Federal Disclosure Requirements to Protect Homeowners

By now, we’ve all heard of foreclosure rescue companies, loan modification services, and the like.  Many of these companies offer an invaluable service and are worth every penny they make in the process.  However, there are some groups out there who are either unknowingly charging illegal fees to underwater homeowners or who are complete and total scam artists.

The good news is the Federal Trade Commission has created the Mortgage Assistance Relief Services Rule (or MARS Rule) to protect homeowners from “unfair and deceptive practices.”

The key points are as follows:

  • It’s illegal to charge upfront fees.
  • The company must disclose key information upfront, including
    • the total cost,
    • that you can stop using their services at any time,
    • that they’re not associated with the government or your lender, and
    • that your lender may not agree to change the terms of your mortgage.
  • If they advise you not to pay your mortgage, they must clearly and prominently disclose the negative consequences that could result.  Of course, no one other than your attorney should advise you to take such a step.
  • They must not advise you to stop communicating with your lender or servicer.  It’s not uncommon for homeowners to direct all communication to their attorney, but that’s the homeowner’s decision to make.
  • They must disclose key information to you if they forward an offer of mortgage relief from a lender or servicer.  In other words, they must provide a written notice from the lender or servicer describing all material differences between the terms of the lender’s offer and your current loan.  They must also tell you that if the lender or servicer’s offer isn’t acceptable to you, then you don’t have to pay their fee.
  • They must not misrepresent their services.

What I really like about this is that it creates a pay-for-performance model that rewards successful negotiation and means that these companies can only get paid if the homeowner agrees to the terms offered by the lender or servicer.  It also prevents the homeowner from getting forced into a situation that is not beneficial to them.

For the sake of this discussion, let’s assume we’re only talking about short sales (and not other options, such as loan modifications).  If a seller hires a real estate agent to list a short sale, the agent should only be paid at closing.  And closing should only take place if the seller agrees to the terms of the short sale.  If the seller hires an attorney to negotiate the short sale, then I would think the attorney should also be paid at closing.  All the short sale attorneys I know in the Asheville area (and beyond) work this way.  If the seller likes the lender’s terms and the sale closes, everybody wins.  It should be noted that the FTC does not require a Realtor (in most cases) to make this disclosure, although I do so anyway at the bottom of my website.

Sellers and borrowers should beware of anyone who demands upfront fees, or if an agent says the seller will be on the hook for their commission regardless of whether the sale closes.  Additionally, if a real estate agent “guarantees” that he/she can close your short sale, or “guarantees” that the lender will forgive the entire debt, a seller would be advised to seek help elsewhere.  Remember, the short sale lender is never obligated to approve a short sale, and even when they do, the terms of the approval should be reviewed by the seller’s attorney.

 

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