Proposed FTC Rule Bans Up-Front Fees for Modifications

California law already prohibits upfront fees for loan modification services. Now the Federal Trade Commission has prposed a similar rule.

The Federal Trade Commission has proposed a new rule that would prohibit third parties, including loan modification specialists and loss mitigation attorneys, from collecting payment for foreclosure prevention services until after they obtain a documented offer from a lender or servicer for a modification or other form of mortgage relief.

Interestingly, the rule would apply to attorneys as well, with a limited exception for attorneys representing a consumer in a bankruptcy or other legal proceeding.

"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."

The FTC has brought 28 cases against companies suspected of foreclosure rescue and mortgage modification scams, and state and federal law enforcement partners have brought hundreds more. According to the agency, generally these cases charged that companies do not provide the services they promise and that they misrepresent their affiliation with the government and government housing assistance programs, including the Making Home Affordable program.

Apparently, this has become a big enough problem that the FTC in Washington has heard about it.