[Federal Register Volume 74, Number 103 (Monday, June 1, 2009)]
[Proposed Rules]
[Pages 26130-26138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-12596]


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FEDERAL TRADE COMMISSION

16 CFR Parts 321 and 322

[RIN 3084-AB18]


Advance Notice of Proposed Rulemaking: Mortgage Assistance Relief 
Services

AGENCY: Federal Trade Commission (FTC or Commission)

ACTION: Advance Notice of Proposed Rulemaking; request for comment

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SUMMARY: President Obama signed the 2009 Omnibus Appropriations Act on 
March 11, 2009. Section 626 of the Act directed the Commission to 
initiate, within 90 days of the date of enactment, a rulemaking 
proceeding with respect to

[[Page 26131]]

mortgage loans. To implement the Act, the Commission has commenced a 
rulemaking proceeding in two parts. This Advance Notice of Proposed 
Rulemaking (ANPR), the Mortgage Assistance Relief Services Rulemaking, 
addresses the practices of entities (other than mortgage servicers) who 
offer assistance to consumers in dealing with owners or servicers of 
their loans to modify them or avoid foreclosure. Another ANPR, the 
Mortgage Acts and Practices Rulemaking, will address more generally 
activities that occur throughout the life-cycle of a mortgage loan, 
i.e., practices with regard to mortgage loan advertising and marketing, 
origination, appraisals, and servicing. The Commission is seeking 
public comment with regard to the unfair and deceptive acts and 
practices that should be prohibited or restricted pursuant to any rules 
adopted in these proceedings. Any rules adopted will apply to entities, 
other than banks, thrifts, federal credit unions, and non-profits, that 
are engaged in such unfair and deceptive acts and practices.

DATES: Comments must be received by July 15, 2009.

ADDRESSES: Interested parties are invited to submit written comments 
electronically or in paper form. Comments should refer to ``Mortgage 
Assistance Relief Services Rulemaking, Rule No. R911003'' to facilitate 
the organization of comments. Please note that comments will be placed 
on the public record of this proceeding--including on the publicly 
accessible FTC website, at (http://www.ftc.gov/os/publiccomments.shtm)--and therefore should not include any sensitive or 
confidential information. In particular, comments should not include 
any sensitive personal information, such as an individual's Social 
Security Number; date of birth; driver's license number or other state 
identification number, or foreign country equivalent; passport number; 
financial account number; or credit or debit card number. Comments also 
should not include any sensitive health information, such as medical 
records or other individually identifiable health information. In 
addition, comments should not include any ``[t]rade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential . . . .,'' as provided in Section 6(f) of 
the FTC Act, 15 U.S.C. 46(f), and Commission Rule 4.10(a)(2), 16 CFR 
4.10(a)(2). Comments containing material for which confidential 
treatment is requested must be filed in paper form, must be clearly 
labeled ``Confidential,'' and must comply with FTC Rule 4.9(c), 16 CFR 
4.9(c).\1\
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See FTC Rule 4.9(c), 16 CFR 
4.9(c).
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    Because paper mail addressed to the FTC is subject to delay due to 
heightened security screening, please consider submitting your comments 
in electronic form. Comments filed in electronic form should be 
submitted by using the following weblink: (https://secure.commentworks.com/ftc-mortgageassistancereliefservices) (and 
following the instructions on the web-based form). To ensure that the 
Commission considers an electronic comment, you must file it on the 
web-based form at the weblink (https://secure.commentworks.com/ftc-mortgageassistancereliefservices). If this Notice appears at (http://www.regulations.gov/search/index.jsp), you may also file an electronic 
comment through that website. The Commission will consider all comments 
forwarded to it by regulations.gov. You may also visit the FTC website 
at http://www.ftc.gov to read the Notice and the news release 
describing it.
    A comment filed in paper form should include the reference 
``Mortgage Assistance Relief Services Rulemaking, Rule No. R911003'' 
both in the text of the comment and on the envelope, and should be 
mailed or delivered to the following address: Federal Trade Commission, 
Office of the Secretary, Room H-135 (Annex W), 600 Pennsylvania Avenue, 
NW., Washington, DC 20580. The FTC requests that any comment filed in 
paper form be sent by courier or overnight service, if possible, 
because U.S. postal mail in the Washington area and at the Commission 
is subject to delay due to heightened security precautions.
    The FTC Act and other laws administered by the Commission permit 
the collection of public comments to consider and use in this 
proceeding as appropriate. The Commission will consider all timely and 
responsive public comments received, whether filed in paper or 
electronic form. Comments received will be available to the public on 
the FTC website, to the extent practicable, at (http://www.ftc.gov/os/publiccomments.shtm). As a matter of discretion, the Commission makes 
every effort to remove home contact information from comments filed by 
individuals before placing those comments on the FTC website. More 
information, including routine uses permitted by the Privacy Act, may 
be found in the FTC's privacy policy, at (http://www.ftc.gov/ftc/privacy.shtm).

FOR FURTHER INFORMATION CONTACT: Evan Zullow or Stephen Shin, 
Attorneys, (202) 326-3224, Division of Financial Practices, Federal 
Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580.

SUPPLEMENTARY INFORMATION: 

I. Background

A. FTC Rulemaking Authority Pursuant to the Omnibus Appropriations Act 
of 2009

    Section 626 of the Omnibus Appropriations Act of 2009\2\ requires 
that, within 90 days of enactment, the FTC initiate a rulemaking 
proceeding with respect to mortgage loans. Pursuant to the Act, the 
rulemaking proceeding will be conducted in accordance with the 
requirements of Section 553 of the Administrative Procedure Act.\3\ To 
implement the Omnibus Appropriations Act of 2009, the Commission has 
commenced a rulemaking proceeding in two parts.
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    \2\ Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, Sec.  
626, 123 Stat. 524 (Mar. 11, 2009).
    \3\ 5 U.S.C. 553. Section 626 of the Omnibus Appropriations Act 
of 2009 authorizes use of these procedures in lieu of the procedures 
set forth in Section 18 of the FTC Act, 15 U.S.C. 57a. Note that, 
because this rulemaking is not undertaken pursuant to Section 18, 15 
U.S.C. 57a(f), federal banking agencies are not required to 
promulgate substantially similar regulations for entities within 
their jurisdiction. Nonetheless, the Commission plans to consult 
with the federal banking agencies in this proceeding.
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    This ANPR, the Mortgage Assistance Relief Services (MARS) 
Rulemaking, addresses the practices of entities (other than mortgage 
servicers) who offer assistance to consumers in dealing with owners or 
servicers of their loans to modify them or avoid foreclosure. Another 
ANPR, the Mortgage Acts and Practices (MAP) Rulemaking, addresses more 
generally activities that occur throughout the life-cycle of a mortgage 
loan, i.e., practices with regard to mortgage loan advertising and 
marketing, origination, appraisals, and servicing. Although the Omnibus 
Appropriations Act of 2009 specifies neither the type of conduct nor 
the types of entities any proposed rules should address, the Commission 
has used its organic statute, the FTC Act, in establishing the 
parameters for this rulemaking.\4\ In particular, the types of

[[Page 26132]]

conduct that the FTC proposes to cover include acts and practices that 
meet the FTC's standards for unfairness or deception under Section 5 of 
the FTC Act.\5\ In addition, the entities that the FTC intends to cover 
are those over which the FTC has jurisdiction under the FTC Act--
specifically, entities other than banks, thrifts, federal credit 
unions,\6\ and non-profits\7\ that engage in the conduct the rules 
would cover.
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    \4\ The available legislative history is consistent with the 
Commission's determination as to the scope of the FTC's rulemaking. 
See 155 Cong. Rec. S2816-S2817 (2009).
    \5\ 15 U.S.C. 45(a)(1). For a comprehensive description of the 
FTC's application of its unfairness and deception authority in the 
context of financial services, see Letter from the FTC staff to John 
E. Bowman, Chief Counsel of the Office of Thrift Supervision (Dec. 
12, 2007), available at (http://www.ftc.gov/os/2007/12/P084800anpr.pdf).
    \6\ 15 U.S.C. 45(a)(2).
    \7\ 15 U.S.C. 44. Bona fide non-profit entities are exempt from 
the jurisdiction of the FTC Act. Sections 4 and 5 of the FTC Act 
confer on the Commission jurisdiction only over persons, 
partnerships, or corporations organized to carry on business for 
their profit or that of their members. See 15 U.S.C. 44, 45(a)(2).
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    The Commission is seeking comments on a series of questions related 
to loan modification and foreclosure rescue. The FTC is seeking 
comments to determine whether certain acts and practices of loan 
modification and foreclosure rescue entities are unfair or deceptive 
under Section 5 of the FTC Act and should be incorporated into a 
proposed rule. These acts and practices include conduct that the FTC 
currently could challenge in a law enforcement action as violating 
Section 5 of the FTC Act. However, the Commission is not seeking 
comments on statutes that have been enacted and rules that have been 
issued on these topics.
    Pursuant to Section 626 of the Omnibus Appropriations Act of 2009, 
any violation of a rule adopted under that section will be treated as a 
violation of a rule promulgated pursuant to Section 18 of the FTC 
Act.\8\ Therefore, pursuant to Section 5(m)(1)(A) of the FTC Act,\9\ 
the Commission may seek civil penalties as a remedy for such rule 
violations. In addition, pursuant to Section 626(b) of the Omnibus 
Appropriations Act of 2009, a state may bring a civil action, in either 
state or federal court, to enforce the FTC mortgage loan rules and 
obtain civil penalties and other relief for violations. Before 
initiating an enforcement action, the state must notify the FTC, at 
least 60 days in advance, and the Commission may intervene in the 
action.
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    \8\ 15 U.S.C. 57a.
    \9\ 15 U.S.C. 45(m)(1)(A).
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B. FTC Authority Over Mortgage Loans and Other Financial Services

    The Commission has law enforcement authority over a wide range of 
acts and practices throughout the consumer credit life-cycle. The 
agency enforces Section 5 of the Federal Trade Commission Act, which 
prohibits ``unfair or deceptive acts or practices in or affecting 
commerce.''\10\ The Commission also enforces other consumer protection 
statutes that govern financial services providers. These include the 
Truth in Lending Act (TILA),\11\ the Home Ownership and Equity 
Protection Act,\12\ the Consumer Leasing Act,\13\ the Fair Debt 
Collection Practices Act,\14\ the Fair Credit Reporting Act (FCRA),\15\ 
the Equal Credit Opportunity Act,\16\ the Credit Repair Organizations 
Act,\17\ the Electronic Funds Transfer Act,\18\ the Telemarketing and 
Consumer Fraud and Abuse Prevention Act,\19\ and the privacy provisions 
of the Gramm-Leach-Bliley (GLB) Act.\20\
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    \10\ 15 U.S.C. 45(a)(1).
    \11\ 15 U.S.C. 1601-1666j (mandates disclosures and other 
requirements in connection with consumer credit transactions).
    \12\ 15 U.S.C. 1639 (provides protections for consumers entering 
into certain high-cost mortgage refinance loans).
    \13\ 15 U.S.C. 1667-1667f (requires disclosures, limits balloon 
payments, and regulates advertising in connection with consumer 
lease transactions).
    \14\ 15 U.S.C. 1692-1692p (prohibits abusive, deceptive, and 
unfair debt collection practices by third-party debt collectors).
    \15\ 15 U.S.C. 1681-1681x (imposes standards for consumer 
reporting agencies and information furnishers; places restrictions 
on the use of consumer report information). The Fair and Accurate 
Credit Transactions Act of 2003 amended the FCRA. Pub. L. No. 108-
159, 117 Stat. 1952 (2003).
    \16\ 15 U.S.C. 1691-1691f (prohibits creditor practices that 
discriminate on the basis of race, religion, national origin, sex, 
marital status, age, receipt of public assistance, or the exercise 
of certain legal rights).
    \17\ 15 U.S.C. 1679-1679j (mandates disclosures and other 
requirements in connection with credit repair organizations, 
including a prohibition against charging fees until services are 
completed).
    \18\ 15 U.S.C. 1693-1693r (establishes rights and 
responsibilities of institutions and consumers in connection with 
electronic fund transfer services).
    \19\ 15 U.S.C. 6101-6108 (provides consumer protection from 
telemarketing deception and abuse and requires the Commission to 
promulgate implementing rules).
    \20\ 15 U.S.C. 6801-6809 (requires financial institutions to 
provide annual privacy notices; provides consumers the means to opt 
out from having certain information shared with non-affiliated third 
parties; and safeguards customers' personally identifiable 
information).
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    Notwithstanding the Commission's broad authority over acts and 
practices related to financial services, the FTC does not have 
jurisdiction over all providers of these services. The FTC Act 
specifically excludes banks, thrifts, and federal credit unions from 
the agency's jurisdiction.\21\ However, non-bank affiliates of banks, 
such as parent companies or subsidiaries, are subject to the 
Commission's jurisdiction.\22\ Likewise, the FTC has jurisdiction over 
entities that have contracted with banks to perform certain services on 
behalf of banks, such as credit card marketing and other services, but 
which are not themselves banks.\23\ As a result, non-bank entities that 
provide financial services to consumers are subject to Commission 
jurisdiction, even if they are affiliated with, or are contracted to 
perform services for, banking entities.
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    \21\ 15 U.S.C. 45(a)(2). The FTC Act defines ``banks'' by 
reference to a listing of certain distinct types of legal entities. 
See 15 U.S.C. 44, 57a(f)(2). That list includes: national banks, 
federal branches of foreign banks, member banks of the Federal 
Reserve System, branches and agencies of foreign banks, commercial 
lending companies owned or controlled by foreign banks, banks 
insured by the Federal Deposit Insurance Corporation, and insured 
state branches of foreign banks.
    \22\ Congress clarified FTC jurisdiction when it enacted the GLB 
Act. Section 133(a) of the GLB Act states that an entity that is 
affiliated with a bank, but which is not itself a bank, is not a 
bank for purposes of the FTC Act. Section 133(a) of the GLB Act 
specifically provides:
    CLARIFICATION OF FEDERAL TRADE COMMISSION JURISDICTION. Any 
person that directly or indirectly controls, is controlled directly 
or indirectly by, or is directly or indirectly under common control 
with, any bank or savings association . . . and is not itself a bank 
or savings association shall not be deemed to be a bank or savings 
association for purposes of any provisions applied by the Federal 
Trade Commission under the Federal Trade Commission Act.
    Pub. L. No. 106-102, Sec.  133(a), 113 Stat. 1383; 15 U.S.C. 41 
note (a). This section has been interpreted to apply to subsidiaries 
of banks that are not themselves banks. Minnesota v. Fleet Mortgage 
Corp., 181 F. Supp. 2d 995 (D. Minn. 2001).
    \23\ See, e.g., FTC v. CompuCredit Corp., Civil Action No. 1:08-
CV-01976-BBM-RGV (N.D. Ga. 2008) (approving stipulated final order 
involving FTC action against entity that contracted to perform 
credit card marketing services for a bank); FTC v. Am. Standard 
Credit Sys., 874 F. Supp. 1080, 1086 (C.D. Cal. 1994) (dismissing 
argument that entity that contracted to perform credit card 
marketing and other services for a bank is not subject to FTC Act).
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    The Commission also does not have jurisdiction under the FTC Act 
over non-profit organizations.\24\ However, the FTC does have 
jurisdiction over for-profit entities that provide mortgage-related 
services as a result of a contractual relationship with a non-profit 
organization.\25\
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    \24\ See 15 U.S.C. 44.
    \25\ See Nat'l Fed'n of the Blind v. FTC, 420 F.3d 331, 334-35 
(4th Cir. 2005). In addition, the Commission asserts jurisdiction 
over ``sham charities'' that operate as for-profit entities in 
practice. See, e.g., FTC v. Ameridebt, Inc., 343 F. Supp. 2d 451 (D. 
Md. 2004).
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    As discussed above, the Commission intends that any rules that it 
issues in this proceeding would apply only to the same types of 
entities over which the Commission has jurisdiction under the FTC Act.

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C. Deceptive and Unfair Acts and Practices

1. Deceptive Acts and Practices
    Section 5 of the FTC Act broadly proscribes deceptive or unfair 
acts or practices in or affecting commerce. An act or practice is 
deceptive if there is a representation, omission of information, or 
practice that is likely to mislead consumers, who are acting reasonably 
under the circumstances, and the representation, omission, or practice 
is one that is material.\26\ Injury is likely if the misleading or 
omitted information is material to consumers, i.e., likely to affect a 
decision to purchase or use a product or service.
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    \26\ Federal Trade Commission Policy Statement on Deception, 
appended to In re Cliffdale Assocs., 103 F.T.C. 110, 174-84 (1984) 
(Deception Policy Statement).
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    To determine that an act or practice is deceptive, the Commission 
first must conclude that there is a representation, omission of 
information, or a practice that is likely to mislead consumers. A claim 
about a product or service may be either express or implied. An express 
claim generally is established by the representation itself. An implied 
claim, on the other hand, is an indirect representation, which must be 
examined within the context of other information that is either 
presented or omitted. Deception may occur based on what is stated or 
because of the omission of information that would be important to the 
consumer. In determining that an advertisement is deceptive, for 
example, the Commission considers whether the overall net impression of 
the ad (including language and graphics) is likely to mislead 
consumers.\27\
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    \27\ Disclaimers or qualifying statements are important to 
consider for deception analysis. Such disclaimers must be 
sufficiently clear, prominent, and understandable to convey the 
qualifying information effectively to consumers. The Commission 
recognizes that often ``reasonable consumers do not read the 
entirety of an ad or are directed away from the importance of the 
qualifying phrase by the acts or statements of the seller.'' 
Deception Policy Statement at 181. Thus, fine print disclosures at 
the bottom of a print ad or television screen are unlikely to cure 
an otherwise deceptive representation.
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    Second, the Commission considers the act or practice from the 
perspective of a consumer acting reasonably under the 
circumstances.\28\ Reasonableness is evaluated based on the 
sophistication and understanding of consumers in the group to whom the 
representation or sales practice is directed. If a specific audience is 
targeted, the Commission will consider the effect on a reasonable 
member of that target group. A representation may be susceptible to 
more than one reasonable interpretation, and if one such interpretation 
is misleading, the advertisement is deceptive, even if other non-
deceptive interpretations are possible.\29\
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    \28\ Deception Policy Statement at 177-81.
    \29\ Id. at 178.
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    Third, to conclude that deception has occurred, the Commission must 
determine that the representation, omission, or practice is material, 
i.e., one that is likely to affect a consumer's decision to purchase or 
use a product or service. A deceptive representation, omission, or 
practice that is material is likely to cause consumer injury--that is, 
but for the deception, the consumer may have made a different 
choice.\30\ Express claims about a product or service, such as 
statements about cost, are presumed to be material. Claims about 
purpose and efficacy of a product or service are also presumed to be 
material.\31\
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    \30\ Id. at 182-83.
    \31\ Novartis Corp. v. FTC, 223 F.3d 783, 786-87 (D.C. Cir. 
2000).
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2. Unfair Acts and Practices
    Section 5(n) of the FTC Act also sets forth a three-part test to 
determine whether an act or practice is unfair.\32\ First, the practice 
must be one that causes or is likely to cause substantial injury to 
consumers. Second, the injury must not be outweighed by countervailing 
benefits to consumers or to competition. Third, the injury must be one 
that consumers could not reasonably have avoided.
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    \32\ 15 U.S.C. 45(n). Section 5(n) of the FTC Act also provides 
that ``[i]n determining whether an act or practice is unfair, the 
Commission may consider established public policies as evidence to 
be considered with all other evidence.''
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    In analyzing whether injury is substantial, the Commission is not 
concerned with trivial, speculative, or more subjective types of harm. 
The substantial injury test may be met by small harm to a large number 
of consumers. In most cases, substantial injury involves monetary harm. 
Once it determines that there is substantial consumer injury, the 
Commission considers whether the harm is offset by any countervailing 
benefits to consumers or to competition. Thus, the Commission considers 
both the costs of imposing a remedy and any benefits that consumers 
enjoy as a result of the practice at issue. Finally, the injury must be 
one that consumers cannot reasonably avoid. If consumers reasonably 
could have made a different choice that would have avoided the injury, 
but did not do so, the practice is not deemed to be unfair under the 
FTC Act.
    In applying its unfairness standard, the Commission takes the 
approach that well-informed consumers are capable of making choices for 
themselves. The agency therefore may prohibit or restrict acts and 
practices if they unreasonably create, or take advantage of, an 
obstacle to the ability of consumers to make informed choices, thus 
causing, or being likely to cause, consumer injury.\33\
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    \33\ See Letter from the FTC to Hon. Wendell Ford and Hon. John 
Danforth, Committee on Commerce, Science and Transportation, United 
States Senate, Commission Statement of Policy on the Scope of 
Consumer Unfairness Jurisdiction (December 17, 1980), reprinted in 
In re Int'l Harvester Co., 104 F.T.C. 949, 1070, 1073 (1984) 
(Unfairness Policy Statement); see also Trade Regulation Rule 
Concerning Cooling-Off Period for Sales Made at Homes or at Certain 
Other Locations, 16 CFR 429 (making it an unfair and deceptive 
practice for anyone engaged in ``door-to-door'' sales of consumer 
goods or services with a purchase price of $25 or more to fail to 
provide buyer with certain oral and written disclosures regarding 
buyer's right to cancel within three business days); FTC v. Holland 
Furnace, 295 F.2d 302 (7th Cir. 1961) (seller's servicemen 
dismantled home furnaces then refused to reassemble them until 
consumers agreed to buy services or replacement parts).
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II. Loan Modification and Foreclosure Rescue Services

    With the recent economic downturn, more consumers have become 
delinquent on their mortgages or at risk of foreclosure. Others, even 
if not yet delinquent, are struggling to pay their mortgage debt. To 
respond to these problems, many consumers have sought to modify their 
loans or purchase services to assist them in avoiding foreclosure. 
However, the acts and practices of some companies that provide or 
advertise loan modification and foreclosure rescue services have raised 
substantial consumer protection concerns. To date, the Commission has 
addressed these concerns primarily through law enforcement under 
Section 5 of the FTC Act. Through this ANPR, the FTC seeks comment on 
whether it should also issue rules to address the conduct of those who 
provide or advertise loan modification and foreclosure rescue services.

A. Mortgage Loan Servicing

    In the past, mortgage lenders usually made loans to consumers and 
then held the loans until consumers paid off their mortgages or sold 
their homes. In more recent years, however, more mortgage lenders have 
regularly sold their loans to others. Thus, the owner of a mortgage 
loan may be either the originating lender or an investor who has 
purchased the loan.
    Owners of loans often contract with others to service their loans. 
A mortgage servicer is the agent responsible for handling the day-to-
day aspects of a loan on behalf of the loan's owner. A mortgage 
servicer's responsibilities

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include collecting monthly mortgage payments and crediting borrowers' 
accounts. A servicer may also maintain an escrow account which covers 
charges such as property taxes and homeowners insurance. If a borrower 
falls behind on monthly payments and becomes delinquent on the loan, 
the mortgage servicer also conducts activities associated with a 
defaulted loan, such as attempting to collect overdue payments, 
negotiating loss mitigation options, and, if necessary, overseeing 
foreclosure proceedings.
    Generally, financially distressed homeowners having difficulty 
making mortgage payments can contact their mortgage servicers directly 
and seek assistance. Pursuant to guidelines or agreements with the 
owners of loans, many servicers provide loss mitigation options for 
distressed homeowners. Owners of loans often have an incentive to 
consider such options because of the cost associated with foreclosure 
proceedings.
    Mortgage servicers may provide various loss mitigation options to 
help distressed homeowners avoid foreclosure, including a repayment 
plan, forbearance agreement, short sale, deed-in-lieu of foreclosure, 
or loan modification.\34\ A repayment plan gives a borrower a fixed 
amount of time to repay the overdue amount by adding a portion of what 
is past due to the regular payment. A forbearance agreement reduces or 
suspends payments for a period of time, at the end of which the 
borrower resumes regular payments as well as a lump sum payment or 
additional partial payments. A short sale is an agreement to sell the 
house before foreclosure and to have the servicer forgive any shortfall 
between the sales price and the mortgage balance. A deed-in-lieu of 
foreclosure allows a borrower to transfer voluntarily the property 
title to the servicer, in exchange for cancellation of the remainder of 
the debt. A loan modification is an agreement to change permanently one 
or more of the terms of the mortgage loan to make the borrower's 
monthly payments more affordable.\35\
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    \34\ Servicers consider loss mitigation options if a delinquent 
borrower does not have adequate equity to sell the house and pay off 
the mortgage in full or to refinance into a more affordable loan. A 
delinquent borrower can also file Chapter 13 personal bankruptcy to 
prevent foreclosure, often as a debt management option of last 
resort. If a borrower has regular income, Chapter 13 may allow the 
borrower to keep property, such as a mortgaged house or car. In 
Chapter 13, the court may approve a repayment plan that allows the 
use of future income toward payment of debts during a three-to-five 
year period, rather than requiring surrender of property.
    \35\ For example, the servicer may lower the monthly payment, 
alter the payment schedule, fix or lower the interest rate, apply 
fees and arrearage to the principal, or even reduce the unpaid 
principal balance.
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    A loan modification, in particular, benefits distressed homeowners 
because borrowers can avoid foreclosure and are more likely to be able 
stay in their homes with more affordable payments. In addition, if 
loans are in default, once they have been modified, servicers will 
reinstate the loans and treat borrowers as being current on their 
mortgages. The specific loan modification policies used vary by 
mortgage servicer.

B. Mortgage Foreclosure

    Foreclosure is the legal means an owner of a mortgage loan can use 
to take possession of a home when a borrower defaults on the loan. In 
general, a borrower is in default thirty days after the first missed 
mortgage payment. Typically, a mortgage servicer may attempt various 
loss mitigation options prior to initiating foreclosure proceedings, 
which generally occur three to six months after the first missed 
mortgage payment.\36\
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    \36\ See U.S. Department of Housing and Urban Development, 
Foreclosure Process, available at (http://www.hud.gov/foreclosure/foreclosureprocess.cfm).
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    Foreclosure processes differ by state and depend on the details of 
state foreclosure laws. Differences among states include the 
requirements of notification and the types of foreclosure proceedings 
available. Generally, there are three types of foreclosures processes: 
judicial foreclosure, power of sale foreclosure, and strict 
foreclosure. Judicial foreclosure involves the owner of the loan filing 
suit in court and the home being sold under the court's supervision. 
All states allow judicial foreclosure, and in some states it is the 
only foreclosure option available. Power of sale foreclosure, also 
known as ``statutory foreclosure,'' involves the sale of the home at 
public auction by the servicer if the mortgage contains a ``power of 
sale'' clause or if a deed of trust was used instead of a mortgage. 
Many states permit power of sale foreclosure, which is often more 
expedient than judicial foreclosure. In a power of sale foreclosure, 
the owner of the loan sends notices demanding payment to borrowers who 
have defaulted. Once the required waiting period has passed, the 
mortgage servicer can sell the home at public auction, subject to 
judicial review. Strict foreclosure is available in a limited number of 
states and permits the owner of the loan to file lawsuits against 
borrowers who have defaulted. If the borrower cannot pay the mortgage 
debt within the period of time set by court order, the property title 
goes directly to the owner of the loan.

C. Developments in the Mortgage Marketplace

    As a result of the recent downturn in the economy and housing 
market, many American homeowners are in financial distress. The rate of 
mortgage loan delinquency and foreclosure has risen to the highest 
level in three decades.\37\ The recent economic downturn has also given 
rise to a new and broader range of third-party providers who offer to 
assist homeowners--for free or for a fee--in obtaining a loan 
modification or preventing foreclosure.
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    \37\ See Mortgage Bankers Association, Delinquencies Continue to 
Climb in Latest MBA National Delinquency Survey (Mar. 5, 2009), 
available at (http://www.mbaa.org/NewsandMedia/PressCenter/68008.htm). According to the Mortgage Bankers Association's (MBA) 
National Delinquency Survey, the delinquency rate for mortgage loans 
on one-to-four unit residential properties rose to a seasonally 
adjusted rate of 7.88% of all loans, as of the end of the fourth 
quarter of 2008, which is the highest rate ever based on data dating 
back to 1972. Over 11% of loans are either in foreclosure or 
delinquent by at least one payment, which is the highest rate ever 
recorded in the MBA national delinquency survey.
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    The FTC and other agencies like the U.S. Department of Housing and 
Urban Development (HUD) have generally advised consumers who are behind 
on their mortgage payments to contact their mortgage servicer about the 
possibility of loan modification or other options.\38\ The Commission 
has initiated a stepped-up consumer outreach initiative on foreclosure 
rescue and loan modification fraud. The Commission has issued consumer 
education publications warning homeowners against foreclosure rescue 
and loan modification scams. Most recently, the Commission issued a new 
consumer education publication on this topic, which several servicers 
have provided directly to consumers, including during loan counseling 
sessions, in monthly statements, in correspondence to delinquent 
borrowers, and on their websites.\39\
---------------------------------------------------------------------------

    \38\ See FTC Publication, Mortgage Payments Sending You Reeling? 
Here's What to Do, available at (http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea04.shtm).
    \39\ See FTC Publication, A Note to Homeowners, available at 
(http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea16.pdf); see also 
FTC Publication, Foreclosure Rescue Scams: Another Potential Stress 
for Homeowners in Distress, available at (http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre42.shtm).
---------------------------------------------------------------------------

    In addition, government agencies have instituted new programs to 
help homeowners in financial distress. For

[[Page 26135]]

example, on March 4, 2009, the U.S. Department of the Treasury 
introduced the Making Home Affordable Program to assist eligible 
homeowners to refinance or modify their mortgage loans to an affordable 
payment. Under the program, mortgage servicers who adopt certain loan 
modification guidelines and provide eligible homeowners with loan 
modifications can qualify to receive substantial government 
incentives.\40\ .
---------------------------------------------------------------------------

    \40\ See Home Affordable Modification Program Guidelines (Mar. 
4, 2009), available at (http://www.financialstability.gov/roadtostability/homeowner.html)
---------------------------------------------------------------------------

    In addition to federal efforts, state and local agencies and non-
profit organizations also offer similar foreclosure prevention 
assistance and other housing-related services. Non-profit organizations 
and housing counseling agencies continue to provide a wide array of 
free services to homeowners who are in financial distress. HUD has 
certified numerous non-profit housing counseling agencies. These 
agencies provide homeowners with assistance, such as offering consumer 
education, assisting with debt management, negotiating directly with 
servicers to make mortgage payments more affordable--thereby providing 
foreclosure relief and helping consumers stay in their homes.
    The private sector also has developed and offered programs at no 
cost to help distressed homeowners. HUD-approved counseling agents, 
mortgage companies, investors, and other mortgage market participants 
created the HOPE NOW Alliance (Hope Now) to provide homeowners with 
free foreclosure prevention assistance. Consumers can visit Hope Now's 
website, www.hopenow.com, or call the Homeowner's HOPE Hotline, 1-888-
995-HOPE, to find housing counselors from HUD-certified agencies who 
can help guide them through various foreclosure prevention options, 
including loan modification.
    At the same time that governmental and private sector entities 
(both for-profit and non-profit) are increasing their efforts to assist 
distressed homeowners, there has been an increase in individuals and 
entities offering to assist consumers in securing loan modifications 
and foreclosure rescue services in exchange for a fee. Foreclosure 
rescue and loan modification entities frequently market their services 
via direct mail, email, radio, television, and Internet 
advertisements.\41\ They sometimes send targeted written solicitations 
to consumers facing mortgage rate resets\42\ or foreclosure.\43\ 
Specifically, foreclosure rescue and loan modification entities often 
identify such consumers by reviewing notices of default and other 
publicly-available records.
---------------------------------------------------------------------------

    \41\ See, e.g., FTC v. National Foreclosure Relief, Inc., Case 
No. SACV09-117 DOC (MLGx) (C.D. Cal. filed Feb. 2, 2009) (alleging 
that defendants targeted consumer in arrears with mailer 
advertisements).
    \42\ Mortgage loans are sometimes categorized as having either a 
``fixed'' or ``adjustable'' rate. A fixed rate mortgage loan 
maintains the same interest rate throughout its term. An adjustable 
mortgage, by contrast, has an interest rate which is subject to 
change (or ``reset'') after a certain introductory period; and that 
reset can result in an increased interest rate.
    \43\ See, e.g., Testimony of Prentiss Cox, before the U.S. 
Senate Committee on Commerce Science & Technology (Feb. 26, 2009) at 
2 (noting that ``families are often desperate to save their homes,'' 
and that ``[a]s soon as a house enters the foreclosure process, the 
homeowner in foreclosure typically is subject to an avalanche of 
mail, phone calls and personal visits from people promising to help 
the homeowner''); see also Steve Tripoli & Elizabeth Renuart, 
National Consumer Law Center, Dreams Foreclosed: The Rampant Theft 
of Americans' Home Through Foreclosure ``Rescue'' Scams (2005), at 9 
(``The `rescuer' identifies distressed homeowners through public 
foreclosure notices in newspapers or at government offices. . . . 
The `rescuer' then contacts the homeowner by phone, personal visit, 
card or flyer left at the door . . . or advertising. Initial contact 
typically revolves around a simple message such as `Stop foreclosure 
with just one phone call,' `I'd like to $ buy $ your house,' `You 
have options,' or `Do you need instant debt relief and CASH?'''), 
available at (http://www.consumerlaw.org/news/content/ForeclosureReportFinal.pdf).
---------------------------------------------------------------------------

    Foreclosure rescue and loan modification entities, sometimes also 
referred to as ``foreclosure consultants,'' generally offer to 
negotiate with a consumer's servicer to secure a reduction in mortgage 
payments or otherwise obtain a favorable modification of loan terms on 
behalf of a consumer. Foreclosure rescue and loan modification entities 
charge a fee for their services, and this fee is almost always charged 
up-front. In many instances, these entities claim that they have 
knowledge of and experience with the mortgage industry and lending 
because they are attorneys or mortgage brokers. In some cases, instead 
of simply offering to negotiate on behalf of a consumer, foreclosure 
rescue operations require consumers to enter a new loan with them or to 
transfer title to the property (for example, to remain in the home as a 
renter with the option to repurchase or otherwise maintain the 
opportunity to reacquire title).
    Consumers may choose to pay a fee for the services of providers of 
foreclosure rescue and loan modification services rather than use free 
services for a variety of reasons. Some distressed homeowners may be 
drawn to, or targeted for, aggressive advertisements by fee for service 
providers and may be unaware of the free services available to them. 
They also may be unwilling or unable to work directly with their 
mortgage servicer or with a non-profit organization. For example, 
consumers may be wary of or unsatisfied with a mortgage servicer's loss 
mitigation offer, or frustrated with their inability to contact the 
appropriate person at their servicer.

III. FTC Law Enforcement

A. Application of the FTC Act and Consumer Protection Concerns

    The FTC has taken a number of law enforcement actions to protect 
consumers from unfair and deceptive loan modification and foreclosure 
rescue practices. The Commission has recently filed numerous lawsuits 
against defendants for allegedly engaging in deceptive practices.\44\ 
Most recently, the FTC--along with other federal and state regulators--
announced law enforcement actions as part of a broader crackdown on 
loan modification and foreclosure rescue entities.\45\ In connection 
with this effort, the Commission also sent warning letters to 71 
companies for marketing potentially deceptive mortgage loan 
modification and foreclosure assistance programs.\46\
---------------------------------------------------------------------------

    \44\ See, e.g., FTC v. New Hope Property LLC, Case No. 1:09-cv-
01203-JBS-JS (D.N.J. filed Mar. 17, 2009); FTC v. Hope Now 
Modifications, LLC, Case No. 1:09-cv-01204-JBS-JS (D.N.J. filed Mar. 
17, 2009); FTC v. National Foreclosure Relief, Inc., Case No. 
SACV09-117 DOC (MLGx) (C.D. Cal. filed Feb. 2, 2009); FTC v. United 
Home Savers, LLP, Case No. 8:08-cv-01735-VMC-TBM (M.D. Fla. filed 
Sept. 3, 2008); FTC v. Foreclosure Solutions, LLC, No. 1:08-cv-01075 
(N.D. Ohio filed Apr. 28, 2008); FTC v. Mortgage Foreclosure 
Solutions, Inc., Case No. 8:08-cv-388-T-23EAJ (M.D. Fla. filed Feb. 
26, 2008); FTC v. National Hometeam Solutions, Inc., Case No. 4:08-
cv-067 (E.D. Tex. filed Feb. 26, 2008).
    \45\ See FTC v. Federal Loan Modification Law Center, LLP, Case 
No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009); FTC v. 
Thomas Ryan, Civil No. 1:09-00535 (HHK) (D.D.C. filed March 25, 
2009); FTC v. Home Assure, LLC, Case No. 8:09-CV-00547-T-23T-SM 
(M.D. Fla. filed Mar. 24, 2009); see also, Press Release, Federal 
and State Agencies Crack Down on Mortgage Modification and 
Foreclosure Rescue Scams (Apr. 6, 2009), available at (http://www.ftc.gov/opa/2009/04/hud.shtm); Press Release, Federal, State 
Partners Announce Multi-Agency Crackdown Targeting Foreclosure 
Rescue Scams, Loan Modification Fraud (Apr. 6, 2009), available at 
(http://www.ftc.gov/opa/2009/04/loanfraud.shtm).
    \46\ An example of these letters is available at (http://www.ftc.gov/os/2009/04/090406warningletter.pdf).
---------------------------------------------------------------------------

    In the FTC's law enforcement actions against those who offer loan 
modification and foreclosure rescue services, the Commission has 
alleged that a number of acts and practices were deceptive under 
Section 5 of the FTC Act:
    First, many defendants promised a high likelihood of success but 
failed to fulfill their promise to modify

[[Page 26136]]

consumers' existing loans or to stop foreclosure.\47\ For example, some 
defendants assured consumers that they could stop foreclosure or obtain 
a loan modification with claims such as a ``97% success rate.''\48\ 
However, many defendants allegedly did little or nothing to negotiate 
with the mortgage servicer or to stop foreclosure. Second, many 
defendants promised to fully or partially refund consumers' payments in 
the event that negotiation efforts to obtain a loan modification or to 
prevent foreclosure were unsuccessful.\49\ Often, defendants allegedly 
did not provide the promised refunds. Third, some defendants 
represented that they were affiliated with governmental or free non-
profit programs,\50\ when in fact they were not.\51\
---------------------------------------------------------------------------

    \47\ For example, in one case the Commission charged a 
foreclosure rescue operation for promising consumers that it could 
stop ``any foreclosure,'' but then failing to stop foreclosure or 
taking minimal steps to do so.See FTC v. National Hometeam 
Solutions, LLC, Case No. 4:08-cv-067 (E.D. Tex. filed Feb. 26, 
2008).
    \48\ See, e.g., FTC v. Federal Loan Modification Law Center, 
LLP, Case No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009); 
FTC v. National Foreclosure Relief, Inc., Case No. SACV09-117 DOC 
(MLGx) (C.D. Cal. filed Feb. 2, 2009); FTC v. Foreclosure Solutions, 
LLC, No. 1:08-cv-01075 (N.D. Ohio filed Apr. 28, 2008); FTC v. 
Mortgage Foreclosure Solutions, Inc., Case No. 8:08-cv-388-T-23EAJ 
(M.D. Fla. filed Feb. 26, 2008). Additionally, some entities claim 
to be associated with or to have good relationships with the 
consumer's mortgage servicer. FTC v. Home Assure, LLC, Case No. 
8:09-CV-00547-T-23T-SM (M.D. Fla. filed Mar. 24, 2009).
    \49\ See, e.g., FTC v. Home Assure, LLC, Case No. 8:09-CV-00547-
T-23T-SM (M.D. Fla. filed Mar. 24, 2009) (alleging that defendant 
promised ``100% SATISFACTION GUARANTEE OR YOUR MONEY BACK''); FTC v. 
United Home Savers, LLP, Case No. 8:08-cv-01735-VMC-TBM (M.D. Fla. 
filed Sept. 3, 2008); FTC v. National Hometeam Solutions, LLC, Case 
No. 4:08-cv-067 (E.D. Tex. filed Feb. 26, 2008).
    \50\ The Federal Reserve Board recently promulgated amendments 
to Regulation Z of TILA, generally effective October 1, 2009, which 
would ban various mortgage entities from a number of relevant 
practices, including banning mortgage advertisers from: 
misrepresenting an advertised loan as being part of a ``government 
loan program'' or otherwise endorsed or sponsored by a government 
entity; making misleading claims of debt elimination; and using the 
term ``counselor'' to refer to for-profit mortgage creditors or 
brokers. See 73 FR 44589-90, 44602. To the extent that loan 
modification or foreclosure rescue entities are offering loans to 
consumers, they may fall within the ambit of these rules.
    \51\ For example, in two cases the Commission charged defendants 
for falsely advertising themselves to be associated with the HOPE 
NOW Alliance, and then breaking promises to secure loan 
modifications or alternatively, to refund the money of consumers 
whose loans could not be modified. SeeFTC v. New Hope Property LLC, 
Case No. 1:09-cv-01203-JBS-JS (D.N.J. filed Mar. 2009); FTC v. Hope 
Now Modifications, LLC, Case No. 1:09-cv-01204-JBS-JS (D.N.J. filed 
Mar. 2009). In another case, a defendant marketing purported loan 
modification services allegedly represented, via his website, that 
he was the ``House and Urban Department,'' displaying a government-
like seal; and using a web address (``bailout-hud-gov.us'' or 
``bailout.dohgov.us'') and other features to create the impression 
his business was associated with the U.S. government. FTC v. Thomas 
Ryan, Civil No. 1:09-00535 (HHK) (D.D.C. filed Mar. 25, 2009); see 
alsoFTC v. Federal Loan Modification Law Center, LLP, Case No. 
SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009) (charging 
defendant with misrepresenting that it is part of or affiliated with 
the federal government).
---------------------------------------------------------------------------

    Moreover, most defendants charged substantial, up-front fees, which 
appears to be a prevalent practice in the for-profit foreclosure rescue 
and loan modification industry. When defendants use deception to secure 
advance payment and then fail to fulfill their promise to stop a 
foreclosure or obtain a loan modification, consumers are unlikely to 
receive a refund or recover their money.\52\ Payment of up-front fees, 
which are sometimes thousands of dollars, exacerbates the consumer 
injury from deception, and imposes a significant burden on consumers 
already in financial distress.
---------------------------------------------------------------------------

    \52\ Note that, even if providers do fulfill their promises to 
provide refunds, this action does not cure the deception employed in 
enrolling the consumer in the program. See, e.g., FTC v. Think 
Achievement Corp., 312 F.3d 259, 262 (7th Cir. 2002) (``[A] money-
back guaranty does not sanitize a fraud.'')
---------------------------------------------------------------------------

    In addition, some defendants advise consumers, including those who 
are still current on their loans, to stop making mortgage payments and 
to cease communication with their mortgage servicer while the 
foreclosure rescue or loan modification operator purportedly negotiates 
on their behalf.\53\ If the operator fails to take adequate steps to 
obtain a loan modification or to prevent foreclosure, the operator may 
actually increase the likelihood of foreclosure, because consumers fail 
to take advantage of other options available to them that might help 
save their homes.\54\
---------------------------------------------------------------------------

    \53\ See, e.g., FTC v. Home Assure, LLC, Case No. 8:09-CV-00547-
T-23T-SM (M.D. Fla. filed Mar. 24, 2009); FTC v. National Hometeam 
Solutions, LLC, Case No. 4:08-cv-067 (E.D. Tex. filed Feb. 26, 
2008).
    \54\ The FTC has warned consumers about for-profit loan 
modification and foreclosure rescue operations which charge hefty 
fees for services which consumers can undertake themselves by 
contacting their mortgage servicer directly or obtain for free 
through organizations like Hope Now. See FTC Publication, A note to 
Homeowners, available at (http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea16.pdf).
---------------------------------------------------------------------------

B. State Law Enforcement

    Many states have engaged in legislative and law enforcement efforts 
to address conduct in the loan modification and foreclosure rescue 
industry. First, several states have filed lawsuits against loan 
modification or foreclosure rescue entities for violating state 
consumer protection laws prohibiting unfair and deceptive 
practices.\55\ Second, some states have applied existing statutes 
specifically regulating the debt settlement, debt management, or credit 
counseling industries to cover foreclosure rescue and loan modification 
practices.\56\ Third, numerous states and the District of Columbia have 
recently enacted statutes that specifically restrict or ban 
``foreclosure consultants'' from engaging in some of the foreclosure 
rescue and loan modification practices detailed above.\57\ State law 
enforcement agencies have filed numerous suits against individuals and 
entities for violations of these statutes.\58\
---------------------------------------------------------------------------

    \55\ See, e.g., State Foreclosure Rescue Enforcement Actions - 
Sampling of Actions: March 31, 2009, available at (http://www.ftc.gov/os/2009/04/090406foreclosurerescue.pdf); see also Press 
Release, Federal and State Agencies Crack Down on Mortgage 
Modification and Foreclosure Rescue Scams (Apr. 6, 2009), available 
at (http://www.ftc.gov/opa/2009/04/hud.shtm); Press Release, 
Federal, State Partners Announce Multi-Agency Crackdown Targeting 
Foreclosure Rescue Scams, Loan Modification Fraud (Apr. 6, 2009), 
available at (http://www.ftc.gov/opa/2009/04/loanfraud.shtm).
    \56\ See, e.g., Ohio Attorney General, Press Release, Attorney 
General Dann Files 6 Suits Against Companies For Foreclosure Rescue 
Scams (Aug. 8, 2007) (including count under state ``debt 
adjustment'' statute).
    \57\ See, e.g., Cal. Civ. Code Sec.  2945, et seq.; Colo. Rev. 
Stat. Sec.  6-1-1101, et seq.; 6 Del C. Sec.  2400B, et seq.; D.C. 
Code Ann. Sec.  42-2431, et seq.; Fla. Stat. Ann. Sec.  501.1377; 
GA. Code Ann. Sec.  10-1-393; Hawaii Rev. Stat. Ann. Sec.  480E-1, 
et seq.; IL Comp. Stat, Ann., Ch. 765 Sec.  940/1, et seq.; Ind. 
Code Ann Sec.  24-5.5-1-1, et seq.; Iowa Code Sec.  714E.1, et seq.; 
ME Rev. Stat. Ann. tit 32 Sec.  6191, et seq.; MD Real Property Code 
Ann.Sec.  7-301, et seq.; Code Mass. Reg., 940 CMR Sec.  25.01, et 
seq.; Minn. Stat. Ann. Sec.  325N.01, et seq.; MO Ann. Stat. Sec.  
407.935, et seq.; Neb. Rev. Stat. Ann. Sec.  76-2701, et seq.; NH 
Rev. Stat. Sec.  479-B:1, et seq.; NY CLS Real Prop. Sec.  265-b; RI 
Gen. Laws Sec.  5-79-1, et seq.
    \58\ See, e.g., Press Release, Massachusetts Attorney General, 
Attorney General Martha Coakley Obtains Temporary Restraining Order 
against Perpetrators of Loan Modification Scam; Warns Public About 
Scams Targeting Homeowners (Apr. 7, 2009) (alleging defendant loan 
modification service violated state law prohibiting advance fees), 
available at (http://www.mass.gov/?pageID=cagopressrelease&L=1&L0=Home&sid=Cago&b=pressrelease&f=2009_04_07_fox_loan_mods&csid=Cago); Press Release, Illinois Attorney 
General, MADIGAN FILES TWO MORTGAGE RESCUE FRAUD LAWSUITS, SEEKS 
IMMEDIATE BAN ON COMPANIES' OPERATIONS (Apr. 6, 2009) (alleging 
defendant loan modification entity violated Illinois Mortgage Rescue 
Fraud Act for, inter alia, charging up-front fee), available at 
(http://www.ag.state.il.us/pressroom/2009_04/20090406.html); Press 
Release, Florida Attorney General, Court Grants Request to 
Temporarily Stop Loan Modification Company's Up-Front Fees (Feb. 23, 
2009) (noting that Florida statute ``governs companies providing 
foreclosure-related rescue services including loan modification''), 
available at (http://www.myfloridalegal.com/newsrel.nsf/pv/FF973C8A0EEE167B85257566006916E8; Press Release, Minnesota Attorney 
General, Attorney General Lori Swanson Expands Litigation Against 
Fraudulent Foreclosure Consultants And Issues Warning To Minnesota 
Homeowners In Mortgage Trouble To Seek Reputable Help And Steer 
Clear Of Scam Artists (Jan. 29, 2009), available at (http://www.ag.state.mn.us/consumer/pressrelease/090129foreclosureconsultants.asp); Press Release, Illinois Attorney 
General's Office, Madigan Sues Seven Companies For Mortgage Rescue 
Fraud (Nov. 18, 2008), available at (http://www.illinoisattorneygeneral.gov/pressroom/2008_11/20081118.html).

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[[Page 26137]]

    In 1979, California enacted the first statute that specifically 
restricts the practices of entities offering foreclosure rescue or 
similar services.\59\ More recently, in 2004, Minnesota enacted a 
statute, based on the California law, but adding several additional key 
restrictions on foreclosure reconveyance transactions.\60\ Since then, 
over twenty states have passed their own foreclosure consultant 
statutes, which are modeled after the California and Minnesota laws. 
These state foreclosure consultant statutes generally include a number 
of requirements and restrictions, including: (1) banning covered 
entities from requiring or collecting advance fees before fully 
performing contracted or promised services to the consumer; (2) 
requiring written contracts containing certain provisions and 
disclosures; and (3) providing consumers with the right to cancel the 
contract in certain circumstances.
---------------------------------------------------------------------------

    \59\ Cal. Civ. Code Sec.  2945, et seq.
    \60\ Minn. Stat. Ann. Sec.  325N.01, et seq.
---------------------------------------------------------------------------

    Some statutes also impose additional requirements on foreclosure 
rescue operations that require consumers to transfer title to their 
homes, and purport to offer reconveyance at a later date. These 
statutes often include the requirement that foreclosure rescue 
operations must verify before doing a reconveyance that the consumer 
has a reasonable ability to pay for the subsequent conveyance of the 
home back to the consumer.\61\ Other states have decided to ban 
outright certain practices, like title reconveyances.\62\Some states 
also have enacted criminal statutes covering foreclosure rescue 
operations.\63\
---------------------------------------------------------------------------

    \61\ See, e.g., Minn. Stat. Ann. Sec.  325N.17. The Minnesota 
statute also requires, among other things, that the foreclosure 
rescue operator reconvey the foreclosed property to the homeowner or 
pay the homeowner such that the total consideration is at least 82% 
of the fair market value of the property.
    \62\ See, e.g., D.C. Code Ann. Sec.  42-2431, et seq.; Code 
Mass. Reg., 940 CMR Sec.  25.01, et seq.
    \63\ See, e.g., Iowa Code Sec.  714E.1, et seq.
---------------------------------------------------------------------------

    Almost all state foreclosure consultant laws exempt state-licensed 
attorneys. Some for-profit loan modification and foreclosure rescue 
operations have partnered with attorneys,\64\ which some operations may 
use to avoid state statutory prohibitions against the collection of 
advance fees. Some state bar associations have responded by issuing 
warnings to attorneys that many relationships between licensed 
attorneys and foreclosure consultants violate state ethics rules for 
attorneys.\65\;
---------------------------------------------------------------------------

    \64\ See, e.g., FTC v. Federal Loan Modification Law Center, 
LLP, Case No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009) 
(alleging violations of FTC Act against professional law corporation 
and an attorney).
    \65\ See, e.g., Ethics Alert: Legal Services to Distressed 
Homeowners and Foreclosure Consultants on Loan Modifications 
(Committee on Professional Responsibility and Conduct, The State Bar 
of California, San Francisco, CA) Feb. 2, 2009 at 1, available at 
http://www.calbar.ca.gov/calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf; Ethics Alert: Providing Legal Services to 
Distressed Homeowners (The Florida Bar) Mar. 15, 2009, available at 
(http://www.floridabar.org/tfb/TFBETOpin.nsf/EthicsIndex?OpenForm).
---------------------------------------------------------------------------

    Some of the consumer protections that state statutes provide to 
homeowners in financial distress do not commence until the owner or 
servicer of a mortgage has served a notice of default on the borrower. 
However, some loan modification and foreclosure rescue services 
apparently provide services before a notice of default has been served, 
thereby limiting the protection accorded under state law to some 
homeowners in financial distress.

IV. Request for Comment

    The Commission seeks written comments on a series of questions 
related to loan modification and foreclosure rescue. The FTC is seeking 
comments to determine whether certain acts and practices of loan 
modification and foreclosure rescue entities are unfair or deceptive 
under Section 5 of the FTC Act and should be incorporated into a 
proposed rule. These acts and practices include conduct that the FTC 
currently could challenge in a law enforcement action as violating 
Section 5 of the FTC Act. However, the Commission is not otherwise 
seeking comments on statutes that have been enacted and rules that have 
been issued.
    The Commission invites interested persons to submit written 
comments on any issue of fact, law, or policy that may bear upon these 
issues. After examining the comments, the Commission will determine 
whether and how to incorporate them into any proposed rule.
    The Commission encourages commenters to respond to the specific 
questions. However, commenters do not need to respond to all questions. 
Please provide explanations for your answers and detailed, factual 
supporting evidence.
    Without limiting the scope of issues on which it seeks comment, the 
Commission is particularly interested in receiving comments on the 
following questions:
1. The Loan Modification and Foreclosure Rescue Industry
    A. What empirical data are available concerning the nature, extent, 
and impact of the loan modification and foreclosure rescue industry? 
Please identify any such data sources.
    B. What business models are used to provide loan modification and 
foreclosure rescue services? Please identify and describe any such 
business models and their impact on consumers and competition.
    C. What are the distinctions between different models of providing 
loan modification and foreclosure rescue services (e.g., free versus 
fee-for-service, loan negotiation versus title transfer, etc.)?
    D. What are the costs and benefits of various loan modification and 
foreclosure rescue services?
    E. What roles do mortgage servicers play in the loan modification 
and foreclosure rescue industry? What are the costs and benefits of 
their conduct in the context of loan modification and foreclosure 
rescue services? Do the practices of mortgage servicers present 
consumer protection concerns? If so, how are these concerns the same as 
or different from those raised by third-party loan modification and 
foreclosure rescue entities?
    F. What empirical data are available concerning the performance of 
loan modification and foreclosure rescue entities in obtaining promised 
results? Please identify any such data (broken down by business model, 
if possible) used to provide loan modification and foreclosure rescue 
services, including but not limited to data addressing the following:
    1. The percentage or proportion of consumers enrolled in loan 
modification or foreclosure rescue services who successfully obtain a 
loan modification or foreclosure relief.
    2. For the consumers described in (F)(1), the percentage who, after 
successfully obtaining the modification or foreclosure relief, remain 
current on their mortgage payments for a substantial period of time 
(e.g., six months, one year, or two years).
2. Need for FTC Rule
    A. Given that many states have enacted and enforced laws concerning 
loan modification and foreclosure services and that the FTC has brought 
law enforcement actions against providers of these types of services 
under Section 5 of the FTC Act, should the FTC promulgate a rule to 
address these services? Why or why not?
3. Scope of Covered Practices
    A. Should conduct by loan modification and foreclosure rescue 
service providers or advertisers that the FTC has challenged as unfair 
or

[[Page 26138]]

deceptive in violation of Section 5 of the FTC Act in its law 
enforcement actions be incorporated into a proposed FTC rule? If so, 
what conduct should be included, how should it be addressed, and why?
    B. Should conduct by loan modification and foreclosure rescue 
service providers or advertisers that states have declared unlawful by 
statute or regulation or have challenged in law enforcement actions be 
incorporated into a proposed FTC rule? Why or why not? If so, what 
prohibitions and restrictions should be incorporated in a proposed FTC 
rule?
    1. Some states require providers to create written contracts and 
include key disclosures in these contracts. Should the Commission 
impose the same or similar disclosure requirements in a proposed FTC 
rule? If so, what disclosures should be included and why?
    2. Some states require providers to give consumers who enroll the 
right to rescind or cancel their agreements with the providers. Should 
the Commission include the same or similar rights of rescission or 
cancellation in a proposed rule? If so, what rescission and 
cancellation rights should be included and why?
    3. Some states have restricted the type, amount, and timing of the 
fees charged and refunds given by providers of loan modification and 
foreclosure rescue services. In particular, some states ban advance 
fees until all services promised or contracted for are completed.
    (i) Should the Commission address in a proposed FTC rule any fee or 
refunds practices of providers of loan modification and foreclosure 
rescue services? If so, what practices should be addressed, how they 
should be addressed, and why?
    (ii) Should the Commission ban the payment of advance fees for loan 
modification and foreclosure rescue services in a proposed FTC rule? If 
so, why or why not? What effect, if any, would an advance fee ban have 
on the willingness or ability of loan modification and foreclosure 
rescue services providers to do business?
    (iii) Should the Commission impose fee restrictions in a proposed 
FTC rule other than a ban on the advance fees that providers of loan 
modification and foreclosure rescue services receive? If so, what 
restrictions should be imposed and why? Would these restrictions 
prevent or mitigate the potential harm caused by payment of these fees? 
For example, to what extent might the possible harm from advance fees 
be prevented or mitigated by requiring providers to make specific 
disclosures regarding the timing, amount, or allocation of fees? 
Additionally, to what extent might such harm be prevented or mitigated 
by requiring providers to make more general disclosures regarding the 
nature and material restrictions of their services (e.g., the 
disclosures regarding the likelihood of success, timing of services or 
negotiations with mortgage servicers, refund restrictions, or any 
potentially negative ramifications of using the service)?
    4. Some states have foreclosure rescue laws which, in whole or in 
part, only apply once a consumer has received a notice of default. At 
what stage or stages of the process should a proposed FTC rule protect 
consumers? Should it take effect before consumers receive a notice of 
default, after the notice of default is received, or once foreclosure 
proceedings have begun? Why?
    5. Please identify any other state restrictions or challenged 
conduct which should (or should not) be addressed in a proposed FTC 
rule, and explain why.
    C. Are there any unfair or deceptive acts and practices by 
providers or advertisers of loan modification and foreclosure rescue 
services that neither the FTC nor the states have addressed that a 
proposed FTC rule should address? If so, how should these acts and 
practices be addressed and why?
4. Scope of Covered Entities
    A. As described in the text, an FTC proposed rule would not cover 
banks, thrifts, federal credit unions, and non-profits. To what extent 
do these types of entities provide or advertise loan modification and 
foreclosure rescue services? To what extent do these entities compete 
with entities that an FTC proposed rule would cover and what effect 
would an FTC proposed rule have on such competition?
    B. As described in the text, many states have exempted attorneys 
from laws (e.g., foreclosure consultant laws) which regulate the 
conduct of providers and advertisers of loan modification and 
foreclosure rescue services. What are the costs and benefits of 
exempting attorneys from these laws? What has been the effect of such 
exemptions on competition between attorneys and non-attorneys in 
providing or advertising loan modification and foreclosure rescue 
services? Should an FTC proposed rule include an exemption for 
attorneys or any other class of persons or entities? Why or why not?
    By direction of the Commission.

Donald S. Clark
Secretary
[FR Doc. E9-12596 Filed 5-29-09: 8:45 am]
BILLING CODE 6750-01-S