of compliance for a month… that’ll be $330,000, thank you very much.
So, what else is in the 180 pages that describing the new Final Rule?
Well, let’s see… one HUGE thing is that lead generation companies are pretty much cooked too.
Federal courts have held that providing knowing substantial assistance to others who engaged in unlawful conduct is an unfair practice.
And that means that if you provide leads to a company that you know or should know… or have consciously avoided knowing… is breaking the rule, you can be charged just like if you were breaking the rule yourself. The rule speaks to this issue extensively, so I would think that it’s clearly an area the FTC intends to enforce.
F. Section 322.6: Substantial Assistance or Support
The proposed rule prohibited any person within the FTC’s jurisdiction under the FTC Act from providing “substantial assistance or support” to any MARS provider if the person “knows or consciously avoids knowing that the provider is engaged in any act or practice that violates this rule.”
Several commenters asserted that such a measure would prevent MARS providers from using “lead generators” or mortgage brokers to supply contact information for potential customers, thus making it more difficult for deceptive MARS providers to operate. For example, a consumer group explained that such a provision would be valuable because entities that assist and facilitate fraudulent MARS providers often receive a substantial portion of the funds obtained from consumers for mortgage assistance relief services.367
1. Substantial Assistance
Many MARS providers rely on, or work in conjunction with, other entities to advertise their services and operate their businesses. The Final Rule provision applies to substantial – i.e., more than casual or incidental – assistance or support that such entities provide to MARS providers.
Substantial assistance could include such critical support functions as lead generation, telemarketing and other marketing support, payment processing, back-end handling of consumer files, and customer referrals. A common example of those who provide substantial assistance to MARS providers are so- called “lead generators.”
Lead generators obtain the contact information of consumers, i.e. leads, who have indicated interest in MARS by visiting the lead generator’s website in response to advertisements disseminated either by the lead generators themselves, or through a network of Internet advertisers. Lead generators then sell the consumer information to MARS providers.
The Commission retains the “knows or consciously avoids knowing” standard in the Final Rule.
… the ‘conscious avoidance’ standard is intended to capture the situation where actual knowledge cannot be proven, but there are facts and evidence that support an inference of deliberate ignorance on the part of a person that [the wrongdoer] is engaged in an act or practice that violates [the Rule].”379
If those who provide substantial assistance or support to MARS providers receive or become aware of information that reasonably calls into question the legality of the MARS provider’s practices, they will be liable if they continue to assist and support that provider. In general, the determination of whether a person had the requisite knowledge will depend on a variety of factors such as the person’s relationship to the MARS provider, the nature and extent of the person’s degree of involvement in the operations of the MARS provider, and the nature of the provider’s violations.
2. The Knowledge Standard
Under the proposed rule, those who provided substantial assistance to MARS providers would be liable if they knew or consciously avoided knowing that the providers were violating the rule.
Lead generators themselves often may also qualify as “mortgage assistance relief service providers” and thus be liable for primary violations of the Rule, because many of these entities “arrange for others to provide” MARS. For example, if a lead generator disseminates advertisements containing misrepresentations to entice consumers to provide their contact information, and then passes that information on to another entity that will provide MARS, the lead generator would likely be in violation of § 322.3 of the Final Rule.
Additionally, advertising affiliate network companies may serve as intermediaries between advertisers and lead generator websites. Such companies also could be held liable if they knowingly provide substantial assistance to MARS providers who violate the Rule.
So, if you’re in the business of generating leads for a company offering loan modification services, you’d better make sure they’re not breaking the new rule, because just saying “I didn’t know” is not going to get you very far in terms of a defense should the fit hit the shan.
And what else?
This may sound terrible, but one positive thing for those that provide loan modification services, I suppose, is that the FTC declined to place caps on amounts charged for services, saying:
… the Commission declines to set caps on the fees MARS providers can receive. While the FTC concludes that the collection of advance fees by MARS providers is an unfair act or practice, it has made no such determination about the amount of fees charged. In general, the competitive market should establish the prices MARS providers charge,351 and the Commission’s role is to remove obstacles to consumers making the informed choices that are necessary to a properly functioning market.
I know, some of you may be thinking that placing caps on fees would be a good thing, but I’m not at all sure about that. The market is almost always much better at setting the costs of things, and if the caps didn’t allow lawyers to provide the service, they wouldn’t… and homeowners would be on their own… not a good thing. Also, it costs more to do business in some states and less in others, so caps would have been difficult to establish correctly.
There’s also a whole lot about how the FTC reached the conclusions they did… what the arguments were, for and against the various points, but I’m not going to bother going into all that mostly because I just don’t see the point. I mean, why should I bother describing the new record keeping requirements for non-attorneys when I can’t envision any non-attorneys even being in the business after this coming New Years’ Day. And attorneys are exempted from those new record keeping requirements anyway.
What I will do is offer what I considered to be a few of the most important paragraphs from the 180-page document, and provide a link so you can read it for yourself, if you are so inclined.
So, here are some of the paragraphs you might want to read… and you’ll find Title 16 – Code of Federal Regulations, Part 322, for Mortgage Assistance Relief Services in its entirety by clicking on that blue type.
And here are some of the highlights, or lowlights, as the case may be:
The Final Rule, however, requires that payment be contingent upon consumer acceptance of results the provider presents.337
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Original Post: Here
