Jan. 5, 2011 – Facing an estimated 9 million foreclosures for the period 2009 through 2012,1 the Federal Trade Commission (FTC) has issued a final rule that gives federal and state authorities a new tool to combat the increase in deceptive mortgage relief practices.
The final rule does not affect attorneys who provide mortgage assistance relief services (MARS) in connection with the practice of law if basic requirements are met, but the FTC warns of MARS providers that try to use attorneys as fronts to avoid state laws.
Over the past three years, the FTC noticed a spike in the number of consumers scammed by MARS providers that charge advanced fees in the hundreds or thousands of dollars then disappear or fail to provide the promised service. Often, the delay and the cost combine to leave homeowners in a much worse position.
Many states have responded by passing state laws, commonly known as mortgage rescue statutes, under which MARS providers cannot charge advanced fees. Lawyers often are exempt from these mortgage rescue statutes.
For instance, Wis. Stat. section 846.45, enacted in 2009, prohibits certain “foreclosure consultants” from claiming, demanding, charging or collecting “any compensation until after the foreclosure consultant has fully performed each and every service the foreclosure consultant contracted to perform or represented that he or she would perform.”
Wisconsin-licensed attorneys are not considered foreclosure consultants when the attorney “renders service in the course of his or her practice as an attorney at law.”
Attorneys may take advanced fees where a foreclosure consultant cannot. Thus, scammers have attempted to associate with or employ attorneys to avoid state laws that prohibit MARS or “foreclosure consultants” from taking advanced fees before providing service.
For example, the National Association of Attorneys General made note of national foreclosure relief companies that try to recruit attorneys as “partners” or “local counsel” to evade state mortgage rescue statutes, or open sham law firms designed to evade such laws.
The Florida Bar Association’s ethics hotline reported receiving numerous calls from lawyers who had been contacted by nonlawyers seeking assistance in foreclosure-related rescue services. In addition, attorneys have been disciplined for improper involvement in these types of scams.2
As of Dec. 1, 2010, the FTC reported that state attorneys general had investigated at least 450 deceptive mortgage relief providers and sued hundreds for state law violations. A federal mortgage fraud sweep resulted in nearly 200 civil enforcement actions as of June 2010.
The new federal rule allows the FTC and individual states (not private citizens) to enforce the rule and seek penalties and other relief in federal district courts. State law, such as Wis. Stat. section 846.45, gives private citizens a cause of action.
Attorneys are fully exempt if they:
- Provide mortgage assistance relief as part of the practice of law; and
- Are licensed to practice law in the state in which the consumer for whom the attorney is providing mortgage assistance relief services resides or in which the consumer’s dwelling is located; and
- Comply with state laws and regulations that cover the same type of conduct the rule requires; and
- Deposit any funds received from the consumer prior to performing legal services in a client trust account; and
- Comply with all state laws and regulations, including licensing regulations, applicable to client trust accounts.
Mortgage assistance relief services
In general, MARS means “any service, plan, or program” that offers or provides assistance in preventing or postponing foreclosure sales, negotiating loan modifications, obtaining forbearances or modifications in the timing of loan payments, or negotiating extensions.3
Lawyers often provide these services in connection with representing clients in bankruptcy, foreclosure, or other administrative proceedings. Without an exemption, lawyers would become subject to all the requirements of the new federal rule.
Under the new rule, any for-profit entities providing mortgage assistance relief services are, among other things, prohibited from misrepresenting any material aspect of their services, advising a consumer to cease communication with a lender, or taking advanced fees. The prohibition on advanced fees is not effective until Jan. 31, 2011.
In addition, a person violates the rule by providing substantial assistance to a MARS provider if the person knows (or consciously avoids knowing) the provider is violating the rules.
The rule also is designed to prevent abuses by mandating that MARS providers disclose certain information to the consumer, including their “for-profit” status.
Attorney exemption and client trust accounts
Attorneys who are providing MARS “as part of the practice of law” are partially exempt from the new rule as long as the attorney is licensed in the state in which services are provided (or where the consumer’s “dwelling” is located) and the attorney complies with applicable state laws and regulations, such as Wis. Stat. section 846.45.
However, to get the full benefit of the exemption, attorneys must comply with certain provisions regarding client trust accounts.
In order to be fully exempt, lawyers must place advanced fees in a client trust account before performing legal services and comply with state laws and regulations, including licensing regulations, applicable to client trust accounts.
A lawyer who does not comply with the client trust account provisions cannot charge advanced fees, or “request or receive payment of any fee or other consideration,” until the lawyer executes a written agreement between the consumer and the consumer’s loan holder. In addition, the lawyer must make specific disclosures through the written agreement, but is otherwise exempt from other provisions of the final rule.
The State Bar of Wisconsin was one of several state bar associations – along with the American Bar Association – that sought an amendment to the proposed rule that would provide an exemption for lawyers. The proposed rule did not exempt lawyers at all.
Without an exemption, these bar associations feared the rule could undermine the confidential attorney-client relationship and “make it difficult or impossible for many consumer debtors to obtain the legal services that they desperately need to help negotiate changes to their residential mortgages with their lenders and keep their homes.”4
Douglas Kammer, then-president of the State Bar of Wisconsin, commented that without an exemption for lawyers, the rule could “drive lawyers out of the mortgage modification business, leaving these services in the hands of lay practitioners, including ‘mortgage rescue’ charlatans who prey on the most vulnerable of our public.”5