The Federal Government’s Move to Protect Homeowners

In light of the recent spike in fraudulent loan modification companies and scams targeting desperate and distressed homeowners, the Federal Trade Commission has made a move to protect these very homeowners. This new rule that is being proposed would forbid companies from charging fees up-front for the services that they render. With this rule, companies would have to wait until the services are provided before they could charge or collect any payments.

As many in the mortgage industry are aware, these loan modification scams are slickly worded and prey on the urgency that is already inherent in struggling homeowners. These fraudulent businesses then require their fees and payments up-front, usually thousands of dollars, which can ultimately wipe out a homeowner’s savings and their last bastion of hope to save their home.

FTC Chairman Jon Leibowitz stated that, ‘Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent companies that don’t provide what they promise.’ He went on to explain that this proposed rule would eliminate the opportunity for these companies to ‘take the money and run.’

The perfect storm of historic levels of consumer debt, the drop in the housing market, and increased unemployment have all contributed to mortgage loan delinquency and foreclosure. With these factors all pressing down on homeowners, they have opened the doorway to a host of companies claiming to be able to help, for a fee, to modify home loans as well as promising other relief options. There are hundreds of fraud cases being brought at the local, state, and federal level but they will do little to help the homeowners who are facing these difficult circumstances. This new rule is aimed at avoiding these ugly situations.

The FTC is seeking public input from a variety of individuals, from attorneys and other industry professionals on this rule that would require mortgage relief companies to provide the services first before being able to collect payment. According to this new rule proposal, these loan modification companies would not be able to collect fees until they can show documentation of an offer from a mortgage lender that lives up to the promises made to the consumer.

Treasury Secretary Timothy Geithner praised the FTC’s move to regulate this part of the mortgage industry, stating, “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.”

This new rule would also prohibit providers from informing their clients that they need to cease any and all direct communications with their lenders or mortgage servicers. They will no longer be entitled to mislead consumers about a variety of other topics, as well, including the likelihood that they can achieve the desired results, refund and cancellation policies, their affiliation with public or private entities, or payment obligations.

An additional facet of this proposed rule would demand that providers inform their clients that they are for-profit businesses. Also they will be required to inform their clients of the precise amount of their total fees as well as the fact that neither the government nor the client’s lender has approved their services.

Perhaps one of the most important aspects of this rule would require the provider to inform their clients that there is no guarantee that the lender will accept a change to the terms of the loan. This is one of the most prevalent misleading aspects of many fraudulent loan modification companies.

This new rule would apply to all for-profit companies will work with lenders for a fee on behalf of their clients in an attempt to modify a home loan or to take any other steps in an attempt to avoid foreclosure. The rule passed with a 4-0 vote and has a 45-day public comment period that will terminate on March 29, 2010.

If you have any comments to submit to this proposed rule, you can follow instructions in the Address section of the Notice located on the FTC’s website.

David Reinholtz is a professional Mortgage expert in Real Estate Industry. David is also a sales and marketing expert and trains professionals in every career field. David has personally trained tens of thousands of loan officers, mortgage brokers, real estate agents and individuals through The Close More University Seminar Series, LoanOfficerSchool.com Classes, Correspondence and On Line Learning, and countless private engagements and training events throughout the country.

David is the Founder and CEO of LoanOfficerSchool.com, an approved education provider for The Conference of State Bank Supervisors and The National Mortgage Licensing Systems’ (NMLS) required pre-licensing education and continuing education.