MORTGAGE ASSISTANCE RELIEF SERVICES

Federal RegisterMar 9, 2010

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FEDERAL TRADE COMMISSION

16 CFR Part 322

RIN 3084-AB18

MORTGAGE ASSISTANCE RELIEF SERVICES

AGENCY:

Federal Trade Commission (FTC or Commission).

ACTION:

Notice of Proposed Rulemaking; request for public comment.

SUMMARY:

Pursuant to the 2009 Omnibus Appropriations Act (Omnibus Appropriations Act), which was later clarified by the Credit Card Accountability and Responsibility and Disclosure Act of 2009 (Credit CARD Act), the Commission issues a Notice of Proposed Rulemaking (NPRM) concerning the practices of for-profit companies that, in exchange for a fee, offer to work with lenders and servicers on behalf of consumers to modify the terms of mortgage loans or to avoid foreclosure on those loans. The proposed Rule published for comment, among other things, would: prohibit providers of these services from making false or misleading claims; mandate that providers disclose certain information about these services; bar the collection of advance fees for these services; prohibit persons from providing substantial assistance or support to an entity they know or consciously avoid knowing is engaged in a violation of these Rules; and impose recordkeeping and compliance requirements.

DATES:

Comments must be received by March 29, 2010.

ADDRESSES:

Interested parties are invited to submit written comments electronically or in paper form by following the instructions in the Request for Comment part of the

SUPPLEMENTARY INFORMATION

section below. Comments in electronic form should be submitted at (

http://public.commentworks.com/ftc/MARS-NPRM

) (and following the instructions on the web-based form). Comments in paper form should be mailed or delivered to the following address: Federal Trade Commission, Office of the Secretary, Room H-135 (Annex W), 600 Pennsylvania Avenue, NW, Washington, DC 20580, in the manner detailed in the

SUPPLEMENTARY INFORMATION

section below.

FOR FURTHER INFORMATION CONTACT:

Laura Sullivan, Evan Zullow, or Robert Mahini, Attorneys, Division of Financial Practices, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580, (202) 326-3224.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Authority

On March 11, 2009, President Obama signed the Omnibus Appropriations Act.

Section 626 of this Act directed the Commission to commence, within 90 days of enactment, a rulemaking proceeding with respect to mortgage loans.

Section 626 also directed the FTC to use notice and comment rulemaking procedures under Section 553 of the Administrative Procedure Act (APA), 5 U.S.C. 553.

2009 Omnibus Appropriations Act, Pub. L. 111-8, 123 Stat. 524.

Id.

§ 626(a).

Id.

Because Congress directed the Commission to use these APA rulemaking procedures, the FTC will not use the procedures set forth in Section 18 of the FTC Act, 15 U.S.C. 57a.

On May 22, 2009, President Obama signed the Credit CARD Act.

Section 511 of this act clarified the Commission’s rulemaking authority under the Omnibus Appropriations Act. First, Section 511 specified that the rulemaking “shall relate to unfair or deceptive acts or practices regarding mortgage loans, which may include unfair or deceptive acts or practices involving loan modification and foreclosure rescue services.”

The Omnibus Appropriations Act, as clarified by the Credit CARD Act, does not specify any particular types of provisions that the Commission should or should not include in a rule addressing loan modification and foreclosure rescue services but rather directs the Commission to issue rules that “relate to” unfairness or deception.

Accordingly, the Commission interprets the Omnibus Appropriation Act to allow it to issue rules prohibiting or restricting conduct that may not be unfair or deceptive itself but would be reasonably related to the goal of preventing unfairness or deception.

Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. 111-24, 123 Stat. 1734 (Credit CARD Act).

Id.

§ 511(a)(1)(B).

Id.

Unlike Section 18 of the FTC Act, 15 U.S.C. 57, the Omnibus Appropriations Act, as clarified by the Credit CARD Act, does not require that the Commission identify with specificity in the rule the unfair or deceptive acts or practices that the prohibitions will prevent. Omnibus Appropriations Act § 626(a); Credit CARD Act § 511(a)(1)(B);

see also

NYC DCA at 4 (“The FTC rulemaking should ban foreclosure rescue services from collecting up-front fees from consumers. Collecting fees in advance gives these businesses an easy opportunity to swindle consumers by failing to provide adequate service, or not providing any service at all.”); OH AG at 3-4 (“A prohibition or low fee cap on up-front fees is of primary importance in regulating foreclosure rescue services.”).

See, e.g.

, NCLC at 5; NAAG at 4; MN AG at 1-2.

See, e.g.

, NCLC at 3; OH AG at 4; ABA at 7; Chase at 3.

II. Mortgage Assistance Relief Services

A. The Mortgage Crisis and Assistance for Consumers

As discussed in the ANPR, historic levels of consumer debt, increased unemployment, and a stagnant housing market have contributed to high rates of mortgage loan delinquency and foreclosure.

As a result, many

consumers struggling to make their mortgage payments are in search of ways to avoid foreclosure. There are a number of options that may be available to consumers, including: (1) short sales or deeds-in-lieu of foreclosure transactions in which the proceeds of a sale of the home or the receipt of the deed to the home is treated as repayment of the outstanding mortgage balance; (2) forbearance or repayment plans that do not reduce the amount that consumers pay but give them more time to bring their payments current; and (3) loan modifications to reduce the amount of consumers’ monthly payments. Because loan modifications allow consumers to stay in their homes and reduce their overall debt, this possible solution often has great appeal to consumers. The Commission’s law enforcement actions suggest that loan modifications may currently be the most frequently marketed and sold mortgage assistance relief service.

Delinquency and foreclosure start rates are at record highs. In the third quarter of 2009, the Mortgage Bankers Association’s quarterly National Delinquency Survey found that 14.41% of all mortgage loans were either in foreclosure or delinquent by at least one payment, the highest percentage recorded in the survey’s history. Mortgage Bankers Association,

Delinquencies Continue to Climb in Latest MBA National Delinquency Survey

(Nov. 19, 2009),

available at

(

http://www.mbaa.org/NewsandMedia/PressCenter/71112.htm

). In December 2008, Credit Suisse Bank forecasted a total of 9 million foreclosures for the period 2009 through 2012.

See

Credit Suisse Fixed Income Research 2 (2008),

available at

(

http://

www.chapa.org/pdf/ForeclosureUpdateCreditSuisse.pdf

);

see also

NAAG at 2 (“An estimated 8.1 million mortgages are anticipated to be in foreclosure within the next four years.”).

See

Appendix B (list of FTC actions against MARS providers).

In response to the recent mortgage crisis, a number of government and private sector programs have been initiated to assist distressed homeowners in modifying or refinancing their mortgages.

In March 2009, for example, the Obama Administration launched the Making Home Affordable (MHA) program, which provides mortgage owners and servicers with financial incentives to modify and refinance loans.

More than 650,000 loans have been modified pursuant to this program.

In addition, state and local governments, nonprofit organizations, housing counselors, and private sector entities have offered a variety of other programs and services to help homeowners in distress.

Section II.C of the ANPR described the ongoing federal, state, and local efforts to educate consumers, to assist consumers in working with their lenders and servicers, and to make loan modifications available to a larger number of consumers struggling to stay current on their mortgage.

See MARS ANPR

, 74 FR at 26135-36.

For example, the program offers servicers that modify loans according to its guidelines an up-front fee of $1,000 for each modification,“pay for success” fees on still-performing loans of $1,000 per year, and one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments. U.S. Dep’t of Treasury,

Making Home Affordable Summary of Guidelines

available at

(

http://www.treas.gov/press/releases/reports/guidelines_summary.pdf

Renae Merle,

Lenders to Get Push to Help Homeowners

, Wash. Post, Nov. 29, 2009, at A4,

available at

(

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/28/AR2009112802436.html

See, e.g.

, FTC,

Mortgage Payments Sending You Reeling? Here’s What to Do

available at

(

http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea04.pdf

) (2009) (describing various credit counselor alternatives);

Foreclosure Prevention Workshops for Consumers

available at

(

http://www.freddiemac.com/avoidforeclosure/workshops.html

) (last visited Dec. 22, 2009) (describing local credit counseling events by local governments, nonprofits, and other organizations).

Despite these public and private efforts, consumers continue to seek assistance from for-profit companies in obtaining loan modifications. Many consumers who are seeking loan modifications are not eligible for the MHA program or other government and private assistance programs. For example, while the Department of the Treasury has estimated that the MHA program will help 3-4 million borrowers by February 2012,

industry surveys report that roughly 7.5 million households are at least 30 days behind on their mortgage payments or already are in foreclosure.

Even among consumers who may be eligible for the program, it appears many are failing to meet other requirements necessary to qualify for a permanent loan modification.

In addition, even if consumers are eligible for government and private assistance programs, many housing counselors and servicers have struggled to respond in a timely manner to the sheer number of consumers who are seeking loan modifications,

leaving consumers who are desperate to save their homes waiting anxiously for assistance.

See, e.g.

, Press Release, Making Home Affordable,

Making Home Affordable Program on Pace to Offer Help to Millions of Homeowners

(Aug. 4, 2009),

available at

(

http://makinghomeaffordable.gov/pr_08042009.html

See

Ruth Simon & James R. Hagerty,

One in Four Borrowers Is Underwater

, Wall St. J., Nov. 24, 2009, at A1,

available at

(

http://online.wsj.com/article/SB125903489722661849.html

See, e.g.

, Brady Dennis & Renae Merle,

Democrats Push More Mortgage Aid

, Wash. Post, Dec. 8, 2009, at A19,

available at

(

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/07/AR2009120703903.html

) (noting that “6 percent of borrowers enrolled in the [MHA] program so far have moved from trial modification to permanent adjustment”); Renae Merle,

Banks Slow to Modify Mortgages

, Wash. Post, Aug. 5, 2009,

available at

(

http://www.washingtonpost.com/wp-dyn/content/article/2009/08/04/AR2009080401134.html

) (“Less than 10 percent of delinquent borrowers eligible for the Obama administration’s foreclosure prevention program have received help so far, according to Treasury Department estimates. . . .”).

See, e.g.

, NCLC at 2 (noting that servicers have failed to meet borrower demand for loan modifications); NAAG at 7 (noting that borrowers have had a difficult time reaching servicers and obtaining their assistance); Peter S. Goodman,

A Plan to Stem Foreclosures, Buried in a Paper Avalanche

, N.Y. Times, July 29, 2009, at A1,

available at

(

http://www.nytimes.com/2009/06/29/business/29loanmod.html

Many consumers who have been unable to obtain assistance have turned to MARS providers. These for-profit companies have widely promoted their ability to help consumers in negotiating with lenders or servicers and in taking other steps to prevent foreclosure.

Responding to consumer demand, these providers focus their advertising mainly on their capacity to obtain mortgage loan modifications

as opposed to other forms of foreclosure relief, such as a short sale or loan forbearance.

Mortgage assistance services based on negotiating with the lender or servicer to obtain a loan modification or some other type of foreclosure relief have mushroomed in the past two years.

Given that there are many small and relatively new MARS providers, it is difficult to estimate the total number of such providers,

but comments suggest that there are at least 450.

See MARS ANPR

, 74 FR at 26134-35.

Another foreclosure prevention method that MARS providers have used is “sale-leaseback” or “title reconveyance” transactions. In these transactions, MARS providers instruct financially distressed consumers to transfer title to their homes to the providers and then lease the property back from the providers. The providers promise to reconvey title to the homes at some later date, yet often do not do so, thereby giving the providers the equity in the homes. The incidence of such sale leaseback and title reconveyance transactions appears to have declined, in part because many consumers do not have significant equity in their homes.

See, e.g.

, NAAG at 2 (“[T]he [loan modification] consulting business model is dominating the marketplace. Consultants are by far the most common source of consumer complaints received by our offices in the area of mortgage assistance services.”); OH AG at 2 (“For those companies that actually do put some effort into helping the consumer, the most common business model is an offer to negotiate a loan modification or repayment plan with the consumer’s servicer.”); CRC at 1 (“In California, advertisements promising loan modification success are inescapable.”);

see also

Appendix B.

See

id.

See, e.g.

, NAAG at 3 (“It is difficult to gather exact empirical data on companies providing loan modification and foreclosure rescue services due to the predominance of internet-based companies and their ephemeral nature. The difficulty of gathering information is increased due to the fact many of these companies operate primarily over the internet and do not maintain a physical presence in the states in which they do business.”); OH AG at 2 (“There is little reliable data about the foreclosure rescue industry.”).

See, e.g.

, NAAG at 4 (noting that state attorneys general have investigated more than 450 mortgage assistance relief services).

Typically, MARS providers charge consumers advance fees in the thousands of dollars.

Some providers

collect their entire fee at the beginning of the transaction,

and others request two to three large installment payments from consumers.

One commenter stated that many MARS providers have begun to offer their services piecemeal, collecting fees upon reaching various stages in the process, such as assembling the documentation required by the lender or servicer, mailing paperwork to the lender or servicer, and negotiating with a lender’s loss mitigation department.

Id.

;

see also, e.g.

, CRC at 3 (“The average fee that we are seeing borrowers charged is $3,000; we have seen fees as high as $9,500.”); NCRC at 3 (“NCRC documented a median fee of $2,900. . . for our testing study. Fees ranged as high as

$5,600. . . .”); NCLR at 1 (observing fees as high as $8,000); NCLC at 6 (estimating fees to be between $2,000 and $4,000).

See, e.g.

FTC v. Infinity Group Servs.

, No. SACV09-00977 DOC (MLGx) (C.D. Cal. filed Aug. 26, 2009);

FTC v. Freedom Foreclosure Prevention Specialists, LLC

, No. 2:09-cv-01167-FJM (D. Ariz. June 1, 2009);

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009).

See, e.g.

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009);

FTC v. Washington Data Res., Inc.

, No. 8:09-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12, 2009);

FTC v. First Universal Lending, LLC

, No. 09-CV-82322, Mem. TRO at 5 (S.D. Fla. filed Nov. 24, 2009).

See, e.g.

, NAAG at 5;

see also, e.g.

FTC v. Debt Advocacy Ctr., LLC

, No. 1:09CV2712 (N.D. Ohio filed Nov. 19, 2009).

As discussed in the ANPR, MARS providers often claim to possess specialized knowledge of the mortgage lending industry,

sometimes hiring former mortgage brokers and real estate agents

to support their claims. In addition, a growing number of MARS providers are employing or affiliating with lawyers.

The providers often tout the expertise of these attorneys in negotiating with lenders and servicers. In some cases, MARS providers also offer “forensic audits,” purported reviews of mortgage loans to determine lender and servicer compliance with federal and state law, thereby supposedly helping the consumer to acquire the leverage needed to obtain better loan modifications.

Providers also may use their relationship with attorneys to assert that they are not covered by state laws that prohibit non-attorneys from collecting advance fees for loan modification services.

For example, a previous California law that imposed a number of restrictions on “foreclosure consultants” also allowed “licensed attorneys. . . [to] charge advance fees under certain limited circumstances.”

The State Bar of California subsequently observed that “foreclosure consultants may be attempting to avoid the statutory prohibition on collecting a fee before any services have been rendered by having a lawyer work with them in foreclosure consultations.”

California has since passed a new law that removes this exemption.

See, e.g.

FTC v. Fed. Housing Modification Dep’t

, No. 09-CV-01753 (D.D.C. filed Sept. 15, 2009);

FTC v. LucasLawCenter “Inc.,”

No. 09-CV-770 (C.D. Cal. filed July 7, 2009).

See, e.g.

, NCLC at 11 (“Mortgage brokers-often cited as one of the driving forces in the growth of bad subprime loans-are in demand to work for loan modification companies. One MARS advertised for consultants with mortgage and real estate experience to join its cadre of loan modification specialists.”).

See, e.g.

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX), Mem. Supp. Pls. Ex Parte App. at 3 (Aug. 3, 2009) (alleging that defendants engaged in “misrepresentations prohibited by the TRO, behind a new facade: the ‘Walker Law Group,’” which was “nothing more than a sham legal operation designed to evade state law restrictions on the collection of up-front fees for loan modification and foreclosure relief”);

FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX) (C.D. Cal. filed July 7, 2009);

FTC v. Data Med. Capital Inc.

, No. SA-CV-99-1266 AHS (Eex) (C.D. Cal., contempt application filed May 27, 2009);

FTC v. US Foreclosure Relief Corp.

, No. SACV09-768 JVS (MGX) (C.D. Cal. filed July 7, 2009);

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009);

see also, e.g.

Cincinnati Bar Assoc. v. Mullaney,

119 Ohio St. 3d 412 (2008) (disciplining attorneys involved in mortgage assistance relief services); Press Release, North Carolina Dep’t of Justice,

AG Cooper Targets California Schemes that Prey on NC Homeowners

(July 15, 2009),

available at

(

http://www.ncdoj.com/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/AG-Cooper-targets-California-schemes-that-prey-on-.aspx

); Press Release, Colorado Attorney General’s Office,

Attorney General Announces Actions Against Seven Loan-Moficiation Companies As Part of Multistate Sweep

(July 15, 2009),

available at

(

http://www.coloradoattorneygeneral.gov/press/news/2009/07/15/attorney_general_announces_actions_against_seven_loan_modification_companies_p

); Press Release, Illinois Attorney General,

Illinois Attorney General Sues 14th Company for Mortgage Rescue Fraud

(Aug. 28, 2009),

available at

(

http://www.illinoisattorneygeneral.gov/pressroom/2008_08/20080828.html

See, e.g.

FTC v. Data Med. Capital Inc.

, No. SA-CV-99-1266 AHS (Eex), Mem. Supp. App. Contempt at 18 (C.D. Cal. filed May 27, 2009);

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009); California Dep’t of Real Estate,

Consumer Alert

6 (warning consumers of “forensic loan reviews”),

available at

(

http://www.dre.ca.gov/pdf_docs/FraudWarningsCaDRE03_2009.pdf

See supra

notes 46-47;

see also

IL AG at 2 (“Attorneys are using the [state] exemption to market and sell the same mortgage consulting services provided by non-attorneys.”).

Press Release, Office of the Attorney General, California Dep’t of Justice,

Brown Alerts Homeowners that New Law Prohibits Up-front Fees for Foreclosure Relief Services

(Oct. 15, 2009),

available at

(

http://ag.ca.gov/newsalerts/release.php?id=1821

See

State Bar of California,

Ethics Alert: Legal Services to Distressed Homeowners and Foreclosure Consultants on Loan Modifications

2, Ethics Hotliner (Feb. 2, 2009),

available at

(

http://www.calbar.ca.gov/calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf

) (“California State Bar Ethics Alert”);

see also

Florida Bar,

Ethics Alert: Providing Legal Services to Distressed Homeowners

at 1,

available at

(

http://www.floridabar.org/TFB/TFBResources.nsf/Attachments/872C2A9D7B71F05785257569005795DE/$FILE/loanModification20092.pdf?OpenElement

) (“The Florida Bar’s Ethics Hotline recently has received numerous calls from lawyers who have been contacted by non-lawyers seeking to set up an arrangement in which the lawyers are involved in loan modifications, short sales, and other foreclosure-related rescue services on behalf of distressed homeowners. . . . The [Florida] Foreclosure Rescue Act. . . imposed restrictions on non-lawyer loan modifiers to protect distressed homeowners. The new statute appears to be the impetus for these inquiries.”).

Cal Civ. Code § 2944.7;

see also

Press Release, Office of the Attorney General, California Dep’t of Justice,

Brown Alerts Homeowners that New Law Prohibits Up-front Fees for Foreclosure Relief Services

(Oct. 15, 2009),

available at

(

http://ag.ca.gov/newsalerts/release.php?id=1821

B. Observed Consumer Protection Abuses

The FTC has extensive law enforcement experience with MARS providers. In the past two years, the Commission has filed 28 law enforcement actions against providers of loan modification and foreclosure rescue services.

This extensive law enforcement experience, as well as the information received in response to the ANPR,

strongly suggests that the deceptive practices of MARS providers are widespread and are causing substantial harm to consumers. MARS providers often misrepresent the services that they will perform and the results they will obtain for consumers. Indeed, providers frequently fail to perform even the most basic of promised services. As a result, consumers not only lose the thousands of dollars they pay to the providers, but may also lose their homes.

See

Appendix B.

As stated above, the Commission received few comments from MARS providers in response to its ANPR. Therefore, to ensure that it has complete and accurate information concerning mortgage assistance service providers, the effect of their activities on consumers, and the impact of proposed restrictions in their operations, the Commission is especially interested in receiving comments from MARS providers in response to this NPRM.

Typically, MARS providers initiate contact with prospective customers through Internet, radio, television, or direct mail advertising. The ads instruct consumers to call a toll-free telephone number or e-mail the company. Customary claims in the ads and ensuing telemarketing and email pitches include representations that the MARS provider: (1) will obtain for the consumer a substantial reduction in a mortgage loan’s interest rate, principal amount, or monthly payments; (2) will achieve these results within weeks;

(3) has special relationships with lenders

and servicers;

and (4) is closely affiliated with the government,

various nonprofit programs,

or the consumer’s own lender or servicer.

In some cases, MARS providers also entice consumers to make substantial up-front payments with false promises of a refund if they do not receive the promised results.

Providers typically also represent that there is high likelihood, and in some instances a “guarantee,” of success.

Despite these promises of extremely high success rates, the vast majority of consumers do not receive the promised results.

See, e.g.

FTC v. First Universal Lending, LLC

, No. 09-CV-82322, Mem. TRO at 4-5 (S.D. Fla. filed Nov. 24, 2009);

FTC v. 1st Guar. Mortgage Corp.

, No. 09-DV-61846 (S.D. Fla. filed Nov. 17, 2009);

FTC v. Freedom Foreclosure Prevention Specialists, LLC

, No. 2:09-cv-01167-FJM (D. Ariz. filed June 1, 2009);

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009).

See, e.g.

FTC v. Debt Advocacy Ctr., LLC

, No. 1:09CV2712 (N.D. Ohio filed Nov. 19, 2009);

FTC v. 1st Guar. Mortgage Corp.

, No. 09-DV-61846 (S.D. Fla filed Nov. 17, 2009);

FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX) (C.D. Cal. filed July 7, 2009);

FTC v. US Foreclosure Relief Corp.

, No. SACVF09-768 JVS (MGX) (C.D. Cal. filed July 7, 2009).

See, e.g.

FTC v. Washington Data Res., Inc.

, No. 8:08-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12, 2009) (alleging that defendants falsely represented that they were affiliated with the United States government);

FTC v. Fed. Housing Modification Dep’t

, No. 09-CV-01753 (D.D.C. filed Sept. 15, 2009);

FTC v. Sean Cantkier,

No. 1:09-cv-00894 (D.D.C. filed July 10, 2009) (alleging defendants placed advertisements on Internet search engines that refer consumers to websites that deceptively appear to be affiliated with government loan modification programs);

FTC v. Thomas Ryan

, No. 1:09-00535 (HHK) (D.D.C. filed Mar. 25, 2009);

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009) (charging defendant with misrepresenting that it is part of or affiliated with the federal government);

see also

OH AG at 4 (“Our office has seen many companies that have names or advertisement that make it sound like they are government sponsored.”); NCLC at 3 (“One website, USHUD.com, even claims to be ‘America’s Only Free Foreclosure Resource’ even though HUD-certified agencies also offer free assistance regardless of income.”).

See FTC v. New Hope Prop. LLC

, No. 1:09-cv-01203-JBS-JS (D.N.J. filed Mar. 17, 2009);

FTC v. Hope Now Modifications, LLC

, No. 1:09-cv-01204-JBS-JS (D.N.J. filed Mar. 17, 2009).

See, e.g.

FTC v. Kirkland Young, LLC

, No. 09-23507 (S.D. Fla. filed Nov. 18, 2009) (alleging that defendants falsely represented an affiliation with borrowers’ lenders);

FTC v. Loss Mitigation Servs., Inc.

, No. SACV-09-800 DOC (ANX) (C.D. Cal. filed July 13, 2009);

see also

ABA at 7 (“They often misuse the intellectual property of lenders and servicers by claiming in mailings, on websites, and in other communications that they either are affiliated with the lenders and servicers or have special relationships with them that do not exist. They use the names, trademarks and logos of these lenders and servicers in their advertising to deceive consumers into believing they can obtain modification relief for them that these consumers could not otherwise obtain for themselves at no cost.”); Chase at 3 (“These MARS entities also may lead the borrower to believe that they are associated with the servicer or that they have special agreements with the servicer for processing loan modifications, when, in fact, they do not.”).

See, e.g.

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009) (alleging that defendant falsely claims to provide “100% money back guarantee”);

Debt Advocacy Ctr., LLC

, No. 1:09CV2712 (N.D. Ohio filed Nov. 19, 2009) (alleging that defendants falsely represent they would refund borrower fee if unsuccessful);

FTC v. Infinity Group Servs.

, No. SACV09-00977 DOC (MLGx) (C.D. Cal. filed Aug. 26, 2009);

FTC v. Loan Modification Shop, Inc.

, No. 3:09-cv-00798 (JAP), Mem. Supp. TRO at 1 (D.N.J. amended complaint filed Aug. 4, 2009) (alleging defendants represented that advance fees were fully refundable);

FTC v. Freedom Foreclosure Prevention Specialists, LLC

, No. 2:09-cv-01167-FJM (D. Ariz. June 1, 2009) (alleging defendants promised “100% money-back guarantee” but then failed to provide refunds).

See, e.g.

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009) (alleging defendants falsely claimed success rate of 97 to 100%);

FTC v. Debt Advocacy Ctr., LLC

, No. 1:09CV2712 (N.D. Ohio filed Nov. 19, 2009) (alleging defendants falsely claimed a 90% success rate);

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX) (C.D. Cal. filed July 13, 2009) (alleging “[d]efendants have told homeowners that their success rate is above ninety percent”);

FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX) (C.D. Cal. filed July 7, 2009) (alleging “[d]efendants’ representatives tell consumers that Defendants have a success rate in the ninetieth percentile with their lender”);

FTC v. Freedom Foreclosure Prevention Specialists, LLC

, No. 2:09-cv-01167-FJM (D. Ariz. filed June 1, 2009) (alleging defendants claimed to have 97% success rate);

FTC v. Data Med. Capital Inc.

, No. SA-CV-99-1266 AHS (Eex), Mem. Supp. App. Contempt at 8 (C.D. Cal. filed May 27, 2009) (alleging defendants represented 100% success rate to consumers).

See, e.g.

infra

note 123-27; CMC at 1 (“CMC members and other mortgage servicers found that MARS providers consistently misrepresent their ability to obtain concessions from servicers. . . .”); Chase at 3 (“They collect their fees up-front and promise the borrower they can get a loan modification or other foreclosure relief, when, in fact, this is only a determination that the servicer can make after reviewing the borrower’s financial information and investor agreements.”).

Even if the services of MARS providers could deliver the promised results, many providers do not provide even the most basic services they claimed they would perform. After collecting their up-front fees, MARS providers often fail to make initial contact with the lender or servicer for months, if at all. They frequently neglect to commence negotiations or have substantive discussions with the consumer’s lender or servicer.

In many cases, the consumer harm from this failure to perform as promised is exacerbated because MARS providers often instruct consumers to stop communicating with their lenders.

Because consumers sever their contact with lenders and servicers, they may not discover that their MARS provider is doing little or nothing on their behalf; may never learn of concessions that their lender or servicer is willing to make; or, worst of all, may never discover that foreclosure is imminent.

In some cases, MARS providers advise consumers to discontinue making their mortgage payments, without informing them that doing so can result in the loss of their homes and damage to their credit ratings.

Because of this advice, consumers who otherwise could have avoided becoming delinquent may damage their credit rating or end up in foreclosure.

See, e.g.

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009) (alleging that defendant often failed to return borrowers’ phone calls and failed to contact and negotiate with lenders);

FTC v. Apply2Save, Inc.

, No. 2:09-cv-00345-EJL-CWD (D. Idaho filed July 14, 2009) (complaint alleging that “[m]any consumers learned from their lenders that Defendants had not even contacted the lender or that Defendants had only minimal, non-substantive contact with the lender”);

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX) (C.D. Cal. filed July 13, 2009) (alleging that “Defendants have misrepresented that negotiations were underway, although Defendants had not yet contacted the lender”);

FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX), Mem. Supp. App. TRO at 19 (C.D. Cal. filed July 7, 2009) (alleging that consumers who contact their lenders “learn that [Defendant] never even contacted the lender, or merely verified the consumer’s loan information’);

FTC v. Freedom Foreclosure Prevention Specialists, LLC

, No. 2:09-cv-01167-FJM (D. Ariz. June 1, 2009) (alleging that defendants failed to act on homeowners’ cases for longer than four to six weeks without completing - or in some cases, even starting - negotiations and ”failed to return consumers’ repeated telephone calls, even when homeowners were on the brink of foreclosure").

See, e.g.

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009);

FTC v. Kirkland Young, LLC

, No. 09-23507 (S.D. Fla filed Nov. 18, 2009);

FTC v. Washington Data Res., Inc.

, No. 8:09-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12, 2009);

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX) (C.D. Cal. filed July 13, 2009);

FTC v. US Foreclosure Relief Corp.

, No. SACV09-768 JVS (MGX) (C.D. Cal. filed July 7, 2009).

See, e.g.

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009) (“When consumers speak with their lenders directly, they often discover that Defendants had not yet contacted the lender or only had left messages or had non-substantive contacts with the lender.”);

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX), Mem. In Supp. of Ex Parte TRO at 18-19 (C.D. Cal. filed July 13, 2009) (detailing “devastating effects” of consumers learning too late of lack of effort by loan modification company); CRC at 7 (“People who do have a chance of keeping the home are being steered away from legitimate, free homeowner counseling services or are failing to take any action before it is too late because they have been assured everything is being taken care of for them already. All too often, it is not.”).

See, e.g.

FTC v. First Universal Lending, LLC

, No. 09-CV-82322 (S.D. Fla. filed Nov. 24, 2009);

FTC v. Fed. Housing Modification Dep’t

, No. 09-CV-01753 (D.D.C. filed Sept. 15, 2009);

FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX)(C.D. Cal. filed July 9, 2009) (“In numerous instances, Defendants’ representative [allegedly] encourages consumers to stop paying their mortgages, telling consumers that delinquency will demonstrate the consumers’ hardship to the lender and make it easier to obtain a loan modification.”);

see also

NAAG at 10 (“In some cases, the mortgage consultants will actually counsel the consumer not to make a mortgage payment, which of course frees up funds for the consultants’ fee.”).

In addition, some MARS providers make the specific claim that they offer legal services,

when, in fact, no

attorneys are employed at the company or, even if there are, they do little or no legal work for consumers.

The Commission’s law enforcement experience, state law enforcement, the comments received in response to the ANPR, and state bar actions indicate that a growing number of attorneys themselves are engaged in deceptive and unfair practices in the marketing and sale of MARS.

See, e.g.

FTC v. Fed. Housing Modification Dep’t

, No. 09-CV-01753 (D.D.C. filed Sept. 16, 2009) (alleging that defendants falsely claim to have attorneys or forensic accountants on staff);

FTC v.

Loan Modification Shop, Inc.

, No. 3:09-cv-00798 (JAP), Mem. Supp. TRO at 14 (D.N.J. filed Aug. 4, 2009) (alleging that defendants misrepresent “that it is an attorney-based company”);

see also FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX), Mem. Supp. App. TRO at 19 (C.D. Cal. filed July 7, 2009) (alleging that “[d]espite promises to the contrary, consumers have no contact with the purported attorneys who are supposed to be negotiating with their lenders”).

See, e.g.

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009);

FTC v. Washington Data Res., Inc.

, No. 8:09-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12, 2009);

see also, e.g.

FTC v. US Foreclosure Relief Corp.

, No. SACV09-768 JVS (MGX), Prelim. Rep. Temp. Receiver at 2-3 (C.D. Cal. filed July 7, 2009) (stating that defendants’ “relationship with two different lawyers was nominal at best and served primarily as a cover to dignify the business and invoke the attorney exception to advance fee prohibitions”).

See, e.g.

, IL AG at 1 (noting that “33 percent of the [MARS] companies we have dealt with are owned by attorneys, while 38 percent have some link to the legal profession”); CRC at 2 (“An increasing number of attorneys are involving themselves in these unethical practices without providing any legal (or other) services. . . .”); MN AG at 5 (“This Office is aware of several loan modification and foreclosure rescue companies that have affiliated with licensed attorneys in other states in an effort to circumvent state law.”); NAAG at 4 (“Attorneys. . . have an increasing presence in this industry and have been found working in conjunction with or serving as referral sources for mortgage consultants.”);

see also, e.g.

, Legislative Solutions for Preventing Loan Modification and Foreclosure Rescue Fraud, 111th Cong. 1st Sess., Testimony of Scott J. Drexel (State Bar of California) at 2, 4 (Drexel Testimony) (noting that attorney misconduct in connection with MARS “is a problem of extremely significant - if not crisis - proportions in California,” and that the state bar has initiated over 175 associated investigations of attorneys); Polyana Da Costa,

Record Number of Complaints Target Florida Loan Modification Lawyers

, Law.com (Oct. 1, 2009) (“The [Florida] state attorney general has received a record 756 complaints through August of this year about loan modifications involving attorneys.”),

available at

(

http://www.law.com/jsp/law/LawArticleFriendly.jsp?id=1202434223147

C. Continued Law Enforcement and Other Responses

The Commission has taken aggressive action to protect consumers from deceptive MARS providers. As part of that effort, the FTC has filed 28 lawsuits

in the last two years against entities in this industry for engaging in deceptive practices in violation of the FTC Act and, in several instances, the Commission’s Telemarketing Sales Rule (TSR).

The FTC has coordinated with state law enforcement and federal agencies, including the Department of Justice, the Department of Housing and Urban Development (HUD), the Treasury Department, and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIG-TARP), in these efforts.

For example, the FTC has conducted two nationwide sweeps: “Operation Stolen Hope” (November 24, 2009), in which the Commission joined with 20 states collectively to file over one hundred lawsuits against MARS providers,

and “Operation Loan Lies” (July 15, 2009), in which the FTC coordinated with 25 federal and state agencies to bring 189 actions against MARS defendants.

Previously, the Commission, jointly with the Justice Department, the Treasury Department, HUD, and the Illinois Attorney General’s office, had announced several law enforcement actions.

See

Appendix B.

16 CFR 310.1,

et seq

. (2003); s

ee, e.g.

FTC v. Kirkland Young, LLC

, No. 09-23507 (S.D. Fla. filed Nov. 18, 2009);

FTC v. Washington Data Res., Inc.

, No. 8:09-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12, 2009);

FTC v. First Universal Lending, LLC

, No. 09-CV-82322 (S.D. Fla. filed Nov. 24, 2009);

FTC v. Fed. Housing Modification Dep’t

, No. 09-CV-01753 (D.D.C. filed Sept. 15, 2009);

FTC v. Hope Now Modifications, LLC

, No. 1:09-cv-01204-JBX-JS (D.N.J. filed Sept. 14, 2009);

FTC v. US Foreclosure Relief Corp.

, No. SACV09-768 JVS (MGX) (C.D. Cal. filed July 7, 2009).

See

Press Release, FTC,

Federal and State Agencies Target Mortgage Foreclosure Rescue and Loan Modification Scams

(July 15, 2009),

available at

(

http://www.ftc.gov/opa/2009/07/loanlies.shtm

); Press Release, FTC,

Federal and State Agencies Crack Down on Mortgage Modification and Foreclosure Rescue Scams

(Apr. 6, 2009),

available at

(

http://www.ftc.gov/opa/2009/04/hud.shtm

Press Release, FTC,

Federal and State Agencies Target Mortgage Relief Scams

(Nov. 24, 2009),

available at

(

http://www.ftc.gov/opa/2009/11/stolenhope.shtm

Press Release, FTC,

Federal and State Agencies Target Mortgage Foreclosure Rescue and Loan Modification Scams

(July 15, 2009),

available at

(

http://www.ftc.gov/opa/2009/07/loanlies.shtm

Press Release, FTC,

Federal and State Agencies Crack Down on Mortgage Modification and Foreclosure Rescue Scams

(Apr. 6, 2009),

available at

(

http://www.ftc.gov/opa/2009/04/hud.shtm

). In connection with these joint efforts, the Commission also sent warning letters to 71 companies for marketing potentially deceptive mortgage loan modification and foreclosure assistance programs.

Id.

In addition to coordination with the Commission, the states have continued to engage in their own aggressive law enforcement. For example, the National Association of Attorneys General (NAAG) reports that, as of July 2009, its members had investigated 450 MARS providers and sued hundreds of them for alleged state law violations.

The states also have continued to enact laws and regulations to address practices related to MARS.

NAAG at 4;

see also

IL AG at 1 (noting that Illinois has over 240 open investigations of MARS providers and filed 28 lawsuits against them).

To date, at least 29 states and the District of Columbia have enacted such statutes or regulations.

See, e.g.

, Cal. Civ. Code §§ 2944.7 & 2945,

et seq.

; Colo. Rev. Stat. § 6-1-1101,

et seq.

; 2009 Conn. Gen. Stat. § 36a-489; 6 Del. Code Ann. § 2400B,

et seq.

; D.C. Code § 42-2431,

et seq.

; Fla. Stat. § 501.1377; Haw. Rev. Stat. § 480E-1,

et seq.

; Idaho Code Ann. § 45-1601,

et seq.

; 765 Ill. Comp. Stat. Ann. 940/1,

et seq.

; 24 Ind. Admin. Code § 5.5-1-1,

et seq.

; Iowa Code § 741E.1,

et seq.

; Me. Rev. Stat. Ann. tit. 32, §§ 6171,

et seq.

& 6191,

et seq.

; Md. Code Ann., Real Property § 7-301,

et seq.

; 940 Mass. Code Regs. § 25.01,

et seq.

; Mich. Comp. Law § 445.1822,

et seq.

; Minn. Stat. § 325N.01,

et seq.

; Mo. Rev. Stat. § 407.935,

et seq.

; Neb. Rev. Stat. § 76-2701,

et seq.

; Nev. Rev. Stat. § 645F.300,

et seq.

; N.H. Rev. Stat. Ann. § 479-B:1,

et seq.

; N.Y. Real Prop. Law § 265-b; N.C. Gen. Stat. § 14-423,

et seq.

; 2008 Or. Laws Ch. 19; R.I. Gen. Laws § 5-79-1,

et seq.

; Tenn. Code Ann. § 47-18-5501,

et seq.

; Va. Code Ann. § 59.1-200.1; Wash. Rev. Code § 19.134.010,

et seq.

; Wis. Stat. § 846.45.

III. Discussion of the Proposed Rule

A. Section 322.1: Scope

As detailed in Section I, the scope of this rulemaking is set forth in the Omnibus Appropriations Act, as clarified by the Credit CARD Act. These statutes direct the Commission to commence a rulemaking proceeding to enact rules “related to unfair or deceptive acts or practices” that address, among other things, mortgage assistance relief services. As noted earlier, the Commission interprets this language to allow it to issue rules that not only restrict practices that are themselves unfair or deceptive, but also to restrict other practices that may not themselves be unfair or deceptive but the restriction of which is reasonably related to the goal of preventing unfairness or deception. The Commission’s rulemaking authority is limited by the Credit CARD Act to persons over whom the FTC has enforcement power under the FTC Act.

B. Section 322.2: Definitions

1. Section 322.2(h): Mortgage Assistance Relief Service

As discussed, the proposed Rule is intended to regulate for-profit providers of mortgage assistance relief services. The controlling definition of the proposed Rule, which informs the parameters of its scope, is that of “mortgage assistance relief service.” Proposed § 322.2(h) 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” negotiate a modification of any term of a loan or obtain other types of relief to avoid delinquency or

foreclosure. Proposed § 322.2(h)(2) provides that the term “mortgage assistance relief services” includes any service marketed to “stop[], prevent[], or postpone[] any (i) mortgage or deed of trust foreclosure sale for a dwelling or (ii) repossession of the consumers’ dwelling; or otherwise save the consumer’s home from foreclosure or repossession.” Proposed §§ 322.2(h)(3)-(7) further define these services to include offers purported to assist consumers in obtaining: (1) a forbearance or repayment plan; (2) an extension of time to cure default, reinstate a loan, or redeem a property;

(3) a waiver of an acceleration clause or balloon payment; and (4) a short sale, deed-in-lieu of foreclosure, or any other disposition of the property except a sale to a third-party that is not the loan holder. Accordingly, proposed § 322.2(h) 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.

In some states, mortgagors have the right to “redeem,”

i.e.

, regain possession of, a property for a period of time following foreclosure.

One example of this coverage is the marketing of sale-leaseback or title-reconveyance transactions, which commonly are touted to consumers as a means to avert foreclosure or its consequences.

As a general matter, the FTC does not intend the proposed Rule to address how title-transfer transactions are regulated. The Commission recognizes that there are many comprehensive state laws that govern these types of transactions and impose specific requirements when title transfers occur.

To the extent sale-leaseback and title-reconveyance transactions are marketed as a means to avoid foreclosure, however, these purported services would be covered by the proposed Rule. The Commission specifically solicits comment on how the proposed Rule should apply to these types of transactions, especially in light of existing state laws.

See supra

note 35;

see also

NAAG at 2.

See supra

note 76. For example, some laws mandate that before doing a title transfer the foreclosure rescue operator must verify that the consumer can reasonably afford to repurchase the home.

See, e.g.

, Minn. Stat. § 325N.17(a)(1).

As a general matter, mortgage brokers are covered by the proposed Rule to the extent that they market “mortgage assistance relief services.”

The Commission does not intend the proposed Rule to apply to bona fide loan origination or refinancing services that mortgage brokers frequently offer. To obtain a new loan or refinance an existing loan, consumers can work either with the lender directly or with a mortgage broker who acts as an intermediary between the consumer and lender. Mortgage brokers can provide the benefit of offering consumers a wider choice of loan products from different lenders, without consumers having to deal with each lender separately.

Homeowners who are delinquent on their loans may be among the consumers whom mortgage brokers assist by helping them refinance their loans.

See

NAAG at 11-12 (“We have already seen complaints in which mortgage brokers charge consumers for mortgage consulting services and then failed to provide services or provided fewer services that originally promised. The trend of mortgage brokers providing services is likely to continue, especially if the market for mortgage loan origination remains soft.”).

Mortgage brokers typically are paid by the lender, and sometimes the borrower, from the closing costs of the loan transaction.

See, e.g.

, National Association of Mortgage Brokers FAQs,

available at

(

http://www.namb.org/namb/FAQs1.asp?SnID=498395277

);

see also

NAAG at 12 (noting that brokers “are traditionally paid. . . at the closing of a consumer’s loan, after all services have been provided”); NCLC at 29 (“[B]rokers are normally paid only when a sale or mortgage transaction is completed.”).

The Commission is mindful that consumers at risk of foreclosure could benefit from assistance in refinancing, and does not wish the proposed Rule to reduce the availability of legitimate services of this kind. At the same time, the Commission is concerned that services purported to help consumers obtain refinancing could be marketed deceptively as a means to avoid foreclosure.

Mortgage brokers or others could deceive consumers into paying large, up-front fees for loan origination or refinancing services based on false promises that consumers will be able to save their homes. Thus, the Commission solicits comment on how the proposed Rule should treat offers from mortgage brokers to work with lenders to negotiate new loans or refinance existing loans.

Consumers who otherwise would not consider themselves eligible to refinance their mortgage might have a different perspective because publicized government programs such as the MHA program offer consumers the opportunity to refinance at lower interest rates, even though they are delinquent or owe more than what the home is worth.

Finally, mortgage assistance relief services are limited to services that are marketed to consumers

who owe on loans secured by a “dwelling” or residence. A “dwelling” is defined to be a residential structure containing four or fewer units, whether or not it is attached to real property. The term dwelling also includes individual condominium units, cooperative units, mobile homes, or trailers.

On the other hand, the proposed Rule is not intended to cover MARS offered to borrowers whose loans are secured by commercial properties. The definition of “dwelling” applies only to residences that are “primarily for personal, family, or household purposes.”

Based on its law enforcement experience, the Commission believes that there are consumers who may own a second home or a rental property and seek help to avoid foreclosure on these properties. Therefore, the Commission intends the proposed Rule to apply to mortgage assistance relief services marketed to these consumers.

“Consumer” is broadly defined to include “any natural person who owes on any loan secured by a dwelling.” Proposed § 322.2(b). The Commission intends to cover consumers at every stage of the process, and does not limit the proposed Rule to those who are in default or foreclosure. Commenters observed that many consumers seek assistance from MARS providers before they are delinquent on their loans.

See

CMC at 8 (“Many of the abuses that servicers have encountered have occurred before the consumer has received a notice of default. MARS providers sometimes solicit customers who are not in default but who live in areas with high numbers of distressed borrowers. Any rule should apply to MARS providers at any stage of the process.”); CFA at 4 (“Many homeowners have sought help from MARS before entering default, though sometimes the MARS then encourages a default. . . . The mortgage servicing industry and others have urged homeowners to seek help before they go into default.”); NCRC at 2 (noting that there are “[c]ompanies claiming to offer assistance with loan modifications, to consumers who may or may not be in default”);

see also

NAAG at 11 (“The [state] requirement that consumers be in default before statutory protections begin made sense when mortgage consultants solicited business based on foreclosure filings, as those consumers would necessarily be in default. Mortgage consultants are now able to mine public information to target consumers who are not yet in default. Consultants may rely on an internet presence to draw in consumers who may also not be in default. As consumers have grown more concerned about the state of the economy, these solicitations are proving increasingly attractive. Based on these reasons, a rule should provide as much coverage for consumers as possible.”).

Proposed § 322.2(d). The definition for dwelling is based on that used in Regulation Z, 12 CFR 226, which implements the Truth in Lending Act, 15 USC 1601

et seq.

12 CFR 226.2(a)(19) (2009).

This language is derived from Regulation Z.

See

12 CFR at 226.2(a)(12) (definition of “consumer credit”).

2. Section 322.2(c): “Clear and Prominent”

The proposed Rule mandates that disclosures be made with clarity and prominence in various types of media. As discussed in more detail in Section III.D, the proposed disclosures are intended to prevent deception and allow consumers to make purchasing decisions about mortgage assistance relief services based on truthful information. The proposed Rule sets forth general requirements to ensure that the disclosures made in commercial

communications

are sufficiently clear and prominent for consumers to notice and comprehend them.

In all cases, disclosures are required to use syntax and wording that consumers easily can understand, and cannot be accompanied with statements that contradict or confuse their meaning.

The proposed Rule intends to prevent MARS providers from undermining required disclosures with contradictory or obscuring information. In addition, as described below, there are clear and prominent requirements that are specific to the particular media in which disclosures appear. In the Commission’s view, the extensive record of deception in the MARS industry makes it necessary to articulate with specificity how MARS providers must make required disclosures to consumers.

As defined in the proposed Rule, “commercial communication” is intended to include any written or verbal statement, illustration, or other depiction used to induce the purchase of goods or services.

See

Proposed § 322.2(a).

Where possible, in formulating the requirements of the proposed Rule, the Commission has drawn from comparable FTC rules requiring clear and prominent disclosures.

See

Disclosure Requirements and Prohibitions Concerning Franchising, 16 CFR 436.6 (2007) (Franchise Rule); Disclosure Requirements and Prohibitions Concerning Business Opportunities, 16 CFR 437.1 (2007) (Business Opportunity Rule); Regulations Under Section 4 of the Fair Packaging and Labeling Act, 16 CFR 500.4 (1994) (Fair Packaging and Labeling Act Regulations); Trade Regulation Pursuant to the Telephone Disclosure and Dispute Resolution Act of 1992, 16 CFR 308.2 (1993) (900 Rule); Rule Concerning Cooling-Off Period for Sales Made at Home or at Certain Other Locations, 16 CFR 429.1 (1988) (Door-to-Door Sales Rule). The disclosure requirements also are consistent with those in many FTC orders.

See, e.g.

Sears Holding Mgmt. Co.

, Docket No. C-4264, File No. 082-3099 (FTC Sept. 9, 2009),

available at

(

http://www.ftc.gov/os/caselist/0823099/090604searsdo.pdf

See

900 Rule, 16 CFR 308.3(a)(5); Franchise Rule, 16 CFR 436.9(a); Business Opportunity Rule, 16 CFR 437.1(a)(21) (prohibits making any oral, visual, or written representation that contradicts the information required to be disclosed by the Rule).

a. Written Disclosures

Proposed § 322.2(c)(1) sets forth various requirements for disclosures disseminated in print or written form. This includes consumer communications that appear in print publications or on a computer screen. For such disclosures, the proposed Rule specifies that the disclosure must be in a color that readily contrasts with the background of the consumer communication,

be in the same language predominant in the communication,

and appear parallel to the base of the communication.

Unless otherwise specified in the proposed Rule, the text size must be the larger of 12-point font or one-half the size of the largest letter or numeral of any company website or telephone number that is displayed in the consumer communication.

If there is no website or telephone number displayed in a communication touting mortgage assistance relief services, the disclosures must be in at least 12-point type. The text-size requirements of the proposed Rule are comparable to those of the FTC’s Trade Regulation Rule Pursuant to the Telephone Disclosure and Dispute Resolution Act of 1992 (“900 Number Rule”), except for the 12-point type default.

See, e.g.

Tender Corp.

, Docket No. C-4261, File No. 082-3188 (FTC July 17, 2009),

available at

(

http://www.ftc.gov/os/caselist/0823188/090717tenderdo.pdf

) (stating that disclosures must appear “in print that contrasts with the background against which it appears”);

Budget Rent-A-Car-System, Inc.

, Docket No.C-4212, File No. 062-3042 (FTC Jan. 4, 2008),

available at

(

http://www.ftc.gov/os/caselist/0623042/080104do.pdf

) (same);

see also

FTC,

Dot Com Disclosures: Information about Online Advertising

12 (2000),

available at

(

http://www.ftc.gov/bcp/edu/pubs/business/ecommerce/bus41.pdf

) (“

Dot Com Disclosures

”) (“A disclosure in a color that contrasts with the background emphasizes the text of the disclosure and makes it more noticeable. Information in a color that blends in with the background of the advertisement is likely to be missed.”).

See, e.g.

, 900 Rule, 16 CFR 308.3(a)(1). If the ad has substantial material in more than one language, the proposed MARS Rule requires that the disclosure be delivered in each such language. Proposed § 322.2(c)(1).

See, e.g.

Swisher Int’l, Inc.

, Docket No. C-3964, File No. 002-3199 (FTC Aug. 25, 2000),

available at

(

http://www.ftc.gov/os/2000/08/swisherdo.htm

) (finding that warnings for cigars must appear “parallel. . . to the base of the. . . advertisement”); Fair Packaging and Labeling Act Regulations, 16 CFR 500.4(b) (requiring that identification for packaged goods must appear “in lines generally parallel to the base on which the packaging or commodity rests as it is designed to be displayed”).

There are additional and qualifying requirements for disclosures mandated in §§ 322.4(b) and (c) of the proposed Rule.

See

900 Rule, 16 CFR 308.

b. Audio Disclosures

Proposed § 322.2(c)(2) addresses the use of disclosures in audio communications such as broadcast radio or streaming radio. The disclosure must be delivered in a slow and deliberate manner, at a reasonable volume, and at a slow enough pace to be heard and understood.

See, e.g.

Sears Holding

, Docket No. C-4264 (stating that audio disclosures must be made “in a volume and cadence sufficient for an ordinary consumer to hear and comprehend them”);

Darden Rests., Inc.

, Docket No. C-4189, File No. 062-3112 (FTC May 11, 2009),

available at

(

http://www.ftc.gov/os/caselist/0623112/070510do0623112c4189.pdf

) (same);

In re Kmart Corp.

, Docket No. C-4197, File No. 062-3112 (FTC Aug. 15, 2007),

available at

(

http://www.ftc.gov/os/caselist/0623088/0623088do.pdf

) (same);

In re Palm, Inc.

, Docket No. C-4044, File No. 002-3222 (FTC Apr. 19, 2002),

available at

(

http://www.ftc.gov/os/caselist/0023332/index.shtm

) (same);

Dot Com Disclosures

at 14 (explaining that audio disclosures should be “in a volume and cadence sufficient for a reasonable consumer to hear and comprehend it”).

c. Video Disclosures

Proposed § 322.2(c)(3) imposes requirements for consumer communications disseminated through video means. This includes video communications that appear on television or are streamed over the Internet. As a threshold matter, these communications must be delivered in accordance with the requirements for written and audio disclosures in proposed §§ 322.2(c)(1) and (2). In addition, the communication must include a simultaneous audio and visual disclosure,

the latter of which must be displayed for at least the duration of the oral disclosure and comprise four percent of the vertical picture height of the screen.

Disclosures are more effective if they are made in both the visual and audio part of a consumer communication.

See generally

Maria Grubbs Hoy & J. Craig Andrews,

Adherence of Prime-Time Televised Advertising Disclosures to the “Clear and Conspicuous” Standard: 1990 Versus 2002

, 23 J. Mktg. Pub. Pol. 170 (2004) (stating that “dual modality” disclosures - oral and visual together - are more effective at communicating information to consumers);

see also

NAAG at 13 (“We are unaware of any banks, thrifts or federal credit unions engaged in for-profit loan modification or foreclosure rescue services, aside from negotiating loan modifications for consumers whose loans they are servicing.”); OH AG at 5.

106

See, e.g.

, ABA at 5; AFSA 3-4; CMC at 4-5; MBA at 4; HPC at 2.

107

See, e.g.

, MBA at 4.

108

Further, application of the advance fee ban provision, discussed

infra

§ III.E, to servicers could interfere with their primary business function, collecting and processing scheduled loan payments on behalf of lenders.

See

Proposed § 322.5.

109

Note that proposed § 322.2(i) does not exempt agents of loan holders and servicers if they “claim, demand, charge, collect, or receive any money or other valuable consideration from the borrower for the agent’s benefit.” The limiting language ensures that MARS providers do not evade the Rule by styling themselves as “agents” of the lender or servicer. Thus, the exemption only applies to functions an agent undertakes on behalf of the lender or servicer but not on its own behalf.

Finally, § 322.2(e)(3) exempts nonprofit entities excluded from the FTC’s jurisdiction under the FTC Act.

110

The Commission intends for this exemption to include bona fide nonprofit housing counselors presently offering mortgage assistance relief services.

111

The FTC, however, does have jurisdiction over purported nonprofits that, in reality, operate for the profit of their members,

112

and proposed § 322.2(e)(3) does not exempt these entities.

110

Section 5(a)(2) of the FTC Act states: ‘‘The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations. . . from using unfair or deceptive acts or practices in or affecting commerce.’’ 15 U.S.C. 45(a)(2). Section 4 of the Act defines ‘‘corporation’’ to include: ‘‘any company, trust, so-called Massachusetts trust, or association, incorporated or unincorporated,

which is organized to carry on business for its own profit or that of its members

. . . .’’ 15 U.S.C. 44 (emphasis added).

111

These nonprofit services are described in more detail in Section II.C. of the ANPR.

MARS ANPR

, 74 FR 26135.

112

See, e.g.

AMA v. FTC

, 638 F.2d 443 (2d Cir. 1980),

aff’d by equally divided Court

, 455 U.S. 676 (1982);

FTC v. Ameridebt, Inc.

, 343 F. Supp. 2d 451 (D. Md. 2004).

C. Section 322.3: Prohibited Representations

Proposed § 322.3 addresses deceptive or unfair representations that MARS providers commonly make in marketing their services.

1. Section 322:3(a): Prohibited Statements

Proposed § 322.3(a) prohibits MARS providers from instructing consumers to cease communicating with their lenders or servicers. As discussed above, if consumers comply with this instruction and stop communicating with their lenders and servicers, consumers may not discover that their MARS provider is doing little or nothing on their behalf, may never learn of concessions their lender or servicer is willing to make, or, worst of all, may never be informed that foreclosure is imminent. The Commission is not aware of any benefits to consumers or competition from MARS providers directing consumers to

stop communicating with their lenders or servicers. Consumers cannot reasonably avoid the injury from this practice because many of them do not know of the potentially adverse consequences that could occur from ceasing such communications. Nor are there any countervailing benefits to consumers or competition from this practice. Accordingly, the Commission believes that it is an unfair practice for MARS providers to convey such an instruction to consumers. In addition, prohibiting this practice is reasonably related to the goal of preventing MARS providers from deceiving consumers by hiding from them the actions they have or have not taken on consumers’ behalf.

2. Section 322.3(b): Prohibited Misrepresentations

Proposed § 322.3(b) prohibits misrepresentations of any material aspect of any mortgage assistance relief service. Proposed §§ 322.3(b)(1)-(8) sets forth a non-exclusive list of specific aspects of a mortgage assistance relief service about which misrepresentations would violate the proposed Rule. These aspects include the likelihood and time to provide services or obtain results; the affiliation of the provider with public or private entities; payment and other obligations under existing mortgage loans; the MARS provider’s refund and cancellation policies; and the completion of promised services. This list tracks the types of false or misleading claims that the Commission and the states have challenged in law enforcement actions, as described above.

A claim is “deceptive” under Section 5 of the FTC Act if there is “a representation or omission of fact that is likely to mislead consumers acting reasonably under the circumstances, and that representation or omission is material.”

113

Misrepresentations of material fact are deceptive practices under Section 5. The aspects of MARS specified in §§ 323.3(b)(1)-(7) of the proposed Rule are material to consumers because they pertain to the cost, central characteristics, efficacy or other attributes of such services that are important to consumers.

114

Thus, the misrepresentations proposed § 323.3(b) prohibits constitute deceptive practices under the FTC Act.

113

In re Cliffdale Assocs., Inc.

, 103 F.T.C. 110, 164-66, 175-76 (1984). Information is “material” if it is “likely to affect a consumer’s choice of or conduct regarding a product.”

Id.

at 165.

114

Id.

at 182-83.

D. Section 322.4: Required Disclosures

Section 322.4 of the proposed Rule requires that MARS providers disclose information to consumers to assist them in making decisions about mortgage assistance relief services. First, proposed § 322.4(a) requires MARS providers to disclose clearly and prominently

115

in all of their commercial communications with consumers that they are for-profit businesses not associated with the government, and that neither the government nor the lender has approved the MARS provider’s offer of services. The Commission intends for this disclosure to apply to all advertisements and other marketing materials directed at a general audience.

115

The disclosure must be made in a manner that conforms with the definition of “clear and prominent” in proposed § 322.2(c).

See supra

§ III.B.2.

In addition, proposed § 322.4(b) requires that MARS providers disclose in all commercial communications directed to specific consumers, clearly and prominently and prior to consummating any agreement with the consumer, that: (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. The Commission intends these three disclosures to be made in every promotional communication between the MARS provider and a specific consumer that occurs prior to such consumer incurring any financial obligations.

116

The Commission believes it is appropriate to require the disclaimer disavowing any affiliation with the government or the consumer’s lender not only in general advertising, but in ensuing promotional communications with consumers as well. Otherwise, MARS providers could qualify or contradict this disclaimer during subsequent telemarketing calls or other communications with individual consumers, which the FTC’s enforcement experience indicates is common practice.

117

116

As discussed in Section II.B, often MARS providers disseminate advertisements that instruct consumers to call a telephone number or contact an email address, and once consumers do so MARS providers begin to interact with them on an individual level.

117

See, e.g

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009) (false success rate claims and other deceptive claims often made during telemarketing calls with consumers);

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX) (C.D. Cal. filed July 13, 2009) (same).

First, as described above, there are many government, nonprofit, and for-profit programs operating in the marketplace that provide a wide array of mortgage assistance relief services. In addition, the Commission and state law enforcement officials have brought numerous law enforcement actions against MARS providers who have misrepresented their affiliation with a government agency, a lender, a servicer, or others in connection with offering mortgage assistance relief services. These providers have used a variety of techniques to create such misimpressions, including adopting trade names that resemble the names of legitimate government programs.

118

Given the variety of entities that provide such services and the prevalence of these deceptive claims, the Commission believes that the requirement that MARS providers disclose their for-profit status and nonaffiliation with government or other programs is reasonably related to the goal of preventing deception.

118

See supra

note 56.

Second, the total cost of the mortgage assistance relief services is perhaps the most material information for consumers in making well-informed decisions whether to purchase those services. Requiring the clear and prominent disclosure of total cost information in every communication directed at a specific consumer prior to the consumer entering into an agreement makes it less likely that MARS providers will deceive prospective customers with incomplete, inaccurate, or confusing cost information.

119

The Commission therefore believes that requiring MARS providers to disclose total cost information clearly and prominently is reasonably related to the prevention of deception.

119

An incidental benefit of requiring that MARS providers disclose total cost clearly and prominently is that such transparency may facilitate the efforts of consumers to comparison shop among MARS providers based on cost, which would be beneficial to consumers and competition.

Third, in light of the history of deceptive success claims in this industry and the many widely-publicized government programs to help consumers seeking relief from lenders, consumers are likely to overestimate their abilities to obtain substantial loan modifications or other mortgage relief from MARS providers, even in the absence of specific misrepresentations of success. Therefore, the Commission believes that requiring MARS providers to disclose clearly and prominently in all commercial communications with prospective customers that their lenders may not agree to change their loan even if consumers purchase the services the

MARS provider offers is reasonably related to preventing deception.

The Commission has not conducted any empirical research into whether the disclosures that are specified in the proposed Rule would be an effective means of conveying information about the status, cost, and limitations of MARS. The Commission intends to study the effectiveness of any proposed disclosures in preventing consumer deception. To aid its analysis, the Commission seeks comment and data bearing on the costs and benefits of the disclosure requirements articulated in the proposed Rule.

E. Section 322.5: Prohibition on Collection of Advance Fees

The Commission proposes to ban MARS providers from requiring that consumers pay in advance for their services,

i.e.

, prior to the provider doing or accomplishing what it promised. This remedy is justified on two independent grounds: (1) that the collection of advance fees by MARS providers is an unfair act or practice and (2) that the prohibition is reasonably related to the goal of preventing deception. It is also strongly supported by the public comments submitted by law enforcers, consumer groups, and financial service businesses.

120

Supra

notes 18-21.

1. Advance Payments as an Unfair Act or Practice

Under Section 5(n) of the FTC Act, an act or practice is unfair if: (1) it causes or is likely to cause substantial injury to consumers; (2) that injury is not outweighed by countervailing benefits to consumers or competition; and (3) the injury is not reasonably avoidable by consumers themselves.

121

Section 5(n) also provides that the Commission may consider established public policies in determining whether an act or practice causes substantial injury, but may not use such policies as a primary basis for determining that an act or practice is unfair. The Commission believes that requiring that consumers pay advance fees for mortgage assistance relief services meets the standard for an unfair practice under Section 5(n) of the FTC Act, a conclusion that is supported by established public policies already incorporated into federal and state laws.

121

15 U.S.C. 45(n) (codifying the Commission’s unfairness analysis);

see also, e.g.

FTC v. US Foreclosure Relief Corp.,

No. SACV09-768 JVS (MGX), Prelim. Rep. Temp. Receiver at 2 (C.D. Cal. filed July 15, 2009) (“[O]n [defendants’] applications taken since November 2008, only 11% have resulted in closed modifications.”);

FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX), Mem. Supp. App. TRO at 19 (C.D. Cal. filed July 7, 2009) (“Nearly every consumer who is promised a loan modification never received any offer to modify their home loans.”);

FTC v. Freedom Foreclosure Prevention Specialists, LLC

, No. 2:09-cv-01167-FJM (D. Ariz. June 1, 2009) (alleging defendants only completed loan modifications for about 6% of consumers).

124

As noted in Section II, since January 1, 2008, the Commission has filed twenty-eight actions against MARS providers for deceptive and other unlawful practices that typically resulted in their failure to provide the promised results.

See

Appendix B.

125

See, e.g.

, NAAG at 4 (“As of July 1, 2009, over 450 companies are or have been investigated for providing foreclosure rescue services that violated state laws. Collectively, the states participating in the NAAG group have sued at least 130 of these companies.”);

id.

at 6.

126

See, e.g.

, NAAG at 3 (“As of July 1, 2009, the Office of the Illinois Attorney General had identified roughly 170 companies operating in Illinois that appeared to have offered or were presently offering foreclosure rescue services that violated Illinois state laws. The majority of these companies take impermissible up-front fees and then fail to deliver promised services. . . .”); MN AG at 2 (“As a general rule, these companies provide no service, or at most, simply submit paperwork to the homeowner’s mortgage company.”); Chase at 1 (“Chase’s experience has been that MARS entities disrupt the loan modification process and provide little value in exchange for the high fees they charge.”).

In our experience, we have found that services provided by foreclosure rescue services companies result only in costs to consumers. There are no benefits. The companies collect an upfront fee that consumers can ill-afford to pay. Consumers then submit financial information to the companies and the companies promise to forward the information to the consumers’ loan servicers and obtain a loan modification offer. In the majority of cases, the companies do nothing with the consumers’ information. The consumers then end up turning to a non-profit for help, calling their servicers themselves, or falling further behind on their mortgage payments as they wait for the promised loan modification offer that never materializes.

127

NAAG at 6.

The marketplace does not appear to provide an adequate deterrent to MARS providers failing to perform on their contracts. MARS providers are often new entrants or ephemeral operations with little or no good will in their businesses and rarely provide repeat services to their customers. In these circumstances, the reputational harm from not providing promised services appears to provide little disincentive to nonperformance by MARS providers.

Consumers are especially unlikely to obtain the claimed services or results if the MARS provider has promised to obtain a mortgage loan modification that lowers consumers’ monthly payments.

128

Many consumers who seek mortgage assistance from MARS providers are not eligible for the mortgage loan modifications that various government programs offer.

129

Apart from these programs, lenders and servicers often are unwilling to modify the terms of mortgage loans or forgive fees and penalties as an alternative to foreclosure.

130

Even if lenders and servicers might be amenable to a modification, many MARS providers do little or no work for their customers, neglecting to contact their lenders or servicers or failing to respond to their requests for basic information.

131

128

See, e.g.

, each case in Appendix B.

129

See, e.g.

, Manuel Adelino

et al.

Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization

3 (July 2009),

available at

(

http://www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf

) (finding that lender provided monthly payment-lowering modifications to only 3% of seriously delinquent loans in 2007and 2008); NCLC at 6 (pointing to “[o]ne analysis of statistics for modifications made

in May 2009 [which] showed that only 12% reduced the interest rate or wrote-off fees or principal”).

130

Id.

;

see also, e.g.

, Alan M. White,

Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications

, 41 Conn. L. Rev. 1107, 1111(2009) (arguing,

inter alia

, that “[n]o single servicer or group of servicer. . . has any incentive to organize a pause in foreclosures or organized deleveraging program to benefit the group”).

131

See supra

notes 62-64.

b. Countervailing Benefits to Consumers and Competition

In analyzing whether an act or practice is unfair, the Commission considers its benefits to consumers and competition in comparison to its harms. The comments received do not demonstrate that paying in advance for mortgage assistance relief services has any benefits to consumers. MARS providers, however, have argued generally that charging fees in advance is needed to protect them against the risks of nonpayment by consumers after delivery of the services.

132

These providers point out that most consumers who purchase MARS are in financial distress, so they may not be willing or able to pay the amount owed, and that any judicial remedy against consumers for nonpayment is costly. MARS providers also argue that they require advance fees to pay their ongoing operating costs -

e.g.

, for payroll, office space, and equipment - as well as the direct costs of seeking modifications for consumers, all of which they incur prior to obtaining the modifications.

133

In short, MARS providers claim that it would be impossible or extremely difficult to provide mortgage assistance relief services if they could not charge advance fees, thus depriving consumers of the benefits of those services.

132

TNLMA at 5 (“Nearly all professions, from attorneys to accountants to personal trainers, charge advance fees. . . . The reason these other professions charge fees ‘up-front’ is to avoid the risk of being ‘stiffed’ at the end of a laboriously costly effort.”). Relatedly, one commenter expressed concern that consumers could “game” a back-end fee model by rejecting the loan modification secured by the provider (in exchange for the fee) and then simply approaching the lender directly to obtain the very same modification for free.

Id.

133

See, e.g.

, Gutner at 1 (“[L]oan modification is not as simple as filling out a few forms and then it is done. Loan modification is a long and involved process. . . . Loan modification companies have expenses just like any other company - payroll, lease, insurance, equipment etc.”); TNLMA at 5 (“[MARS providers] incur significant costs before the consumer’s mortgage is ready to be modified.”).

The Commission concludes that the record to date does not show that charging advance fees provides a benefit to consumers. As discussed above, few MARS providers perform the services or obtain the results promised and, therefore, consumers who pay in advance typically get nothing in return for their payments. The FTC also concludes that the record to date does not demonstrate that charging advance fees benefits competition or the extent of any such benefits, much less that any benefits to competition exceed the harms to consumers from the payment of advance fees. Nothing in the record bears on the nature and extent of the costs, if any, to MARS providers if they cannot operate without charging advance fees,

e.g.

, by capitalizing their business. For example, the record does not address whether MARS providers would be unable to recoup their costs relatively quickly - by achieving promised results for some consumers and collecting the associated fees - even if they were prohibited from charging advance fees. The information the Commission has received and reviewed also does not address the extent to which consumers would not pay the money they are obligated to pay once the services are rendered, or that there are no other means by which providers could protect themselves from the risk of nonpayment.

134

The Commission seeks comment and data bearing on the costs to MARS providers if they cannot charge advance fees for MARS, and the extent to which these costs would prevent them from offering services to consumers.

134

In particular, the Commission seeks comment on the costs and benefits of allowing providers to request or require that consumers place advance fees in an independent third-party escrow or trust to eliminate the risk of nonpayment.

c. Reasonable Avoidability of Injury

In considering whether an act or practice is unfair, the Commission also considers whether the harm from the practice is reasonably avoidable by consumers. Consumers can only reasonably avoid harm if they understand the risk of injury from an act or practice.

135

Consumers also must have available to them an alternative means of avoiding the injury that is not unduly costly to them.

136

135

See In re Int’l Harvester Co.

, 104 F.T.C. at 1073 (Unfairness Policy Statement);

In re Orkin Exterminating Co., Inc.

, 108 F.T.C. 263 at 366 (1986),

aff’d

FTC v. Orkin

, 849 F.2d 1354 (11th Cir. 1988).

136

In re Orkin Exterminating Co., Inc.

, 108 F.T.C. at 374-75 (Oliver, Chm., concurring).

There is nothing in the record that suggests consumers could reasonably avoid the substantial injury caused by having to pay advance fees for MARS. Consumers can avoid the injury only if they are aware of the risks of paying in advance. Especially in light of the prevalence of deception surrounding these services, consumers are unlikely to know of the substantial risk that the provider will not perform as promised.

MARS providers also do not appear to compete on the basis of when fee collection takes place. Based on the current record, it appears that nearly all MARS providers charge up-front fees for their services.

137

Thus, even if consumers were aware of the risk that MARS providers will not perform, as a practical matter they might not have the option of protecting themselves by choosing a provider that charges only after services are rendered. At the very least, the search costs in identifying such providers would pose a significant deterrent for consumers in financial distress. Thus, consumers who seek mortgage assistance relief services cannot reasonably avoid the substantial harm associated with being charged an advance fee for those services.

137

Specifically, in its law enforcement actions, the Commission has not observed any MARS providers that did not charge up-front fees to consumers.

See

Appendix B. Additionally, none of the comments submitted in response to the ANPR cite any example of MARS providers employing a different fee model.

In addition, consumers who have paid in advance, only to discover that the providers have not provided the promised services or result, typically cannot mitigate their harm by seeking a refund. Most MARS providers do not provide refunds to consumers;

138

indeed, providers commonly make false claims about the availability of refunds.

139

Ultimately, many consumers

of mortgage assistance services are never able to recover the amount of the advance payment they made to a MARS provider who neither performed promised services nor delivered promised results.

140

138

See supra

note 59.

139

Even if a MARS provider gave refunds, consumers would have been deprived of the use of the money they paid for their advance fee for the period of time from when the contract was signed until the refund was provided. Financially distressed consumers facing the prospect of losing their homes suffer injury from being deprived of the use of hundreds or thousands of dollars during this critical period of time when they are trying to stay current on their mortgages and pay other expenses. Thus, a refund would not eliminate the injury from having to make advance payments. It is established law under Section 5 that offering a refund is not a defense to a charge that a marketer misrepresented its product or service.

See, e.g.

FTC v. Think Achievement Corp.

, 312 F.3d 259, 261-62 (7th Cir. 2002);

FTC v. Pantron I Corp.

, 33 F.3d 1088, 1103 (9th Cir. 1994);

In re Sears, Roebuck and Co.

, 95 F.T.C. 406, 518 (1980),

aff’d

, 676 F.2d 385 (9th Cir. 1982).

140

See, e.g.

Door-to-Door Sales Rule Statement of Basis and Purpose

, 40 FR at 53523 (“Consumers are clearly injured by a system which forces them to bear the full risk and burden of sales related abuses. There can be little commercial justification for such a system.”).

Having paid in advance and not received a refund, the only remaining recourse consumers would have for a nonperforming MARS provider is to file a lawsuit for breach of contract, hardly a viable option for financially-distressed consumers who might be facing imminent foreclosure.

141

Many consumers who are in financial distress are not sophisticated in legal matters and may not be aware that filing an action against the MARS provider for breach of contract is available as an alternative. More significantly, the cost of litigating makes it impossible or impractical for many consumers to seek legal recourse. Thus, the possibility of taking legal action does not sufficiently mitigate the harm to consumers from paying an advance fee.

141

In re Orkin Exterminating Co.

, 108 F.T.C. 263 at 374-75 (Oliver, Chmn., concurring) (suing for breach of contract is not a reasonable means for consumers to avoid injury).

Based on the forgoing analysis, the Commission believes that charging an advance fee for mortgage assistance relief services is an unfair practice. The Commission reached the same conclusion in its TSR with respect to the charging of an advance fee for credit repair services, money recovery services, and guaranteed loans or other extensions of credit.

142

As is true in this proceeding, the Commission found in the TSR proceeding that companies selling those products or services routinely misrepresented the services they would perform or the results they would achieve, and that consumers paying advance fees would incur all of the risk of nonperformance. The TSR therefore prohibits telemarketers of such products or services from charging an advance fee.

143

142

See Telemarketing Sales Rule Statement of Basis and Purpose

, 68 FR 4580, 4614 (Jan. 29, 2003)

(TSR Statement of Basis and Purpose)

143

See

16 CFR 310.4(a). Note that, although the TSR declares the charging of advance fees in this context to be “abusive” - the term used in the Telemarketing Act - the Commission used the unfairness analysis set forth in Section 5(n) of the FTC Act to support this declaration.

See TSR: Notice of Proposed Rulemaking

, 67 FR 4492, 4511 (Jan. 30, 2002).

d. Public Policy Concerning Advance Fees

Section 5(n) of the FTC Act permits the Commission to consider established public policies in determining whether an act or practice is unfair, although those policies cannot be the primary basis for that determination. There are strong public policies against charging advance fees for MARS as shown by the 20 or more state laws that prohibit this practice because of its adverse effect on consumers.

144

Consistent with these statutes and their law enforcement experience, 46 states filed comments strongly advocating that the Commission issue a rule that prohibit the charging of advance fees for MARS.

145

The Commission believes that these state laws provide further support for its finding that this practice is unfair.

144

See supra

note 76.

145

See

NAAG at 9; MN AG at 4; MA AG at 2; OH AG at 3.

2. The Advance Fee Ban to Help Prevent Deception

As a second basis for imposing an advance fee ban, the Commission believes that such a ban is reasonably related to the goal of protecting consumers from widespread deception in the offering of MARS. The Commission has authority not only to prohibit conduct that is itself unlawful, but also may impose additional relief that is reasonably related to restraining unlawful conduct.

146

The Commission exercises similar discretion in crafting orders to resolve law violations.

Cf. FTC v. National Lead Co.

, 352 U.S. 419, 428 (1957) (“[T]he Commission is clothed with wide discretion in determining the type of order that is necessary to bring an end to the unfair practices found to exist.”);

FTC v. Ruberoid

, 343 U.S. 470, 473 (1952) (“If the Commission is to attain the objectives Congress envisioned, it cannot be required to confine its road block to the narrow lane the transgressor has traveled; it must be allowed effectively to close all roads to the prohibited goal, so that its order may not be by-passed with impunity.”);

Jacob Seigel Co. v. FTC

, 327 U.S. 608, 611-12 (1946) (“The Commission has wide discretion in its choice of a remedy deemed adequate to cope with the unlawful practices in this area of trade and commerce.”).

As detailed in Section II of this document, MARS providers commonly make claims as to the services they will provide or the results they will obtain. These claims induce consumers to pay up-front fees of hundreds or thousands of dollars for services and results the providers typically do not deliver. Because the likelihood of consumers pursuing judicial remedies against nonperformance is small, MARS providers have little incentive to perform, and in fact many do not.

147

The advance fee ban proposed in § 322.5 realigns the incentives of the MARS provider to deliver on its promises because it will not be paid until it does so.

148

Thus, the ban would help to prevent the deceptive performance claims providers frequently make.

149

147

See supra

notes 123-26.

148

See, e.g.

, NAAG at 10 (“The risk of not receiving payment provides the strongest possible incentive for mortgage consultants to promptly and adequately provide all promised services. Plus, if the consultant provides good services and the consumer obtains an affordable loan modification, the consumer should be in a better position financially to pay the consultant.”);

id.

at 11 (“The incentives created for fraudulent companies to enter into this industry by allowing payment of advance fees cannot be mitigated through disclosures. The only way to ensure that companies are actually working for consumers is to require them to produce results before the consumers make payment.”); NCLC at 5, 8 (“Requiring these companies to obtain the promised loan modification as a condition of being paid will substantially reduce their incentive for making false or inflated promises of foreclosure assistance.”); MN AG at 4 (“A prohibition on up-front fees also provides the strongest incentive for loan modification and foreclosure rescue companies to provide adequate services. . . .”).

149

Although the proposed Rule prohibits deceptive representations and mandates certain disclosures, there is no assurance that these remedies would be effective in every case, or that all providers will abide by them. An advance fee ban thus also may be needed to prevent deception. The Commission in the TSR prohibited the collection of advance fees from credit repair services, money recovery services, and guaranteed loans or other extensions of credit even though the Rule also banned deceptive claims and required disclosures in marketing those products and services.

See

TSR, 16 CFR 310.1,

et seq.

;

TSR Statement of Basis and Purpose

, 68 FR 4580.

3. The Ban on Advance Payments in the Proposed Rule

Section 322.5(a) of the proposed Rule provides that:

It is a violation of this rule for any mortgage assistance relief service provider to request or receive payment of any fee or other consideration until the provider has: (1) [a]chieved all of the results that: (i) [t]he provider represented, expressly or by implication, to the consumer that the service would achieve, and (ii) [a]re consistent with consumers’ reasonable expectations about the service and (2) [p]rovided the consumer with documentation of such achieved results. . . .

The Commission intends for this provision to prevent a MARS provider from requesting or receiving any fees or any other form of compensation, including an equity stake in consumers’ property, until it achieves the results that its claims cause consumers to expect or that consumers reasonably expect given the type of service sold. Thus, the performance that MARS providers must complete before collecting fees is those results that are

represented, expressly or by implication, to prospective consumers and that are consistent with the purpose for which the service is sold.

Section 322.5(1)(i) prohibits a MARS provider from collecting a fee until it has achieved each result “represented, expressly or by implication, to the consumer that the service would achieve.” In determining what representations consumers take away from providers’ communications, the Commission will employ its traditional tools of claims construction. Thus, an advertisement or other communication will be deemed to convey a claim if consumers, acting reasonably under the circumstances, would interpret the communication to convey that message.

150

The message may be conveyed by innuendo as well as by express statements.

151

The Commission looks to the overall, net impression created by the communication, rather than focusing on the individual elements in isolation.

152

Information intended to qualify a claim must be presented in a clear and prominent manner; fine print disclosures in advertisements or contracts generally are ineffective to change the meaning of statements that appear in the body of a communication.

153

150

See Kraft, Inc.

, 114 F.T.C. 40, 120 (1991),

aff’d

, 970 F.2d 311 (7th Cir. 1992).

151

See Fedders Corp. v. FTC

, 529 F.2d 1398, 1402-03 (2d Cir.).

152

See Cliffdale Assocs.

, 103 F.T.C. at 179 & n.32 (Deception Policy Statement).

153

Id.

at 180-81 (“Written disclosures or fine print may be insufficient to correct a misleading representation. . . . Oral statements, label disclosures or point-of-sale material will not necessarily correct a deceptive representation or omission. Thus, when the first contact between a seller and a buyer occurs through a deceptive practice, the law may be violated even if the truth is subsequently made known to the purchaser. Pro forma statements or disclaimers may not cure otherwise deceptive messages or practices.”). To be effective, disclosures must be clear and conspicuous.

See, e.g.

Thompson Med. Co. v. FTC

, 104 F.T.C. 648 (1984),

aff’d

, 791 F.2d 189 (D.C. Cir. 1986);

United States v. Bayer Corp.

, No. CV-00-132 (D.N.J. Jan. 11, 2000) (consent decree).

In addition, under § 322.5(a)(1)(ii), before a MARS provider can collect any payment, it also must achieve all those results that “are consistent with the consumers’ reasonable expectations about the service.” Using traditional principles of claim interpretation, the Commission believes that even general efficacy claims (

e.g.

, “our service will help you with your mortgage”) are likely to convey that consumers can expect to achieve a result consistent with the purpose of the product or service,

154

that the result will be beneficial to them,

155

and that the benefit will be substantial.

156

Even in the absence of claims that a specific result will be achieved, reasonable consumers thus are likely to interpret an advertisement as promising results consistent with the purpose of the product or service.

157

The act of offering the MARS for sale obligates the provider to achieve at a minimum results that are consistent with the results consumers reasonably expect to receive from such a service.

158

154

FTC v. Chrysler Corp.

, 561 F.2d 357 (D.C. Cir. 1977);

Feil v. FTC

, 285 F.2d 879, 885-87 & n.19 (9th Cir. 1960);

In re J.B. Williams

, 68 F.T.C. 481, 542-43 (1965).

155

For example, in a legitimate short sale, the property is sold for a price that is less than the debt owed on the mortgage, but the lender agrees to take this lesser amount as full satisfaction of the debt. A short sale is intended to result in less damage to a consumer’s credit rating than a foreclosure. Some purported “short sales” are detrimental to consumers, however.

See, e.g.

, NCLC at 17-18 (expressing concern about “short sale” scams). Some MARS providers that purportedly help the consumer to sell the property “short” conceal the actual sale price amount from the lender, leaving the consumer liable for the difference and owing taxes on a larger forgiven balance than necessary. This would not be considered a beneficial result for the consumer, and thus the MARS provider could not collect a fee for it.

156

An efficacy claim conveys to consumers that the result or benefit will be meaningful and not

de minimis

See P. Lorillard Co. v. FTC

, 186 F.2d 52, 57 (4th Cir. 1950) (challenging advertising that claimed that the cigarette was lowest in nicotine, tar and resins in part because the difference was, in fact, insignificant);

Sun Co.

, 115 F.T.C. 560 (1992) (challenging advertising for octane gasoline that represented gas would provide superior power that would be significant to consumers); Guides Concerning the Use of Endorsements and Testimonials in Advertising, 16 CFR 255.2 (2009) (“An advertisement containing an endorsement relating the experience of one or more consumers on a central or key attribute of the product or service also will likely be interpreted as representing that the endorser’s experience is representative of what consumers will generally achieve with the advertised product or service in actual, albeit variable, conditions of use.”); Guides for the Use of Environmental Marketing Claims,16 CFR 260.6(c) (1998) (“Marketers should avoid implications of significant environmental benefits if the benefit is in fact negligible.”);

FTC Enforcement Policy Statement on Food Advertising

, 59 FR 28388, 28395 & n.96 (June 1, 1994),

available at

(

http://www.ftc.gov/bcp/policystmt/ad-food.shtm

) (“The Commission shares FDA’s view that health claims should not be asserted for foods that do not significantly contribute to the claimed benefit. A claim about the benefit of a product carries with it the implication that the benefit is significant.”).

157

See, e.g.

In re International Harvester Co.

, 104 F.T.C. 949, 1058-59 (1984) (implied representations may arise from “ordinary consumer expectations as to the irreducible minimum performance standards of a particular class of good,”

i.e.

, “by the very act of offering goods for sale the seller impliedly represents that they are reasonably fit for their intended uses.”)

158

The proposed Rule mandates that providers achieve a defined result if they promise consumers a loan modification. Specifically, the Commission believes that a MARS provider’s representation that it will negotiate, arrange, or obtain a loan modification (which may include modifying the interest rate, principal amount, or the term of the loan) implies to reasonable consumers that they will receive a reduction in their mortgage obligation, that the result will be permanent, and that the benefits will include a substantial decrease in the amount of their monthly payments for a meaningful period of time. Accordingly, § 322.5 provides that if a MARS provider makes an express or implied representation that it will “negotiate, obtain, or arrange a modification of any dwelling loan,” it must obtain a “mortgage loan modification” for the consumer before it can collect any fee or other consideration.

Under proposed § 322.5, the required “mortgage loan modification” that must be provided prior to payment is a

permanent

contractual change to the mortgage that substantially reduces the borrower’s scheduled periodic payments. The reduction must be permanent for a period of at least five years or a reduction that will become permanent once the consumer successfully completes a trial period. Many MARS providers attempt to persuade consumers to accept repayment plans or forbearance agreements as a substitute for a promised loan modification.

159

Such plans and agreements do not result in a permanent decrease in monthly payments, but tend to increase the amount that consumers owe each month on their mortgages, either immediately or in the near future when the forbearance period ends. Under the proposed Rule, a loan modification must

reduce

the consumer’s scheduled periodic payments, and that reduction must be

substantial

i.e.

, a meaningful reduction that makes the loan affordable for that consumer.

159

See, e.g.

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX), Mem. In Supp. of Ex Parte TRO, Ex. 10 (C.D. Cal. filed July 13, 2009);

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009), Reply to Resp. Order to Show Cause at 7 (C.D. Cal. filed Apr. 22, 2009).

The proposed ban on advance fees prohibits MARS providers from requesting or collecting advance fees for any represented service until

all

of the results promised, expressly or by implication, are delivered. This prevents MARS providers from charging for their services piecemeal.

160

If, for

example, consumers reasonably expect that at the end of the process they will receive a particular outcome, such as a short sale or deed-in-lieu of foreclosure transaction, the MARS provider cannot require the consumer to pay a fee for an initial consultation or subsequent fees on a periodic basis as it purportedly performs various steps to achieve that outcome. The provider cannot collect any fee until after the favorable result marketed ultimately has been achieved for the consumer.

161

160

Without such a prohibition, MARS providers might attempt to charge consumers for discrete tasks that fall short of the full service or result promised, such as collecting a fee once they conduct an initial consultation with the consumer; review or audit the consumer’s mortgage loan documents; gather financial or other information from the borrower; send an application or other request to the lender or borrower; facilitate communications between the borrower or servicer;

or respond to particular requests from the lender or borrower on behalf of the consumer.

See, e.g.

, NAAG at 5 (“We are now seeing consultants offering these services piecemeal. For example, some companies represent they will help consumers gather their financial documents and prepare the information to submit to their mortgage servicer for a fee. Then, for another fee, the companies represent that they will facilitate communication between the consumers and their mortgage servicer.”).

161

The MARS provider cannot evade this prohibition by refraining from making any explicit claim about the result it will achieve (such as a loan modification) and instead offering to provide specific mortgage relief-related services, such as a review of consumers’ loan documents. Such offers are likely to convey to reasonable consumers that they will receive the ultimate result that is the purpose for which they are entering into the transaction. Thus, proposed § 322.5(b) requires MARS providers to obtain the loan modification or other remedy before requesting or collecting any fee.

Under proposed § 322.5, MARS providers must provide the consumer with documentary proof of completed services and achieved results before requesting or collecting payment. The Commission intends for the required documentation to be the most comprehensive written instrument memorializing the loan holder’s agreement to offer the represented concession to the consumer. In the case of promised loan modifications, the proposed Rule specifies that documentation must be a “written offer from the dwelling loan holder or servicer to the consumer.” Likewise, the MARS provider must provide documentation in the form of a written offer from the lender or servicer setting forth other concessions, such as a forbearance agreement, short sale or deed-in-lieu of foreclosure transaction; waiver of an acceleration clause; opportunity to cure default or reinstate a loan; or repayment plan.

4. Alternatives to an Advance Fee Ban

In proposing an advance fee ban, the Commission has considered and, at this stage, decided against imposing alternative restrictions on MARS providers. However, it seeks comment on these alternatives - in particular, on whether the Commission should: (1) limit or cap advance fees instead of banning them outright; (2) allow MARS providers to use independent third-party escrow accounts to hold fees until they achieve the results; and (3) include a right of rescission.

First, the Commission seeks comment on whether, instead of banning fees outright, the proposed Rule should permit MARS providers to charge a small up-front fee or to collect fees as they perform services preliminary to obtaining the result that are commensurate with those services.

162

As detailed above, the FTC believes that charging hundreds or thousands of dollars in advance for MARS is unjustified based on the current record. However, the Commission seeks comment on whether there are MARS providers currently operating that charge a small up-front fee (such as $50 - $100) or collect fees as they perform preliminary services, and then successfully deliver results to their customers. Based on the current record, the FTC is not aware of such entities.

162

For example, Maine’s statute regarding MARS providers limits them to a $75 up-front fee.

See

ME. REV. STAT. ANN. tit. 32, § 6174-A.

Second, the Commission seeks comment on whether, in the event the Rule bans advance fees, MARS providers should be allowed to request or require that consumers place any such fees in an escrow account. Under this approach, an escrow agent could administer the account to ensure that MARS providers receive payment if and only if they successfully provide the ultimate results. Based on the Commission’s law enforcement experience, as well as the views of state law enforcement officials and consumer groups,

163

however, the Commission is concerned that MARS providers might improperly obtain access to MARS funds in escrow accounts.

164

The Commission seeks 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.

163

See, e.g.

, NAAG at 10 (“By fees, we mean any transfer of money whatsoever from consumers to consultants. This includes monies placed in escrow, holds placed on credit cards, and checks that are post-dated.”); NCLC at 4 (“Companies should not be permitted to evade an advance fee ban by taking the money ‘in trust’ until the ‘services’ are performed.”).

164

See, e.g.

FTC v. US Foreclosure Relief Corp.

, No. SACV09-768 JVS (MGX), Decl. Thomas Layton (C.D. Cal. filed July 16, 2009) (stating that attorney improperly transferred 90% of funds from client trust accounts associated with loan modification services to other non-attorney business partners).

Third, the Commission seeks comment on whether the proposed Rule should include a right of rescission. A right of rescission, often called a “cooling-off period,” would allow consumers to cancel their agreements with a MARS provider for a certain period after entering into the agreement. Several commenters recommended that the Commission include such a provision in the proposed Rule.

165

Additionally, most state MARS statutes provide a right of cancellation.

166

In light of the acute financial and emotional distress faced by consumers of MARS,

167

consumers often may not have or take the time needed, or obtain the information necessary, to consider carefully their options before deciding to purchase these services.

168

A right of rescission would serve to provide consumers with additional time to make decisions.

165

See, e.g.

, NAAG at 9; MN AG at 3-4; NCLC at 12; CRC at 4-5.

166

See supra

note 76.

167

See MARS ANPR

, 74 FR at 26134-35.

168

The Commission has previously issued regulations providing for a rescission period in circumstances in which the context of the transaction made it difficult for consumers to make well-informed purchasing decisions.

See

Door-to-Door Sales Rule, 16 CFR 429.1,

et seq

.; Trade Regulation Rules: Mail or Telephone Order Merchandise (Mail Order Rule), 16 CFR 435.1(c) (1993);

see also Door-to-Door Sales Rule Statement of Basis and Purpose

, 37 FR 22943, 22937.

At this time, the Commission believes that a right of rescission is not needed to protect consumers if MARS providers are banned from collecting advance fees. The Commission seeks comment on whether a right of rescission would be adequate to protect consumers in lieu of an advance fee ban or, alternatively, whether it would be beneficial to consumers as a complement to an advance fee ban. It also seeks comment on, to the extent such a provision were included in the Rule, the appropriate period of time after consumers enter into the agreement that they should be able to rescind their agreements with MARS providers.

F. Section 322.6: Assisting and Facilitating

1. Background

Many MARS providers engaged in deceptive or unfair practices rely on, or work in conjunction with, other entities to advertise and operate their businesses. These entities may provide a wide variety of critical support and assistance, including advertising services, telemarketing and other marketing support,

169

payment

processing,

170

and the back-end handling of consumer files.

171

In providing this support and assistance, such entities often know, or consciously avoid knowing, that the MARS providers whom they assist are engaging in deceptive or unfair conduct.

172

169

See, e.g.

FTC v. Kirkland Young, LLC

, No. 09-23507, Mem. Supp. of Emer. Mot. for TRO at 9 (S.D. Fla. filed Nov. 24, 2009).

170

See, e.g.

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX), Pls. Opp. Mot. Decl. Relief at 5 (C.D. Cal. filed Nov. 20, 2009) (alleging that payment processor for defendant loan modification company had “actual knowledge that the credit card charges [it] processed for [the defendant] were for advance fees in violation of relevant consumer protection laws”). In other industries, the FTC has sued payment processors for charging consumers for products or services despite indications that those products or services were illusory.

See, e.g.

FTC v. InterBill, Ltd

., No. 06-cv-01644-JCM-PAL (D. Nev. Jan. 8, 2007);

FTC v. Your Money Access, LLC

, No. 07-5174 (E.D. Pa. filed Dec. 11, 2007).

171

See, e.g.

FTC v. Fed. Loan Modification Law Ctr., LLP

, No. SACV09-401 CJC (MLGx), Reply to Resp. Order To Show Cause at 9 (C.D. Cal. filed April 22, 2009) (alleging that defendants contracted with another entity to process backlog of consumer files and negotiate with lenders on behalf of those consumers).

172

See supra

notes 170-71.

MARS providers, for example, often purchase the contact information of potential customers from so-called “lead generators.” These lead generators, in turn, often rely on a network of Internet advertisers to drive traffic to their websites so that they can obtain consumers’ information.

173

Lead generators have provided contact information of potential customers to many of the MARS providers that the Commission has challenged in its law enforcement actions.

174

Additionally, some lead generators themselves disseminate claims to consumers, and the Commission has challenged some of these claims as deceptive in violation of Section 5 of the FTC Act.

175

173

Additionally, advertising affiliate network companies may serve as intermediaries between individual advertisers and lead generator websites.

174

See, e.g.

FTC v. Kirkland Young, LLC

, No. 09-23507, Mem. Supp. of Emer. Mot. for TRO at 9 (S.D. Fla. filed Nov. 24, 2009) (alleging that defendant employed lead generators to leave messages with consumers via outbound telemarketing calls);

FTC v. Truman Foreclosure Assistance, LLC

, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009);

FTC v. Hope Now Modifications, LLC

, No. 1:09-cv-01204-JBS-JS (D.N.J. filed Mar. 17, 2009).

175

See United States v. Ryan

, No. 09-00173-CJC (C.D. Cal. filed July 14, 2009) (criminal complaint against lead generator named as defendant in FTC action);

FTC v. Thomas Ryan

, No. 1:09-00535 (HHK) (D.D.C. filed Mar. 25, 2009);

FTC v. Sean Cantkier

, No. 1:09-cv-00894 (D.D.C. amended complaint filed July 10, 2009). The Commission also has alleged the involvement of lead generators in deception and abusive practices in other contexts, including deceptive or abusive telemarketing and payday lending practices.

See, e.g.

We Give Loans, Inc.

, Docket No. C-4232, FTC File No. 072 3205 (FTC Sept. 5, 2008) (complaint) (payday loans);

United States v. Voice-Mail Broad. Corp.

, No. CV-08 MMM (JTLx) (C.D. Cal. filed Jan. 29, 2008) (telemarketing).

To address the conduct of those who provide key support to MARS providers engaged in unlawful conduct, the proposed Rule prohibits any person from providing substantial assistance or support to a MARS provider if that person knows or consciously avoids knowing that the provider is violating any provision of the proposed Rule. Proposed § 322.6 thus would allow FTC and state law enforcement officials to obtain monetary and injunctive relief against those who knowingly help MARS providers engaged in conduct that harms consumers. The Commission believes that (1) it is an unfair act or practice to knowingly or with conscious avoidance provide substantial assistance or support to those engaged in unlawful conduct; and (2) prohibiting such assistance is reasonably related to the goal of preventing the deceptive or unfair practices of MARS providers.

2. Substantial Assistance or Support as an Unfair Practice

Applying the three-prong test under Section 5(n) of the FTC Act, the Commission tentatively concludes that it is unfair to knowingly (or with conscious avoidance) provide substantial assistance or support to a MARS provider engaged in violations of the proposed Rule. A person engaged in such conduct causes substantial injury to consumers that is not offset by benefits to consumers or competition, and consumers cannot reasonably avoid the injury.

176

In law enforcement actions, the Commission has alleged that entities that offered substantial assistance to another engaged in unlawful acts were themselves engaged in unfair practices in violation of Section 5 of the FTC Act.

See, e.g.

FTC v. InterBill, Ltd.

, No. 06-cv-01644-JCM-PAL (D. Nev. filed Jan. 8, 2007);

FTC v. Your Money Access, LLC

, No. 07-5174 (E.D. Pa. filed Dec. 11, 2007). Federal court decisions have held that such conduct is unfair in violation of Section 5.

See, e.g.

FTC v. Neovi, Inc.

, 598 F. Supp. 2d 1104 (S.D. Cal. 2008) (holding that defendants engaged in unfair acts by creating checks they knew were often requested by unauthorized parties);

FTC v. Accusearch

Inc.

, No. 06-CV-105-D, 2007 WL 4356786 (D. Wyo. Sept. 28, 2007) (holding that defendants engaged in unfair practices by selling phone records obtained by other parties through deception);

FTC v. Windward Mktg.

, No. Civ.A. 1:96-CV-615F, 1997 WL 33642380 (N.D. Ga. Sept. 30, 1997) (holding that defendants engaged in unfair acts by depositing unauthorized bank drafts obtained by a deceptive telemarketing operation).

Persons who knowingly provide substantial assistance or support to a MARS provider engaged in unlawful practices significantly enhance the provider’s ability to engage in the conduct and greatly increase the scope of the injury the practices cause. For example, a lead generation company may possess the contact information of thousands of consumers that otherwise might be unavailable to a small MARS provider. The MARS provider could use that information to target in a cost-effective manner many more consumers with deceptive marketing advertisements or pitches than it could in the absence of such information. Thus, entities such as lead generators often play a key role in enabling MARS providers to promote their services widely, leading to substantial injury to consumers if those providers collect advance fees but fail to deliver on their promises.

The Commission is not aware of any benefits to consumers or competition from knowingly assisting or supporting providers in violating the proposed Rule. The Commission seeks comment on whether there are benefits to consumers or competition from this conduct and, if so, whether those benefits outweigh the harms they cause to consumers.

Finally, the substantial injury caused by knowingly providing substantial assistance or support in this context is not reasonably avoidable by consumers. Consumers do not know that the MARS providers with whom they contract are engaged in unlawful conduct, much less those who assist or facilitate the providers.

3. Prohibiting Substantial Assistance or Support to Prevent Deception

The Commission believes that proposed § 322.6 is warranted for the purposes of preventing deceptive and unfair conduct by MARS providers. As noted above, MARS providers frequently rely upon the assistance and support of other entities for essential tasks such as identifying potential customers, marketing, back-room operations, and payment processing. These support entities make it possible for deceptive MARS providers to efficiently target, enroll, and process consumers on a wide scale. Prohibiting the knowing substantial assistance or support of MARS providers engaged in illegal acts is reasonably related to preventing deceptive or unfair practices by MARS providers.

4. The Proposed Provision

Section 322.6 of the proposed Rule prohibits any person from providing “substantial assistance or support” to any MARS provider if the person “knows or consciously avoids knowing that the provider is engaged in any act or practice that violates the Rule.” This provision is modeled on a similar provision in the TSR.

177

See

16 CFR 310.3(b). The Telemarketing Sales Act gave the Commission the express authority to prohibit assisting and facilitating another in violating the TSR. Although the Omnibus Appropriation Act, as clarified by the Credit CARD

Act, did not provide comparable authority, the Commission believes, as discussed earlier, that assisting and facilitating another in violating the MARS Rule is itself an unfair act or practice, and in addition that prohibiting this conduct is reasonably related to the goal of preventing unfair and deceptive conduct.

Proposed § 322.6 is limited to persons providing

substantial

i.e

., more than casual or incidental - assistance or support to MARS providers.

178

Activities that might constitute substantial assistance or support include the provision of consumer leads,

179

contact lists, advertisements, or promotional materials.

180

Such activities also might include the support provided by payment processors

181

and other entities providing essential backroom operations.

178

See TSR Statement of Basis and Purpose

, 60 FR 43842, 43852 (“The Commission further believes that the ordinary understanding of the qualifying word ‘substantial’ encompasses the notion that the requisite assistance must consist of more than mere casual or incidental dealing with a seller or telemarketer that is unrelated to a violation of the Rule.”).

179

See, e.g.

FTC v. Patten

, No. 08-5560 (N.D. Ill. filed Sept. 29, 2008).

180

See id.

181

See, e.g.

FTC v. Your Money Access, LLC

, No. 07-5174 (E.D. Pa. filed Dec. 11, 2007).

In addition, proposed § 322.6 is limited to persons who know or consciously avoid knowing that the MARS provider is violating the Rule. As the Commission concluded in the context of the TSR, “[t]he ‘conscious avoidance’ standard is intended to capture the situation where actual knowledge cannot be proven, but there are facts and evidence that support an inference of deliberate ignorance on the part of a person that the seller or telemarketer is engaged in an act or practice that violates [the Rule].”

182

Proposed § 322.6 similarly excludes entities that provide basic support and services to MARS providers, but have no reasonable way of knowing that the providers are engaged in conduct in violation of the Rule.

182

TSR Statement of Basis and Purpose

, 60 FR at 43852.

G. Section 322.7: Exemptions

Section 322.7 of the proposed Rule addresses the applicability of the Rule’s provisions to attorneys who are MARS providers. There 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. Attorneys who meet these criteria would be exempt from the proposed Rule’s prohibitions against requesting or collecting advance fees. Additionally, attorneys would be exempt from the Rule’s prohibition against advising consumers to cease contact with their lenders or servicers. Note, however, that all attorneys would continue to be subject to the proposed Rule’s prohibition against misrepresentations, disclosure requirements, prohibition against knowing substantial assistance or support, and recordkeeping requirements.

1. Background

As discussed in Section II, an increasing number of attorneys have engaged in deception and unfairness in connection with mortgage assistance relief services.

183

For example, in its written comment, the Illinois Attorney General reported that “33 percent of the [MARS] companies we have dealt with are owned by attorneys, while 38 percent have some link to the legal profession.”

184

Including attorneys within the proposed Rule is necessary to ensure that the rule is effective in preventing such conduct.

183

See supra

notes 46-48, 66-68

In fact, the State Bar of California recently reported a “crisis” of attorney misconduct, noting that it “has experienced a 58 percent increase in active investigations over 2008 due in large part to the huge increase in complaints against attorneys offering loan modification services.”

See

Press Release, State Bar of California,

State Bar Takes Action to Aid Homeowners in Foreclosure Crisis

(Sept. 18, 2009),

available at

(

http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395

);

see also

CRC at 6.

184

IL AG at 1.

The Commission, however, recognizes that legal counsel may be valuable to some consumers who are trying to save their homes. Frequently, consumers will turn to attorneys for legal assistance with bankruptcy or other legal proceedings regarding their mortgage.

185

Consumers also may seek legal advice that may not necessarily be connected to a legal proceeding. For example, attorneys may conduct a review of mortgage contracts to determine legal options and obligations, which may aid the attorney in negotiating with a servicer on behalf of a consumer.

186

Under the proposed Rule, in the absence of an exemption, attorneys would be prohibited from using certain methods of collecting fees when they provide MARS to consumers. For example, attorneys representing clients in bankruptcy and other court proceedings often collect advance fees in the form of retainers, which usually must be placed in escrow.

187

Section 322.5 of the proposed Rule would prohibit the collection of such fees. In addition, attorneys performing bona fide legal services routinely advise clients to cease any direct communication with outside parties, such as lenders and servicers, and to refer all communications from these outside parties to the attorneys. Section 322.3(a) of the proposed Rule bars giving this instruction to consumers.

185

See, e.g.

, NCLC at 14 (noting that attorneys could “fil[e] a bankruptcy petition or. . . suit challenging a predatory loan or a defense to foreclosure” and provide other non-litigation legal services including “negotiating a settlement with a lender”); OH AG at 5 (“The knowledge an attorney has of his or her state’s foreclosure law can properly help borrowers navigate the foreclosure process.”); MA AG at 7 (noting that “a competent and ethical attorney can be a valuable asset to a homeowner trying to avoid foreclosure”).

186

See

NCLC at 14 (noting that “an attorney’s more beneficial and traditional role of analyzing a client’s paperwork and advising the client of potential claims and options may also fit within the definition of mortgage assistance relief”).

187

See, e.g.

, MODEL RULES OF PROF’L CONDUCT R. 1.15 (2009).

In the Commission’s view, the present record

188

does not support a broad exemption for attorneys. Some attorneys have engaged in various forms of deceptive and unfair conduct in conducting activities covered by the proposed Rule. First, some attorneys have engaged in the same deceptive practices as non-attorney MARS providers,

i.e.

, failing to provide promised services, falsely touting high likelihoods of success, misrepresenting their refund policies, and falsely claiming an affiliation with the government or other entities.

189

Second, some MARS providers have begun employing or associating with attorneys to (1) support the MARS providers’ (often false) claims that they provide legal services and (2) try to avail themselves of attorney exemptions under various state laws governing MARS.

190

In such attorney-MARS

provider arrangements, the attorneys often do little or no legal work on behalf of consumers,

191

with non-attorneys handling most functions, including communications with the lender or servicer.

192

The Commission’s law enforcement experience, as well as that of state attorneys general, indicates that MARS providers often induce consumers to believe that they will receive specialized legal assistance from attorneys, even though the attorneys have done little more than lend their names and credentials to the operation.

193

188

Note that the Commission did not receive any comments in response to its ANPR from attorneys or organizations representing attorneys addressing the role of attorneys in connection with providing loan modification services. To have a complete and accurate understanding of the role of attorneys in connection with loan modification services, the Commission seeks comment from attorneys and other interested parties on this issue.

189

See supra

notes 46-47;

see also, e.g.

, NAAG at 13 (“We have received many complaints regarding attorneys who are offering loan modification business. These attorneys generally provide no legal services for consumers and present the same problems as mortgage consultants in general.”); Drexel Testimony, 111th Cong. 1st Sess. at 6 (“[A] certain number of attorneys are willing to engage in these fraudulent activities on their own.”).

190

See

IL AG at 2 (“Attorneys are using the exemption to market and sell the same mortgage consulting services provided by non-attorneys.”); CSBS at 2 (noting “attorneys who lend their name to a loan modification company, but play, little, if

any direct role, in helping consumers obtain actual loan modifications”); MN AG at 5 (“The Office is aware of several loan modification and foreclosure rescue companies that have affiliated with licensed attorneys in other states in an effort to circumvent state law.”); CRC at 2 (“An increasing number of attorneys are involving themselves in these unethical practices without providing any legal (or other) services, sometimes engaging in fee-splitting or even simply acting as fronts for loan modification companies who are seeking to avoid state laws that prohibit some of the practices described above but exempt attorneys.”); California State Bar Ethics Alert at 2 (“There is evidence that some foreclosure consultants may be attempting to avoid the statutory prohibition on collecting a fee before any services have been rendered by having a lawyer work with them in foreclosure consultations.”);

FTC v. Loss Mitigation Servs., Inc.

, No. SACV09-800 DOC (ANX), Mem. Supp. Pls. Ex Parte App. at 3 (C.D. Cal. Aug. 3, 2009) (alleging that “Walker Law Group” was “a sham legal operation designed to evade state law restrictions on the collection of up-front fees for loan modification and foreclosure relief”).

191

See, e.g.

, IL AG at 2 (“While attorney mortgage consultants charge a premium for their services and aggressively market their status as legal professionals, they generally exclude - either expressly or in practice - actual legal representation or legal work from the scope of provided services.”). Some MARS providers advertise the provision of legal services to consumers but then later disclaim, in fine print contracts, that they will actually provide such services.

See id.

at 2-4, 7.

192

See, e.g.

, Chase at 5 (“Many MARS providers claim to be affiliated with attorneys, but typically the people performing the services are not attorneys, and the connection with the attorney is very tenuous. Calls to the MARS provider do not go to the attorney’s office and addresses used by the providers are not the same as the attorney’s.”); OH AG at 5 (“[A]t most the lawyer [advertised to consumers by foreclosure rescue companies] will file a brief template response on behalf of the consumers.”);

see also

Drexel Testimony at 6 (“In exchange for the use of the attorney’s name and his or her ability to charge and receive advance fees, the foreclosure consultant typically offers to perform most or all of the loan modification services. . . .”); Press Release, State Bar of California,

State Bar Takes Action to Aid Homeowners in Foreclosure Crisis

(Nov. 25, 2009) (“[T]he attorneys work with untrained non-attorney staff engaging in the unlawful practice of law by offering legal advice to prospective clients. [The Office of Trial Counsel] also is investigating the non-attorney staff for possible referral to law enforcement.”),

available at

(

http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395

);

FTC v. LucasLawCenter “Inc.,”

No. SACV-09-770 DOC (ANX) (C.D. Cal. filed July 7, 2009).

193

See, e.g.

supra

note 46;

see also

CMC at 10 (“[The attorneys’] communications [with the consumer] are generally ‘boilerplate’ that does not appear to reflect any considered review by an attorney.”); OH AG at 5 (“[O]ur office sees foreclosure rescue companies advertise that they will provide a lawyer or legal help to that consumer. The lawyer’s client, however, is actually the company, not the consumer, and at most the lawyer will file a brief template response on behalf of the consumers”); IL AG at 2.

Many state MARS statutes contain relatively broad exemptions for attorneys. For example, some states exempt attorneys so long as they are licensed in the same state as the borrower or have an attorney-client relationship with the borrower.

194

Attorneys offering MARS often have flouted various state bar rules, however.

195

In many cases, these attorneys have not been licensed to practice law in the states where consumers who purchase the MARS reside.

196

In addition, given that attorneys purporting to provide MARS often play little or no role in counseling or negotiating on behalf of borrowers, they may violate state bar requirements that they provide bona fide legal services to their clients.

197

Attorneys also allegedly have engaged in prohibited affiliation arrangements with non-attorneys such as fee-splitting, providing or taking referral fees, and assisting or supporting others in the unauthorized practice of law.

198

In response, state bars have initiated numerous investigations of attorneys engaged in MARS and, in some cases, have brought misconduct cases against them.

199

194

See, e.g.

, COLO. REV. STAT. § 6-1-1103(4)(b)(I); 765 IL. COMP. STAT. ANN. 940/5; Mo. Rev. Stat. § 407.935(2)(b)a;

see also, e.g.

, NAAG at 13 (“Currently, most states exempt attorneys from their mortgage rescue consultant laws.”); CMC at 9-10.

195

See generally, e.g.

Cincinnati Bar Assoc. v. Mullaney

, 119 Ohio St. 3d 412 (2008) (sanctioning attorneys engaged in mortgage assistance relief service for,

inter alia

, engaging in the unauthorized practice of law, fee sharing with nonlawyers, and failing to provide adequate legal services); CRC at 2 (“An increasing number of attorneys are involved themselves in these unethical practices without providing any legal (or other) services, sometimes engaging in fee-splitting or even simply acting as a front for loan modification companies who are seeking to avoid state laws that prohibit some of the practices described above but exempt attorneys.”).

196

See, e.g.

, CMC at 9-10 (“These attorneys are often not licensed to practice in either the borrower’s or servicer’s state. . . .”); CSBS at 2 (“This [increase of involvement by attorneys] includes out-of-state attorneys, many of whom are not licensed to practice law in the state where the homeowner lives. . . .”);

see also

MODEL RULES OF PROF’L CONDUCT R. 5.5 (2009).

197

See, e.g.

, CSBS at 2; Chase at 5; CMC at 9-10; OH AG at 5.

198

CSBS at 2; California State Bar Ethics Alert at 2 (“Many of the proposed relationships between these foreclosure consultants and lawyers violate the Rules of Professional Conduct and other ethical rules and, therefore, could result in lawyer discipline.”);

see also, e.g.

, California Rules of Professional Conduct R. 1-310 (prohibiting partnerships with non-attorneys);

id.

R. 1-310 (prohibiting fee sharing with non-attorneys);

id.

R. 1-300(A) (prohibiting aiding in unauthorized practice of law.).

199

See, e.g.

, Press Release, State Bar of California,

State Bar Continues Pursuit of Attorney Modification Fraud

(Aug. 12, 2009),

available at

(

http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96096

); Florida Bar,

Ethics Alert: Providing Legal Services to Distressed Homeowners

available at

(

http://www.floridabar.org/TFB/TFBResources.nsf/Attachments/872C2A9D7B71F05785257569005795DE/$FILE/loanModification20092.pdf?

);

see also, e.g.

Cincinnati Bar Assoc. v. Mullaney

, 119 Ohio St. 3d 412 (2008) (disciplining attorneys involved in mortgage assistance relief services).

Most of the public comments filed in response to the ANPR that addressed this issue recommended that th

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