The Federal Trade Commission is reportedly considering banning foreclosure rescue and loan modification companies from collecting fees in advance, and new restrictions on how those companies can advertise their services as part of a crackdown on fraud.

The Obama administration said today it’s acting pre-emptively with state attorneys general to combat fraud against consumers in housing markets, such as foreclosure rescue and loan modification scams.

U.S. Attorney General Eric Holder and the heads of the Treasury, Housing and Urban Development, Federal Trade Commission and Financial Crimes Enforcement Network met today with attorneys general from 12 states to discuss emerging trends and proactive strategies to combat fraud against consumers in the housing markets, the Treasury Department said.

The FTC also announced civil charges against two California-based companies accused of advertising that they could obtain mortgage modifications in virtually all cases, and allegedly doing little or nothing to help consumers who paid large upfront fees.

"If you’re worried about keeping your home, avoid any company that asks for a large fee in advance, guarantees that they’ll stop a foreclosure or modify a loan, or tells you to stop paying your mortgage company and to pay them instead," FTC Chairman Jon Leibowitz said in a statement.

The FTC said the latest actions bring the number of cases filed against foreclosure rescue firms to 22. In July, the FTC said "Operation Loan Lies," a coordinated effort with 23 state attorneys general, had resulted in lawsuits against 178 companies accused of deceptive marketing of foreclosure rescue and loan modification services (see story).

Leibowitz also said today that the FTC may ban foreclosure rescue companies from collecting upfront fees, and place restrictions on their advertising, the Associated Press reported. Foreclosure rescue companies are prohibited from collecting upfront fees in 20 states, AP said. …CONTINUED

In California, only lawyers, real estate brokers and their licensed agents can legally negotiate with lenders on behalf of borrowers.

Real estate brokers who plan to collect fees for such services in advance must first enter into written agreements with their clients, and place any fees collected in a trust account that’s drawn upon as services are performed. Before real estate brokers can collect advance fees, the California Department of Real Estate must sign off on the agreements and accounting practices they propose to use.

As of Sept. 15, more than 1,000 real estate brokers had obtained "no objection" letters from the Department of Real Estate allowing them to collect fees in advance when they negotiate loan modifications and short sales with lenders. That’s up from more than 500 companies in April, 200 in February and about two dozen in November, shortly after the policy on advance fees was instituted.

Companies that charge for such services upfront say nonprofits that provide free counseling to borrowers are often overwhelmed, and firms that charge for their services can produce better results because they have the knowledge, experience and persistence needed to work with lenders (see story). Some companies offer to refund part or all of their fees if they don’t get results.

More than 460 companies have also received "cease and desist" letters from the California Department of Real Estate ordering them to stop providing loan modification or foreclosure rescue services. In some cases, the companies were not licensed to negotiate with lenders at all, and in others they had not obtained "no objection" letters that would allow them to collect advance fees.

One recently shut-down loan modification company in Southern California, H.E. Servicing Inc., allegedly spent $70,000 a week on radio and television advertising, and established ties with two lawyers in an attempt to meet the state’s requirements for collecting upfront fees (see story).


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