The final rule does not affect attorneys who provide mortgage assistance relief services (MARS) in connection with the practice of law if certain basic requirements are met, but the FTC warns of MARS providers that try to use attorneys as fronts to avoid state laws.
Over the past three years, the FTC noticed a spike in the number of consumers scammed by MARS providers that charge advanced fees in the hundreds or thousands of dollars then disappear or fail to provide the promised service. Often, the delay and the cost combine to leave homeowners in a much worse position.
Many states have responded by passing state laws, commonly known as mortgage rescue statutes, under which MARS providers cannot charge advanced fees. Lawyers often are exempt from these mortgage rescue statutes.
Mortgage assistance relief services
In general, MARS means "any service, plan, or program" that offers or provides assistance in preventing or postponing foreclosure sales, negotiating loan modifications, obtaining forbearances or modifications in the timing of loan payments, or negotiating extensions.
Lawyers often provide these services in connection with representing clients in bankruptcy, foreclosure, or other administrative proceedings. Without an exemption, lawyers would become subject to all the requirements of the new federal rule.
Under the new rule, any for-profit entities providing mortgage assistance relief services are, among other things, prohibited from misrepresenting any material aspect of their services, advising a consumer to cease communication with a lender, or taking advanced fees. The prohibition on advanced fees is not effective until Jan. 31, 2011.
In addition, a person violates the rule by providing substantial assistance to a MARS provider if the person knows (or consciously avoids knowing) the provider is violating the rules.
The rule also is designed to prevent abuses by mandating that MARS providers disclose certain information to the consumer, including their "for-profit" status.
Attorney exemption/client trust accounts
Attorneys who are providing MARS "as part of the practice of law" are partially exempt from the new rule as long as the attorney is licensed in the state in which services are provided (or where the consumer's "dwelling" is located) and the attorney complies with applicable state laws and regulations.
However, to get the full benefit of the exemption, attorneys must comply with certain provisions regarding client trust accounts. In order to be fully exempt, lawyers must place advanced fees in a client trust account before performing legal services and comply with state laws and regulations, including licensing regulations, applicable to client trust accounts.
A lawyer who does not comply with the client trust account provisions cannot charge advanced fees, or "request or receive payment of any fee or other consideration" until the lawyer executes a written agreement between the consumer and the consumer's loan holder. In addition, the lawyer must make specific disclosures through the written agreement, but is otherwise exempt from other provisions of the final rule.
The proposed rule did not exempt lawyers at all, but several state bar associations, along with the American Association, sought an amendment to the proposed rule that would provide an exemption for lawyers.
Without an exemption, these bar associations feared the rule could undermine the confidential attorney-client relationship and "make it difficult or impossible for many consumer debtors to obtain the legal services that they desperately need to help negotiate changes to their residential mortgages with their lenders and keep their homes."
All in all, it is hoped that the new FTC MARS rule will curb the "mortgage rescue" charlatans who prey on the most vulnerable of our public.
Attorneys are fully exempt if they:
· Provide mortgage assistance relief as part of the practice of law; and
· Are licensed to practice law in the state in which the consumer for whom the attorney is providing mortgage assistance relief services resides or in which the consumerï¿½s dwelling is located; and
· Comply with state laws and regulations that cover the same type of conduct the rule requires; and
· Deposit any funds received from the consumer prior to performing legal services in a client trust account; and
· Comply with all state laws and regulations, including licensing regulations, applicable to client trust accounts.
Click here for more information on the new FTC MARS Rule