Federal regulators say they intend to follow the lead of many states in banning for-profit companies from collecting advance fees from homeowners in exchange for promises to help them obtain loan modifications or avoid foreclosure.

A rule proposed today by the Federal Trade Commission would bar for-profit companies that work with lenders and servicers on behalf of homeowners to modify loans or avoid foreclosure from collecting payment until after such services are provided, and impose other restrictions on their practices.

Federal regulators say they intend to follow the lead of many states in banning for-profit companies from collecting advance fees from homeowners in exchange for promises to help them obtain loan modifications or avoid foreclosure.

A rule proposed today by the Federal Trade Commission would bar for-profit companies that work with lenders and servicers on behalf of homeowners to modify loans or avoid foreclosure from collecting payment until after such services are provided, and impose other restrictions on their practices.

The FTC said that in many cases, companies collecting advance fees told homeowners to stop communicating with their loan servicer and did not provide the services they promised. Some have falsely claimed to be affiliated with government programs, including the Making Home Affordable Program, the FTC said.

Foreclosure rescue companies have also misled consumers about their refund and cancellation policies, and the likelihood of obtaining a loan modification, the FTC said. The new rule would make it easier for the FTC to crack down on such practices.

The FTC has brought 28 enforcement actions against foreclosure rescue companies, and said state and federal law enforcement agencies have brought "hundreds more" cases.

"Far too many homeowners have paid upfront fees to bad actors who promised loan modifications but never delivered," Treasury Secretary Timothy Geithner said in a press release. "I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices."

Consumers who have been unable to obtain assistance from their loan servicer or nonprofit housing counselors often turn to for-profit mortgage assistance relief services, the FTC said.

Many housing counselors and loan 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," the FTC said in formally proposing the new rule.

The proposed rule, which is subject to a 45-day comment period ending March 29, would not apply to companies that own or service mortgage loans, and provides a limited exemption for attorneys who are representing homeowners in bankruptcy or other legal proceedings. …CONTINUED

The FTC also sought public comments in June, when it issued advance notice that it was considering new rules governing the practices of for-profit mortgage assistance relief services.

The National Association of Attorneys General said that as of last summer, its members had investigated 450 such companies, and sued hundreds for alleged violations of state law.

For-profit loan modification consultants were "dominating the marketplace," NAAG told the FTC at the time, and were "by far the most common source of consumer complaints received by our offices in the area of mortgage assistance services."

Many states haven’t waited for federal regulators to take action.

In October, California joined 20 other states that banned the collection of advance fees for loan modification services (see story).

California had previously allowed real estate brokers and their licensed agents to collect advance fees for negotiating with lenders on behalf of borrowers — but only after entering into written agreements with their clients, using forms and procedures that had been reviewed by the Department of Real Estate.

Before California banned the practice altogether, more than 1,000 real estate brokers had obtained "no objection" letters from the state to collect advance fees for loan modification services.

Under that system, nearly 500 companies were also accused of providing loan modification services without a license, or collecting advance fees without first obtaining a "no objection" letter from the state.

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