FTC Seeks Ban on Upfront Loan Modification Fees

Yesterday the Federal Trade Commission, in a unanimous 4-0 vote sought to protect distressed mortgage borrowers from one of the biggest sources of fraud in the loan modification business, charging homeowners upfront fees.Under the proposed rule, mortgage relief companies could only collect after providing services.

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” FTC Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

According to the Notice of Proposed Rule making, burdensome consumer debt, stubborn unemployment (down to 9.7% according to today’s figures) and a precipitous drop in the real estate market have all contributed to high rates of mortgage delinquency and foreclosure.

The home loan crisis gave birth to an instant industry of companies that offer mortgage relief to consumers threatened by foreclosure. The FTC has prosecuted 28 cases against unscrupulous operators in this field. State and federal officials are pursuing hundreds more. Many of those now offering loan mods are the same people who sold complex mortgages to people that they could neither afford nor understand.

In the pages of ForeclosureIQ.com, we have repeatedly warned borrowers against paying upfront fees. What incentive does a company have to deliver the goods, if you have already paid? If you are a distressed homeowner, free or low cost help is available from a multitude of HUD approved housing counseling agencies.   If you qualify for relief under the Obama Homeowner Affordability and Stability Plan  there is no need to pay anybody for mortgage help.

The proposed regulation also would also prohibit loan mod companies from telling borrowers to end all communication with their lenders. It would mandate that mortgage workout providers must specify:

  • How likely a borrower will get the results offered, including the fact that there is no guarantee of success.
  • Admission that the company is a for profit business, clarifying its affiliation with other public or private entities including the fact that neither the loan servicer nor government have approved the loan mod company’s actions.

“Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered,” Treasury Secretary Timothy Geithner said. “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.”

The rules would apply to for profit companies in the loan mod field. Servicers or lenders themselves would be exempt. Bankruptcy attorneys working with homeowners would have limited exemptions. Here’s the entire text of the rule.  The FTC invites the public’s reaction during 45-day public comment period for this rule change which ends March 29, 2010.

If you believe that you have already been the victim of loan mod fraud, the FTC invites you to call 1-877-FTC-HELP (1-877-382-4357) to report the perpetrator.


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