The Federal Trade Commission (FTC) has issued the Mortgage Assistance Relief Services (MARS) rule to protect distressed homeowners from those mortgage relief scams that have sprung up during the mortgage crisis. The rule covers any operation that, for a fee, will initiate negotiations with the seller’s mortgage lender or servicer to obtain a loan modification, short sale approval, or other relief from foreclosure. Of course, this affects many agents and negotiators who work in short sales.
MARS has three parts. It forbids advance payments, it requires certain disclosures, and it prevents the negotiator from making certain claims.
Ban on Advance Fees
MARS completely bans upfront fees for short sale negotiators. What this means is that short sale negotiators may no longer require payment upfront upon the commencement of their efforts with the bank. Rather, the negotiator may only collect fees after satisfactory agreement between the bank and the seller.
Further, the agreement will only be deemed “satisfactory” if there is evidence that the seller knew 1) how the terms of his mortgage would change, and 2) that he had an option to refuse the modification. Therefore, this rule imparts a more pronounced duty on both the listing agent and the negotiator (if they are different) because they are on the hook if the client comes back later and claims, “I didn’t understand what was happening.”
Of course, this part of the rule is easily complied with so long as negotiators only get paid upon closing, which is advisable.
MARS further requires standard disclosures for the short sale negotiator to make before executing a loan modification agreement. The FTC will assume that the seller was mislead if he was not explicitly informed that:
- The negotiator is not associated with the government, and the negotiator’s services have not been sanctioned by the government or the bank;
- The bank has the right to refuse to modify the existing loan;
- The seller has the right to refuse an offer and, if he does, he owes nothing to the negotiator,
- The seller may lose his home and damage his credit rating if he discontinues making mortgage payments, and
- The amount of the fee.
Coupled with its mandatory disclosures, the MARS rule prohibits negotiators from making any false or misleading claims about their services. This is not new (fraud or false promises have always been a trade violation). However, the rule gives examples of misleading claims. Generally, advertisements about the following topics will be scrutinized to determine whether they are misleading:
- The likelihood of sellers getting the results they seek (essentially, claims that promise or impart certainty that the seller will get approval at the seller’s terms. For example, “I have a 99% success rate” is now likely a violation if things don’t work out);
- The negotiator’s affiliation with government or private entities (For example, ads that say things like “this is made possible by the federal stimulus plan” and the like will now be scrutinized);
- The seller’s payment and other mortgage obligations (Any ad that would make a seller think he doesn’t need to pay his mortgage or that his mortgage agreement has standard language that entitles the seller to a short sale will be scrutinized);
- The negotiator’s refund and cancellation policies (Any statement that leads people to think they can get a full refund from their agent or negotiator, if reasonably untrue, will be scrutinized);
- Whether the negotiator has performed the services promised (the negotiator must negotiate a settlement that is knowingly accepted by the seller and bank. Any statement that seems to entitle the negotiator to money for anything short of this is a violation);
- Whether the negotiator will provide legal representation to the seller (if the negotiator’s company makes it seem that they will act as the seller’s attorney, they need to be duly licensed to do so and they need to follow through. Attorney affiliates will be scrutinized to determine what percentage of “bone-fide legal work” they deliver);
- The availability or cost of any alternative to for-profit mortgage assistance relief services (any assertion about other services or options needs to be 100% accurate. It is not appropriate to discourage making payments, talking to a lawyer, working with the bank directly, or looking into government programs. Ads stating “don’t waste money on a lawyer” or “stop letting your bank call the shots” and the like will be scrutinized);
- The money and/or credit a seller will preserve by using these services (if the total benefit does not seem to match the prior promises, the FTC will scrutinize that situation. This makes it even more important to request that the client seek independent legal/financial advice);
- The cost of the services (hidden fees and unusual costs will be scrutinized); or
- Any advertisement or advice that tells sellers to discontinue speaking with their bank.
What it Means
In California, most legitimate negotiators have DRE licenses and work with listing agents to negotiate with the bank. The negotiator is then paid out of the commission. The bank and the seller know about it and the listing agent is arguably the one losing money. As such, the seller does not pay until the agreement is made and the seller gets the service for which he bargained.
However, this rule should cause all short sale listing agents and negotiators to revisit their practices. Be sure that the client is given those disclosures listed above and be sure that the client knows how the negotiator is compensated. Further, negotiators and listing agents must be careful that their advertisements can survive FTC scrutiny. This is more a good-faith judgment call than anything else. If it sounds disingenuous, change it. And always advise that the client seek outside counsel.
Finally, and probably most importantly, NEVER require any up-front payment for negotiation. While the rule technically allows negotiators to collect after short sale approval and prior to closing, the short sale negotiators and listing agents who avoid trouble always and only get paid upon a successful closing.