WASHINGTON - The pitches are on TV and the Internet and are in the mail: official-looking communications with insignias and letterheads that look vaguely like those used by the Treasury, IRS, and other federal agencies.
The names resemble federal foreclosure-intervention programs, such as Making Home Affordable or Home Affordable Modification.
They claim they can persuade lenders to cut monthly payments, forgive all penalties, slash interest rates, and even get loan balances reduced.
If the lender won't cooperate, they say, they'll perform "forensic audits" on the mortgage and persuade a court to cancel the entire loan transaction because of technical mistakes in the paperwork.
But these actions won't begin without an up-front payment.
The Federal Trade Commission is stepping in: Under rules outlined Nov. 19, the agency plans to ban virtually all up-front payments, institute mandatory disclosure rules, and clamp new restrictions on lawyers who participate in mortgage modification schemes.
Companies offering mortgage relief will have to contact the lender or servicer and present a written description of the key changes to the mortgage terms that the note holder is willing to make before any the companies can collect any money.
Modification companies also will be required to make clear that they have no connection with any government agencies or program and that borrowers are free to reject any offer from the lender, with no requirement to pay a fee.
Modification firms can no longer instruct clients to stop communicating with their lenders or servicers.
The FTC estimates that bogus modification companies have stolen millions from unwary
homeowners in the past two years and that the number of abusive schemes has jumped since the federal government began efforts to create legitimate foreclosure relief programs. The agency has brought more than 30 cases against these operations but until now has had no way to control advance-fee requirements.
When that portion of the new rule takes effect Jan. 31, the agency will be able to proceed against any firm that collects up-front fees without obtaining the required written proposals at no charge from lenders.
The only exception will be for lawyers, who typically require retainers before they begin negotiating on a client's behalf. They will be permitted to collect retainer fees for modification efforts but only if they deposit the money into "client trust accounts" under state bar regulations.
Joel Winston, the agency's associate director of financial practices and a lawyer himself, said "a disappointingly high percentage of fraudsters [in FTC loan modification cases] have been lawyers."
Fraudster lawyers "won't be able to fly under the radar anymore," he said. "Now they are going to have the federal government to contend with - and we will be looking for them."
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