The lesson of the MARS Rule: Not one penny up front

Like calling an NFL lineman “Tiny,” we appreciate an ironic name as much as the next person. But it’s different when a company calls itself – among other things – Consumer Defense, Preferred Law, and Modification Review Board and then makes allegedly deceptive claims regarding loan modification services to consumers struggling to hold onto their homes. An FTC lawsuit filed against a related group of 14 companies and individuals charges them with violations of the FTC Act and the MARS Rule (Regulation O).

According to the FTC, the defendants preyed on struggling homeowners with promises that their expert legal advice could stop consumers from going into foreclosure and that they could get affordable mortgage modifications. Advertising on TV and radio, online, through direct mail, and on the phone, the defendants often claimed that these modifications would not only save consumers’ homes, but also big bucks – for example, by slashing interest rates in half and reducing monthly payment by hundreds of dollars.

Touting a track record as high as 98%-100%, the defendants typically charged cash-strapped consumers $3,900 in monthly installments of $650. Some contracts with consumers made representations like this:

Based on the past performance of American Home Loan Counselors with the assistance of Preferred Law’s federal legal services, and our knowledge of your factual situation, MRB [Modification Review Board] hereby GUARANTEES that a modification or home foreclosure alternative pursuant to the HAFA program will be secured for you conditioned upon the following terms . . . .

(The “conditions” were things like paying required fees and returning documents in a timely fashion.)

The FTC says that the defendants strung consumers along for months with misleading promises that modification packages were in the works. As part of the ploy, the defendants allegedly directed homeowners not to pay their mortgages and not to communicate with their lenders. The defendants insisted that consumers pay them, of course.

But according to the FTC, in numerous instances, the defendants failed to get any relief for their customers. The complaint alleges that consumers learned from their lenders that the defendants didn’t provide complete modification documents, submitted irrelevant requests for information, or never even contacted the lender in the first place. The lawsuit charges that by turning over what little cash they had to the defendants and getting next to nothing in return, many consumers ultimately lost their homes.

Of course, there are federal programs to assist struggling homeowners, like Making Home Affordable (MHA). The FTC alleges that the defendants used doctored logos and other tactics to suggest a false affiliation with government programs.

The complaint alleges the defendants violated the FTC Act by misrepresenting their services, touting a false affiliation with or endorsement by the federal government, claiming to have special relationships with the consumers’ mortgage companies, and telling people they should stop making their mortgage payments.

The lawsuit also charges multiple violations of the MARS Rule, which makes it illegal – among other things – to ask for or receive upfront payments before there’s a written agreement between the consumer and the loan holder or servicer. The FTC says the defendants also failed to make specific disclosures required by the Rule, including (to name just a few)

• “[Name of Company] is not associated with the government, and our service is not approved by the government or your lender.&rdquo
• “Even if you accept this offer and use our service, your lender may not agree to change your loan.”
• “You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us [insert] amount or method for calculating the amount] for our services.”
• “If you stop paying your mortgage, you could lose your home and damage your credit.”

The case is pending in a Nevada federal court, which granted the FTC’s request for a temporary restraining order.

Looking for tips on complying with MARS? Read Mortgage Assistance Relief Services Rule: A Compliance Guide for Business. The most important reminder is that businesses claiming to offer mortgage assistance services can’t charge upfront fees – as in not one penny – until consumers and their loan holders or servicers sign a new agreement.