By Ken Harney
Over the past two years I’ve tracked the Federal Trade Commission’s “Operation Clean Sweep,” a crackdown on those loan modification companies that promise distressed homeowners that they’ll negotiate lower interest rates or principal reductions with lenders, but then simply pocket homeowners’ money upfront — often between $2,500-$4,000 — doing little or nothing in return.
Based on discussions with some of their victims, I can tell you that these loan mod predators are among the worst of the vermin bred during the mortgage bust and recession. They take people’s money when they’re already in extreme financial and emotional distress, panicked about losing their houses.
The FTC’s joint strike force with state attorneys general already has put dozens of them out of business and yielded millions of dollars in civil settlements and penalties.
None of the FTC’s settlements or lawsuits with the fraudsters to date, that I’m aware of, has involved active real estate agents. But guess what?
The regulations the FTC adopted to put the kibosh on future scammers touch large numbers of real estate professionals.
• Do you ever represent sellers in short-sale negotiations?
• Do you ever discuss clients’ delinquent mortgage situations and their need for assistance with mortgage servicers?
• Do you ever refer clients to companies that specialize in loan workout solutions?
If the answer to any of those questions is yes, you’re probably covered by the FTC’s definition of a “mortgage assistance relief services (MARS) provider,” and you’re subject to disclosure requirements.
If you fail to provide them to clients, you could be subject to prosecution and civil penalties under the FTC’s current regulations.
How’s this possible? Here’s a quick overview of the problem, and some good news about where it’s headed for real estate professionals.
Under the FTC’s MARS regulation, which took effect Jan. 31, anyone who offers to help a homeowner negotiate a short sale, or offers assistance in arranging a loan modification or other mortgage relief, falls under the broad definition of a MARS provider.
The short-sale provision alone covers potentially thousands of real estate brokers and agents, especially in markets hardest hit by foreclosures.
The rule requires that if you have discussions with prospective clients about a short sale or loan mod — but you don’t otherwise advertise yourself as short-sale or loan mod specialist — you still need to make what’s called a “consumer specific” disclosure.
The disclosure itself needs to be provided in writing to the client before you begin negotiations with the lender.
But if you read the FTC’s model language for the disclosure, it makes almost no sense in the context of a typical real estate transaction.
Here it is, in part: “IMPORTANT NOTICE. You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender (or servicer). If you reject the offer you do not have to pay us. … Even if you accept this offer and use our service, your lender may not agree to change your loan.”
Huh? If I needed to sell my house or modify my mortgage and a broker handed me that, I would be totally confused. When I talked recently with Joel Winston, associate director in the FTC’s bureau of consumer protection, he agreed.
As presently written, Winston told me, “in some ways” the MARS rule “doesn’t fit very well” with transactions between a real estate agent and a client.
Say, for example, you’re a broker, occasionally handle distressed sales, but do not advertise yourself as a short-sale or loan modification specialist. Say you take a listing from a seller but get no offers for an extended period of months.
During this time, local property values continue to decline. Then out of the blue, you get an offer that is far below the listing price, but not out of line with recent closed sales for similar houses in the neighborhood.
You know the offer is lower than the seller’s mortgage balance, but she tells you she’d accept it as long as the mortgage lender agrees to a short sale.
Under a strict interpretation of the FTC’s rule now in effect, you’d be required to fill out a confusion-producing disclosure and give it to the seller before even picking up the phone to talk with the lender or servicer.
Worse yet, everybody’s who’s failed to comply with the regulations during the past two months is now technically vulnerable to attack from the FTC, including big fines — up to $16,000 per violation — and “equitable money relief.”
No wonder Laurie Janik, NAR’s general counsel, says she’s been fielding nervous phone calls from across the country seeking guidance. In a discussion I had with her last week, Janik said that, along with NAR’s Washington staff, she’s been pushing the FTC to clarify its MARS rules as they relate to ordinary services by Realtors in short-sale situations.
The idea would not be to totally exempt real estate professionals from coverage; after all, some of them do specialize in distressed-sale transactions, advertise their services, and fit the definition of a MARS provider in key respects.
Rather, the goal would be to provide carefully delineated exceptions where disclosures might not be needed, or came with language that is intelligible to home sellers and others in a real estate context.
So how’s that project going? Well, it looks like the efforts of Janik and NAR may be about to pay off. When I spoke with the FTC’s Winston, he said that his staff is working on revisions to the rules to accommodate typical real estate services.
They should be out “in the near future,” he said — “weeks,” not months. Equally important, the FTC will not enforce its rules in instances where real estate agents are merely working with clients on short sales, and where they’re not being paid up front for their negotiations with lenders.
“The trick for us,” Winston said, “is to allow legitimate businesses to help consumers,” while still flagging and bagging the rip-off fraudsters who seek to exploit innocent homeowners.
Sounds good. Let’s see how it all comes out.
Ken Harney(email@example.com) writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.