The Obama administration is proposing a ban on fees charged to a borrower before a modification firm obtains a loan modification.
In a statement today, the Federal Trade Commission said it is proposing a new rule that would make up-front fees illegal. It would also bar modification firms from advising borrowers to stop making their payments or stop communicating with their lenders.
Modification service providers would also be banned from making misleading promises about the likelihood that a modification will be approved. In addition, they can’t suggest affiliation with public or private entities or mislead borrowers about refunds. They would be required to disclose their for-profit status as well as the total amount that will have to be paid by the borrower.
Financial institutions and firms that own or service mortgages would be exempted from the proposed rule. Also exempted would be attorneys who represent borrowers in a bankruptcy or other legal proceedings.
The move is being made “so companies can’t take the money and run,” FTC Chairman Jon Leibowitz said in the statement.
U.S. Department of the Treasury Secretary Timothy Geithner added, “Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered.”
The FTC said that the mortgage crisis has spawned a cottage industry of loan modification firms that charge up-front fees. Cases have been brought against 28 such firms by the FTC and more by state regulators.
“Under the proposed rule, companies could not be paid until they had a documented offer from a mortgage lender or servicer that lives up to the promises they have made,” the statement said.
The public comment period for the proposed rule end on March 29.
