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FTC Takes Steps Against Foreclosure Fraud

The Federal Trade Commission (FTC) is set to lay down new rules that will discourage fraudulent loan modification, short sale, and foreclosure prevention companies from operating throughout the country.

One of the main features of the FTC’s plan is the prevention of upfront fees, a telltale sign of mortgage fraud. The Mortgage Assistance Relief Services (MARS) prohibits companies from charging any fees until the borrower has a written offer from the bank, and advance fees to attorneys must be held in escrow.

The rule is expected to put most scammers out of business, as they usually rely on upfront payments for profit. The requirement that they show results before collecting payment will make it much harder for them to trick borrowers out of their money.

Some experts complain that the FTC’s efforts lack strength compared to regulations already in place in some states. For example, laws in Maryland, Minnesota, and Illinois require companies who sell distressed homes shortly after acquiring them have to give back a certain percentage of the profits to the previous owners.

In addition to the upfront fee ban, the FTC will also take steps to prevent companies from publishing false or misleading information, require them to disclose key details about their services, and keep track of compliance and record-keeping practices.

The MARS regulations apply to non-profit organizations whose service consists of negotiating mortgage workouts, such as loan modifications and short sales, with lenders for a specified fee.

Lawyers are exempt from the regulations provided they are in active practice, hold the necessary licenses in the state where the borrower resides or the home is located, and are working in compliance with attorney conduct rules.

The ban on advance fees will go into effect on January 31, 2011. All the other provisions will apply starting December 29,2010.