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FTC Issues Notice of Proposed Rulemaking on Mortgage Assistance Relief Services

January 1, 0001

 

Executive Summary

On February 4, 2010, the Federal Trade Commission ("FTC" or "Commission") released a Notice of Proposed Rulemaking ("NPRM") seeking comments on a proposed rule ("proposed Rule") regulating the practices of for-profit "mortgage assistance relief service" providers. The proposed Rule would, among other things, (1) prohibit providers of mortgage assistance relief services from making false or misleading representations; (2) ban collection of advance fees by these providers; (3) mandate disclosure of specific information about these providers and their services; (4) prohibit persons from providing substantial assistance or support to providers they know or consciously avoid knowing are engaged in a violation of the Rule; and (5) establish certain recordkeeping and compliance requirements.

The proposed Rule does not extend to any entity outside the Commission's jurisdiction under the FTC Act and thus does not apply to banks, thrifts, and federal credit unions. It also purports to exclude from its coverage mortgage investors and servicers, and in certain circumstances their agents as well. Indeed, the FTC has now stated that it intends to promulgate a separate rule governing mortgage servicers in the near future, thus underscoring its intent to focus here on the narrow category of for-profit firms offering "mortgage rescue" services – a business segment in which fraud allegations have been common.

Nonetheless, given the complexity of the structure of the mortgage market – a market in which servicers often engage agents for various purposes, and in which servicing rights are sometimes delegated to sub-servicers and special servicers – there is inherent ambiguity in the proposed Rule's attempt to distinguish between servicers (which are generally exempt) and agents of servicers (which are sometimes exempt and sometimes not exempt, depending on the nature of their activities and of their compensation arrangement). For example, as explained below, while mortgage investors and servicers are unconditionally excluded from the definition of "mortgage assistance relief provider," their agents conducting activities on their behalf are only exempt if they do not demand or collect consideration from consumers for the agents' benefit. Whether this language would provide an exemption for sub-servicers who retain late fees as part of their compensation, or for agents such as property inspectors or providers of broker-price opinions whose fees are passed directly through to borrowers, is not at all clear from the text of the proposed Rule. These kinds of ambiguities in the proposed Rule (and their broader implications, discussed at the end of this document) call for careful study by mortgage industry participants, who now have the opportunity to comment on the proposed Rule before a final version is adopted by the Commission.

The proposed Rule follows an Advance Notice of Proposed Rulemaking ("ANPR") on Mortgage Assistance Relief Services issued on June 1, 2009, and reflects the Commission's review of the commentary received from various law enforcement, industry, and consumer protection interest groups. The currently proposed Rule is open for public comment for 45 days with the comment period set to expire on March 29, 2010.

An overview of the proposed Rule and suggested areas for industry comment follow.

Definitions and the Scope of the Proposed Rule

The core focus of the proposed Rule is on Mortgage Assistance Relief Service Providers ("MARS providers" or "providers"), defined as any person that provides, offers to provide, or arranges for others to provide, any mortgage assistance relief service.[1] Mortgage assistance relief service is defined in significant detail,[2] and the NPRM summarizes it as any fee-based service, plan or program that is represented, expressly or by implication, to assist or attempt to assist the consumer with negotiating a modification of any term of a loan or obtaining other types of relief to avoid delinquency or foreclosure. The key proscriptions of the proposed Rule are designed for the benefit of borrowers of "dwelling loans" where dwelling means a residential structure of four or fewer units used primarily for personal, family, or household purposes, and individual condominium units, cooperative units, mobile homes, and trailers if used as a residence.[3] The term "MARS provider" specifically excludes:

  • The dwelling loan holder,[4] or its agent, provided that such agent does not claim, demand, charge, collect or receive any money or other valuable consideration from the consumer for the agent's benefit;
  • The servicer of a dwelling loan, or its agent, provided that such agent does not claim, demand, charge, collect or receive any money or other valuable consideration from the consumer for the agent's benefit; and
  • Any nonprofit, bank, thrift, federal credit union, or other person specifically excluded from the FTC's jurisdiction pursuant to 15 U.S.C. §§ 44 and 45(a)(2).[5]

The term "servicer" under the proposed Rule means the person responsible for receiving any scheduled periodic payments from a consumer pursuant to the terms of any dwelling loan, including amounts for escrow accounts under Section 10 of the Real Estate Settlement Procedures Act, and making the payments of principal and interest and such other payments with respect to the amounts received from the consumer as may be required pursuant to the terms of the mortgage servicing loan documents or servicing contract.[6]

Prohibitions

The proposed Rule prohibits certain claims and misrepresentations by MARS providers, bars collection of advance payments by providers, prohibits persons from providing substantial assistance or support to MARS providers when the person knows or consciously avoids knowing that the provider is engaged in unlawful acts or practices, and makes it a violation to attempt to obtain a waiver from consumers of the protections of the proposed Rule.

Prohibited Statements and Misrepresentations:

The proposed Rule prohibits MARS providers from instructing consumers to stop communicating with their lenders or servicers. MARS providers also are prohibited from making misrepresentations of any material aspect of their services, including misrepresentations concerning:

  • The likelihood and time of providing services or obtaining results;
  • Provider's affiliation with public or private entities;
  • The consumer's payment and other obligations under the existing dwelling loans;
  • Provider's refund and cancellation policies; and
  • The completion of promised services.[7]

Attorneys licensed to practice law in the state in which the consumer resides are exempted from this provision.[8]

The Commission observed that it considers the prohibited misrepresentations to be deceptive practices within the meaning of Section 5 of the FTC Act.

Ban on Advance Payments:

The proposed Rule bans MARS providers from requiring that consumers pay in advance for their services until the provider

(1) has achieved all of the results that the provider represented that the service will achieve consistent with the consumers' reasonable expectations; and

(2) provides the consumer with documentation of such achieved results.[9]

The NPRM explains that this prohibition extends to any attempts to charge piecemeal. No fees for any proposed service or its components may be charged until all of the results promised are delivered. The Commission concluded that even general efficacy claims promising no more than some undefined help with a home mortgage will likely be construed as creating an expectation of a substantial beneficial result. The Commission will not allow evasion of this prohibition through general assistance offers to avoid making explicit claims to provide specific relief-related services. For example, a general assistance offer, such as a review of a consumer's loan documents, will be construed as promising to deliver the ultimate result for which the services are accepted.[10]

In cases in which the provider has promised to negotiate, obtain, or arrange dwelling loan modification, the provider may not request or receive any payments for services until it has:

(1) obtained a mortgage loan modification; and

(2) provided the consumer with documentation of the mortgage loan modification in the form of a written offer from the dwelling loan holder or servicer to the consumer.[11]

The Commission believes that a promise of loan modification assistance implies to reasonable consumers that they will receive a substantial reduction in their mortgage obligation for a meaningful period of time. Thus, a mortgage loan modification is defined as a contractual change to one or more terms of an existing dwelling loan that substantially reduces the consumer's scheduled periodic payments, where the change is

(1) permanent for a period of five years or more; or

(2) will become permanent for a period of five years or more once the consumer successfully completes a trial period of three months or less.[12]

The NPRM specifically admonishes against recommending various repayment and forbearance plans as substitutes for the promised loan modification because, in the Commission's view, the former tends to increase the amount of payments by consumers. The Commission opines that under the proposed Rule, the loan modification must reduce the consumer's scheduled periodic payment, and that reduction must be substantial, i.e., a meaningful reduction that makes the loan affordable for the consumer.[13]

The Commission also intends that the documentation required by the proposed Rule be the most comprehensive written instrument memorializing the dwelling loan holder's agreement to offer the represented concession to the consumer. In case of loan modifications, the required documentation is a written offer from the dwelling loan holder or servicer to the consumer. A violation of the advance payment ban will be deemed an unfair act or practice under the FTC Act.

Attorneys licensed in the state of the consumer's residence are exempt from the advance payment ban if the attorney complies with all applicable state laws, including licensing regulations, in connection with preparing or filing a bankruptcy petition or other document in a bankruptcy proceeding or any document to be filed in connection with a court or administrative proceeding.[14]

Assisting and Facilitating:

It is a violation of the proposed Rule for a person to provide substantial assistance or support to any MARS provider when that person knows or consciously avoids knowing that the provider is engaged in any act or practice that violates the proposed Rule.[15] According to the NPRM, the proposed Rule intends to exclude from its scope entities that have no reasonable way of knowing that the providers are engaged in violative conduct, but would extend to situations when enough facts suggest an inference of deliberate ignorance. To come within the purview of the Rule, the assistance must be substantial, i.e., more than casual or incidental. The NPRM states that covered activities may include providing consumer leads, contact lists, advertisements, or promotional materials, and the support from payment processors, and other entities contributing essential backroom operations.[16]

Waiver:

Attempts by any person to obtain a consumer waiver from any of the protections of the proposed Rule is a violation of the Rule.

Disclosure, Record-Keeping and Compliance Requirements

Disclosure:

Section 322.4 of the proposed Rule requires all MARS providers to disclose clearly and prominently[17] in all of their commercial communications with consumers that they are a for-profit business not associated with the government, and that neither the government nor the lender has approved their offer of services. In addition, all communications by MARS providers directed at a specific consumer prior to the consumer's entering into an agreement for their services must be accompanied with the following clear and prominent disclosures:

(1) The provider is a for-profit business not associated with the government, and neither the government nor the consumer's lender endorses its service;

(2) The total amount consumers will have to pay to purchase, receive, and use the service; and

(3) Even if consumers buy the provider's service, there is no guarantee that their lender will agree to change their loan terms.[18]

Record-Keeping and Compliance:

The proposed Rule imposes a 24-month record-keeping requirement on MARS providers. The records may be kept in any form and in the same manner, format, or place as they are kept in the ordinary course of business.[19] In addition, MARS providers are required to take reasonable steps to monitor and ensure that all their employees and contractors comply with the Rule. In particular, providers must:

  • Conduct random, blind tape recordings of oral representations made by persons in sales or other customer service functions;
  • Establish a procedure for receiving and responding to consumer complaints; and
  • Investigate promptly and fully any consumer complaints received and take corrective action when noncompliance with the proposed Rule is identified.[20]

 

Commission's Views Regarding Some of the Received Comments

In response to its June 1, 2009 ANPR, the Commission has received 46 comments from state attorneys general, federal banking agencies, consumer advocacy groups, mortgage lenders, brokers, and nonprofit and for-profit MARS providers. According to the Commission, the institutional comments it received overwhelmingly supported the issuance of a rule governing the activities of MARS providers, including particularly support from state attorneys general and consumer and community organizations for a prohibition on the collection of advance fees by MARS providers before the promised services have been delivered.

The Commission also heeded the industry arguments to exempt loan servicers from the proposed Rule in light of the commentary explaining that servicers generally do not engage in the deceptive and abusive practices targeted by the proposed Rule; they typically do not charge significant up-front fees for working with consumers; and that application of the Rule to servicers would restrict mortgage loan holders' and servicers' ability to inform consumers of loss mitigation options and to assist them in providing relief. The Commission, however, seeks comments in the current comment period regarding the propriety of the exemption, including any information on whether servicers engage in a kind of conduct that warrants their coverage under the proposed Rule.

The Commission agreed with the concern of some law enforcement and consumer groups that allowing MARS providers to request advance fees and place them in escrow accounts until the completion of their services could result in improper access to the escrow funds. On this issue as well, however, the Commission is seeking comment on whether escrow accounts protect consumers adequately in other types of financial transactions, whether such escrows could be used in the context of mortgage assistance relief services and, if so, what restrictions or limitations should be placed on their use.

The Commission also took note of the fact that most of the public comments recommended that the Commission not grant a broad exemption for attorneys in light of their past record of engaging in deceptive or unfair practices related to mortgage assistance relief services. As a result, the proposed Rule provides only limited, targeted exemptions for attorneys from the communications-related and advance fee prohibitions.

The Implications

One of the more critical issues arising from the proposed Rule is whether it sufficiently insulates mortgage investors and servicers from its application. Section 322.2(i)'s unconditional exemption of mortgage investors and servicers from the Rule's provisions and its prohibition on the collection of money or consideration from consumers as a basis for qualification for the exemption probably will ensure that the Rule does not conflict with federal program incentive payments, such as those provided by the Home Affordable Modification Program. Nevertheless, the provision of Section 322.2(i) that agents of mortgage investors and servicers are not MARS providers if they do not charge any money or other valuable consideration for the agents' benefit may expose a non-trivial part of investors' and servicers' activities to the application of the Rule. Some mortgage investors or servicers outsource some of their mortgage-related activities to third parties. Such agents may be entitled to a percentage of payments collected from consumers as part of their business arrangement with mortgage investors or servicers (as, for instance, is done by sub-servicers who retain the collected late fees), or they may pass their fees directly through to consumers (as is the practice among some property inspectors and providers of broker-price opinions). Yet, such billing or collection activities by agents could bring them within the purview of the proposed Rule.

It is also unclear why agents of servicers and of mortgage investors should not be considered to be servicers too. It is possible that such "sub-servicers" may not always meet Section 232.2(k)'s definition of receiving payments from consumers "pursuant to the terms of the mortgage servicing loan documents or servicing contract." Yet, an absence of a definition of the terms "servicing loan documents" and "servicing contract" does not even necessarily dictate such an outcome as the agent agreements with servicers or investors may be plausibly construed to constitute "servicing loan documents" or "servicing contracts." More importantly, assuming arguendo that agents do not meet the proposed Rule's definition for a servicer, the policies underlying the present rulemaking do not support the distinction between the treatment of loan servicers and investors on the one hand and their agents on the other. If the animating principle of the proposed Rule is that practices like charging advance fees are suspect, it should be clarified that neither servicers/mortgage investors nor their agents engage in them. If collection of late fees and similar charges by agents is what explains the Commission's more stringent treatment of agents under the Rule, the distinction is again unwarranted because mortgage investors and services collect such fees as well and there is no record of impropriety about the practice.

Mortgage investors and servicers should consider filing a comment to resolve these ambiguities and to develop a record in support of the exemption. More pertinently for loan services, the Commission's ambivalence regarding the propriety of the servicer exemption and its specific request for comments regarding the types of services offered and fees collected by servicers underscores the need for industry comments to make a convincing case for why the adopted Rule should contain an unequivocal exemption for servicers.

The proposed Rule also includes an unusually expansive concept of aiding-and-abetting liability. While many consumer protection regimes permit liability claims to be asserted against persons who knowingly assist or facilitate a primary wrongdoer, the proposed Rule expands the scope of aiding-and-abetting liability to include those who help a third party in violation of its provisions and "consciously avoid[] knowing" that the unlawful conduct is occurring. Depending on how it is interpreted in individual cases, this "willful blindness" standard could substantially expand the scope of aiding-and-abetting liability beyond its traditional bounds, and potentially could even be asserted to encompass unknowing (but "consciously" unknowing) acts by servicers, who otherwise are supposed to be exempt from the proposed Rule altogether. In addition, in laying out the rationale for the assisting-and-facilitating provision, the Commission specifically mentioned such service providers as lead generators and payment processors.[21] Some of the questions remaining are how the Rule's provisions will affect legitimate providers of such services and how broadly the Commission will interpret its "no reasonable way of knowing" safe harbor.[22] Will, for instance, credit reporting agencies be considered lead generators under certain circumstances, and how will the knowledge element be construed with respect to them? By the same token, will payment processing systems be charged with knowledge of MARS provider's misconduct for merely processing provider payments when the consumer's prior payment history suggests economic distress?

Banks and other financial services providers also should consider if they would benefit from a change in the proposed Rule that would allow MARS providers to request advance fees and place them in escrow given that escrow servicing may be a source of revenue. The Commission has specifically requested comments on this subject, and industry views will be important.

Finally, the question of whether there is a private cause of action to enforce the proposed Rule is not expressly addressed, although it appears that a private cause of action is not available in light of the fact that only the Commission and state law enforcement authorities are given express authority to bring actions.[23] Nevertheless, because the Rule would be enforceable under some state consumer protection statutes, a private cause of action may be a distinct possibility.

The Commission also has provided a long list of specific questions for comment. Some of the more relevant ones follow:

  • How would the proposed Rule affect the provision of different types of mortgage assistance relief services?
  • Would the proposed Rule encourage or discourage financial advisors, financial planners, and other providers of financial services from becoming MARS providers or adding MARS to their existing lines of business? Does the proposed Rule restrict business practices to an extent that it creates barriers for financial service providers' entry into the MARS market?
  • What changes, if any, should be made to the proposed Rule to decrease costs to industry or consumers?
  • Should any entities covered by the definition of "mortgage assistance relief service provider" in proposed Section 322.2(i) be excluded or exempted from the definition? Specifically, should persons providing only incidental or de minimis mortgage relief assistance be excluded from the definition of MARS?
  • What are the costs to MARS providers if they are not allowed to charge advance fees?
  • Are some alternatives to an advance fee ban superior to it, e.g., 1) limits or caps on advance fees instead of an outright ban; 2) independent third-party escrow accounts to hold advance fees until MARS providers achieve the results promised; 3) a consumer right to rescission as a substitute or supplement to the advance fee ban; 4) allowing MARS providers to charge a small up-front fee ($50 - $100) or collect fees as they perform preliminary services prior to obtaining the promised result in proportion to the services delivered.
  • Are there entities other than attorneys that should be exempt from the advance fee ban?

These and similar issues warrant the submission of comments during the comment period or engaging in other forms of dialogue with the Commission to advance the industry views on these important aspects of the proposed Rule.

The text of the NPRM and the proposed Rule are available at http://www.ftc.gov/os/2010/02/100204marsfrn.pdf.





[1] Proposed Rule § 322.2(i).

[2] See Proposed Rule § 322.2(h).

[3] Proposed Rule § 322.2(d).

[4] "Dwelling loan holder" is defined as a person who holds a loan secured by a dwelling. Proposed Rule § 322.2(f). It is more commonly referred to in the industry as "mortgage investor," and the two terms will be used here interchangeably.

[5] Proposed Rule § 322.2(i)(1)-(3).

[6] Proposed Rule § 322.2(k).

[7] Proposed Rule § 322.3.

[8] Proposed Rule § 322.7(a).

[9] Proposed Rule § 322.5(a).

[10] See NPRM at 53-58.

[11] Proposed Rule § 322.5(b).

[12] Proposed Rule § 322.5(c).

[13] See NPRM at 56-57.

[14] Proposed Rule § 322.7(b).

[15] Proposed Rule § 322.6.

[16] See NPRM at 61-62, 66-67.

[17] See Proposed Rule § 322.2(c) for the definition of the specific technical requirements for clarity and prominence for various communication media.

[18] Proposed Rule § 322.4.

[19] Proposed Rule § 322.9(a) and (c).

[20] Proposed Rule § 322.9(b).

[21] See NPRM at 61-62.

[22] See id. at 67.

[23] See Credit Card Accountability and Responsibility and Disclosure Act of 2009, Pub. L. 111-24, 123 Stat. 1734, §511(a); Proposed Rule § 322.10.