In a welcome and somewhat overdue policy shift last month, the Federal Trade Commission (FTC) pledged that it will no longer hold real estate brokerages to many of the rigid requirements spelled out in its Mortgage Assistance Relief Services (MARS) Rule published earlier this year. However, Brokerages will continue to be enjoined from making misleading statements during their agency and in their advertisements.
This policy change does not apply to real estate professionals who offer loan modification services.
The MARS Rule
The MARS Rule was published early this year to address widespread fraud within the loan modification industry. The rule was specifically envisioned to cover lawyers and loan negotiators who promised to renegotiate a debtor’s mortgage for an upfront fee. Often, these negotiations were half hearted and wholly unsuccessful – costing the debtor his upfront fee and inevitably leading him to bankruptcy.
The MARS Rule disallows upfront fees for loan modification services. It also requires that any servicer who touches the debtor’s loan make numerous mandatory disclosures and statements to the debtor. Servicers must allow the debtors to talk directly with their lenders. Servicers must also make multiple disclosures which generally emphasize that they are not members of any bank or the government and that they cannot guaranty the successful renegotiation of any particular loan.
Of course, the MARS Rule was originally interpreted to cover real estate agents who must negotiate with their clients’ creditors during the short sale process.
More information on the MARS Rule and its specific requirements can be found here.
The Recent Change
On July 15, 2011, the FTC voted 5-0 in favor of no longer enforcing most of the provisions of the MARS Rule against real estate professionals engaged in obtaining short sales for consumers. The stay applies only to real estate professionals who: 1) are licensed and in good standing under state licensing requirements; 2) comply with state laws governing the practices of real estate professionals; and 3) assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. The stay exempts real estate professionals who meet these requirements from the obligation to make many of the mandatory disclosures required by the MARS Rule. These professionals, however, remain subject to the Rule’s ban on misrepresentations and deceptive advertisements.
Real Estate Practice
This change removes some direct liability for agents, but it should not cause day to day practices to change in any extreme way. The real estate industry’s standard forms changed in anticipation of the MARS requirements earlier this year and many prudent real estate agents have been using variations of the CAR form MARSMRN, 3/11 and its sister document CAR form MARSSN, 3/11, since the Rule’s publication.
CAR form MARSMRN, 3/11 states:
“This notice is required by the Mortgage Assistance Relief Services Rule when the listing agent presents the lenders short sale approval letter.”
CAR form MARSSN, 3/11 states:
“This notice is required by the Mortgage Assistance Relief Services Rule when taking a short sale listing or at the time the listing agent becomes aware that the sale will require a lender’s consent to a short sale, whichever occurs first, if the listing agent will be communicating with the short sale lender regarding their consent to a short sale.”
While the FTC’s promise of forbearance renders much of the disclosures within these forms unnecessary, I still strongly recommend that they continue to be used for the time being. It’s the clients that represent most liability faced by real estate professionals. The FTC might discontinue enforcing parts of its MARS Rule on licensed real estate professionals, but that does not mean that clients won’t file suit against brokerages when they feel that they have been ill informed about their short sale. These disclosures remain helpful when a seller files a lawsuit claiming that he did not understand what his real estate agent was doing.
Also, the FTC’s policy shift does not change its pledge to scrutinize dishonest advertisements. Any misleading advertisement, especially those that seem to evoke a dishonest suggestion about the agent’s affiliation with the lender or some government program, can still result in state and federal penalties as well as a civil lawsuit.
The FTC’s full announcement about its policy shift concerning real estate professionals can be found here.