Original posted on Lexology by Jonathan Pompan and Kristalyn Loson:
On February 4, 2010, the Federal Trade Commission (“FTC” or “Commission”) issued a Notice of Proposed Rulemaking (“NPRM”), seeking comment on a proposed Rule that would regulate loan modification, foreclosure rescue, and other mortgage assistance relief (“MARS”) providers.
The proposed Rule would ban MARS providers from collecting fees prior to delivering these services, prohibit misrepresentations in the marketing of these services, and require certain affirmative disclosures about the nature and terms of the service. Significantly, the proposed Rules also would extend liability for violations to persons or companies who provide assistance or support to MARS providers that violate the proposed Rule.
The Commission invites comment from entities that would be covered under the proposed Rule as well as those with an interest in the rulemaking. The NPRM lists general questions to which the Commission seeks responses from the public, such as “what changes should be made to the proposed Rule to increase benefits to consumers and competition” and “how would the proposed Rule affect small business entities,” as well as questions about specific proposed provisions, some of which are enumerated below. Of particular note are comments requested on a jurisdictionally-based exemption for bona fide nonprofits (including bona fide nonprofit housing counselors) and a limited exemption for attorneys.
Comments are due on or before March 29, 2010.
The 2009 Omnibus Appropriations Act(1), as clarified by the Credit Card Accountability and Disclosure Act(2) (“Credit CARD Act”), gives the FTC specific rulemaking authority to prevent unfairness or deception in practices involving loan modification and foreclosure rescue services. This NPRM follows up on the Commission’s June 1, 2009 Advanced Notice of Proposed Rulemaking addressing MARS.(3)
The Commission has continued an aggressive approach in protecting consumers against the alleged deceptive practices of MARS providers. In the past two years, the Commission has filed over 28 lawsuits against entities in the industry and the proposed Rule would provide an additional basis for enforcement. States also are active in the regulation of MARS providers and state Attorneys General have investigated over 450 MARS providers, resulting in hundreds of enforcement actions.
On the same day that the NPRM was issued – February 4, 2010 – FTC Chairman Jon Leibowitz testified before the U.S. Senate Committee on Commerce Science and Transportation about the Commission’s enhanced efforts to protect consumers during the economic downturn, including initiating hundreds of cases against mortgage relief scams.
Who Is Covered by the Proposed Rule?
The proposed Rule is directed toward MARS providers and is intended to apply to “every solution that may be marketed by covered providers to financially distressed consumers as a means to avoid foreclosure or save their homes.” The proposed Rule defines “mortgage assistance relief service” to include “any service, plan or program, offered or provided in exchange for consideration on behalf of the consumer, that is represented, expressly or by implication, to assist or attempt to assist the consumer” in negotiating a modification of any term of a loan or obtain other types of relief to avoid delinquency or foreclosure.
The Commission intends the definition to include mortgage brokers to the extent that they market MARS but would generally exclude loan holders, servicers, and agents of such holders and servicers. However, the Commission does not intend the proposed Rule to apply to “bona fide loan origination or refinancing services.” In addition, the proposed Rule generally exempts loan holders and servicers and their agents. The Commission seeks comment on the scope of this exemption, including whether services have engaged in covered conduct that warrants encompassing them in the proposed Rule.
The proposed Rule would only apply to entities under FTC’s jurisdiction. Accordingly, the proposed Rule generally exempts from the definition of MARS providers any nonprofit excluded from the FTC’s jurisdiction.(4) The proposed Rule states, “The Commission intends for this exemption to include bona fide nonprofit housing counselors presently offering mortgage assistance services.” Note there is no similar express statement of exclusion for nonprofit credit counseling agencies in the FTC’s proposed Rule to amend the Telemarketing Sales Rule (“TSR”) to cover debt relief services. It should also be noted, however, that the FTC has a long history of enforcement against entities it deems to be “sham nonprofits.”
For similar reasons as the bona fide nonprofit exclusion, the reach of the proposed Rule would not cover banks, thrifts and federal credit unions, as the FTC Act places these entities outside the FTC’s jurisdiction. Although the exclusion of nonprofits (and banking entities) is a jurisdictional issue, the Commission seeks responses on the effect of these exclusions, such as whether the proposed Rule creates an incentive for forprofit entities to become nonprofits.
In addition to jurisdictional exclusions, the proposed provides a limited exemption for attorneys engaged in MARS. The NPRM states, “[t]here is no general exemption for attorneys from the requirements of the proposed Rule. The Commission, however, proposes a limited exemption for licensed attorneys’ conduct in connection with a bankruptcy case or other court proceeding to prevent foreclosure, where that conduct complies with state law, including rules regulating the practice of law.” The Commission explains that attorneys who provide such representation in bankruptcy or court proceedings would be exempt from prohibitions on advance fees, and also would be permitted to advise consumers to cease contact with their lenders. Attorneys would still be subject to the proposed Rule’s ban on misrepresentations, disclosure requirements, prohibitions on known substantial assistance, and recordkeeping requirements. The NPRM notes that these rules are designed to balance the potential value of a legal review to consumers who are trying to save their homes with the unfortunate fact that growing number of attorneys are allegedly involved in deceptive and unfair MARS activities, including serving as a front for organizations seeking to avail themselves of the attorney exemptions under various state MARS laws. In justifying the delicate balance the limited attorney exemption strives to achieve, the NPRM asks for comment on different ways the exemption could be tailored, and whether the exemption should apply to any other groups.
The proposed Rule focuses on five key areas: (1) Prohibited Representations; (2) Ban on Collection of Advance Fees; (3) Required Disclosures; (4) Liability for Substantial Assistance; and (5) Recordkeeping/ Compliance.
1. Prohibited Representations
- The proposed Rule prohibits several specific representations as deceptive or unfair, including:
- Instructing consumers to stop communications with their lenders or servicers,
- Misrepresentation of likelihood of time necessary to obtain results,
- Wrongful suggestions of affiliation with government, nonprofit housing counselors, or program, lenders or loan servicers,
- Implication of relief of payment and obligations under the existing mortgage, and
- Misrepresentation of refund and cancellation policies of the MARS provider.
2. Ban on Collection of Advance Fees
Under the proposed Rule, MARS providers would be prohibited from charging or collecting any payment from consumers until they provide a documented offer from the mortgage lender or service provider to modify mortgage terms or deliver on a similarly-promised service. This proposal takes aim at what the Treasury Secretary Timothy Geithner characterizes as “bad actors who promised to loan modifications but never delivered,” and would essentially prohibit the charging of any up-front fees or piecemeal payments. The NPRM states that typical up-front fees can be in the thousands of dollars. The results that MARS providers must achieve before requesting or collecting payment are those results which their claims cause consumers to expect or that consumers reasonably expect given the type of service sold. The NPRM specifically requests data on the costs to MARS providers if they are prohibited from charging advance fees and also seeks comments on alternatives to the advance fee prohibition.
3. Required Disclosures
Prominent and clear disclosures are required by the proposed Rule in a variety of media formats, including written, audio and video disclosures, as well as disclosures in interactive media. Specific requirements such as size, text and duration of display of the disclosures are addressed.
The subjects of the disclosures mirror the prohibited representations and include, among others, that: (1) the provider is a for-profit business and is not endorsed by either the government nor the consumer's lender; (2) the total fee the consumer will have to pay to purchase, receive and use the service; and (3) that even if the consumer purchases the service, the consumer’s lender may not agree to change their loan.
Required disclosures under the proposed Rule are to be provided in all commercial communications. The Commission admits that it does not have any empirical research on whether the proposed disclosures are an effective means of conveying the status, cost and limitations of MARS providers and seeks comment in this area. The FTC also inquires whether other disclosure requirements should be added to the proposed Rule, such as requiring MARS providers to disclose their historical performance.
4. Liability for Assisting and Facilitating
The proposed Rule includes provisions extending liability to entities that work with MARS providers engaged in deceptive or unfair practices if they “know or consciously avoid knowing that the provider is engaged in any act or practice that violates the Rule.” This “substantial assistance” provision is modeled after a similar provision in the FTC’s Telemarketing Sales Rule and what has, in recent years, become the FTC’s general enforcement position. The NPRM lists the provision of advertising services, telemarketing, marketing support, payment processing, and lead generation as activities that might constitute substantial assistance. On the other hand, the proposed Rule specifically excludes from liability entities that provide basic support and services but have no reasonable way of knowing the providers are engaged in violation of the rule. Both the FTC and state law enforcement officials are able to obtain monetary and injunctive relief against those who “substantially assist” culpable MARS providers.
The proposed Rule requires MARS providers to retain several different types of records for a period of 24 months. The failure to do so is a violation of the proposed Rule. The recordkeeping requirement is modeled after similar requirements in TSR and requires the following to be kept:
- All contracts between the provider and any consumer for mortgage assistance relief services;
- Copies of any written communications between the provider and the consumer occurring before the consumer enters into a contract or agreement for mortgage assistance relief;
- Copies of documents or telephone recordings created in compliance with requirements to monitor employees’ and independent contractors’ compliance with proposed Rule;
- All consumer files containing the names, telephone numbers, dollar amounts paid, and quantity of items or services purchased if such information is kept in the ordinary course of business;
- Copies of materially-different sales scripts, training materials, commercial communications, and other marketing materials; and
- Copies of documentation required to be given to the consumer.
In addition to preservation of required records, the proposed Rule also requires that MARS providers take enumerated steps to monitor compliance of their employees and independent contractors, and to investigate “promptly and fully” any consumer complaints. Documentation of such monitoring is requested under the proposed Rule.
The proposed Rule would provide that “[a]ny attempt by any person to obtain a waiver from any consumer of any protection provided by or any right of the consumer under this rule constitutes a violation of the rule.”
The Commission has authority to investigate and enforce the proposed Rule, and can impose monetary penalties up to $16,000 per violation, including against those who substantially assist entities in violation. States also can bring civil actions in federal district court to seek civil penalties and other relief.