Federal Register, Volume 75 Issue 230 (Wednesday, December 1, 2010)

[Federal Register Volume 75, Number 230 (Wednesday, December 1, 2010)]
[Rules and Regulations]
[Pages 75092-75144]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29694]

[[Page 75091]]

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Part VI

Federal Trade Commission

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16 CFR Part 322

Mortgage Assistance Relief Services; Final Rule

Federal Register / Vol. 75 , No. 230 / Wednesday, December 1, 2010 /
Rules and Regulations

[[Page 75092]]

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FEDERAL TRADE COMMISSION

16 CFR Part 322

RIN 3084-AB18

Mortgage Assistance Relief Services

AGENCY: Federal Trade Commission (FTC or Commission).

ACTION: Final rule.

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SUMMARY: Pursuant to the 2009 Omnibus Appropriations Act (Omnibus
Appropriations Act), as clarified by the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (Credit CARD Act), the
Commission issues a Final Rule and Statement of Basis and Purpose (SBP)
concerning the practices of for-profit companies that, in exchange for
a fee, offer to work on behalf of consumers to help them obtain
modifications to the terms of mortgage loans or to avoid foreclosure on
those loans. The Final Rule, among other things, would: prohibit
providers of such mortgage assistance relief services from making false
or misleading claims; mandate that providers disclose certain
information about these services; bar the collection of advance fees
for these services; prohibit anyone from providing substantial
assistance or support to another they know or consciously avoid knowing
is engaged in a violation of the Rule; and impose recordkeeping and
compliance requirements.

DATES: This final rule is effective on December 29, 2010, except for
Sec. 322.5, which is effective on January 31, 2011.

ADDRESSES: Requests for copies of this Rule and this Statement of Basis
and Purpose (SBP) should be sent to: Public Reference Branch, Federal
Trade Commission, 600 Pennsylvania Avenue, NW., Room 130, Washington,
DC 20580. The complete record of this proceeding is also available at
that address. Relevant portions of the proceeding, including the Final
Rule and SBP, are available at (http://www.ftc.gov).

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

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Authority

On March 11, 2009, President Obama signed the Omnibus
Appropriations Act of 2009.\1\ Section 626 of the Act directed the
Commission to commence, within 90 days of enactment, a rulemaking
proceeding with respect to mortgage loans.\2\ Section 626 also directed
the FTC to use notice and comment procedures under Section 553 of the
Administrative Procedure Act (APA), 5 U.S.C. 553, to promulgate these
rules.\3\
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\1\ Omnibus Appropriations Act, 2009, Public Law 111-8, 123
Stat. 524 (Omnibus Appropriations Act).
\2\ Id. Sec. 626(a).
\3\ Id. Because Congress directed the Commission to use these
APA rulemaking procedures, the FTC did not use the procedures set
forth in Section 18 of the FTC Act, 15 U.S.C. 57a.
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On May 22, 2009, President Obama signed the Credit CARD Act.\4\
Section 511 of this statute clarified the Commission's rulemaking
authority under the Omnibus Appropriations Act. First, Section 511
specified that the rulemaking ``shall relate to unfair or deceptive
acts or practices regarding mortgage loans, which may include unfair or
deceptive acts or practices involving loan modification and foreclosure
rescue services.''\5\ The Omnibus Appropriations Act, as clarified by
the Credit CARD Act, does not specify any particular types of
provisions that the Commission should include, or refrain from
including, in a rule addressing loan modification and foreclosure
rescue services, but rather directs the Commission to issue rules that
``relate to'' unfairness or deception.\6\ Accordingly, the Commission
interprets the Omnibus Appropriations Act to allow it to issue rules
that prohibit or restrict conduct that may not be unfair or deceptive
itself, but that are reasonably related to the goal of preventing
unfairness or deception.\7\
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\4\ Credit Card Accountability Responsibility and Disclosure Act
of 2009, Public Law 111-24, 123 Stat. 1734 (Credit CARD Act).
\5\ Id. Sec. 511(a)(1)(B).
\6\ Id.
\7\ Unlike Section 18 of the FTC Act, 15 U.S.C. 57a, see
Katharine Gibbs Sch. v. FTC, 612 F.2d 658 (2d Cir. 1979), the
Omnibus Appropriations Act, as clarified by the Credit CARD Act,
does not require that the Commission identify with specificity in
the rule the unfair or deceptive acts or practices that the
prohibitions will prevent. Omnibus Appropriations Act Sec. 626(a);
Credit CARD Act Sec. 511(a)(1)(B).
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Second, Section 511 of the Credit CARD Act clarified that the
Commission's rulemaking authority was limited to entities that are
subject to enforcement by the Commission under the FTC Act.\8\ The
rules the Commission promulgates to implement the Omnibus
Appropriations Act, therefore, cannot cover the practices of banks,
thrifts, Federal credit unions,\9\ or certain nonprofits.\10\
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\8\ Credit CARD Act Sec. 511(a)(1)(C).
\9\ 15 U.S.C. 45(a)(2).
\10\ 15 U.S.C. 44. Bona fide nonprofit entities are exempt from
the jurisdiction of the FTC Act. Sections 4 and 5 of the FTC Act
confer on the Commission jurisdiction over persons, partnerships, or
corporations organized to carry on business for their profit or that
of their members. 15 U.S.C. 44, 45(a)(2). The FTC does, however,
have jurisdiction over for-profit entities that provide mortgage-
related services as a result of a contractual relationship with a
nonprofit organization. See Nat'l Fed'n of the Blind v. FTC, 420
F.3d 331, 334-35 (4th Cir. 2005). In addition, the Commission has
jurisdiction over sham non-profits that in fact operate as for-
profit entities. See infra note 176.
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The Omnibus Appropriations Act, as clarified by the Credit CARD
Act, also permits both the Commission and the states to enforce the
rules the FTC issues.\11\ The Commission can use its powers under the
FTC Act to investigate and enforce the rules, and the FTC can seek
civil penalties under the FTC Act against those who violate them. In
addition, states can enforce the rules by bringing civil actions in
Federal district court or another court of competent jurisdiction to
obtain civil penalties and other relief. Before bringing such an
action, however, states must give 60 days advance notice to the
Commission or other ``primary federal regulator'' of the proposed
defendant, and the regulator has the right to intervene in the action.
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\11\ Omnibus Appropriations Act Sec. 626(b); Credit CARD Act
Sec. 511(a)(1)(B).
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On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act.\12\ The Dodd-Frank Act made
substantial changes in the federal regulatory framework for providers
of financial services. Among the changes, the Dodd-Frank Act will
transfer the Commission's rulemaking authority under the Omnibus
Appropriations Act to a new Bureau of Consumer Financial Protection
(BCFP)\13\ on July 21, 2011, which is the ``designated transfer date''
that the Treasury Department has set.\14\ In addition, on the
designated transfer date, the FTC's authority to ``prescribe rules''
and ``issue guidelines'' under the Omnibus Appropriations Act will
transfer to the BCFP.\15\ Both the Commission and the BCFP, however,
will have authority to bring law enforcement actions to enforce the
rules promulgated under the Omnibus Appropriations Act, including the
Final Rule in this Proceeding.
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\12\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, 124 Stat. 1376 (2010) (Dodd-Frank Act).
\13\ Id. Sec. 1061.
\14\ Dep't of the Treasury, Bureau of Consumer Financial
Protection; Designated Transfer Date, 75 FR 57252, 57253 (Sept. 20,
2010); see also Dodd-Frank Act Sec. 1062.
\15\ Dodd-Frank Act Sec. 1061.
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B. The Rulemaking and Public Comments Received

On June 1, 2009, the Commission published in the Federal Register
an Advance Notice of Proposed

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Rulemaking (ANPR) addressing the acts and practices of for-profit
companies that offer to work on behalf of consumers to help them modify
the terms of their loans or to avoid foreclosure. The ANPR described
these services generically as ``Mortgage Assistance Relief Services,''
or ``MARS.'' \16\ On March 9, 2010, the Commission published\17\ a
Notice of Proposed Rulemaking (NPRM) and proposed rule addressing
Mortgage Assistance Relief Services (MARS).\18\ Among other things, the
proposed rule included provisions that would:
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\16\ See Mortgage Assistance Relief Services, 74 FR 26130 (June
1, 2009) (MARS ANPR). In response to the ANPR, the Commission
received a total of 46 comments, which are available at http://www.ftc.gov/os/comments/mars/index.shtm. Notably, a wide spectrum of
these commenters, including a consortium of over 40 state attorneys
general, consumer and community organizations, and financial service
providers, strongly urged the Commission to propose a rule
prohibiting or restricting the collection of fees for mortgage
relief services until the promised services have been completed.
Additionally, a majority of the comments expressed concern regarding
pervasive deception and abuse in the marketing of MARS, including
misrepresentations regarding the services MARS providers will
perform and regarding their affiliation with the government,
nonprofits, lenders, or loan servicers.
This SBP cites to comments submitted in response to both the
ANPR and the NPRM. To distinguish the comments submitted in response
to the ANPR, the notation ``(ANPR)'' is included in any citations to
them.
\17\ See Press Release, FTC, FTC Proposes Rule That Would Bar
Mortgage Relief Companies From Charging Up-Front Fees (Feb. 4,
2010), available at http://www.ftc.gov/opa/2010/02/mars.shtm.
\18\ See Mortgage Assistance Relief Services, 75 FR 10707 (Mar.
9, 2010) (MARS NPRM).
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Prohibit MARS providers from making false or misleading
claims;
Mandate that providers disclose certain information about
their services;
Bar the collection of advance fees for the provision of
MARS, except in certain circumstances for attorneys who collect them in
connection with preparing or filing documents in bankruptcy, court, or
administrative proceedings;
Prohibit anyone from providing substantial assistance or
support to another they know or consciously avoid knowing is engaged in
a violation of the rule; and
Impose recordkeeping and compliance requirements.
In response to the NPRM, the Commission received 75 comments from
stakeholders, including for-profit MARS providers, state law enforcers,
consumer and community groups, state bars and bar associations, and
financial service providers.\19\ The largest number of comments--a
total of 30--were submitted either by attorneys who provide MARS \20\
or entities representing attorneys, including the American Bar
Association and several state bar associations.\21\ These comments
focused on the scope of the proposed rule's exemption for attorneys,
asserting that the Commission should expand the exemption. Other
commenters, including some consumer groups and a coalition of state
bank examiners, also advocated that the proposed exemption for
attorneys be broadened, although to a lesser extent than the attorneys
and their representatives advocated.\22\ By contrast, comments from
NAAG \23\ and others\24\ urged the Commission not to change the
attorney exemption in the proposed rule.
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\19\ The comments submitted in response to the NPRM are
available at http://www.ftc.gov/os/comments/mars-nprm/index.shtm. A
list of those who submitted comments appears following Section V of
this SBP.
\20\ See, e.g., Deal; Greenfield.
\21\ See, e.g., Am. Bar Ass'n (ABA); ME BA at 1-2; OR Bar at 1;
WI Bar at 1; GA Bar at 1; FL Bar at 1.
\22\ See, e.g., NCLC at 10-13; CSBS at 4-5.
\23\ See NAAG at 3-4.
\24\ See, e.g., CUUS at 8-9.
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Apart from comments that focused on the coverage of attorneys, most
comments supported the proposed rule and its specific provisions. Most
significantly, these comments generally supported an advance fee
ban,\25\ although a few non-attorney MARS providers opposed it.\26\
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\25\ See, e.g., MN AG at 3; OH AG at 1; MBA at 2-3 (supporting
``strict prohibition'' of advance fees); NAAG at 2 (``The advance
fee ban is the linchpin of effective deterrence of fraudulent
practices by providers of mortgage relief services.''); NCLC at 3
(``The single most important provision is section 322.5, which
prohibits the collection of any fee before providing tangible
results of real value to consumers.''); AFSA at 5 (``Banning upfront
fees is the best way for the FTC to ensure that MARS providers do
really provide consumers with a beneficial service.''); see also
CSBS at 3; CUUS at 6; NYC DCA at 3.
\26\ See, e.g., Metropolis; RMI; Hirsch.
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II. Mortgage Assistance Relief Services

A. The Mortgage Crisis and Assistance for Consumers

As discussed in the ANPR and NPRM, historically high levels of
consumer debt, increased unemployment, and a stagnant housing market
have contributed to high rates of mortgage loan delinquencies, which in
many cases lead to foreclosures.\27\ As a result, many consumers
struggling to make their mortgage payments have been searching for ways
to avoid default and foreclosure. There are a number of options that
may be available to them, including: (1) Short sales or deeds-in-lieu
of foreclosure transactions, in which the proceeds of a sale of the
home or the receipt of the deed to the home, respectively, are treated
by the mortgage lender as repayment of the outstanding mortgage
balance; (2) forbearance or repayment plans that do not reduce the
amount that consumers must pay but give them more time to bring their
balance current; and (3) loan modifications that reduce consumers'
indebtedness or the amount of their monthly payments. Because loan
modifications allow consumers to stay in their homes and reduce their
debt, this possible solution often has great appeal to them. The
Commission's law enforcement experience suggests that loan
modifications are the type of MARS most frequently marketed and
sold.\28\
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\27\ See, e.g., MARS NPRM, 75 FR at 10708-09; MBA,
Delinquencies, Foreclosure Starts Increase in Latest MBA National
Delinquency Survey (May 19, 2010) (``The delinquency rate for
mortgage loans on one-to-four-unit residential properties increased
to a seasonally adjusted rate of 10.06 percent of all loans
outstanding as of the end of the first quarter of 2010, an increase
of 59 basis points from the fourth quarter of 2009, and up 94 basis
points from one year ago.''), available at http://www.mbaa.org/NewsandMedia/PressCenter/72906.htm; NCLC at 2; Press Release,
Realtytrac, Year-end Report Shows Record 2.8 Million U.S. Properties
With Foreclosure Filings in 2009 (Jan. 14, 2010), available at
http://www.realtytrac.com/contentmanagement/pressrelease.aspx?itemid=8333; Credit Suisse Fixed Income Research 2
(2008) (forecasting a total of 9 million foreclosures for the period
2009 through 2012), available at http://www.chapa.org/pdf/ForeclosureUpdateCreditSuisse.pdf.
\28\ See List of MARS Law Enforcement Actions, following Section
V of the SBP, for a list of cases that the FTC has prosecuted (``FTC
Case List''). Unless otherwise specified, all citations to FTC
actions in this SBP refer to the complaints in these lawsuits.
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In response to the mortgage crisis, government and private sector
programs have been initiated to assist distressed homeowners.\29\ In
March 2009, the Obama Administration launched the Making Home
Affordable (MHA) program and the MHA's Home Affordable Modification
Program (HAMP), through which the government provides mortgage owners
and servicers with financial incentives to modify and refinance
loans.\30\ Under the program,

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lenders and servicers have approved roughly 500,000 permanent loan
modifications.\31\ The Treasury Department has also recently expanded
the MHA program to assist more borrowers, for example, by introducing
additional incentives for servicers to write down the outstanding
principal balance for borrowers who are ``under water,'' that is, who
owe more on their mortgages than the value of their homes.\32\
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\29\ See, e.g., HOPE NOW, About Us (``HOPE NOW is an alliance
between counselors, mortgage companies, investors, and other
mortgage market participants. This alliance will maximize outreach
efforts to homeowners in distress to help them stay in their homes
and will create a unified, coordinated plan to reach and help as
many homeowners as possible.''), available at http://www.hopenow.com/hopenow-aboutus.php.
\30\ For example, the program offers servicers that modify loans
according to its guidelines an up-front fee of $1,000 for each
modification, ``pay for success'' fees on still-performing loans of
$1,000 per year, and one-time bonus incentive payments of $1,500 to
lender/investors, and $500 to servicers, for a modification made
while a borrower is still current on his or her mortgage payments.
Dep't of the Treasury, Making Home Affordable Summary of Guidelines
2 (March 4, 2010), available at http://www.ustreas.gov/press/releases/reports/guidelines_summary.pdf.
\31\ See, e.g., Dep't of the Treasury, Making Home Affordable
Program: Servicer Performance Report Through September 2010 (Oct.
25, 2010), available at http://www.financialstability.gov/docs/Sept%20MHA%20Public%202010.pdf. Further, if trial modifications are
added to permanent modifications, over 1.6 million modifications
have been approved. Id., Testimony of Herbert M. Allison, Dep't of
the Treasury, ``Foreclosure Prevention: Is the Home Affordable
Modification Program Preserving Homeownership?,'' before the H.
Comm. on Oversight and Gov't Reform, at 5 (Mar. 25, 2010), available
at http://oversight.house.gov/images/stories/Hearings/Committee_on_Oversight/2010/032510_HAMP/TESTIMONY-Allison.pdf.
\32\ See Press Release, Making Home Affordable (``MHA'') Housing
Program Enhancements Offer Additional Options for Struggling
Homeowners (Mar. 26, 2010), available at http://makinghomeaffordable.gov/pr_03262010.html.
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On April 5, 2010, the Administration launched the Home Affordable
Foreclosure Alternatives (HAFA) Program, which provides servicers with
incentives to enter into short sales or deeds-in-lieu of foreclosure
transactions with consumers who do not qualify for a loan modification
under the MHA program.\33\ In addition, state and local governments,
nonprofit organizations, housing counselors, and private sector
entities\34\ have offered a variety of other programs and services to
help homeowners in financial distress.\35\
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\33\ See MHA, Home Affordable Foreclosure Alternatives (HAFA)
Program, available at http://makinghomeaffordable.gov/hafa.html.
\34\ Loan holders also have exhibited a growing willingness to
modify loan terms for borrowers who do not qualify for loan
modifications under government programs such as HAMP. These are
known as ``proprietary loan modifications.'' See Press Release, HOPE
NOW, HOPE NOW Reports More Than 476,000 Loan Modifications in the
First Quarter of 2010 (May 10, 2010), available at http://www.hopenow.com/press_release/files/1Q%20Data%20Release_05_10_10.pdf (reporting that the industry completed 312,329 proprietary
loan modifications in the first quarter of 2010).
\35\ See, e.g., Freddie Mac, Foreclosure Prevention Workshops
for Consumers, http://www.freddiemac.com/avoidforeclosure/workshops.html (describing local credit counseling events by local
governments and nonprofits); FTC, Mortgage Payments Sending You
Reeling? Here's What to Do (2009), available at http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea04.pdf (describing various credit
counseling alternatives).
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Despite these public and private programs and services, consumers
also continue to seek assistance from for-profit companies who act as
intermediaries between consumers and their lenders or servicers in
obtaining mortgage assistance relief services--including loan
modifications. This may be happening for a number of reasons. First,
MARS have been advertised and marketed widely in mass media and online,
with the result that consumers may be more aware of the services
offered by for-profit entities than they are of other available
programs. Second, many consumers who are seeking loan modifications or
other relief are not eligible for the MHA program or other government
and private assistance programs. While the Treasury Department has
estimated that the MHA program will help 3-4 million borrowers by
February 2012,\36\ industry reports estimate that roughly twice that
number of mortgage loans currently are in delinquency or
foreclosure.\37\ Third, even among consumers who may be eligible to
obtain a temporary loan modification under the MHA program, many do not
qualify for a permanent loan modification.\38\ Fourth, even if
consumers are eligible for government programs or assistance directly
from their servicers or lenders, many housing counselors and servicers
have struggled to respond in a timely manner to the extraordinary
number of consumers who are seeking loan modifications.\39\ Finally,
the Treasury Department also has observed that some servicers have not
adequately met consumer demand for loan modifications under the HAMP
program.\40\
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\36\ See, e.g., Press Release, MHA, Making Home Affordable
Program on Pace to Offer Help to Millions of Homeowners (Aug. 4,
2009) available at http://www.makinghomeaffordable.gov/pr_08042009.html; Dep't of the Treasury, Making Home Affordable
Program: Servicer Report Through June 2010 at 7 n.2 (June 2010)
(``Selected Outreach Measures'' table), available at http://www.financialstability.gov/docs/June%20MHA%20Public%20Revised%20080610.pdf.
\37\ See Alan Zibel, Foreclosures Down 2 Percent From Last Year,
Associated Press, May 13, 2010 (noting that as of March 2010,
``[n]early 7.4 million borrowers, or 12 percent of all households
with a mortgage, had missed at least one month of payments or were
in foreclosure''), available at http://abcnews.go.com/Business/wireStory?id=10632332; see also Press Release, Mortgage Bankers
Ass'n, Delinquencies, Foreclosure Starts Fall in Latest MBA National
Delinquency Survey (Feb. 19, 2010) (noting that roughly 15% of
mortgage loans were delinquent or in foreclosure and that ``[t]he
percentages of loans 90 days or more past due and loans in
foreclosure set new record highs''), available at http://www.mbaa.org/NewsandMedia/PressCenter/71891.htm; Stephanie Armour,
Home Foreclosure Rates Posts First Annual Decline in Five Years, USA
Today (May 13, 2010) (noting that nearly one-fourth of borrowers owe
more on their mortgages that the value of their homes).
\38\ See, e.g., Dep't of the Treasury: MHA Servicer Report June
2010 at 1; NCRC, NCRC Home Affordable Modification Program Survey
2010, at 2 (noting that, as of February 2010, only 12.5% of trial
modifications had been converted into permanent modifications),
available at http://www.ncrc.org/images/stories/mediaCenter_reports/hamp_report_2010.pdf; Foreclosure Prevention: Is the Home
Affordable Modification Program Preserving Homeownership: Hearing
Before the H. Comm. on Oversight & Gov't Reform, 111th Cong. (2010)
(statement of Gene Dodaro, Acting Comptroller General, Government
Accountability Office) (prepared statement at 7), available at
http://oversight.house.gov/images/stories/Hearings/Committee_on_Oversight/2010/032510_HAMP/TESTIMONY-Dodaro.pdf (noting that 32% of
trial modifications lasting three months or more had been approved
for conversion into permanent modifications).
\39\ See, e.g., CRL at 3 (noting that MARS have flourished as
``consumers' demand for relief outpaces the capacity of mortgage
servicers and government programs alike''); The Recently Announced
Revisions to the Home Affordable Modification Program (HAMP):
Hearing Before the Subcomm. on Hous. & Cmty. Opportunity of the H.
Comm. on Fin. Servs., 111th Cong. 131 (2010) (statement of Alan
White, Assistant Professor, Valparaiso Univ.), available at http://financialservices.house.gov/Media/file/hearings/111/Printed%20Hearings/111-122.pdf. (``Modification requests are
languishing for as long as a year, servicers repeatedly ask
borrowers to resubmit documentation that has been lost or become
outdated, and housing counselors and mediators are unable to get
timely information and responses from servicers.''); NCLC (ANPR) at
2 (noting that servicers have failed to meet borrower demand for
loan modifications); NAAG (ANPR) at 7 (noting that borrowers have
had difficulty reaching servicers and obtaining their assistance).
\40\ See, e.g., Holding Banks Accountable: Are Treasury and
Banks Doing Enough to Help Families Save Their Homes?: Hearing
Before the S. Subcomm. on Fin. Servs. & Gen. Gov't of the S. Comm.
on Appropriations, 111th Cong. (2010) (statement of Timothy
Geithner, Sec'y, Dep't of the Treasury) (``[W]e do not believe that
servicers are doing enough to help homeowners.'')
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Many consumers who have been unable to obtain mortgage assistance
relief services through their own efforts have turned to for-profit
MARS providers for help. Providers promoting their ability to negotiate
with lenders and servicers to obtain loan modifications or some other
type of mortgage relief have proliferated in the past few years.\41\
Responding to consumer demand, many providers have promised to obtain
loan modifications,\42\ but others have begun

[[Page 75095]]

to market short sales and other forms of relief.\43\ The Commission's
law enforcement experience shows that MARS providers typically are
small and relatively new businesses,\44\ and thus it is difficult to
estimate their numbers.\45\ Based on the law enforcement actions
brought by the FTC and the states, however, it appears that there are
over 500 such providers in the United States.\46\
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\41\ See MARS ANPR, 74 FR at 26134-35.
\42\ See, e.g., Safe Mortgage Licensing Act: HUD
Responsibilities Under the Safe Act, Proposed Rule, 74 FR 66548,
66554 (Dec. 15, 2009) (``HUD has seen a substantial increase in the
number of third-party actors (i.e., individuals other than lenders
and loan servicers) offering their services as intermediaries
putatively to work on behalf of borrowers to negotiate modifications
of existing loan terms.''); NAAG (ANPR) at 2 (``[T]he [loan
modification] consulting business model is dominating the
marketplace. Consultants are by far the most common source of
consumer complaints received by our offices in the area of mortgage
assistance services.''); OH AG (ANPR) at 2 (``For those companies
that actually do put some effort into helping the consumer, the most
common business model is an offer to negotiate a loan modification
or repayment plan with the consumer's servicer.''); CRC (ANPR) at 1
(``In California, advertisements promising loan modification success
are inescapable.''); FinCEN, Loan Modification and Foreclosure
Rescue Scams--Evolving Trends and Patterns in Bank Secrecy Act
Reporting 10 (May 2010), available at http://www.fincen.gov/news_room/rp/files/MLFLoanMODForeclosure.pdf (FinCEN Report) (``Reports
of foreclosure rescue scams increased substantially in the last
eight months of calendar year 2009.'').
\43\ Although the dominant trend among MARS providers is to
offer loan modifications, over the past few years some providers
also have offered other purported types of loss mitigation and
foreclosure avoidance. See, e.g., FTC v. Foreclosure Solutions, LLC,
No. 1:08-cv-01075 (N.D. Ohio filed Apr. 28, 2008) (alleging that
provider offered to stop foreclosure proceedings and secure workout
plans with consumers' lenders or servicers); FTC v. Mortgage
Foreclosure Solutions, Inc., No. 8:08-cv-388-T-23EAJ (M.D. Fla.
filed Feb. 26, 2008) (same). Providers may adjust their marketing to
offer newly-minted forms of mortgage relief--for example, the
possibility of entering a short sale under the HAFA program. See,
e.g., Illinois v. Home Foreclosure Solutions LLC, No. 08CH43259
(Ill. Cir. Ct. Cook County 2008) (alleging MARS provider offered to
assist consumers to enter short sales). Another new variation of
MARS is charging an advance fee to purportedly ``eliminate''
mortgage debts by challenging the legality of the original
mortgages. See FinCEN, Foreclosure Rescue Fraud Report May 2010,
supra note 42 at 9. MARS providers also have offered ``sale-
leaseback'' or ``title reconveyance'' transactions. In these
transactions, MARS providers instruct consumers to transfer title to
their homes to the providers and then the consumers rent the homes
from them. The providers promise to reconvey title at some later
date, yet often do not do so, thereby taking the equity in the
homes. Sale-leaseback and title reconveyance transactions appear to
have become less prevalent, in part because many consumers do not
have sufficient equity in their homes to make this strategy
profitable. See, e.g., FinCEN, Foreclosure Rescue Fraud Report May
2010, supra note 42 at 4.
\44\ See FTC Case List. Some of these small and relatively new
businesses are law firms. For example, NCLC surveyed members of the
National Association of Consumer Advocates (NACA) and the National
Association of Consumer Bankruptcy Attorneys (NACBA); 298 attorneys
responded that they provided some form of MARS. NCLC at 5; see also
IRELA at 1 (stating that many of the 2,000 members of the Illinois
Real Estate Lawyers Association are ``engaged in the process of
trying to assist their consumer clients in dealing with
foreclosures, mortgage loan workouts, and related matters'').
\45\ See, e.g., U.S. Gov't Accountability Office, GAO-10-787,
Federal Efforts to Combat Foreclosure Rescue Schemes are Under Way,
but Improved Planning Elements Could Enhance Progress 12-16 (July
2010) (``GAO Report'') (noting that data on MARS providers is
limited); NAAG (ANPR) at 3 (``It is difficult to gather exact
empirical data on companies providing loan modification and
foreclosure rescue services due to the predominance of Internet-
based companies and their ephemeral nature.''); OH AG (ANPR) at 2
(``There is little reliable data about the foreclosure rescue
industry.''); CRL at 3 (``With few barriers to entry and little to
no oversight, scams are flourishing in the current environment.'').
\46\ See NAAG (ANPR) at 4 (noting that state attorneys general
have investigated more than 450 MARS providers); FTC Case List,
supra note 28; Press Release, FTC, 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
(reporting that the Commission sent warning letters to 71 companies
offering MARS).
---------------------------------------------------------------------------

Typically, MARS providers charge consumers hundreds or thousands of
dollars \47\ in advance fees, i.e., fees prior to providing their
services. In its law enforcement actions, the FTC has observed that
some providers collect their entire fee at the beginning of the
transaction,\48\ while others collect two to three large installment
payments from consumers.\49\ NAAG and other commenters also stated that
many MARS providers have begun to offer their services piecemeal,
collecting fees upon reaching various stages in the process, such as
assembling the documentation required by the lender or servicer,
mailing paperwork to the lender or servicer, and negotiating with a
lender's loss mitigation department.\50\
---------------------------------------------------------------------------

\47\ See, e.g., infra notes 48-49; GAO Report, supra note 45, at
7 (noting that MARS typically charge a fee of thousands of dollars);
Dargon at 2 (``We charge $2,500 as a flat fee'' in advance.); CRC
(ANPR) at 2 (``The average fee that we are seeing borrowers charged
is $3,000; we have seen fees as high as $9,500. In nearly every
instance, these fees are charged up front, before any services have
been rendered.''); NCRC (ANPR) at 3 (noting that ``[t]ypically, loan
modification companies request a significant fee upfront'' and that
a study performed by NCRC ``documented a median fee of $2,900,''
although ``[f]ees ranged as high as $5,600''); NCLR (ANPR) at 1
(observing fees as high as $8,000); NCLC (ANPR) at 5-6 (estimating
typical advance fees to be between $2,000 and $4,000).
\48\ See, e.g., supra note 47; FTC v. Infinity Group Servs., No.
SACV09-00977 DOC (MLGx) (C.D. Cal. filed Aug. 26, 2009); FTC v.
Freedom Foreclosure Prevention Specialists, LLC, No. 2:09-cv-01167-
FJM (D. Ariz. June 1, 2009); FTC v. Fed. Loan Modification Law Ctr.,
LLP, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009).
\49\ See, e.g., FTC v. Truman Foreclosure Assistance, LLC, No.
09-23543 (S.D. Fla. filed Nov. 23, 2009); FTC v. Washington Data
Res., Inc., No. 8:09-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12,
2009); FTC v. First Universal Lending, LLC, No. 09-CV-82322, Mem.
Supp. TRO at 5 (S.D. Fla. filed Nov. 24, 2009); see also, e.g.,
Dargon at 2; Rogers at 13.
\50\ See, e.g., LFSV at 2 (``[W]e have seen MARS providers who
are effectively evading the advance fee prohibition in California
law by charging for their `services' in `phases.' ''); NAAG at 3;
LCCR at 5; see also FTC v. Debt Advocacy Ctr., LLC, No. 1:09CV2712
(N.D. Ohio filed Nov. 19, 2009).
---------------------------------------------------------------------------

As discussed in the ANPR and NPRM, MARS providers often claim to
possess specialized knowledge of the mortgage lending industry,\51\
sometimes touting their hiring of former mortgage brokers and real
estate agents \52\ to bolster their claims of purported expertise. In
addition, some attorneys--including solo practitioners and small law
firms that represent financially distressed individuals--increasingly
have been offering MARS in connection with their legal practice.\53\
---------------------------------------------------------------------------

\51\ See, e.g., NCLC (ANPR) at 3 (``Some modification firms
claim superior expertise even though there are no recognized
qualifications other than the training programs offered by HUD to
certified agencies. Instead, some for-profit entities tout their
experience as mortgage industry insiders.''); NAAG (ANPR) at 4; FTC
v. Fed Housing Modification Dep't, No. 09-CV-01759 (D.D.C. filed
Sept. 15, 2009) (alleging defendants' Web sites state that many of
their ``skilled negotiators'' have ``worked for the lenders they are
dealing with''); FTC v. US Foreclosure Relief Corp., No. SACV09-768
JVS (MGX), Mem. Supp. TRO. at 4-5 (C.D. Cal. filed July 7, 2009)
(alleging that defendants ``boasted of twenty years' experience''
and that they had ``extensive experience in the industry''); FTC v.
Truman Foreclosure Assistance, LLC, No. 09-23543, Mem. Supp. P.I. at
20 (S.D. Fla. filed Nov. 23, 2009) (alleging that defendants' Web
sites represented that they have ``extensive loss mitigation
experience'' and that ``they are led by a seasoned and proven team
of professionals''); see also FTC v. LucasLawCenter ``Inc.'', No.
09-CV-770 (C.D. Cal filed July 7, 2009).
\52\ See, e.g., NCLC (ANPR) at 11 (``Mortgage brokers--often
cited as one of the driving forces in the growth of bad subprime
loans--are in demand to work for loan modification companies. One
MARS advertised for consultants with mortgage and real estate
experience to join its cadre of loan modification specialists.'');
GAO Report, supra note 45, at 10 (``Federal and state officials and
representatives of nonprofit organizations told us that persons who
have conducted foreclosure rescue schemes include former mortgage
industry professionals who had been involved in the subprime market.
* * *'').
\53\ See generally Greenfield; Deal; Giles. See also NCLC at 4.
---------------------------------------------------------------------------

A number of non-attorney MARS providers are employing or
affiliating with lawyers, with the providers representing that they are
offering traditional legal services.\54\ Although these providers often
tout the expertise of these attorneys in negotiating with lenders and
servicers, in many instances the attorneys do little or no bona fide
legal work.\55\ In some cases, MARS

[[Page 75096]]

providers also offer ``forensic audits,'' during which attorneys
purportedly conduct a legal analysis of mortgage loan documents to find
law violations, thereby supposedly helping consumers acquire leverage
over their lenders or servicers to obtain a better loan
modification.\56\ Providers offering forensic audits also assert that,
because of their relationships with attorneys, state laws that prohibit
non-attorneys from collecting advance fees for loan modification
services do not apply to them.\57\ For example, California law
previously imposed a number of restrictions on ``foreclosure
consultants,'' but allowed ``licensed attorneys * * * [to] charge
advance fees under certain limited circumstances.'' \58\ The State Bar
of California subsequently observed that ``foreclosure consultants may
be attempting to avoid the statutory prohibition on collecting a fee
before any services have been rendered by having a lawyer work with
them in foreclosure consultations.'' \59\ California has since passed a
new law that removes this attorney exemption.\60\
---------------------------------------------------------------------------

\54\ See, e.g., NAAG at 3-4 (``We have noticed that national
companies are recruiting for attorney ``partners'' or ``local
counsel'' in all of the states they work in to evade states'
mortgage rescue fraud statutes.''); IL AG at 1; FTC v. Loss
Mitigation Servs., Inc., No. SACV09-800 DOC (ANX), Mem. Supp. Pls.
Ex Parte App. at 3 (Aug. 3, 2009) (alleging that defendants engaged
in ``misrepresentations prohibited by the TRO, behind a new facade:
the `Walker Law Group,''' which was ``nothing more than a sham legal
operation designed to evade state law restrictions on the collection
of up-front fees for loan modification and foreclosure relief'');
FTC v. LucasLawCenter ``Inc.'', No. SACV-09-770 DOC (ANX) (C.D. Cal.
filed July 7, 2009); FTC v. Data Med. Capital Inc., No. SA-CV-99-
1266 AHS (Eex) (C.D. Cal., contempt application filed May 27, 2009);
FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS (MGX) (C.D.
Cal. filed July 7, 2009); FTC v. Fed. Loan Modification Law Ctr.,
LLP, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009); see
also Cincinnati Bar Assoc. v. Mullaney, 119 Ohio St. 3d 412 (2008)
(disciplining attorneys involved in mortgage assistance relief
services).
\55\ See supra note 54. The experiences detailed in one comment
from an attorney illustrate the role that attorneys play or have
been asked to play in connection with MARS:
I had numerous non-attorney modification companies ask me to
serve as their lawyer and accept a flat fee on each file. I would
get this money and do little or no work for it. In some cases I
would take in the advance fee and then disburs[e] a share to the
loan officer producing the deal and a share to the company actually
doing the work. Or I would be collecting the advance fee and then
holding all or part of it in my trust account until the modification
was completed. I declined to get involved in such arrangements.
Deal at 6.
\56\ See, e.g., MN AG at 2 (``Recently, so-called forensic loan
auditors have emerged as a new type of mortgage assistance relief
`service.'''); 1st ALC at 3 (MARS provider stating it engages in
forensic audits); Dargon at 2 (same); see also FTC v. Debt Advocacy
Ctr., LLC, No. 1:09CV2712 (N.D. Ohio Am. Compl. filed May 14, 2010)
(alleging defendants purporting to offer forensic audits
misrepresented that ``between 80-90% of all loans [they] have
audited have some form of rights violations''); FTC v. Data Med.
Capital Inc., No. SA-CV-99-1266 AHS (Eex), Mem. Supp. App. Contempt
at 18 (C.D. Cal. filed May 27, 2009); FTC v. Fed. Loan Modification
Law Ctr., LLP, No. SACV09-401 CJC (MLGx) (C.D. Cal. filed Apr. 3,
2009).
Since publication of the NPRM, the Commission has released an
alert to warn consumers about entities purporting to provide
forensic audits. FTC, Forensic Mortgage Loan Audit Scams: A New
Twist on Foreclosure Rescue Fraud (Mar. 2010), available at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt177.shtm; see also,
e.g., Cal. Dep't of Real Estate, Consumer Alert 6 (Mar. 2009)
(warning consumers of ``forensic loan reviews''), available at
http://www.dre.ca.gov/pdf_docs/FraudWarningsCaDRE03_2009.pdf.
\57\ See supra notes 51-56; see also IL AG (ANPR) at 2
(``Attorneys are using the [state] exemption to market and sell the
same mortgage consulting services provided by non-attorneys.'').
\58\ Press Release, Office of the Att'y Gen., Cal. Dep't of
Justice, Brown Alerts Homeowners that New Law Prohibits Up-front
Fees for Foreclosure Relief Services (Oct. 15, 2009), available at
http://ag.ca.gov/newsalerts/release.php?id=1821.
\59\ See State Bar of Cal., Ethics Alert: Legal Services to
Distressed Homeowners and Foreclosure Consultants on Loan
Modifications (``Cal. State Bar Ethics Alert'') 2, Ethics Hotliner
(Feb. 2, 2009), available at http://www.calbar.ca.gov/calbar/pdfs/ethics/Ethics-Alert-Foreclosure.pdf ; see also Florida Bar, Ethics
Alert: Providing Legal Services to Distressed Homeowners 1,
available at http://www.floridabar.org/TFB/TFBResources.nsf/
Attachments/872C2A9D7B71F05785257569005795DE/$FILE/
loanModification20092.pdf?OpenElement (``The Florida Bar's Ethics
Hotline recently has received numerous calls from lawyers who have
been contacted by non-lawyers seeking to set up an arrangement in
which the lawyers are involved in loan modifications, short sales,
and other foreclosure-related rescue services on behalf of
distressed homeowners. * * * The [Florida] Foreclosure Rescue Act *
* * imposed restrictions on non-lawyer loan modifiers to protect
distressed homeowners. The new statute appears to be the impetus for
these inquiries.'').
\60\ Cal Civ. Code Sec. 2944.7; see also Press Release, Office
of the Att'y Gen.l, Cal. Dep't of Justice, Brown Alerts Homeowners
that New Law Prohibits Up-front Fees for Foreclosure Relief Services
(Oct. 15, 2009), available at http://ag.ca.gov/newsalerts/release.php?id=1821.
---------------------------------------------------------------------------

B. Unfair or Deceptive Practices in the Marketing of MARS

The FTC, state attorneys general, and other law enforcement
agencies, have extensive experience with MARS providers. In the past
three years, the Commission has filed 32 law enforcement actions
against providers of loan modification and foreclosure rescue
services.\61\ State attorneys general have investigated at least 450
MARS providers and sued hundreds of them for alleged state law
violations.\62\ Additionally, the Department of Justice and other
agencies, working both individually and jointly, have pursued MARS
providers for illegal conduct.\63\ As discussed in more detail below,
the evidence in the record, including extensive law enforcement
experience, demonstrates that the unfair or deceptive practices of MARS
providers are widespread and are causing substantial consumer harm.\64\
Indeed, one recent survey of state and local consumer agencies found
that the fastest growing category of consumer complaints concerned the
failure of MARS providers to fulfill their promises to help save
consumers' homes from foreclosure.\65\
---------------------------------------------------------------------------

\61\ See FTC Case List, supra note 28.
\62\ NAAG (ANPR) at 4; IL AG (ANPR) at 1 (noting that Illinois
has over 240 open investigations of MARS providers and filed 28
lawsuits against them); Press Release, FTC, Federal and State
Agencies Target Mortgage Relief Scams (Nov. 24, 2009) (announcing
118 actions by 26 federal and state agencies), available at http://www.ftc.gov/opa/2009/11/stolenhope.shtm; Press Release, FTC, Federal
and State Agencies Target Mortgage Foreclosure Rescue and Loan
Modification Scams (July 15, 2009) (announcing operation involving
189 actions by 25 federal and state agencies), available at http://www.ftc.gov/opa/2009/07/loanlies.shtm; Press Release, Financial
Fraud Enforcement Task Force, Financial Fraud Enforcement Task Force
Announces Results of Broadest Mortgage Fraud Sweep in History (June
17, 2010), available at http://www.stopfraud.gov/news/news-06172010-02.html.
\63\ See infra notes 92-96 and accompanying text.
\64\ See, e.g., LFSV at 1 (``During the recent mortgage crisis,
we have been dealing with a flood of borrowers whose mortgages are
distressed and who have been subject to abuses by companies and
individuals promising assistance with obtaining modification of
those loans.'')
\65\ See Consumer Fed'n of Am. et al., 2009 Consumer Complaint
Survey Report 3 (July 27, 2010), available at http://www.consumerfed.org/elements/www.consumerfed.org/File/Consumer_Complaint_Survey_Report2009.pdf.
---------------------------------------------------------------------------

MARS providers commonly initiate contact with prospective customers
through Internet, radio, television, or direct mail advertising.\66\
Although MARS providers did not submit information for the record
relating to the extent and cost of their marketing efforts, they appear
to use a variety of media to target large numbers of consumers who are
struggling to pay their mortgages. For example, one MARS provider that
was the subject of an FTC enforcement action spent $9 million in one
year to broadcast deceptive advertisements nationwide on major
television and cable networks, as well as on radio stations and the
Internet.\67\ Typical MARS advertisements instruct consumers to call a
toll-free telephone number or to e-mail the provider. One provider's
advertisements allegedly yielded 1,500 inbound calls per day.\68\
Another such provider disseminating direct mail advertisements reported
receiving approximately 500 inbound calls per day.\69\
---------------------------------------------------------------------------

\66\ The FTC procured information from a media monitoring
company on the occurrence of broadcast advertising for MARS. The
company located 68 radio ads and 71 television and cable ads
containing the terms ``save your home,'' ``mortgage modification,''
or ``loan modification.'' These ads aired between the dates of
September 1, 2008 and September 1, 2010. These ads were attributable
to 139 different companies.
\67\ See FTC v. Fed. Loan Modification Law Ctr., LLP, No.
SACV09-401 CJC (MLGx), Mem. Supp. Ex Parte TRO at 6-7 (C.D. Cal.
filed Apr. 6, 2009).
\68\ Id. at 6-8.
\69\ See FTC v. Loss Mitigation Servs., Inc., No. SACV-09-800
DOC (ANX), Mem. Supp. TRO at 7 (C.D. Cal filed Jul. 13, 2009).
---------------------------------------------------------------------------

Customary representations in the ads and ensuing telemarketing and
email pitches claim that the MARS provider (1) will obtain for the
consumer a substantial reduction in a mortgage loan's interest rate,
principal amount, or monthly payments; (2) will achieve these results
within a specific period of time; \70\ (3) has special relationships

[[Page 75097]]

with lenders and servicers; \71\ and (4) is closely affiliated with the
government,\72\ nonprofit programs,\73\ or the consumer's lender or
servicer.\74\ Providers also commonly represent that there is a high
likelihood, and in some instances a ``guarantee,'' of success.\75\ Many
MARS providers do not disclose to consumers in their promotions the
cost of their services.\76\ In some cases, MARS providers entice
consumers to make substantial up-front payments with false claims that
they will be able to obtain a refund if consumers do not receive an
acceptable result.\77\
---------------------------------------------------------------------------

\70\ See, e.g., FTC v. First Universal Lending, LLC, No. 09-CV-
82322, Mem. Supp. TRO at 4-5 (S.D. Fla. filed Nov. 24, 2009); FTC v.
1st Guar. Mortgage Corp., No. 09-DV-61846 (S.D. Fla. filed Nov. 17,
2009); FTC v. Freedom Foreclosure Prevention Specialists, LLC, No.
2:09-cv-01167-FJM (D. Ariz. filed June 1, 2009); FTC v. Fed. Loan
Modification Law Ctr., LLP, No. SACV09-401 CJC (MLGx) (C.D. Cal.
filed Apr. 3, 2009).
\71\ See, e.g., FTC v. Debt Advocacy Ctr., LLC, No. 1:09CV2712
(N.D. Ohio filed Nov. 19, 2009); FTC v. 1st Guar. Mortgage Corp.,
No. 09-DV-61846 (S.D. Fla filed Nov. 17, 2009); FTC v.
LucasLawCenter ``Inc.,'' No. SACV-09-770 DOC (ANX) (C.D. Cal. filed
July 7, 2009); FTC v. US Foreclosure Relief Corp., No. SACVF09-768
JVS (MGX) (C.D. Cal. filed July 7, 2009).
\72\ See, e.g., FTC v. Dominant Leads, LLC, No. 1:10-cv-00997
(D.D.C. filed June 16, 2010) (alleging that defendants' Web sites
featured official government seals and logos, and deceptively
appeared to be affiliated with the government); FTC v. Washington
Data Res., Inc., No. 8:08-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12,
2009) (alleging that defendants falsely represented that they were
affiliated with the United States government); FTC v. Fed. Housing
Modification Dep't, No. 09-CV-01753 (D.D.C. filed Sept. 15, 2009);
FTC v. Sean Cantkier, No. 1:09-cv-00894 (D.D.C. filed July 10, 2009)
(alleging defendants placed advertisements on Internet search
engines that refer consumers to Web sites that deceptively appear to
be affiliated with government loan modification programs); FTC v.
Thomas Ryan, No. 1:09-00535 (HHK) (D.D.C. filed Mar. 25, 2009); FTC
v. Fed. Loan Modification Law Ctr., LLP, 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); see also LOLLAF at 2 (``Other clients have been
deceived into believing the MARS provider will assist them because
it claimed to be a `non-profit,' used a government symbol or claimed
to be affiliated with the HOPE hotline.''); OH AG (ANPR) at 4 (``Our
office has seen many companies that have names or advertisements
that make it sound like they are government sponsored.''); NCLC
(ANPR) at 3 (``One website, USHUD.com, even claims to be `America's
Only Free Foreclosure Resource' even though HUD-certified agencies
also offer free assistance regardless of income.'').
\73\ See FTC v. New Hope Prop. LLC, No. 1:90-cv-01203-JBS-JS
(D.N.J. filed Mar. 17, 2009); FTC v. New Hope Modifications, LLC,
No.1:09-cv-01204-JBS-JS (D.N.J. filed Mar. 17, 2009).
\74\ See, e.g., FTC v. Kirkland Young, LLC, No. 09-23507 (S.D.
Fla. filed Nov. 18, 2009) (alleging that defendants falsely
represented an affiliation with borrowers' lenders); FTC v. Loss
Mitigation Servs., Inc., No. SACV-09-800 DOC (ANX) (C.D. Cal. filed
July 13, 2009) (alleging that defendants deceptively claimed
affiliation with consumers' lenders); see also Am. Bankers Ass'n
(ANPR) at 7 (``They often misuse the intellectual property of
lenders and servicers by claiming in mailings, on Web sites, and in
other communications that they either are affiliated with the
lenders and servicers or have special relationships with them that
do not exist. They use the names, trademarks and logos of these
lenders and servicers in their advertising to deceive consumers into
believing they can obtain modification relief for them that these
consumers could not otherwise obtain for themselves at no cost.'');
Chase (ANPR) at 3 (``These MARS entities also may lead the borrower
to believe that they are associated with the servicer or that they
have special agreements with the servicer for processing loan
modifications, when, in fact, they do not.'').
\75\ See, e.g., FTC v. Truman Foreclosure Assistance, LLC, No.
09-23543 (S.D. Fla. filed Nov. 23, 2009) (alleging defendants
falsely claimed success rate of 97 to 100%); FTC v. Debt Advocacy
Ctr., LLC, No. 1:09CV2712 (N.D. Ohio filed Nov. 19, 2009) (alleging
defendants falsely claimed a 90% success rate); FTC v. Loss
Mitigation Servs., Inc., No. SACV09-800 DOC (ANX) (C.D. Cal. filed
July 13, 2009) (alleging ``[d]efendants have told homeowners that
their success rate is above ninety percent''); FTC v. LucasLawCenter
``Inc.,'' No. SACV-09-770 DOC (ANX) (C.D. Cal. filed July 7, 2009)
(alleging ``[d]efendants' representatives tell consumers that
Defendants have a success rate in the ninetieth percentile with
their lender''); FTC v. Freedom Foreclosure Prevention Specialists,
LLC, No. 2:09-cv-01167-FJM (D. Ariz. filed June 1, 2009) (alleging
defendants claimed to have 97% success rate); FTC v. Data Med.
Capital Inc., No. SA-CV-99-1266 AHS (Eex), Mem. Supp. App. Contempt
at 8 (C.D. Cal. filed May 27, 2009) (alleging defendants represented
100% success rate to consumers).
The Loan Modification Scam Prevention Network (LMSPN)--a
coalition of Federal and state organizations led by the Lawyers'
Committee for Civil Rights--has created a nationwide complaint
reporting system for loan modification fraud. The Network, formed in
February 2010, has received complaints through a variety of
channels, including a form posted on its Web site, the Homeowners'
Hope Hotline, and referrals from non-profit housing counselors. As
of August 25, 2010, the LMSPN database contained a total of 6,473
complaints of loan modification fraud, dating as far back as April
8, 2008. FTC staff reviewed a random sample of 100 of these
complaints and found that 63 reported that MARS providers had
guaranteed consumers loan modifications. In projecting this finding
to the entire LMSPN database, the FTC estimates that between 52% and
72% of the complaints report the same information.
\76\ In a recent report summarizing the results of undercover
calls made to MARS providers, the National Community Reinvestment
Coalition (NCRC) found that in 54% of the calls the providers did
not inform consumers about their fees. See NCRC, Foreclosure Rescue
Scams: A Nightmare Complicating the American Dream, at 21 (Mar.
2010) (``NCRC Report''), available at http://www.ncrc.org/images/stories/pdf/research/foreclosure%20rescue%20scams%20-%20%20nightmare%20complicating%20the%20american%20dream.pdf.
\77\ See, e.g., FTC v. Truman Foreclosure Assistance, LLC, No.
09-23543 (S.D. Fla. filed Nov. 23, 2009) (alleging that defendant
falsely claimed to provide ``100% money back guarantee''); Debt
Advocacy Ctr., LLC, No. 1:09CV2712 (N.D. Ohio filed Nov. 19, 2009)
(alleging that defendants falsely represented they will refund
borrower fee if unsuccessful); FTC v. Infinity Group Servs., No.
SACV09-00977 DOC (MLGx) (C.D. Cal. filed Aug. 26, 2009); FTC v. Loan
Modification Shop, Inc., No. 3:09-cv-00798 (JAP), Mem. Supp. TRO at
1 (D.N.J. amended complaint filed Aug. 4, 2009) (alleging defendants
represented that advance fees were fully refundable); FTC v. Freedom
Foreclosure Prevention Specialists, LLC, No. 2:09-cv-01167-FJM (D.
Ariz. June 1, 2009) (alleging defendants promised ``100% money-back
guarantee'' but then failed to provide refunds); see also NAAG at 2
(``[MARS providers] generally ignore their own refund policies. In
the vast majority of complaints received by our offices, consumers
were unable to get refunds even though the consultants performed
little or no work and had promised consumers money-back guarantees.
In some cases, the companies had closed or changed locations by the
time the consumers discovered there was a problem, thereby
preventing the consumers from even requesting a refund.''); see
also, e.g., FTC v. Home Assure, LLC, No. 8:09-CV-00547-T-23T-Sm,
Mot. S.J., App.1 at 6 (M.D. Fla. filed Jan. 25, 2010) (Expert Report
of Dr. Kivetz survey reporting that 56% of consumers requested that
defendant provide a refund; 65% of those who requested a refund did
so because defendant failed to perform its services; but only 12% of
consumers who requested refunds received them).
---------------------------------------------------------------------------

Based on the FTC's law enforcement experience, the public comments,
and consumer complaints, it appears that the vast majority of consumers
do not receive the results MARS providers promise.\78\ After collecting
their up-front fees, MARS providers often fail to make initial contact
with the consumer's lender or servicer for months, if at all, or to
have substantive discussions or negotiations with the lender or
servicer.\79\ In many cases, MARS providers fail to perform even the
most basic promised services or achieve any beneficial results.
---------------------------------------------------------------------------

\78\ See, e.g., infra Section III.E.2.a.; LOLLAF at 1 (``We have
worked with many homeowners who have paid money to a Mortgage
Assistant Relief Services (MARS) provider, only to discover that
they received absolutely no service in exchange for the fee.''); CMC
(ANPR) at 1 (``CMC members and other mortgage servicers found that
MARS providers consistently misrepresent their ability to obtain
concessions from servicers * * *.''); Chase (ANPR) at 3 (``They
collect their fees up-front and promise the borrower they can get a
loan modification or other foreclosure relief, when, in fact, this
is only a determination that the servicer can make after reviewing
the borrower's financial information and investor agreements.'').
\79\ See, e.g., FTC v. Truman Foreclosure Assistance, LLC, No.
09-23543 (S.D. Fla. filed Nov. 23, 2009) (alleging that defendant
often failed to return borrowers' phone calls and failed to contact
and negotiate with lenders); FTC v. Apply2Save, Inc., No. 2:09-cv-
00345-EJL-CWD (D. Idaho filed July 14, 2009) (complaint alleging
that ``[m]any consumers learned from their lenders that Defendants
had not even contacted the lender or that Defendants had only
minimal, non-substantive contact with the lender''); FTC v. Loss
Mitigation Servs., Inc., No. SACV09-800 DOC (ANX) (C.D. Cal. filed
July 13, 2009) (alleging that ``[d]efendants have misrepresented
that negotiations were underway, although Defendants had not yet
contacted the lender''); FTC v. LucasLawCenter ``Inc.'', No. SACV-
09-770 DOC (ANX), Mem. Supp. TRO at 19 (C.D. Cal. filed July 7,
2009) (alleging that consumers who contact their lenders ``learn
that [Defendant] never even contacted the lender, or merely verified
the consumer's loan information''); FTC v. Freedom Foreclosure
Prevention Specialists, LLC, No. 2:09-cv-01167-FJM (D. Ariz. June 1,
2009) (alleging that defendants failed to act on homeowners' cases
for more than four to six weeks without completing--or in some
cases, even starting--negotiations and ``failed to return consumers'
repeated telephone calls, even when homeowners were on the brink of
foreclosure'').
---------------------------------------------------------------------------

In some cases, providers also cause harm to consumers by
instructing them to stop communicating with their lenders and
servicers.\80\ Consumers who

[[Page 75098]]

sever contact with lenders and servicers unwittingly diminish their
ability to learn that their MARS provider is doing little or nothing on
their behalf. These consumers may never learn of concessions their
lenders or servicers would be willing to make--or, worst of all, may
never discover that foreclosure is imminent.\81\ In some cases, MARS
providers also advise consumers to discontinue making their mortgage
payments even though doing so could result in the loss of their homes
and damage to their credit ratings.\82\
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\80\ See, e.g., FTC v. Truman Foreclosure Assistance, LLC, No.
09-23543 (S.D. Fla. filed Nov. 23, 2009); FTC v. Kirkland Young,
LLC, No. 09-23507 (S.D. Fla filed Nov. 18, 2009); FTC v. Washington
Data Res., Inc., No. 8:09-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12,
2009); FTC v. Loss Mitigation Servs., Inc., No. SACV09-800 DOC (ANX)
(C.D. Cal. filed July 13, 2009); FTC v. US Foreclosure Relief Corp.,
No. SACV09-768 JVS (MGX) (C.D. Cal. filed July 7, 2009); see also
NCRC Report, supra note 76, at 4 (noting that, on 25% of its
undercover calls, MARS providers instructed the caller to cease
communicating with his or her lender).
\81\ See, e.g., FTC v. Truman Foreclosure Assistance, LLC, No.
09-23543 (S.D. Fla. filed Nov. 23, 2009) (alleging that ``[w]hen
consumers speak with their lenders directly, they often discover
that Defendants had not yet contacted the lender or only had left
messages or had non-substantive contacts with the lender''); FTC v.
Loss Mitigation Servs., Inc., No. SACV09-800 DOC (ANX), Mem. Supp.
TRO at 18-19 (C.D. Cal. filed July 13, 2009) (detailing
``devastating effects'' of consumers learning too late of lack of
effort by loan modification company); CRC (ANPR) at 7 (``People who
do have a chance of keeping the home are being steered away from
legitimate, free homeowner counseling services or are failing to
take any action before it is too late because they have been assured
everything is being taken care of for them already.'').
\82\ See NAAG at 4 (``We are aware of a number of rescue
consultants who incorrectly claim that consumers' lenders will not
work with them until they are behind on their mortgage payments. We
are also aware of consultants who advise consumers not to make
mortgage payments so that they will be able to afford mortgage loan
modification fees.''); CUNA at 2 (consumers ``are often instructed
to stop making mortgage payments''); NCLC at 7 (family told ``to
stop paying their mortgage payments and promised a loan modification
with lower payments.''); Rodriguez at 1 (``I have had clients face
foreclosure because of these companies telling them to stop paying
their mortgage and pay them!''); FTC v. Fed. Loan Modification Law
Ctr., LLP, No. SACV09-401 CJC (MLGx) (C.D. Cal., Am. Compl. filed
June 24, 2009) (``In numerous instances, Defendants have [allegedly]
encouraged consumers to stop paying their mortgages, telling
consumers that delinquency will demonstrate the consumer's hardship
to the lender and make it easier to obtain a loan modification.'');
FTC v. LucasLawCenter ``Inc.'', No. SACV-09-770 DOC (ANX) (C.D. Cal.
filed July 9, 2009) (alleging that ``[i]n numerous instances,
Defendants' representative encourages consumers to stop paying their
mortgages, telling consumers that delinquency will demonstrate the
consumers' hardship to the lender and make it easier to obtain a
loan modification.''); FTC v. Foreclosure Solutions, LLC, No. 1:08-
cv-01075 (N.D. Ohio filed Apr. 28, 2008) (``Defendants [allegedly]
instruct the consumer to open a savings account and deposit, every
month until further notice from Defendants, the consumer's monthly
mortgage payment plus an additional [25%]. Defendants claim this
money will be used to negotiate with the lender to reinstate the
loan.''); see also FTC v. First Universal Lending, LLC, No. 09-CV-
82322 (S.D. Fla. filed Nov. 24, 2009); FTC v. Fed. Housing
Modification Dep't, No. 09-CV-01753 (D.D.C. filed Sept. 15, 2009);
FTC v. Loss Mitigation Servs., Inc., No. SACV09-800 DOC(ANx) (C.D.
Cal. filed July 13, 2009); FTC v. US Foreclosure Relief Corp., No.
SACV09-768 JVS (MLGx) (C.D. Cal., Amd. Compl. filed Mar. 8, 2009);
FTC v. New Hope Property LLC, No. 1:09-cv-01203-JBS-JS (D.N.J. filed
Mar. 17, 2009); NCRC Report, supra note 76, at 24 (``[I]n over 50%
of the tests service providers advised testers that they should not
pay their mortgage.''); NAAG (ANPR) at 10 (``In some cases, the
mortgage consultants will actually counsel the consumer not to make
a mortgage payment, which of course frees up funds for the
consultants' fee.'').
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The Commission's law enforcement experience,\83\ state law
enforcement,\84\ the comments received,\85\ and state bar actions \86\
indicate that a growing number of attorneys themselves market and sell
MARS. Many of them engage in unfair and deceptive acts and practices,
such as making the specific claim that they offer legal services,\87\
when in fact, no attorneys are employed by the company, or if they are,
they do little or no legal work for customers.\88\
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\83\ See infra notes 89-90.
\84\ See, e.g., Florida v. Kirkland Young, No. 09-90945 (Fla.
Cir. Ct. Miami-Dade Cty., filed Dec. 17, 2009), available at http://
myfloridalegal.com/webfiles.nsf/WF/MRAY-7YXQF7/$file/
Complaint.121709.pdf. Press Release, N.C. Dep't of Justice, AG
Cooper Targets California Schemes that Prey on NC Homeowners (July
15, 2009), available at http://www.ncdoj.com/News-and-Alerts/News-Releases-and-Advisories/Press-Releases/AG-Cooper-targets-California-schemes-that-prey-on-.aspx; Press Release, Colo. Att'y Gen. Office,
Attorney General Announces Actions Against Seven Loan-Modification
Companies As Part of Multistate Sweep (July 15, 2009), available at
http://www.coloradoattorneygeneral.gov/press/news/2009/07/15/attorney_general_announces_actions_against_seven_loan_modification_companies_p; Press Release, Ill. Att'y Gen., Illinois
Attorney General Sues 14th Company for Mortgage Rescue Fraud (Aug.
28, 2009), available at http://www.illinoisattorneygeneral.gov/pressroom/2008_08/20080828.html.
\85\ See, e.g., Deal at 5-6 (``Some non-attorney modification
companies claimed to have attorneys on staff or available to review
the work or to negotiate with lenders. A few lawyers `rented' their
names to non-attorney MARS providers while providing little
service.''); IL AG (ANPR) at 1 (noting that ``33 percent of the
[MARS] companies we have dealt with are owned by attorneys, while 38
percent have some link to the legal profession''); CRC (ANPR) at 2
(``An increasing number of attorneys are involving themselves in
these unethical practices without providing any legal (or other)
services. . . .''); MN AG (ANPR) at 5 (``This Office is aware of
several loan modification and foreclosure rescue companies that have
affiliated with licensed attorneys in other states in an effort to
circumvent state law.''); NAAG (ANPR) at 4 (``Attorneys * * * have
an increasing presence in this industry and have been found working
in conjunction with or serving as referral sources for mortgage
consultants.'').
\86\ See, e.g., Legislative Solutions for Preventing Loan
Modification and Foreclosure Rescue Fraud: Hearing Before the
Subcomm. on Hous. & Cmty. Opportunity of the H. Comm. on Fin.
Servs., 111th Cong. 58 (2009) (statement of Scott J. Drexel, Chief
Trial Counsel, State Bar of California), available at http://financialservices.house.gov/media/file/hearings/111/111-28.pdf at 2,
4 (Drexel Testimony) (noting that attorney misconduct in connection
with MARS ``is a problem of extremely significant--if not crisis--
proportions in California,'' and that the state bar has initiated
over 175 associated investigations of attorneys); Polyana Da Costa,
Record Number of Complaints Target Florida Loan Modification
Lawyers, Law.com (Oct. 1, 2009) (``The [Florida] state attorney
general has received a record 756 complaints through August of this
year about loan modifications involving attorneys.''), available at
http://www.law.com/jsp/law/LawArticleFriendly.jsp?id=1202434223147.
\87\ See, e.g., FTC v. Fed. Housing Modification Dep't, No. 09-
CV-01753 (D.D.C. filed Sept. 16, 2009) (alleging that defendants
falsely claim to have attorneys or forensic accountants on staff);
FTC v. Loan Modification Shop, Inc., No. 3:09-cv-00798 (JAP), Mem.
Supp. TRO at 14 (D.N.J. filed Aug. 4, 2009) (alleging that
defendants misrepresent ``that it is an attorney-based company'');
see also FTC v. LucasLawCenter ``Inc.'', No. SACV-09-770 DOC (ANX),
Mem. Supp. TRO at 19 (C.D. Cal. filed July 7, 2009) (alleging that
``[d]espite promises to the contrary, consumers have no contact with
the purported attorneys who are supposed to be negotiating with
their lenders'').
\88\ See, e.g., FTC v. Truman Foreclosure Assistance, LLC, No.
09-23543 (S.D. Fla. filed Nov. 23, 2009); FTC v. Washington Data
Res., Inc., No. 8:09-cv-02309-SDM-TBM (M.D. Fla. filed Nov. 12,
2009); see also FTC v. US Foreclosure Relief Corp., No. SACV09-768
JVS (MGX), Prelim. Rep. Temp. Receiver at 2-3 (C.D. Cal. filed July
7, 2009) (stating that defendants' ``relationship with two different
lawyers was nominal at best and served primarily as a cover to
dignify the business and invoke the attorney exception to advance
fee prohibitions'').
---------------------------------------------------------------------------

C. Continued Law Enforcement and Other Responses

The Commission has taken aggressive action to protect consumers
from deceptive MARS providers. As noted above, the FTC has filed 32
lawsuits \89\ in the last three years against MARS providers for
engaging in deceptive practices in violation of the FTC Act and, in
several instances, the Telemarketing Sales Rule (TSR).\90\ In addition,
the FTC has coordinated its efforts with state law enforcement and
other federal agencies, including the Department of Justice (DOJ), the
Department of Housing and Urban Development (HUD), the Treasury
Department, and the Office of the Special Inspector General for the
Troubled Asset Relief Program (SIG-TARP).\91\ The Commission also is a
member of the Financial Fraud

[[Page 75099]]

Enforcement Task Force (FFETF), a coalition of federal and state law
enforcement agencies that has worked to combat illegal activity by MARS
providers.\92\ In the past 15 months, the FTC has participated in three
interagency nationwide sweeps: ``Operation Stolen Dreams'' (June 17,
2010), in which the Commission secured consent orders against 16
marketers of MARS;\93\ ``Operation Stolen Hope'' (November 24, 2009),
in which the Commission joined with 20 states collectively to file over
one hundred lawsuits against MARS providers;\94\ and ``Operation Loan
Lies'' (July 15, 2009), in which the FTC coordinated with 25 federal
and state agencies to bring 189 actions against MARS defendants.\95\
Prior to these nationwide sweeps, the Commission, jointly with the DOJ,
the Treasury Department, HUD, and the Illinois Attorney General, had
announced several law enforcement actions targeting MARS.\96\
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\89\ See FTC Case List, supra note 28.
\90\ 16 CFR 310.1, et seq. (2003); see, e.g., FTC v. Kirkland
Young, LLC, No. 09-23507 (S.D. Fla. filed Nov. 18, 2009); FTC v.
Washington Data Res., Inc., No. 8:09-cv-02309-SDM-TBM (M.D. Fla.
filed Nov. 12, 2009); FTC v. First Universal Lending, LLC, No. 09-
CV-82322 (S.D. Fla. filed Nov. 24, 2009); FTC v. Fed. Housing
Modification Dep't, No. 09-CV-01753 (D.D.C. filed Sept. 15, 2009);
FTC v. Hope Now Modifications, LLC, No. 1:09-cv-01204-JBX-JS (D.N.J.
filed Sept. 14, 2009); FTC v. US Foreclosure Relief Corp., No.
SACV09-768 JVS (MGX) (C.D. Cal. filed July 7, 2009).
\91\ See Press Release, FTC, Federal and State Agencies Target
Mortgage Foreclosure Rescue and Loan Modification Scams (July 15,
2009), available at http://www.ftc.gov/opa/2009/07/loanlies.shtm;
Press Release, FTC, 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.
\92\ See Press Release, Financial Fraud Enforcement Task Force
(FFETF), President Obama Establishes Interagency Financial Fraud
Enforcement Task Force (Nov. 17, 2009), available at http://www.stopfraud.gov/news/news-11172009-01.html. The FFETF was
established by President Obama in late 2009 and is chaired by the
Attorney General. The Commission has played an active role on the
Task Force through, among other things, its membership on the Task
Force's Mortgage Fraud Working Group.
\93\ See Press Release, FTC, FTC Settlement Orders Ban More Than
A Dozen Marketers from Selling Mortgage Relief Services; Repeat
Offender Ordered to Pay $11.4 Million for Contempt (June 17, 2010),
available at http://www.ftc.gov/opa/2010/06/loanmods.shtm. This
sweep was organized by the FFETF, and member agencies filed hundreds
of civil and criminal mortgage fraud cases, including numerous cases
against MARS providers.
\94\ Press Release, FTC, Federal and State Agencies Target
Mortgage Relief Scams (Nov. 24, 2009), available at http://www.ftc.gov/opa/2009/11/stolenhope.shtm.
\95\ Press Release, FTC, Federal and State Agencies Target
Mortgage Foreclosure Rescue and Loan Modification Scams (July 15,
2009), available at http://www.ftc.gov/opa/2009/07/loanlies.shtm.
\96\ Press Release, FTC, 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. In
connection with these joint efforts, the Commission also sent
warning letters to 71 companies marketing potentially deceptive
mortgage loan modification and foreclosure assistance programs on
the Internet. Id.
Moreover, the Justice Department and other members of the FFETF
have pursued many MARS providers for illegal conduct, including
criminal activity. See Press Release, FFETF, Financial Fraud
Enforcement Task Force Announces Results of Broadest Mortgage Fraud
Sweep in History (June 17, 2010), available at http://www.stopfraud.gov/news/news-06172010-02.html.
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In addition to their coordination with the Commission, the states
have continued to engage in their own aggressive law enforcement.
Collectively, the states have investigated at least 450 MARS providers
and sued hundreds of them for alleged state law violations.\97\
Individual states also have continued to enact statutes and regulations
to address practices related to MARS.\98\
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\97\ See supra note 62.
\98\ At least 30 states and the District of Columbia have
enacted such statutes or regulations. See, e.g., Ariz. Rev. Stat.
Sec. 44-1378 (2010 Ariz. ALS 143); Cal. Civ. Code Sec. 2944.7; id.
Sec. 2945, et seq.; Colo. Rev. Stat. Sec. 6-1-1101, et seq.; 2009
Conn. Gen. Stat. Sec. 36a-489; 6 Del. Code Ann. Sec. 2400B, et
seq.; D.C. Code Sec. 42-2431, et seq.; Fla. Stat. Sec. 501.1377;
Haw. Rev. Stat. Sec. 480E-1, et seq.; Idaho Code Ann. Sec. 45-
1601, et seq.; 765 Ill. Comp. Stat. Ann. 940/1, et seq.; 24 Ind.
Admin. Code Sec. 5.5-1-1, et seq.; Iowa Code Sec. 741E.1, et seq.;
Me. Rev. Stat. Ann. tit. 32, Sec. 6171, et seq. & 6191, et seq.;
Md. Code Ann., Real Property Sec. 7-301, et seq.; 940 Mass. Code
Regs. Sec. 25.01, et seq.; Mich. Comp. Law Sec. 445.1822, et seq.;
Minn. Stat. Sec. 325N.01, et seq.; Mo. Rev. Stat. Sec. 407.935, et
seq.; Neb. Rev. Stat. Sec. 76-2701, et seq.; Nev. Rev. Stat. Sec.
645F.300, et seq.; N.H. Rev. Stat. Ann. Sec. 479-B:1, et seq.; 2010
N.M. ALS 58; N.Y. Real Prop. Law Sec. 265-B; N.C. Gen. Stat. Sec.
14-423, et seq.; 2008 Or. Laws Ch. 19; R.I. Gen. Laws Sec. 5-79-1,
et seq.; Tenn. Code Ann. Sec. 47-18-5501, et seq.; Utah Admin. Code
Sec. 61.2; Va. Code Ann. Sec. 59.1-200.1; Wash. Rev. Code Sec.
19.134.010, et seq.; Wis. Stat. Sec. 846.45.
These laws 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.
Where, as here, Congress has not foreclosed state regulation, a
state statute is preempted only if it conflicts with a federal
statute. Ray v. Atl. Richfield Co., 435 U.S. 151, 158 (1978). State
laws are preempted only to the extent there is a conflict--
compliance with both federal and state regulations is impossible or
the state law is an obstacle to effectuating the purposes and
objectives of Congress. Id. Thus, state laws can impose additional
requirements as long as they do not directly conflict with the Final
Rule. See, e.g., TSR Final Rule, 75 FR at 48481.
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In addition to federal and state law enforcement, on December 15,
2009, HUD published a proposed rule in the Federal Register that would
require states to adopt uniform licensing requirements for MARS
providers.\99\ The proposed HUD Rule targets the practices of ``loan
originators,'' a term that encompasses third-party loan modification
services.\100\ Under the proposed HUD Rule, loan originators must
undergo a background check, complete 20 hours of pre-licensing
education, and pass a written test to obtain a license.\101\ The
proposed HUD Rule also requires the creation of a centralized database
of loan originators licensed in each state, containing such information
as their employment history, consumer complaints, and any enforcement
and disciplinary actions brought against them. State regulators and the
public will be able to access this database, thus allowing them to find
and track mortgage loan originators throughout the country.\102\ The
goal of the proposed HUD Rule is to reduce the incidence of fraud by
encouraging states to establish minimum licensing and registration
standards, thereby making originators, including MARS providers, more
accountable.\103\
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\99\ See Safe Mortgage Licensing Act: HUD Responsibilities under
the Safe Act; Proposed rule, 74 FR 66548 (Dec. 15, 2009) (proposed
HUD Rule). Pursuant to the Dodd-Frank Act, responsibility for HUD's
proposed rule will transfer to the BCFP as of the transfer date
selected by the Treasury Department. Dodd-Frank Act Sec. 1061;
which has been designated as July 21, 2011. BCFP; Designated
Transfer Date, 75 FR 57252.
\100\ 74 FR at 66554.
\101\ 74 FR at 66552.
\102\ 74 FR at 66548-49.
\103\ 74 FR at 66548. The proposed rule also would authorize HUD
to examine loan originators' records, conduct enforcement
proceedings, and collect civil penalties for violations of HUD and
state licensing requirements. See 74 FR at 66550, 66555.
A coalition of state bank regulators argued in its comment that
the FTC's proposed rule would provide important additional
protections not included in the HUD proposal. See CSBS at 1 (``SAFE
Act-compliant state licensing laws are primarily focused toward the
origination of new mortgage loans and may not directly address the
particular dangers associated with mortgage assistance relief
services. The proposed FTC rule will establish a floor to protect
consumers from abusive MARS practices nationwide. By banning up-
front fees, implementing disclosure requirements, prohibiting
certain misrepresentations, and instituting various record-keeping
requirements for MARS providers, the FTC's proposal, if adopted,
will go a long way in rooting out fraudulent practices among these
individuals wherever they operate.'').
---------------------------------------------------------------------------

III. Discussion of the Rule

As detailed in this SBP, the Final Rule prohibits and seeks to
prevent unfair and deceptive acts and practices in connection with
mortgage assistance relief services. It includes provisions that:
1. Define several key terms, including ``mortgage assistance relief
service'' and ``mortgage assistance relief service provider'';
2. Prohibit providers from instructing consumers to cease
communication with their lenders or servicers;
3. Bar providers from misrepresenting any material aspect of their
services, including but not limited to several specific
misrepresentations;
4. Mandate that providers disclose: (a) That they are for-profit
businesses not affiliated with the consumers' lenders or the
government, (b) that consumers' lenders or servicers may not agree to
change their loans, (c) that consumers could lose their homes and
damage their credit ratings if they stop making their mortgage payments
(a disclosure triggered if providers instruct consumers to stop making
payments), and (d) that consumers are not required to stay in the
service or accept the results delivered, and the total cost of the
service if they do accept the results.

[[Page 75100]]

5. Prohibit the collection of fees until providers have: (a)
Secured a written and executed agreement between the consumer and the
lender or servicer and, (b) before that agreement has been executed,
(i) disclosed that the consumer can accept or reject the lender's or
servicer's offer for mortgage relief and (ii) provided a separate
written notice from the consumer's lender or servicer summarizing the
material differences between the consumer's current mortgage loan and
the relief offered;
6. Enjoin persons from providing substantial assistance or support
to another whom they know or consciously avoid knowing is engaged in a
violation of the Rule;
7. Require that providers maintain records and monitor Rule
compliance; and
8. Exempt attorneys providing MARS as part of the practice of law
from most provisions of the Rule if they: (a) Are licensed in the state
where the consumer or the dwelling is located, and (b) comply with
relevant state licensing and bar requirements. Such attorneys are
exempt from the Rule's advance fee ban if they set aside MARS fees in a
client trust account and withdraw funds only as the fees are earned.

A. Section 322.1: Scope

Section 322.1 states that the Final Rule implements the mandate of
the Omnibus Appropriations Act, as clarified by the Credit CARD Act.
These statutes state that the Commission ``shall initiate a rulemaking
proceeding,'' and that ``[s]uch rulemaking shall relate to unfair or
deceptive acts or practices regarding mortgage loans, which may include
unfair or deceptive acts or practices involving loan modification and
foreclosure rescue services.'' \104\ As noted earlier, this language
authorizes rules that not only prohibit or restrict practices that are
themselves unfair or deceptive, but also rules that prohibit or
restrict other practices if such rules are reasonably related to the
goal of preventing unfairness or deception.\105\ As discussed above,
the Commission's rulemaking authority is limited by the Credit CARD Act
to persons over whom the FTC has jurisdiction under the FTC Act.
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\104\ See Omnibus Appropriations Act Sec. 626(a); Credit CARD
Act Sec. 511.
\105\ In articulating the scope of its rulemaking authority to
remedy unfair and deceptive acts and practices under the FTC Act,
the Commission has explained:
In exercising this remedial authority, the Commission has not
been limited to proscribing only the precise practices found to
exist, but rather has been free to close all roads to the prohibited
goal. * * * The Commission's discretion to formulate an appropriate
means of preventing the unfair or deceptive acts or practices found
to exist also takes into account the nature of rulemaking, which
involves predictions based upon pure legislative judgment and
judgmental or predictive determinations such as those involved in
fashioning remedies. In making such determinations, the Commission
is entitled to rely on its judgment, based on experience as to the
appropriate remedy to impose in the rule.
FTC, Funeral Industry Practices; Final Trade Regulation Rule, 47
FR 42269, 42272 (Sept. 24, 1982) (citing, inter alia, FTC v.
Ruberoid, 343 U.S. 470, 473 (1952)) (internal citations and
quotations omitted); see also Am. Fin. Servs Ass'n v. FTC., 767 F.2d
957, 988 (DC Cir. 1985) (noting that the Commission ``has wide
latitude for judgment'' in crafting rules to curb unfair or
deceptive practices).
The Commission exercises similar discretion in crafting orders
to resolve law violations. See FTC v. Nat'l Lead Co., 352 U.S. 419,
428 (1957) (``[T]he Commission is clothed with wide discretion in
determining the type of order that is necessary to bring an end to
the unfair practices found to exist.''); Ruberoid, 343 U.S. at 473
(``If the Commission is to attain the objectives Congress
envisioned, it cannot be required to confine its road block to the
narrow lane the transgressor has traveled; it must be allowed
effectively to close all roads to the prohibited goal, so that its
order may not be by-passed with impunity.''); Jacob Seigel Co. v.
FTC, 327 U.S. 608, 611-12 (1946) (``The Commission has wide
discretion in its choice of a remedy deemed adequate to cope with
the unlawful practices in this area of trade and commerce.'').
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B. Section 322.2: Definitions

1. Section 322.2(i): Mortgage Assistance Relief Service
As discussed above, the Rule is intended to regulate for-profit
providers of mortgage assistance relief services. Section 322.2(i) of
the Rule adopts, without substantive modification, the proposed rule's
definition of ``mortgage assistance relief service'' (MARS) as
including ``any service, plan, or program, offered or provided to the
consumer in exchange for consideration, that is represented, expressly
or by implication, to assist or attempt to assist the consumer'' in
negotiating a modification of a dwelling loan that reduces the amount
of interest, principal balance, monthly payments, or fees; stopping,
preventing, or postponing a foreclosure or repossession; or obtaining
one of several other types of relief to avoid delinquency or
foreclosure. Sections 322.2(i)(3)-(6) define these additional types of
relief to include obtaining: (1) A forbearance or repayment plan; (2)
an extension of time to cure default, reinstate a loan, or redeem a
property; \106\ (3) a waiver of an acceleration clause or balloon
payment; and (4) a short sale, deed-in-lieu of foreclosure, or any
other disposition of the property except a sale to a third-party that
is not the loan holder.\107\ The Rule covers instances in which a third
party itself works with lenders or servicers to obtain mortgage relief
as well as instances in which a third party markets services to aid
consumers who themselves work with lenders or servicers to obtain
relief.\108\ Accordingly, Sec. 322.2(i) is intended to apply to every
service MARS providers offer,\109\ expressly or by implication, for the
purpose of obtaining loan concessions, avoiding foreclosure, or saving
their homes.\110\
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\106\ In many states, mortgagors have the right to ``redeem,''
i.e., regain possession of, a property for a period of time
following foreclosure. See, e.g., RealtyTrac, Foreclosure Laws and
Procedures By State (chart showing that, depending on the state and
the borrower's circumstances, redemption periods can last anywhere
from 10 days to over one year), available at http://www.realtytrac.com/foreclosure-laws/foreclosure-laws-comparison.asp.
\107\ Several commenters supported the adoption of this
definition. See, e.g., NCLC at 3 (``[T]he broad definition of MARS
and MARS provider are also important aspects of the rule that will
help ensure its effectiveness. By including all possible forms of
mortgage relief assistance, including those represented by
implication to assist or attempt to assist consumers, the FTC has
reduced the possibility of scammers evading the rule with tricks or
loopholes.''); CUUS at 2 (``[T]he definition of `mortgage assistance
relief services' in [the proposed rule] is sufficiently broad to
include the types of companies offering the services which are the
subject of abuses.''); CSBS at 2 (``The state regulators believe
that the proposed definition of `mortgage assistance relief service'
is generally adequate in covering the scope of the NPR[M].'').
\108\ The Rule, however, is not intended to cover those who
provide general financial advice to consumers--such as accountants
or financial planners--that consumers could potentially use to avoid
foreclosure or obtain loan modifications from their lenders or
servicers. Nevertheless, if an entity that provides financial advice
or that reviews consumers' mortgage loan paperwork (e.g., performs a
``forensic audit''), see infra note 110, promotes its services in
such a manner that consumers take away the express or implied claim
that the entity's service will result in a loan modification or
other mortgage relief, the entity is a ``mortgage assistance relief
service provider'' under the Final Rule. In that instance, if
consumers do not obtain the represented result, the entity will have
made a misrepresentation in violation of Section 322.3(b) of the
Final Rule. See infra Sec. III.3.a. The Commission emphasizes that
fine-print or pro forma disclaimers generally are not sufficient to
qualify performance or success claims. See, e.g., Deception Policy
Statement, infra note 200, at 180; infra note 220.
\109\ See, e.g., MN AG at 2 (``Any rule adopted by the
Commission should clearly regulate all forms of mortgage assistance
relief servicers.'').
\110\ This provision encompasses ``forensic audits'' and other
services in which the provider purports to review, and identify
potential errors in, loan documents or documents sent by a
consumer's lender or servicer in order to avert foreclosure or
obtain concessions from the lender or servicer. See supra note 56;
MARS NPRM, 75 FR at 10720 n.160. For example, if, for these
purposes, a provider offers to examine and find mistakes in
foreclosure documents which the lender or servicer signed by
automatic means (sometimes referred to as ``robo-signing'') without
checking them for accuracy, this service would fall within Sec.
322.2(i) of the Final Rule.
---------------------------------------------------------------------------

Mortgage assistance relief services under the Rule are limited to
services

[[Page 75101]]

that are offered to consumers \111\ who are obligated under loans
secured by a ``dwelling'' or residence. A ``dwelling'' is defined in
Section 322.2(e) of the Rule to be a residential structure containing
four or fewer units, regardless of whether it is attached to real
property. The term dwelling includes ``an individual condominium unit,
cooperative unit, mobile home, manufactured home, or trailer.'' \112\
In response to comments on the NPRM, the Rule adds the term
``manufactured home'' to the definition of ``dwelling'' to ensure that
the Rule's protections extend to consumers whose homes are constructed
at a site (e.g., factory floor) other than the final location of the
structure.\113\ Finally, the definition of ``dwelling'' applies only to
residences that are ``primarily for personal, family, or household
purposes.'' \114\ The definition of ``dwelling'' includes second homes
and rental properties of consumers, because the Commission's law
enforcement experience indicates that consumers who own such properties
may seek help to avoid foreclosure on these properties.\115\ However,
``dwelling'' does not cover MARS offered in connection with commercial
properties.\116\
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\111\ ``Consumer'' is broadly defined to include ``any natural
person who is obligated under any loan secured by a dwelling.''
Section 322.2(d). For the purposes of clarity, the Final Rule's
definition of ``consumer'' replaces ``owes on'' in the proposed
definition with ``is obligated under.'' The Commission intends to
cover consumers at every stage of the process and does not limit the
Rule's protections to those who are in default or foreclosure. See
NAAG at 3 (``We support broad application of the rule to cover all
homeowners, regardless of whether they are in foreclosure or have
defaulted on their loans.''). Covering consumers who are not in
default or foreclosure is necessary because many of them seek
assistance from MARS providers before they are actually delinquent
on their loans. See CMC (ANPR) at 8 (``Many of the abuses that
servicers have encountered have occurred before the consumer has
received a notice of default. MARS providers sometimes solicit
customers who are not in default but who live in areas with high
numbers of distressed borrowers. Any rule should apply to MARS
providers at any stage of the process.''); NCLC (ANPR) at 4 (``Many
homeowners have sought help from MARS [providers] before entering
default, though sometimes the MARS then encourages a default. * * *
The mortgage servicing industry and others have urged homeowners to
seek help before they go into default.''); NCRC (ANPR) at 2 (noting
that there are ``[c]ompanies claiming to offer assistance with loan
modifications, to consumers who may or may not be in default'');
NAAG (ANPR) at 11 (``The [state] requirement that consumers be in
default before statutory protections begin made sense when mortgage
consultants solicited business based on foreclosure filings, as
those consumers would necessarily be in default. Mortgage
consultants are now able to mine public information to target
consumers who are not yet in default. Consultants may rely on an
Internet presence to draw in consumers who may also not be in
default. As consumers have grown more concerned about the state of
the economy, these solicitations are proving increasingly
attractive. Based on these reasons, a rule should provide as much
coverage for consumers as possible.'').
\112\ Section 322.2(e). The definition for ``dwelling'' is
similar to the definition of that term in Regulation Z, 12 CFR. 226,
which implements the Truth in Lending Act, 15 U.S.C. 1601 et seq.;
12 CFR 226.2(a)(19).
\113\ Some commenters recommended including manufactured homes,
a term defined by the National Manufactured Housing Construction and
Safety Standards Act, 42 U.S.C. 5402(6), to refer to non-site built
homes. See, e.g., NCLC at 3 (the term ``mobile home'' often refers
to a home built prior to 1974, while the term ``manufactured home''
means a post-1974 home that complies with HUD standards); see also
OPLC at 2; NCLC at 4.
\114\ This language is derived from Regulation Z. See 12 CFR
226.2(a)(12) (definition of ``consumer credit'').
\115\ There have been cases in which consumers were at risk of
foreclosure on non-primary residences. One comment observed that
those at risk of losing a property to foreclosure include senior
citizens who live in nursing homes or assisted living facilities and
military service members who rent their homes while deployed. NCLC
at 4 (supporting covering services purported to assist consumers
save second homes or rental properties from foreclosure).
\116\ The Final Rule also contains a definition of ``dwelling
loan,'' unmodified from the proposal, as ``any loan secured by a
dwelling, and any associated deed of trust or mortgage.'' Section
322.2(f).
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a. Sale-Leaseback and Title Reconveyance Transactions
In the NPRM, the Commission advised that the proposed definition of
MARS would cover offers of sale-leaseback and title reconveyance
transactions,\117\ but only if they were marketed ``to save the
consumer's home from foreclosure or repossession.'' \118\ The
Commission specifically solicited comment on this aspect of the
proposed rule, including whether and how a final rule should address
these transactions.\119\
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\117\ As noted in Sec. II, in a sale-leaseback or title
reconveyance transaction, the MARS provider typically instructs the
consumer to transfer title to his or her home to the provider and
then to rent the home from the provider. The provider then promises
to reconvey title to the home at some later date. In some cases, the
provider also may charge upfront fees in connection with the
transaction. See supra note 43.
\118\ MARS NPRM, 75 FR at 10728.
\119\ Id.
---------------------------------------------------------------------------

In response to the FTC's request for comments, state law enforcers
and consumer groups endorsed the proposed rule's coverage of sale-
leaseback or title reconveyance transactions when they are marketed as
ways to avoid foreclosure.\120\ These organizations asserted that this
limited coverage is sufficient in light of existing state laws
governing how such sales must be structured.\121\ One group of state
regulators, however, advocated that the Commission address the
underlying sale-leaseback transaction in a subsequent rulemaking if
addressing it now would delay the issuance of the Final Rule.\122\
---------------------------------------------------------------------------

\120\ See NAAG at 5 (``We believe that the proposed rule will
not interfere with state laws, but instead will complement existing
state laws that address sale-leaseback transactions''); CSBS at 2
(``[S]tate regulators believe that it is important for the FTC to
address abuses with respect to sale-leaseback transactions.''); NCLC
at 16 (``We support the FTC's plan to regulate only the marketing of
these scams while leaving further regulation to the states.'').
\121\ Supra note 120.
\122\ CSBS at 2 (``The state regulators believe that it is
important for the FTC to address abuses with respect to sale-
leaseback transactions. However, given the current prevalence of
loan modification scams, regulations addressing those practices must
receive priority. If the development of sale-leaseback regulations
will delay the promulgation of final regulations to address loan
modification scams, we believe that the sale-lease back regulations
should be addressed in a separate effort.'').
---------------------------------------------------------------------------

Many states have enacted laws that comprehensively regulate sale-
leaseback and title reconveyance transactions, imposing, for example,
specific valuation requirements on the property transfers and
obligations to determine that the consumer can reasonably afford to
repurchase the property.\123\ On the other hand, the record shows that
sale-leaseback and title reconveyance transactions have been commonly
touted as a means to avert foreclosure and its consequences.\124\
Although the Final Rule does not regulate the terms of sale-leaseback
and title reconveyance transactions, if such transactions are
represented, expressly or impliedly, as a way for a consumer to avoid
foreclosure, they present the same risks to consumers as other forms of
MARS.\125\ The FTC thus has determined that the Final Rule will cover
offers of sale-

[[Page 75102]]

leaseback and title reconveyance transactions marketed as a way to save
a consumer's home from foreclosure or repossession.\126\
---------------------------------------------------------------------------

\123\ See supra note 98. For example, some laws mandate that
before executing a title transfer, the foreclosure rescue operator
must verify that the consumer can reasonably afford to repurchase
the home. See, e.g., Minn. Stat. Sec. 325N.17(a)(1). In addition,
the foreclosure rescue operator may be required to obtain written
consent from the homeowner, conduct a face-to-face closing, abide by
federal and state laws governing sales of residential properties,
allow consumers a period of time to cancel the transaction before
title conveyance can be recorded, and either return title to the
consumer or provide compensation that represents the property's fair
market value. See, e.g., id. Sec. 325N.17(a)(2)-(4), (b).
\124\ See supra note 43; see also, e.g., CJI, Att. 1, 2 (private
plaintiffs in Maryland challenging foreclosure rescue and equity
stripping scam); NAAG (ANPR) at 5-6; CJI, Att. 1 at 2; NCLC at 16
(``Sale-leaseback and other title-transfer transactions can be the
most harmful of foreclosure rescue scams because they not only
deprive a homeowner of scarce money but outright steal the
homeowner's deed.'').
\125\ Other transactions proposed to consumers similarly would
be covered by the Rule if marketed as a means to stop or avoid
foreclosure. See, e.g.,. NV DML at 2-3 (describing two transactions
being marketed to some consumers as a means to secure concessions on
their mortgage loans). The definition of MARS encompasses any
service that purports to help consumers stop, prevent, or postpone
any foreclosure sale, or otherwise save the property, regardless of
the form that relief may take. Section 322(i)(2).
\126\ As a general matter, the Final Rule is not intended to
apply to the marketing of services to assist consumers in selling
their properties to third parties. The Final Rule, however, does
specifically cover the marketing of services involving the sale of
properties to third parties if those services are designed or
intended to assist consumers in averting foreclosure, e.g., through
a short sale or deed-in-lieu of foreclosure. One commenter urged the
Commission to exempt licensed real estate professionals from the
Final Rule. NAR at 1-2. The commenter argued the Rule would restrict
real estate agents in helping consumers with the process of selling
their homes through short sales. Id. The Commission concludes that
an exemption for real estate agents is not necessary. Real estate
agents customarily assist consumers in selling or buying homes and
perform functions such as listing homes for sale, showing homes, and
finding desirable homes for consumers. The Commission is aware that
real estate agents may perform these functions when properties are
bought or sold through a short sale transaction, but does not
consider these services to be MARS.
---------------------------------------------------------------------------

b. Mortgage Refinancing Services
The proposed rule covered mortgage brokers who offer loan
origination or refinancing services, but only if those services are
represented, expressly or impliedly, to help consumers avoid
delinquency or foreclosure. The Final Rule is unchanged on this point.
Thus, the Final Rule does not cover mortgage brokers who offer services
that are advertised or marketed for other purposes. To obtain a new
loan or refinance an existing loan, consumers can work either with the
lender directly or with a mortgage broker. \127\
---------------------------------------------------------------------------

\127\ Mortgage brokers can offer a wide choice of loan products
from different lenders, without consumers having to deal with each
lender separately. Thus, mortgage brokers commonly act as
intermediaries between consumers and lenders in bona fide loan
origination or refinancing transactions. Mortgage brokers typically
are paid by the lender, or in some cases by the borrower, from the
closing costs of the loan transaction. See, e.g., Nat'l Ass'n of
Mortg. Brokers FAQs, available at http://www.namb.org/namb/FAQs1.asp?SnID=498395277; see also NAAG at 12 (noting that brokers
``are traditionally paid * * * at the closing of a consumer's loan,
after all services have been provided''); NCLC (ANPR) at 29
(``[B]rokers * * * are normally paid only when a sale or mortgage
transaction is completed.'').
---------------------------------------------------------------------------

As discussed in the NPRM, in some cases consumers at risk of
foreclosure could benefit from assistance in refinancing; thus, the
Commission does not wish the Rule to reduce the availability of
legitimate services of this kind.\128\ At the same time, the Commission
is concerned that services purported to help consumers avoid
foreclosure through refinancing could be marketed unfairly or
deceptively. Indeed, with the deterioration of the housing market, many
mortgage brokers have focused on marketing and providing MARS to
consumers,\129\ and the record shows that some former brokers who now
provide MARS have engaged in the same types of unfair and deceptive
practices as other MARS providers.\130\
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\128\ MARS NPRM, 75 FR at 10713.
\129\ One commenter provided examples of advertisements showing
MARS providers aggressively recruiting mortgage brokers to sell
MARS. See NCLC (ANPR) at 10.
\130\ See, e.g. supra note 52; Peter S. Goodman, Subprime
Brokers Back as Dubious Loan Fixers, N.Y. Times, July 19, 2009, at
A1 (accounting of how many mortgage brokers in southern California
began selling MARS when loan origination work evaporated).
---------------------------------------------------------------------------

In the NPRM, the Commission specifically requested comment on how
the Rule should treat mortgage brokers who offer refinancing services.
A number of commenters, noting the incidence of unfair and deceptive
practices by mortgage brokers selling MARS,\131\ recommended that the
Final Rule cover mortgage brokers.\132\ In addition, one comment from a
consumer group argued that the Rule should expressly cover refinancing
as a form of MARS.\133\ A consortium of state bank regulating agencies,
on the other hand, recommended that the Rule exclude mortgage brokers
entirely or, at a minimum, exclude their loan origination
activities.\134\
---------------------------------------------------------------------------

\131\ See NYC DCA at 8; NAAG (ANPR) at 11-12.
\132\ CSBS at 2 (``The proposed FTC rules should apply to
mortgage brokers to the extent that mortgage brokers engage in non-
loan origination MARS activities, e.g. negotiating loan
modifications, short sales, etc.''); NYC DCA at 8 (``Mortgage
brokers offering for-profit mortgage assistance services are likely
to be engaged in the same problematic practices as other MARS
providers and must be subject to the rule.''); LLAF at 2. Comments
to the ANPR made similar arguments. See, e.g., NAAG (ANPR) at 11-12
(``We have already seen complaints in which mortgage brokers charge
consumers for mortgage consulting services and then failed to
provide services or provided fewer services than originally
promised. The trend of mortgage brokers providing services is likely
to continue, especially if the market for mortgage loan origination
remains soft.''); NCLC (ANPR) at 13-14.
\133\ See CUUS at 2-3 (recommending that Rule specify that ``a
refinance of the existing mortgage'' is an example of an included
service).
\134\ See CSBS at 2 (``The proposed FTC rules do not need to
address loan origination activities, even if the loan is being
originated to avoid foreclosure.'').
---------------------------------------------------------------------------

The Commission concludes that mortgage brokers generally are not
covered by the Rule. However, if a mortgage broker offers loan
refinancing or originations as a means for consumers to save their
homes from foreclosure--that is, the broker is providing MARS--then the
Rule covers this conduct. Thus, the Final Rule protects consumers from
unfair and deceptive practices by mortgage brokers operating as MARS
providers without unduly restricting legitimate mortgage brokerage
activities.
c. Mortgage Assistance Relief ``Product''
One commenter recommended that the Commission add the word
``product'' to the proposed definition ``mortgage assistance relief
service.'' The commenter recommended this addition to ensure that
providers cannot evade the Rule by claiming to sell a product (e.g.,
software, books, CDs, or other tangible materials to help consumers
avoid foreclosure) rather than a service.\135\ Another comment from a
group of state bank regulators disagreed, stating, without elaboration,
that the regulators saw no reason to include the word ``product'' in
the definition of MARS.\136\
---------------------------------------------------------------------------

\135\ See CUUS at 2 (adding the word ``product'' to the
definition of MARS ``would prevent MARS providers from claiming they
are not covered by the rule because they offer a product, not a
service.'').
\136\ See CSBS at 2 (``The state regulators do not believe that
there is any reason to broaden the definition of MARS to include the
word `product' as inquired by the Commission.'').
---------------------------------------------------------------------------

The Commission declines to include products in the definition of
MARS in the Final Rule. The record demonstrates that providers of
services to help consumers modify their mortgages and avoid foreclosure
often engage in unfair and deceptive practices; in contrast, neither
the Commission's law enforcement experience nor the rulemaking record
show that those who sell products for mortgage assistance relief are
engaged in the same types of conduct. The Commission will continue to
monitor to ensure that MARS providers do not gravitate to the sale of
products to evade the Rule.\137\ Should MARS providers selling products
engage in unfair or deceptive practices, the Commission has the
authority to take law enforcement action under Section 5 of the FTC
Act. Moreover, should unfair or deceptive practices in the sale of
mortgage assistance relief products become widespread, the Commission
may consider amending the Rule to include such practices.\138\
---------------------------------------------------------------------------

\137\ Providers should be aware that merely including a product,
such as a book, in conjunction with the sale of services will not
remove the transaction from coverage by the Rule.
\138\ As discussed above, see supra note 15, the Commission's
authority to amend the MARS Rule will transfer to the BCFP on July
21, 2011.
---------------------------------------------------------------------------

2. Section 322.2(a): ``Clear and Prominent''
The proposed rule required that mandated disclosures be made
``clearly and prominently,'' specifying how this requirement applied in
different mediums. The two commenters that addressed how disclosures
must be made supported the proposed criteria for making clear and
prominent

[[Page 75103]]

disclosures.\139\ No commenters opposed these requirements. The Final
Rule substantially adopts the proposed rule's definition of ``clear and
prominent'' with only the few changes discussed below. The Rule sets
forth general requirements to ensure that required disclosures in
commercial communications \140\ are sufficiently clear and prominent
for consumers to notice and comprehend them.\141\ In all cases, the
syntax and wording of disclosures must be easy for consumers to
understand and must not be accompanied by statements that contradict or
obscure their meaning.\142\ The disclosures must be made in each
language that is ``substantially used'' in the advertising.\143\ In
addition, as described below, the Rule includes clarity and prominence
requirements specific to the particular media in which disclosures
appear. The extensive record of unfairness and deception in the MARS
industry makes it appropriate for the Commission to articulate with
specificity how MARS providers must make required disclosures to
prevent consumer harm.
---------------------------------------------------------------------------

\139\ See CSBS at 2 (endorsing requirements as ``generally well-
rounded and adequate''); NCLC at 16 (``The Commission has done an
admirable job writing disclosure rules that will reduce the ability
of MARS providers to obscure or overshadow mandatory disclosure
statements.'').
\140\ As defined in the Final Rule, ``commercial communication''
is intended to include any written or oral statement, illustration,
or other depiction used to induce the purchase of a service, plan,
or program. See Sec. 322.2(c) (adopting the proposed definition
without substantive modification). As detailed in Section III.D. of
this SBP, the Final Rule also adds to the proposed provision two
subprovisions defining ``general commercial communication'' and
``consumer-specific commercial communication.'' See Sec. Sec.
322.2(c)(1) & 322.2(c)(2). Section 322.2(c)(1) defines a ``general
commercial communication'' to be ``a commercial communication that
occurs prior to the consumer agreeing to permit the provider to seek
offers of mortgage assistance relief on behalf of the consumer, or
otherwise agreeing to use the mortgage assistance relief service,
and that is not directed at a specific consumer.'' Section
322.2(c)(2) defines a ``consumer-specific commercial communication''
as ``a commercial communication that occurs prior to the consumer
agreeing to permit the provider to seek offers of mortgage
assistance relief on behalf of the consumer, or otherwise agreeing
to use the mortgage assistance relief service, and that is directed
at a specific consumer.'' These definitions were added to clarify
the disclosure requirements in Sec. 322.4 of the Final Rule.
\141\ Where possible, in formulating the requirements of the
Rule, the Commission has drawn from comparable FTC rules requiring
clear and prominent disclosures. See Free Annual File Disclosures,
16 CFR 610.4 (2010) (Free Credit Report Rule); Disclosure
Requirements and Prohibitions Concerning Franchising, 16 CFR 436.6
(2007) (Franchise Rule); Disclosure Requirements and Prohibitions
Concerning Business Opportunities, 16 CFR 437.1 (Business
Opportunity Rule); Regulations Under Section 4 of the Fair Packaging
and Labeling Act, 16 CFR 500.4 (Fair Packaging and Labeling Act
Regulations); Trade Regulation Pursuant to the Telephone Disclosure
and Dispute Resolution Act of 1992, 16 CFR 308.2 (900 Number Rule);
Rule Concerning Cooling-Off Period for Sales Made at Home or at
Certain Other Locations, 16 CFR 429.1 (Door-to-Door Sales Rule). The
disclosure requirements also are consistent with those in many FTC
orders. See, e.g., Sears Holding Mgmt. Co., Docket No. C-4264, File
No. 082-3099 (FTC Sept. 9, 2009), available at http://www.ftc.gov/os/caselist/0823099/090604searsdo.pdf.
\142\ See Free Credit Report Rule, 16 CFR 610.4(3)(vi)
(prohibiting any representation that contradicts, is inconsistent
with, or undermines the required disclosures, and any techniques
that significantly detract from the message communicated by the
disclosures); 900 Number Rule, 16 CFR 308.3(a)(5); Franchise Rule,
16 CFR 436.9(a); Business Opportunity Rule, 16 CFR 437.1(a)(21).
\143\ See Free Credit Report Rule, 16 CFR 610.4(3)(ii) (same
language as that principally used in the advertisement); see also
NYC DCA at 7-8 (``The FTC should require MARS providers to offer all
mandated disclosures * * * in the languages used in their
advertising.''); LFSV at 2 (``The FTC should require that companies
that negotiate a contract primarily in a language other than English
provide a contract in the language in which the contract was
primarily negotiated.'').
---------------------------------------------------------------------------

a. Written Disclosures
The proposed rule set forth various requirements for disclosures
that must appear in consumer communications disseminated in print or
written form, including on a computer screen. The proposed rule
provided that such disclosures:

shall be in a font easily read by a reasonable consumer, of a
color or shade that readily contrasts with the background of the
commercial communication, in the same language as each that is
substantially used in the commercial communication, parallel to the
base of the commercial communication, and, except as otherwise
provided in this rule, each letter of the disclosure shall be, at a
minimum, the larger of 12-point type or one-half the size of the
largest letter or numeral used in the name of the advertised website
or telephone number to which consumers are referred to receive
information relating to any mortgage assistance relief service.

Section 322.2(a)(1) of the Final Rule largely retains these
requirements but modifies them slightly to improve the clarity and
effectiveness of the disclosures and to conform the relevant provisions
of the Final Rule to the Free Credit Report Rule the Commission
recently issued.\144\ The Final Rule therefore now specifies that a
written disclosure must be easily readable; in a high degree of
contrast from the immediate background on which it appears;\145\
distinct from other text, such as inside a border; and in a distinct
type style, such as bold.\146\ Unchanged, however, are the requirements
that the disclosure must be communicated in the same languages that are
substantially used in the commercial communication;\147\ and appear
parallel to the base of the communication\148\ and that, unless
otherwise specified, each letter of the disclosure text shall be, at a
minimum, the larger of 12-point type or one-half the size of the
largest character used in the name of the advertised website or
telephone number to which consumers are referred for information on any
MARS.\149\
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\144\ See Free Credit Report Rule, 16 CFR 610.4 (2010). The
Commission did not promulgate the Free Credit Report Rule until
after it issued the MARS NPRM. In that proceeding, unlike this one,
the Commission received numerous comments on how the rule should
address the prominence of the required disclosures, including
formatting and placement. Free Annual File Disclosures; Final Rule
75 FR 9733 (2010). Several commenters, for example, offered
suggestions on how to make visual disclosures prominent, including
placing them within a border in a box, and in a contrasting color.
Id. at 9734.
\145\ Free Credit Report Rule,16 CFR 610.4(a)(3)(iii); see also,
In re Tender Corp., Docket No. C-4261 (FTC July 17, 2009), available
at http://www.ftc.gov/os/caselist/0823188/090717tenderdo.pdf
(stating that disclosures must appear ``in print that contrasts with
the background against which it appears''); In re Budget Rent-A-Car-
System, Inc., Docket No. C-4212 (FTC Jan. 4, 2008), available at
http://www.ftc.gov/os/caselist/0623042/080104do.pdf (same); see also
FTC, Dot Com Disclosures: Information about Online Advertising 12
(2000), available at http://www.ftc.gov/bcp/edu/pubs/business/ecommerce/bus41.pdf (Dot Com Disclosures) (``A disclosure in a color
that contrasts with the background emphasizes the text of the
disclosure and makes it more noticeable. Information in a color that
blends in with the background of the advertisement is likely to be
missed.'').
\146\ Sections 322.4(a) and (b) of the Rule set forth additional
requirements for the heading that must precede written disclosures.
This heading must be in bold face font that is at least two-point
type larger than the font size of the text of the required
disclosures.
\147\ See also, e.g., Free Credit Report Rule, 16 CFR
610.4(a)(3)(ii); 900 Number Rule, 16 CFR 308.3(a)(1). If the
advertisement has substantial material in more than one language,
the MARS Rule requires that the disclosure be delivered in each such
language. Section 322.2(a)(1).
\148\ See, e.g., Swisher Int'l, Inc., Docket No. C-3964 (FTC
Aug. 25, 2000), available at http://www.ftc.gov/os/2000/08/swisherdo.htm (requiring warnings for cigars to appear ``parallel *
* * to the base of the * * * advertisement''); Fair Packaging and
Labeling Act Regulations, 16 CFR 500.4(b) (requiring that
identification for packaged goods appear ``in lines generally
parallel to the base on which the packaging or commodity rests as it
is designed to be displayed'').
\149\ See Free Credit Report Rule, 16 CFR 610.4(b)(3); see also
900 Number Rule, 16 CFR 308.
---------------------------------------------------------------------------

b. Audio Disclosures
Section 322.2(a)(2) addresses the use of disclosures in audio
communications such as broadcast radio or streaming radio. The proposed
rule required these disclosures to be ``delivered in a slow and
deliberate manner and in a volume and cadence sufficient for an
ordinary consumer to hear and comprehend them.'' As with the
requirements for written disclosures, the Commission has decided to
modify these requirements slightly to improve the clarity of the

[[Page 75104]]

requirements for audio disclosures and to be consistent with the Free
Credit Report Rule.\150\ Thus, the Final Rule requires MARS providers
to deliver the required disclosures ``in a slow and deliberate manner
and in a reasonably understandable volume and pitch.''\151\
---------------------------------------------------------------------------

\150\ See supra notes 141-49.
\151\ See Free Credit Report Rule, 16 CFR 610.4(a)(1)(3)(iv);
see also In re Sears Holding, Docket No. C-4264 (stating that audio
disclosures must be made ``in a volume and cadence sufficient for an
ordinary consumer to hear and comprehend them''); In re Darden
Rests., Inc., Docket No. C-4189 (FTC May 11, 2009), available at
http://www.ftc.gov/os/caselist/0623112/070510do0623112c4189.pdf
(same); In re Kmart Corp., Docket No. C-4197 (FTC Aug. 15, 2007),
available at http://www.ftc.gov/os/caselist/0623088/0623088do.pdf
(same); In re Palm, Inc., Docket No. C-4044 (FTC Apr. 19, 2002),
available at http://www.ftc.gov/os/caselist/0023332/index.shtm
(same); Dot Com Disclosures, supra note 145, at 14 (same).
---------------------------------------------------------------------------

c. Video Disclosures
Section 322.2(a)(3) of the Final Rule adopts the proposed rule's
video disclosure requirements without modification. Video
communications include those that appear on television or are streamed
over the Internet. As a threshold matter, these disclosures must be
delivered in accordance with the requirements for written and audio
disclosures in Sec. Sec. 322.2(a)(1) and (2). In addition, the
disclosures must be made simultaneously in both audio and video,\152\
the latter of which must be displayed for at least the duration of the
audio disclosure and comprise at least four percent of the vertical
picture height of the screen.\153\
---------------------------------------------------------------------------

\152\ Disclosures generally are more effective if they are made
in both the visual and audio part of a consumer communication. See
generally Maria Grubbs Hoy & J. Craig Andrews, Adherence of Prime-
Time Televised Advertising Disclosures to the ``Clear and
Conspicuous'' Standard: 1990 Versus 2002, 23 J. Mktg. Pub. Pol. 170
(2004) (stating that ``dual modality'' disclosures--oral and visual
together--are more effective at communicating information to
consumers); see also In re Kraft, Inc., 114 F.T.C. 40 (1991)
(finding that a visual disclosure alone was unlikely to be effective
as a corrective measure in light of ``the distracting visual and
audio elements and the brief appearance of a complex superscript in
the middle of the commercial''), aff'd, 970 F.2d 311 (7th Cir.
1992).
\153\ See Federal Election Commission Rules: Contributions and
Expenditure Limitations and Prohibitions, 11 CFR
110.11(c)(3)(iii)(B)-(C) (statement concerning funding source for
political ads ``must appear in letters equal to or greater than four
(4) percent of the vertical picture height'' and ``be visible for a
period of at least (4) four seconds'').
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d. Interactive Media
Section 322.2(a)(4) of the Final Rule addresses how disclosures
must be made in interactive media formats, such as software, the
Internet, or mobile media. As in proposed Sec. 322.2(a)(4), the
disclosures must conform with the requirements for written, audio, and
video disclosures set forth in other parts of the ``clear and
prominent'' definition. In addition, the disclosures must be provided
in a way that the consumer cannot avoid the information, i.e., it must
be visible without the need to scroll down a Web page. The Final Rule
makes two minor modifications to the proposed rule. First, it modifies
the requirement that the disclosure be made on a separate landing page
from the page on which the consumer takes any action to incur a
financial obligation. The disclosure instead must be made on or
immediately prior to the page on which the consumer takes any action to
incur a financial obligation.\154\ Second, the Final Rule mandates that
the disclosure appear in text at least the same size as the largest
character of the advertisement, replacing the proposed rule's
requirement that it be twice the size of any hyperlink to the company's
website or display of the URL. Both of these modifications are intended
to ensure that consumers see mandated disclosures before they decide
whether to purchase a mortgage assistance relief service.\155\
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\154\ The Commission declines to require in the Final Rule that
information be disclosed on a separate landing page, because this
requirement may not be feasible or effective in some contexts, cf.
Free Credit Report Rule; Final Rule, 75 FR 9726, 9737 (Mar. 6,
2010), and there is no evidence in the record addressing its
effectiveness in this context.
\155\ See Dot Com Disclosures, supra note 145, at 11 (explaining
that disclosures are more likely to be effective if they are
provided when the consumer is considering the purchase).
---------------------------------------------------------------------------

e. Program-Length Media
Section 322.2(a)(6) of the Final Rule, which adopts the proposed
rule without modification, requires that disclosures in program-length
television, radio, and Internet-based advertisements for MARS be
presented at the beginning, near the middle, and at the end of the
advertisement.\156\ Requiring that disclosures be delivered at
different stages of the broadcast makes it more likely that consumers
who join the broadcast in progress will receive them.
---------------------------------------------------------------------------

\156\ See Free Credit Report Rule, 16 CFR 610.4(a)(3)(v).
Section 308.3(a)(6) of the 900 Rule also imposes a nearly-identical
requirement. 16 CFR 308.3(a)(6).
---------------------------------------------------------------------------

3. Section 322.2(j): ``Mortgage Assistance Relief Service Provider''
a. Exemption for Loan Holders and Servicers
Under Sec. 322.2(j) of the Final Rule, ``any person that provides,
offers to provide, or arranges for others to provide, any mortgage
assistance relief service'' is a ``mortgage assistance relief service
provider,'' \157\ and thus subject to the Rule. The proposed rule
generally exempted from its provisions loan holders and servicers, and
agents of such entities unless the agents ``claim, demand, charge,
collect, or receive any money or other valuable consideration from the
consumer for the agent's benefit.'' \158\
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\157\ Section 322.2(j).
\158\ See Sec. 322.2(i) (proposed rule). This limiting language
was intended to ensure that MARS providers could not evade the Rule
by styling themselves as ``agents'' of the lender or servicer.
---------------------------------------------------------------------------

In the NPRM, the Commission specifically sought comment on the
proposed exemption for loan holders and servicers.\159\ Lenders and
servicers (who actually have the authority to change loan terms) may
offer MARS that the Rule would cover in the absence of an
exemption.\160\ For example, a lender or servicer may notify a consumer
of her eligibility for a loan modification under the MHA program and
assist her in submitting the necessary paperwork.\161\ In addition,
lenders and servicers may outsource these functions to other parties
who operate on their behalf. Such outsourcing is a common method of
providing these services given the large number of consumers currently
requesting assistance.\162\
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\159\ See MARS NPRM, 75 FR at 10728.
\160\ See, e.g., CMC (ANPR) at 5 (``Servicers are increasingly
turning to third-party service-providers to assist them in
processing loan modifications and in other loss-mitigation
activities.''); Am. Bankers Ass'n (ANPR) at 4-6; AFSA (ANPR) at 3,
5; MBA (ANPR) at 4.
\161\ See, e.g., AFSA at 3 (stating that mortgage servicers
engage in the same forms of communication that would be covered
under the Rule ``to make the consumer aware of the availability of
possible loss mitigation options and to encourage the consumer to
contact the mortgage servicer directly, which is a critical
component of any loss mitigation policy by a mortgage servicer to
assist consumers''); MBA (ANPR) at 4 (stating that mortgage
servicers collect payments, conduct borrower contact and outreach,
and execute loan modification or other loss mitigation agreements).
\162\ See, e.g., David Lawder, Few US Mortgage Modifications
Made Permanent, Reuters Dec. 10, 2009, available at http://www.reuters.com/article/idUSN1021463420091210 (referring to a
company that ``has been hired by some of the largest U.S. banks to
assist in modification efforts'').
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Several comments from the financial services industry and consumer
groups expressly supported the proposed exemption for lenders and
servicers,\163\

[[Page 75105]]

but some recommended modifications to its scope.\164\ Three commenters
said that the Rule should cover lenders and servicers.\165\
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\163\ See AFSA at 2-3 (The Rule is ``not intended to regulate
mortgage holders and servicers, but to stop for-profit MARS
providers from harming consumers. The FTC is currently drafting
proposed rules for mortgage acts and practices. That rule, rather
than this MARS rule, is the appropriate place to consider additional
regulations for mortgage holders and servicers.''); CUUS at 3
(``Consumers Union agrees that lenders and servicers should be
exempted from the definition of `mortgage assistance relief
services.''' Consumers Union is not aware of any lenders or
servicers actively marketing MARS services for a fee to their
customers.''); CUNA at 2 (``We strongly urge the FTC to retain this
exemption in the Final Rule. Credit unions have not been the source
of any problems for home loan borrowers and do not need additional
rules to ensure they act in their members' best interests.''); CSBS
at 2-3 (``We support the Commission's inclination to generally
exempt loan holders and servicers, as well as their agents, and
nonprofit entities excluded from the FTC's jurisdiction from the
definition of mortgage assistance relief service provider.''); MBA
at 3-4 (``We are pleased that the proposed rule specifically
excludes mortgage servicers.'').
\164\ CUUS at 3 (``The Rule should specify that the only lender
or servicer qualifying for this exemption is the one currently
holding the mortgage loan of the homeowner retaining the services of
a MARS entity.''). But see MBA at 4 (the rule should exempt
contractors of lenders and servicers); AFSA at 3-4 (servicers'
agents and contractors that request or collect fees for their own
benefit should not be excluded from the exemption). One commenter
also requested that the Rule specify that ``certain up-front fees
are permissible by a licensed mortgage company, servicer or
depository institution when necessary to execute a refinance,
modification, or other loss mitigation agreement.'' MBA at 4. As
discussed, the rule does not apply to loan holders or servicers, and
thus does not govern these activities.
\165\ One of the three commenters argued that lenders and
servicers do not properly inform consumers of their foreclosure
risks, lose paperwork associated with loan modification requests,
fail to process these requests correctly, and mislead consumers
about their eligibility for permanent loan modifications. See OPLC
at 2. Another said it was aware of servicers who instructed
homeowners to stop making payments and, in some cases, required
homeowners to pay a fee to be considered for a loan modification.
LOLLAF at 2-3. In opposing the exemption, a third commenter, a MARS
provider, claimed that some lenders are ``staffing up to create
their own MARS entities'' but did not elaborate further. See 1st
ALC, Att. at 7. However, these practices fall outside of the scope
of this rulemaking, which is focused on the conduct of
intermediaries who consumers retain to work with their lenders.
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The Commission has determined that the record supports an exemption
for lenders and servicers. These lenders and servicers might provide
useful MARS to consumers, and nothing in the record shows that such
entities have engaged in the core conduct addressed by the Final Rule,
i.e., deceiving consumers into paying large advance fees for services
and not delivering promised results.\166\
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\166\ CUUS at 3 (``Consumers Union is not aware of any lenders
or servicers actively marketing MARS services for a fee to their
customers.''); NAAG (ANPR) at 13 (``We are unaware of any banks,
thrifts or federal credit unions engaged in for-profit loan
modification or foreclosure rescue services, aside from negotiating
loan modifications for consumers whose loans they are servicing.'');
Am. Bankers Ass'n (ABA) (ANPR) at 6; AFSA (ANPR) at 3; HPC (ANPR) at
2; OH AG (ANPR) at 5.
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Thus, the Commission adopts the exemption in the proposed rule for
lenders and servicers, but with three modifications.\167\ First, the
Commission has modified the definitions of ``servicer'' and ``dwelling
loan holder'' in Sec. Sec. 322.2(l) and 322.2(g), respectively, to
limit the exemption to loan holders and servicers of loans ``that [are]
the subject of the offer to provide mortgage assistance relief
services.'' \168\ This modification clarifies that there is no blanket
exemption for lenders and servicers based solely on their status,\169\
but rather that the Final Rule exempts such entities only if they offer
MARS in connection with loans they actually hold or service.
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\167\ Section 322.2(j)(1)-(2).
\168\ ``Dwelling loan holder'' is defined in Sec. 322.2(g) as
``any individual or entity who holds the dwelling loan that is the
subject of the offer to provide mortgage assistance relief
services.'' Section 322.2(l) defines ``servicer'' as ``the
individual or entity responsible for (1) receiving any scheduled
periodic payments from a consumer pursuant to the terms of the
dwelling loan that is the subject of the offer to provide mortgage
assistance relief services, including amounts for escrow accounts
under section 10 of the Real Estate Settlement Procedures Act (12
U.S.C. 2609), and (2) making the payments of principal and interest
and such other payments with respect to the amounts received from
the consumer as may be required pursuant to the terms of the
mortgage servicing loan documents or servicing contract.'' This
definition draws upon the definition of servicer in the Real Estate
Settlement Procedures Act. See 12 U.S.C. 2605(i). As noted above,
the Final Rule adds the phrase ``that is the subject of an offer to
provide mortgage assistance relief services'' to the proposed
definitions of ``dwelling loan holder'' and ``servicer.''
\169\ See CUUS at 3 (``[C]onsumers Union is concerned that the
lender or servicer exemptions may be used by MARS entities who
otherwise provide or service loans and are technically lenders or
servicers, but are not the lenders or servicers for the mortgage
loan that is the subject of MARS services.'')
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The second change to the exemption clarifies that it encompasses
both agents and contractors of lenders and servicers. Specifically,
Sec. Sec. 322.2(j)(1) and (2) have been changed to include not only
loan holders and servicers as well as their agents, but also
``contractor[s] of such individual[s] or entit[ies].'' \170\ Adding the
term ``contractor'' makes clear that the exemption would apply to third
parties with whom lenders and servicers technically do not have an
agency relationship as a matter of law, but who nevertheless perform
MARS on their behalf.\171\
---------------------------------------------------------------------------

\170\ Section 322.2(j).
\171\ See MBA at 4 (contractors under the supervision and
control of the servicer do not ``pose the risk of a foreclosure scam
or phantom help'').
---------------------------------------------------------------------------

Third, the Commission has determined to remove the language in the
proposed rule that would exclude from the exemption third parties who
``claim, demand, charge, collect, or receive any money or other
valuable consideration from the consumer for the agent's benefit.''
Such language would have resulted in the Rule covering agents and
contractors that lenders and servicers may pay on a contingency or
commission basis.\172\ The Rule is not intended to restrict how lenders
and servicers choose to compensate third parties that perform MARS
functions on their behalf. Further, the Commission concludes that such
a restriction on the exemption is not necessary to prevent third
parties from improperly claiming an exemption in order to collect
advance fees for MARS from consumers. The exemption applies only to
those activities conducted within the scope of their agency or
contractor relationship with exempted lenders and servicers. Thus, if
they collect fees for MARS not performed on behalf of the lender or
servicer, they would be subject to the Rule's requirements.
---------------------------------------------------------------------------

\172\ See AFSA at 3-4 (describing use of employee incentive
programs and attorneys who work on a contingency).
---------------------------------------------------------------------------

b. Treatment of Nonprofit Providers of Mortgage Relief Services
Section 322.2(k) of the Final Rule retains without substantive
modification the exemption for nonprofit entities that was included in
the proposed rule.\173\ Nonprofits are excluded from the FTC's
jurisdiction under the FTC Act and, therefore, they are exempt from
rules issued pursuant to the Omnibus Appropriations Act.\174\ This
exemption includes bona fide nonprofit organizations with housing
counselors offering MARS and nonprofit legal organizations representing
financially stressed consumers.\175\ The FTC, however, does have
jurisdiction over purported nonprofits that in fact operate for the
profit of their members,\176\ and Sec. 322.2(k) does not exempt these
entities.\177\
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\173\ To improve the organization and clarity of the Rule text,
however, the Commission has deleted proposed Sec. 322.2(j)(3), and
altered the definition of ``person'' in Sec. 322.2(k) of the Final
Rule--the foundational term of ``mortgage assistance relief service
provider''-- to exclude ``any person [that] is specifically excluded
from the Federal Trade Commission's jurisdiction pursuant to 15
U.S.C. 44 and 45(a)(2).''
\174\ Section 5(a)(2) of the FTC Act states: ``The Commission is
hereby empowered and directed to prevent persons, partnerships, or
corporations * * * from using unfair or deceptive acts or practices
in or affecting commerce.'' 15 U.S.C. 45(a)(2). Section 4 of the Act
defines ``corporation'' to include: ``any company, trust, so-called
Massachusetts trust, or association, incorporated or unincorporated,
which is organized to carry on business for its own profit or that
of its members.'' 15 U.S.C. 44 (emphasis added).
\175\ These nonprofit services are described in more detail in
Section II.C. of the ANPR. MARS ANPR, 74 FR at 26135.
\176\ See, e.g., AMA v. FTC, 638 F.2d 443 (2d Cir. 1980); FTC v.
Ameridebt, Inc., 343 F. Supp. 2d 451 (D. Md. 2004).
\177\ An entity that is registered as a tax exempt nonprofit
under the Internal Revenue Code is not necessarily considered a
nonprofit for the purposes of the exemption in the FTC Act. See,
e.g., FTC v. Ameridebt, Inc., 343 F. Supp. 2d 451, 460-61 (D. Md.
2004).

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[[Page 75106]]

C. Section 322.3: Prohibited Representations

Section 322.3 of the Final Rule prohibits MARS providers from
making certain representations or misrepresentations in connection with
mortgage assistance relief services.
1. Section 322.3(a): Prohibited Statement
Section 322.3(a) of the Final Rule bans MARS providers from
instructing consumers not to communicate with their lender or servicer.
The Commission has concluded that giving such instruction is an unfair
practice. In addition, the Commission has concluded that barring such
instruction is reasonably related to the prevention of deception. The
provision in the Final Rule is slightly modified from the proposed
rule, as detailed below.
a. Public Comments on the Proposed Provision
Several commenters supported the ban on instructing consumers not
to speak with their lender or servicer, including two consumer groups,
a consortium of state banking regulators, and two trade groups for the
financial services industry.\178\ The comments generally warned that
financially-distressed consumers who receive this advice from purported
MARS experts and follow it are prevented from receiving valuable
information from their lender or servicer. More specifically, consumers
who cease such communications prior to purchasing MARS do not learn
about workout or modification offers available from their lender or
servicer,\179\ as well as other information that may be material in
evaluating the veracity of the claims made by the MARS provider about
its services.\180\ Consumers who stop communicating with their lenders
or servicers after purchasing MARS may not learn that the MARS provider
is not taking the actions necessary to deliver the results it
promised.\181\ Finally, in some cases, both before and after purchasing
MARS, consumers who do not communicate with their lenders or servicers
may not know that foreclosure and loss of their home is imminent.\182\
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\178\ See, e.g., CUUS at 3 (``strongly support[ ] the Rule's
prohibition on any representation that would encourage consumers not
to speak with their servicer or lender''); LOLLAF at 3 (``endorse[ ]
the proposed rule's ban on MARS providers advising consumers not to
contact their mortgage lenders and servicers''); CSBS at 3 (supports
prohibiting MARS providers from instructing consumers not to contact
their lenders or servicers but agrees with limited exemption for
attorneys); AFSA at 4 (``strongly support[ ] proposed Sec.
322.3(a). MARS providers should be banned from advising consumers
not to contact or communicate with their lenders or servicers * * *
[T]elling a borrower not to contact a lender or servicer is the
worst advice someone can give a borrower at risk or in default.'').
\179\ AFSA at 4 (``If lenders and servicers are unable to
contact borrowers, they are unable to offer workouts or loan
modifications.''); LOLLAF at 3 (``[O]ngoing communication with
mortgage servicers is key to any homeowner negotiating a workout to
save their home from foreclosure.'').
\180\ CUUS at 3 (``[T]he foreclosure clock continues to run, and
rather than seeking help from a legitimate non-profit housing
counseling agency, the homeowner is diverted away from legitimate
sources of help by the MARS provider's assurances that they will
deliver results.''); see also CRC (ANPR) at 7 (``People who do not
have a chance of keeping the home are being steered away from
legitimate, free homeowner counseling services or are failing to
take any action before it is too late because they have been assured
everything is being taken care of for them already. All too often,
it is not.'').
\181\ LOLLAF at 3 (``[C]ommunication with a servicer may allow a
homeowner to determine whether or not the MARS provider is providing
any service on his or her behalf, as that provider promised.'');
CUUS at 3 (``Consumers report often being instructed by MARS
providers to cease all communication with their lenders and/or loan
servicers, even though the provider subsequently does nothing of
value on the homeowner's behalf.'').
\182\ AFSA at 4 (``[L]enders and servicers would be unable to
warn a borrower of a potential foreclosure.''); LOLLAF at 3
(``[U]rging a homeowner not to communicate with his/her servicers
only increases the likelihood that a homeowner will end up in
foreclosure, as well as burdened with additional late charges and
other fees.'').
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A few commenters objected to this prohibition as it applied to
attorneys, voicing concern that it would prevent attorneys from
properly advising their clients as to their mortgages.\183\ As
described in Sec. III.G. of this SBP, the Final Rule exempts from
Sec. 322.3(a) attorneys who provide MARS when they meet certain
conditions.
---------------------------------------------------------------------------

\183\ See, e.g., ABA at 5; Bronson at 5.
---------------------------------------------------------------------------

b. Final Section 322.3(a)
Section 322.3(a) of the Final Rule adopts the proposed rule's
prohibition on the instruction,\184\ with one clarification. The
proposed rule prohibited MARS providers from giving consumers such
instruction ``in connection with the advertising, marketing, promotion,
offering for sale, or sale'' of mortgage assistance relief services.
The Final Rule clarifies that MARS providers also are prohibited from
giving consumers such instruction in connection with performing
services under their contracts. This change is consistent with the
discussion of the scope of the prohibition in the NPRM,\185\ and with
the comments indicating that consumers who follow this instruction are
likely to be harmed even after purchasing MARS.
---------------------------------------------------------------------------

\184\ The Final Rule does not prohibit MARS providers from
discussing with consumers the advantages and disadvantages of
communicating with their lenders and servicers, so long as providers
do not make any deceptive claims in doing so. Rather, the Final Rule
bars MARS providers from instructing consumers not to engage in
these communications.
\185\ MARS NPRM, 75 FR at 10715-16.
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c. Legal Basis
(1) Unfairness
The Commission concludes that it is an unfair practice for MARS
providers to instruct consumers not to communicate with their lenders
or servicers, because that instruction:
(1) Causes or is likely to cause substantial injury to
consumers,\186\ (2) that is not outweighed by countervailing benefits
to consumers or competition, and (3) is not reasonably avoidable by
consumers.\187\
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\186\ To establish that an act or practice is unfair, the
Commission must demonstrate actual or likely consumer injury. 15
U.S.C. 45(n).
\187\ 15 U.S.C. 45(n) (codifying the Commission's unfairness
analysis); see also In re Int'l Harvester Co., 104 F.T.C. 949, 1079,
1074 n.3 (1984), reprinting Letter from the FTC to Hon. Wendell Ford
and Hon. John Danforth, Comm. on Commerce, Sci. and Transp., United
States Senate, Commission Statement of Policy on the Scope of
Consumer Unfairness Jurisdiction (Dec. 17, 1980) (``Unfairness
Policy Statement'').
---------------------------------------------------------------------------

First, consumers who follow this instruction suffer or are likely
to suffer substantial injury. As the commenters noted, consumers who
stop communicating with their lender or servicer are deprived of
critical information about (1) possible work-out options, (2) the
veracity of the provider's claims, (3) whether the provider is actually
performing, and (4) in some cases, that foreclosure and the loss of
their homes is imminent. Consumers who lack this information may end up
paying hundreds or thousands of dollars for MARS services that do not
provide the promised relief, and may even lose their homes.\188\
---------------------------------------------------------------------------

\188\ The FTC has observed these losses repeatedly in its law
enforcement work. See, e.g., FTC v. Loss Mitigation Servs., Inc.,
No. SACV09-800 DOC (ANX), Mem. Supp. Ex Parte TRO at 18-19 (C.D.
Cal. filed July 13, 2009) (``In numerous instances, Defendants have
warned consumers that any contact with their lenders will hinder
Defendants' modification negotiations, and have threatened to drop
consumers and deny them refunds if they independently talk to their
lenders. Relying on this advice, many consumers avoid their lenders
during critical periods, including after receiving notices of
default or foreclosure, or other important communications. * * * At
that point the cumulative effects of Defendant's misrepresentations
are devastating * * * [including that] many consumers have lost
their homes.'') (citations omitted); FTC v. Kirkland Young, LLC, No.
09-23507, Mem. Supp. P.I. at 19 (S.D. Fla. filed Nov. 24, 2009)
(``[By] attempting to sever communications between consumers and
their lenders, Defendants harm consumers. * * * The cost to
consumers is both in time and money, which are obviously important
to consumers who are behind on their mortgages and facing the threat
of foreclosure on their family's home.''); FTC v. US Foreclosure
Relief Corp., No. SACV09-768 JVS (MGX), Mem. Supp. TRO at 12 (C.D.
Cal. filed July 7, 2009) (``At the company's behest, consumers also
stopped answering inquiries from their lenders, and therefore did
not realize that their modifications were not in process and that
their homes might be at risk. * * * Defendants' inaction caused some
lenders to begin foreclosure proceedings against consumers. Other
consumers lost their homes.''); FTC v. Truman Foreclosure
Assistance, LLC, No. 09-23543, Mem. Supp. P.I. at 20 (S.D. Fla.
filed Nov. 23, 2009) (``When consumers speak with their lenders
directly, they often discover that Defendants had not yet contacted
the lender or only had left messages or had non-substantive contacts
with the lender.'').

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[[Page 75107]]

Second, the injury is not outweighed by any countervailing benefits
to consumers or competition. There is nothing in the record suggesting
that there are any circumstances in which a non-attorney MARS
provider's instruction not to communicate with a consumer's lender or
servicer would benefit the consumer.\189\ Similarly, nothing in the
record, including the comments of MARS providers, identifies any
benefits to competition from such an instruction. A ``benefit'' this
practice might bring is to increase MARS providers' revenues by
increasing the number of consumers who decide to contract with them.
Such ``benefits'' are not cognizable in an unfairness analysis.\190\
Consequently, the Commission concludes that there are no benefits to
consumers or competition from this act or practice, and, even if there
were, they clearly are outweighed by the substantial injury to
consumers discussed above.
---------------------------------------------------------------------------

\189\ Cf Section III.G.3. (discussing the possible benefits to
consumers when attorneys who represent them in legal matters give an
instruction to stop communicating with adverse parties such as their
lenders or servicers).
\190\ Increased revenues or profits to a seller engaged in an
act or practice are not necessarily a benefit to competition for
purposes of unfairness analysis because ``[t]he benefit [from the
conduct] must be to * * * competition--not simply to the actor.'' J.
Howard Beales, III, The FTC's Use of Unfairness Authority: Its Rise,
Fall, and Resurrection, 2003 WL 21501809, at *14 n.51 (2003); see In
re Orkin Exterminating Co., 108 F.T.C. 263, 364-65 (1986)
(discussing benefits to process of competition), aff'd 849 F.2d 1354
(11th Cir. 1988); FTC v. J.K. Publications, Inc., 99 F.Supp.2d 1176
(C.D. Cal. 2000); FTC v. Windward Mktg, No. 1:96-CV-615-FMH, 1997
U.S. Dist. LEXIS 17114, *29-30 (N.D. Ga. Sept. 30, 1997).
---------------------------------------------------------------------------

Finally, consumers cannot reasonably avoid the injury this act or
practice causes. Many consumers are unaware of the negative
consequences of failing to communicate with their lender or servicer.
Moreover, the claims many MARS providers make that they have
specialized expertise \191\ make it less likely that consumers will
disregard or discount their advice. As a result, consumers cannot
reasonably avoid the harm from such instructions.
---------------------------------------------------------------------------

\191\ See supra notes 51-53.
---------------------------------------------------------------------------

The Commission therefore concludes that MARS providers instructing
consumers not to communicate with their lenders or servicers is an
unfair act or practice. The Final Rule's prohibition on this
instruction is intended to preserve and foster consumer access to
information from lenders and servicers that may shed light on issues
critical to consumers' decision making and their well-being.
(2) Prevention of Deception
The Final Rule's prohibition on instructing consumers not to
communicate with their lenders and servicers will remove a barrier to
consumers obtaining information that will enable them to evaluate the
truth and accuracy of the provider's claims and to gauge the provider's
performance against those claims. This provision thus will help
consumers avoid being deceived. Accordingly, the Commission has
concluded that this prohibition is reasonably related to the goal of
preventing deception.\192\
---------------------------------------------------------------------------

\192\ The Commission concludes that prohibiting MARS providers
from instructing consumers to stop communicating with their lender
or servicer does not violate the First Amendment. The Rule restricts
speech that is ``commercial'' in nature because it arises in the
context of a commercial transaction and is ``expression related
solely to the economic interests of the speaker and its audience.''
Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n, 447 U.S. 557,
561 (1980). The intermediate scrutiny standard applies to
restrictions on nonmisleading commercial speech. Milavetz, Gallop &
Milavetz, P.A. v. United States, 130 S. Ct 1324, 1339
(2010), slip op. at 19; Conn. State Bar Ass'n v. United States,
620 F.3d 81, 95 (2d Cir. 2010).
To pass constitutional muster, commercial speech restrictions
subject to intermediate scrutiny must satisfy the test the Court set
forth in Central Hudson. Cent. Hudson Gas & Elec. Corp., 447 U.S. at
566. The Final Rule's prohibition on instructing consumers not to
communicate with their lenders and servicers satisfies this test.
First, the prohibition serves a substantial governmental interest in
ensuring that financially distressed consumers who face foreclosure
have access to information that may prevent injury and may be
critical to their ability to make decisions free of deception and
confusion. See, e.g., Friedman v. Rogers, 440 U.S. 1, 16 (1979)
(upholding ban on use of trade names by optometrists because
``[r]ather than stifling commercial speech, [the ban] ensures that
information regarding optometrical services will be communicated
more fully and accurately to consumers''). Second, prohibiting the
instruction directly advances this goal by removing impediments to
the availability of this information to consumers. Third, there is a
reasonable fit between the problem--MARS providers impeding
consumers' access to critical information--and the solution, which
would remove the impediment. Moreover, alternatives that are less
restrictive of speech, such as a disclosure remedy, would not be
effective means of achieving the goal. See, e.g., Pearson v.
Shalala, 164 F.3d 650, 659 (DC Cir. 1999) (noting that the banning
of a claim may be permissible where a disclosure would not eliminate
the harm the claim causes). For example, if MARS providers were
permitted to instruct consumers not to communicate with their lender
or servicer, but were required to disclose that these entities may
have information that would be valuable to consumers, the
inconsistent and contradictory nature of these statements would not
prevent deception and would, at best, confuse consumers. See, e.g.,
Deception Policy Statement, infra note 200, at 180; Thompson Med.
Co., 104 F.T.C. at 842-43; In re Figgie Int'l, Inc., 107 F.T.C. 313,
401 (1986), aff'd sub nom, Figgie Int'l Inc. v. FTC, 817 F.2d 102
(4th Cir. 1987) (unpublished table decision).
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d. Recommendations by Commenters Not Adopted
Several commenters, including a consortium of state attorneys
general and a consumer group, recommended that the Commission adopt an
additional prohibition, not included in proposed Sec. 322.3(a), that
would ban providers from instructing consumers to stop making their
mortgage payments.\193\ The commenters asserted that MARS providers
commonly mislead consumers concerning the consequences of not paying on
their mortgages, for example, by telling them that lenders will not
work with them unless they stop paying.\194\
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\193\ CUUS at 3 (``MARS providers should be prohibited from
advising current or prospective clients who are not yet in default
to stop making payments on their mortgage loans.''); NAAG at 4
(``[W]e would suggest making clear that consultants may not advise
consumers not to pay their mortgages.'').
\194\ See, e.g., NAAG at 4 (``We are aware of a number of rescue
consultants who incorrectly claim that consumers' lenders will not
work with them until they are behind on their mortgage payments. We
also are aware of consultants who advise consumers not to make
mortgage payments so that they will be able to afford mortgage loan
modification fees.''); CUUS at 3 (``Consumers often report being
instructed by for-profit MARS entities to stop making mortgage
payments in order to qualify for loan modification services or other
forms of foreclosure relief.'').
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The Commission declines to adopt this prohibition. The benefits and
costs to consumers of failing to pay their mortgage depend on their
individual circumstances. In most instances, it is not in the best
interest of a consumer to stop paying,\195\ yet there are some, albeit
limited, circumstances in which it might be beneficial for some
consumers to do so.\196\ The Commission declines to

[[Page 75108]]

adopt the recommended prohibition because it could prevent MARS
providers from disseminating truthful, non-misleading information that
could be useful to some consumers.
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\195\ CUUS at 3 (Consumers are ``often unaware that [following
MARS providers' advice to stop paying their mortgage] may ruin their
credit scores and lead to fewer options to avoid foreclosure.'');
CUNA at 2 (following this instruction ``only serves to increase the
overall mortgage debt in addition to the fees and other penalties
that result when payments to the servicer or lender are not made in
a timely manner'').
\196\ For example, the record suggests that some lenders, in the
current financial crisis, may be more responsive to borrowers who
are delinquent, especially if the borrower would not qualify for a
loan modification under various government programs. See, e.g.,
Suzanne Capner, Lenders Await Call Back After Mobile Giveaway, Fin.
Times, Jun. 28, 2010 (some lenders are sending mobile phones
programmed to call their loss mitigation departments to delinquent
borrowers and offering them lower monthly payments when borrowers
call), available at http://www.ft.com/cms/s/0/d6df8bec-82fe-11df-8b15-00144feabdc0.html; David Streitfeld & Louise Story, Bank of
America to Reduce Mortgage Balances, N.Y. Times, Mar. 24, 2010,
available at http://www.nytimes.com/2010/03/25/business/25housing.html (Bank of America offers mortgage balance reductions
up to 30% to borrowers at least 60 days delinquent on their loans).
How effective a consumer may be in leveraging delinquency is highly
dependent on the particular lender, the type of loan, and the
consumer's financial situation.
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Nevertheless, the Commission recognizes that most consumers would
be harmed if they complied with a MARS provider's instruction to stop
paying on their mortgages. Therefore, as discussed more fully in Sec.
III.D. of this SBP, the Final Rule requires that if providers instruct
consumers not to pay on their mortgages, they must disclose clearly and
prominently that not paying may cause consumers to lose their home and
damage their credit rating.\197\
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\197\ See Sec. 322.4(c).
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2. Section 322.3(b): Prohibited Misrepresentations
a. Proposed Provision
Section 322.3(b) of the proposed rule prohibited express or implied
misrepresentations of any material aspect of any mortgage assistance
relief service. To provide clarity and guidance to the industry,
proposed Sec. Sec. 322.3(b)(1)-(7) set forth a non-exhaustive list of
specific misrepresentations that would violate the Rule, including
misrepresentations about the following:
(1) The likelihood of negotiating, obtaining, or arranging a
specific form of mortgage relief;
(2) The amount of time needed to obtain the promised mortgage
relief;
(3) The affiliation of the provider with the government, public
programs, or consumers' lenders or servicers;
(4) Consumers' payment obligations under their mortgage loans;
(5) The terms or conditions of consumers' mortgage loans;
(6) The provider's refund and cancellation policies; and
(7) That the provider has performed the promised services or has
the right to demand payment.
The Commission received only a few comments specifically addressing
this proposed provision. The comments were generally supportive and did
not recommended substantive modification to the proposed exemplar
misrepresentations \198\--although some commenters recommended adding
additional examples, as detailed below.
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\198\ CUUS at 4 (``Consumers Union supports the non-exclusive
enumeration of other misrepresentations that give rise to a
violation under the proposed rule.''); CSBS at 3 (``We endorse the
Commission's effort to prohibit misrepresentations of any material
aspect of any MARS.''); LOLLAF at 3 (``The prohibited
misrepresentations enumerated in the proposed rule accurately target
the deceptive conduct that it is intended to prevent and may help
dispel the misconceptions that consumers hold regarding MARS
providers.''); MBA at 2.
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b. Final Section 322.3(b)
Section 322.3(b) of the Final Rule, like the proposed rule,
prohibits misrepresenting any material aspect of any MARS, to prevent
deception. The Final Rule also adopts proposed Sec. Sec. 322.3(b)(1)-
(7) without substantive modification, but adds five examples of
prohibited misrepresentations: (a) Misrepresentations about whether
consumers will receive legal services; (b) misrepresentations of the
benefits and costs of using alternatives to for-profit MARS to obtain
relief, such as working with the consumer's lender or servicer directly
or consulting with a nonprofit housing counselor; (c)
misrepresentations regarding the amount or percentage of debts that
consumers may save by purchasing MARS; (d) misrepresentations regarding
the total costs consumers must pay to purchase MARS; and (e)
misrepresentations regarding the terms, conditions, or limitations of
any offer of MARS the provider obtains from the consumer's lender or
servicer, including the amount of time the consumer has to accept or
reject the offer.\199\
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\199\ Sections 322.3(b)(8)-(12).
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A claim is ``deceptive'' under Section 5 of the FTC Act if there is
``a representation or omission of fact that is likely to mislead
consumers acting reasonably under the circumstances, and that
representation or omission is material.'' \200\ A representation is
material if it is likely to influence consumers' decisions or
conduct.\201\ The types of misrepresentations specified in Sec. Sec.
322.3(b)(1)-(12) of the Final Rule are presumed to be material to
consumers because they pertain to the cost, central characteristics,
efficacy, or other important attributes of MARS.\202\
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\200\ Federal Trade Commission Policy Statement on Deception,
appended to In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174-83
(1984) (``Deception Policy Statement'').
\201\ Id. at 182-83.
\202\ Id. at 182-83.
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The exemplar misrepresentations specified in the Final Rule track
the types of false or misleading claims that the Commission and the
states have challenged in law enforcement actions against MARS
providers, as described in Sec. II.C. of this SBP, and also address
additional deceptive practices identified in the comments.
Sections 322.3(b)(1) and (2) prohibit MARS providers from
misrepresenting ``[t]he likelihood of negotiating, obtaining, or
arranging any represented service or result'' and ``the amount of time
it will take'' to do so. As discussed in Sec. II of this SBP, MARS
providers commonly persuade consumers to purchase their services with
false or misleading promises that they can achieve specific successful
results in a short time frame.\203\ This type of information is central
to consumers' decisions to purchase MARS.
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\203\ See supra notes 70 & 75.
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Section 322.3(b)(3) prohibits misrepresentations that any MARS is
``affiliated with, endorsed or approved by, or otherwise associated
with'' the government, nonprofit housing programs, or consumers'
lenders or servicers. To confer greater legitimacy on their services,
MARS providers frequently falsely claim that their services are
associated with such trusted third-party entities or programs.\204\
When these claims are made expressly, as they frequently are, they are
presumed to be material to consumers' purchasing decisions.\205\ Even
when affiliation, endorsement, or approval are implied, such claims are
clearly material because some consumers are more likely to purchase
MARS they believe are endorsed or approved by the government, non-
profit programs, or their lender or servicer.
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\204\ See supra notes 72-74.
\205\ See Deception Policy Statement, supra note 200, at 182.
---------------------------------------------------------------------------

Sections 322.3(b)(4) and (5) bar misrepresentations concerning
consumers' payment and other obligations under their mortgage loans and
the amount owed on them. MARS providers, for example, often falsely
state or imply that once consumers retain a MARS provider, their
obligations to pay their mortgages are suspended and their lenders will
not foreclose.\206\ In fact, consumers who stop making payments may
incur additional fees and charges and lose their homes, regardless of
whether they have retained a MARS provider. The purported benefit of
immunity from foreclosure is material to consumers' decisions to
purchase MARS and whether to continue making payments on their
mortgages. Section 322.3(b)(4)

[[Page 75109]]

will prohibit any such misrepresentations regarding the obligation of
consumers to make payments on their current mortgages and the
consequences of failing to pay. Additionally, Sec. 322.3(b)(5)
prohibits providers from misrepresenting the terms or conditions of
consumers' current loans--for example, by falsely representing that the
terms are unfavorable in some regard in order to persuade consumers to
purchase MARS that purportedly will result in consumers obtaining more
favorable terms. Information regarding the terms and conditions of
consumers' loans is material to them because it is likely to influence
their decision whether to purchase MARS.
---------------------------------------------------------------------------

\206\ See, e.g., FTC v. Fed. Loan Modification Law Ctr., LLP,
No. SACV09-401 CJC (MLGx), Mem. Supp. TRO at 15 (C.D. Cal., Amd.
Compl. filed June 24, 2009) (defendant allegedly instructing
consumers to stop making mortgage payments because such payments
were unnecessary or would adversely affect consumer's ability to
obtain a loan modification).
---------------------------------------------------------------------------

Section 322.3(b)(6) prohibits misrepresentations of MARS providers'
refund, exchange, or cancellation policies, including the ``likelihood
of obtaining a full or partial refund.'' MARS providers commonly tout
their liberal refund and cancellation policies, often to give consumers
a sense of security that the upfront fee they are asked to pay will be
refunded if the provider is unsuccessful. In fact, many providers do
not provide refunds or have restrictive cancellation policies.\207\
Refund and cancellation policies are important considerations for
consumers in deciding whether to purchase MARS.\208\ As detailed in
Sec. III.E. of this SBP, the Final Rule effectively allows consumers
to withdraw from MARS at any time, and prohibits MARS providers from
collecting advance fees. Section 322.3(b)(6) will help ensure that MARS
providers do not misrepresent to consumers that they are, in fact,
obligated to continue to use the provider's services. This provision
will also help ensure that providers do not misrepresent whether they
will refund fees they collect--in compliance with Sec. 322.5 of the
Final Rule--after the consumer has accepted the mortgage relief
delivered.\209\
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\207\ See supra note 77.
\208\ The TSR Rule similarly prohibits misrepresentations about
telemarketers' refund and cancellation policies. See 6 CFR
310.3(a)(2)(iv). In numerous individual cases, the Commission has
challenged as deceptive misrepresentations concerning the refund and
cancellation polices of MARS providers. See FTC Case List, supra
note 28.
\209\ Thus, for example, if a MARS provider represents that the
fee it collects once the consumer has accepted the result the
provider has delivered may later be refundable under certain
conditions (e.g., the consumer decides his or her monthly payments
are unaffordable), then any failure by the provider to observe this
policy would constitute a violation of Sec. 322.3(b)(6).
---------------------------------------------------------------------------

Section 322.3(b)(7) prohibits misrepresentations that a MARS
provider has achieved a represented result or has a right to claim,
charge, or demand money from the consumer. This provision will protect
consumers from MARS providers who make false claims as to whether they
are entitled to receive fees. As detailed in Sec. III.E. of this SBP,
the Final Rule prohibits providers from collecting any fees until the
consumer has accepted the results delivered by the provider. Section
322.3(b)(7) will help to prevent MARS providers from circumventing the
advance fee ban in the Final Rule by misrepresenting that consumers owe
fees before they have accepted the results delivered by the provider.
Additionally, the claim as to results obtained is material to
consumers' decisions whether or not to pay the providers.\210\
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\210\ Section 322.3(b)(7) of the Final Rule makes one non-
substantive modification to the proposed provision. Proposed Sec.
322.3(b)(7) prohibited misrepresenting ``[t]hat the mortgage
assistance relief service provider has completed the represented
services, as specified in Sec. 322.5, or otherwise has a right to
claim, demand, charge, collect or receive payment or other
consideration.'' For clarity, the Final Rule removes the phrase,
``as specified in Sec. 322.5,'' and the word ``otherwise.''
---------------------------------------------------------------------------

Section 322.3(b)(8) prohibits providers from misrepresenting that
consumers will ``receive legal representation.'' The record
demonstrates that MARS providers commonly mislead consumers into
believing that they offer legal services and that they employ attorneys
who will represent consumers in legal proceedings.\211\ Further, MARS
providers often falsely claim to be law firms or affiliated with
attorneys.\212\ Whether licensed legal professionals will be working on
consumers' behalf is material because some consumers may believe that
attorneys are adept at negotiating with lenders or services and, thus,
that having their assistance will increase the likelihood of obtaining
mortgage relief.
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\211\ See supra notes 85-86; OPLC at 2-3 (``Often mortgage
assistance relief services (MARS) providers will imply that they
will represent the homeowners in legal proceedings, or otherwise
suggest or state that they have attorneys on staff that will resolve
the homeowners' legal proceedings. The list of prohibited
representations should include a prohibition on such implications or
statements. * * *''); Francis at 1 (noting concern that some MARS
providers use an attorney's name in their marketing and mislead
consumers ``as to whether or not an attorney-client relationship
will exist''). One comment recommended that the Rule require MARS
providers who advertise legal services to disclose whether an
attorney will represent consumers in foreclosure proceedings and to
provide the name of such attorney, and require that any MARS
provider that uses the name of a law firm or attorney disclose
whether it employs attorneys licensed to practice law in the
consumer's state and whether they would represent the consumer in
foreclosure proceedings. Francis at 1. The Commission believes that
requiring these disclosures is unnecessary in light of the
prohibition on express or implied misrepresentations that a consumer
will receive legal representation. The Commission believes that a
general statement that a MARS provider offers legal services, in the
absence of a qualifying disclosure, is likely to convey an implied
claim that the attorney is properly licensed and will represent
consumers in a foreclosure action.
\212\ See supra notes 84-88 and accompanying text.
---------------------------------------------------------------------------

Section 322.3(b)(9) prohibits misrepresentations concerning ``[t]he
availability, performance, cost, or characteristics of any alternative
to for-profit mortgage assistance relief services through which the
consumer can obtain mortgage assistance relief, including negotiating
directly with the dwelling loan holder or servicer, or using any
nonprofit housing counselor agency or program.'' As discussed in Sec.
II.A. of this SBP, consumers sometimes can obtain mortgage relief at no
cost from nonprofit housing counselor programs or by working directly
with their lenders or servicers. For-profit MARS providers, therefore,
have an incentive to make false or misleading claims about the
effectiveness and value of these forms of competing assistance. The FTC
has charged in its law enforcement actions that some MARS providers, in
fact, make such claims.\213\ Information about potential alternatives
to for-profit MARS is likely to influence consumers' decisions
regarding whether to purchase MARS from a for-profit provider, and if
so, at what price.\214\
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\213\ See, e.g., FTC v. Loss Mitigation Servs., Inc., No.
SACV09-800 DOC (ANX) (C.D. Cal. filed July 13, 2009) (alleging that
defendants represented on their Web site that ``Representing
Yourself Can Be Hazardous!'' and that ``you will be offered less of
a modification or short sale than you could really get''); FTC v.
Truman Foreclosure Assistance, LLC, No. 09-23543, Mem. Supp. P.I. at
20 (S.D. Fla. filed Nov. 23, 2009) (alleging that defendants' Web
sites stated ``Don't go through this alone. You need professional
help at a time like this.'').
\214\ It is a deceptive practice for advertisers to make false
or misleading comparisons between their product and that of
competing products. See, e.g., Novartis Corp. v. FTC, 223 F.3d 783
(DC Cir. 2000) (advertising by drug company was deceptive because it
falsely claimed that its pain pills were superior to other
analgesics for treating back pain); Kraft, Inc. v. FTC, 970 F.2d
311, 322 (7th Cir. 1992) (advertising was deceptive because it
falsely implied Kraft's cheese slices had more calcium than
imitation cheese slices).
---------------------------------------------------------------------------

Section 322.3(b)(10) prohibits MARS providers from misrepresenting
the ``amount of money or the percentage of the debt amount that a
consumer may save by using the mortgage assistance relief service.''
Commonly MARS providers have claimed that they can obtain specific
interest rate reductions and other concessions from lenders, when, in
reality, the results are true only for few, if any, consumers.\215\
This provision will prohibit providers from promising more savings than
they can

[[Page 75110]]

deliver, including any promised reduction in the interest rate on a
mortgage loan--a consideration of central importance to consumers.
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\215\ See, e.g., FTC v. Data Med. Capital, Inc., No. SA-CV-99-
1266 AHS (Eex), Mem. Supp. Contempt at 12 (C.D. Cal. filed May 27,
2009) (alleging that defendant claimed it could reduce consumers'
interest rates to 2 to 5 percent).
---------------------------------------------------------------------------

Section 322.3(b)(11) prohibits MARS providers from misrepresenting
the ``total cost to purchase the mortgage assistance relief service.''
This provision is designed to prevent providers from making deceptive
claims about the amount of their fees--a pivotal fact for consumers
considering whether to purchase MARS.
Finally, Sec. 322.3(b)(12) prohibits MARS providers from
misrepresenting ``[t]he terms, conditions, or limitations of any offer
of mortgage assistance relief the provider obtains from the consumer's
dwelling loan holder or servicer, including the time period in which
the consumer must decide to accept the offer.'' As discussed in Sec.
III.E. of this SBP, the Final Rule allows consumers to reject the
results obtained by MARS providers, in which case they do not have to
pay the provider's fee. When a MARS provider obtains an offer for a
loan modification or other mortgage relief and presents it to the
consumer, the terms, conditions, and limitations of the offer are
material to the consumer's decision whether to accept it and pay the
provider's fee. Additionally, it is material for consumers to know how
much time they have to accept or reject the offer for mortgage relief,
so that they make a timely decision. This provision will ensure that
providers do not deceive consumers regarding the results they have
obtained and do not make misrepresentations that pressure them into
accepting unfavorable terms.\216\ It is thus reasonably related to
preventing providers from undermining the ability of consumers to
accept or reject the offer.
---------------------------------------------------------------------------

\216\ Additionally, to the extent that providers obtain trial
loan modifications for consumers, Sec. 322.3(b)(12) prohibits
providers from misrepresenting that these loan modifications are
permanent.
---------------------------------------------------------------------------

c. Section 322.3(c): Substantiation
Commission law enforcement actions reveal that MARS providers often
make representations about the benefits, performance, or efficacy of
their services.\217\ MARS providers must have substantiation for such
claims at the time they are made. The Final Rule therefore specifies
that it is a violation of the Rule to:

\217\ See FTC Case List, supra note 28.

Mak[e] a representation, expressly or by implication, about the
benefits, performance, or efficacy of any mortgage assistance relief
service unless, at the time such representation is made, the
provider possesses and relies upon competent and reliable evidence
that substantiates that the representation is true. For the purposes
of this paragraph, ``competent and reliable evidence'' means tests,
analyses, research, studies, or other evidence based on the
expertise of professionals in the relevant area, that have been
conducted and evaluated in an objective manner by individuals
qualified to do so, using procedures generally accepted in the
---------------------------------------------------------------------------
profession to yield accurate and reliable results.

Section 322.3(c) also clarifies the types of evidence that MARS
providers must possess and rely upon to comply with Sec. 322.3(c) when
representing the ``benefits, performance, or efficacy'' of any MARS.
This provision encompasses a wide variety of claims, including but not
limited to: the provider's ability to save consumers a specific amount
of money (e.g., a reduction in interest rate or monthly payments), the
likelihood that the provider will secure a loan modification or other
results for consumers, and the amount of time it will take for the
provider to secure a loan modification or other result.
Advertisers and marketers that make objective claims about their
products must have a ``reasonable basis'' to substantiate them.\218\ In
the particular context of MARS, when making claims regarding the
performance, benefits, or efficacy of these services, providers must
possess a reasonable basis in the form of ``competent and reliable
evidence'' to support the claim.\219\ Thus, when a MARS provider
represents that it will save consumers money or reduce their debt
amount or interest rate, this claim must be supported by competent and
reliable, methodologically sound evidence showing that consumers who
purchase the service generally will obtain the advertised results,
i.e., that the typical consumer who purchases MARS from that provider
will achieve that result.\220\
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\218\ It is an unfair and deceptive practice, in violation of
Section 5 of the FTC Act, to make an express or implied objective
claim without a reasonable basis supporting it. See, e.g., FTC v.
Pantron I Corp., 33 F.2d 1088, 1096 (9th Cir. 1994); Removatron
Int'l Corp., 111 F.T.C. 206, 296-99 (1988), aff'd, 884 F.2d 1489
(1st Cir. 1989); In re Thompson Med. Co., 104 F.T.C. 648, 813
(1984), aff'd, 791 F.2d 189 (DC Cir. 1986); see also generally 1984
Policy Statement Regarding Advertising Substantiation, appended to
Thompson Med. Co., 104 F.T.C. at 813 (Advertising Substantiation
Policy Statement); Amended Franchise Rule, 16 CFR 436.5(s),
436.9(c); Amended Franchise Rule Statement of Basis and Purpose, 72
FR 15444, 15449 (Mar. 30, 2007).
\219\ As discussed in the SBP addressing amendments to the TSR
regarding debt relief services, claims concerning the benefits,
performance, or efficacy of debt relief services must be supported
by competent and reliable evidence. See TSR; Final Rule, 75 FR
48458, 48500 n.574 and accompanying text (Aug. 10, 2010).
In addition, in order to comply with Sec. 322.3(b), the
prohibition against misrepresentations, a provider must not make
false or misleading statements regarding the level of support it has
for a claim.
\220\ It is deceptive to make unqualified performance claims
that are only true for some consumers, because reasonable consumers
are likely to interpret such claims to apply to the typical
consumer. See FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502,
528-29 (S.D.N.Y. 2000) (holding that in the face of express earnings
claims for multi-level marketing scheme, it was reasonable for
consumers to have assumed the promised rewards were achieved by the
typical participant); Chrysler Corp. v. FTC, 561 F.2d 357, 363 (DC
Cir. 1977); In re Ford Motor Co., 87 F.T.C. 756, 778, aff'd in part
and remanded in part, 87 F.T.C. 792 (1976); In re J. B. Williams
Co., 68 F.T.C. 481, 539 (1965), aff'd as modified, 381 F.2d 884 (6th
Cir. 1967); FTC v. Feil, 285 F.2d 879, 885-87 & n.19 (9th Cir.
1960); cf. Guides Concerning the Use of Endorsements and
Testimonials in Advertising, 16 CFR 255.2 (``An advertisement
containing an endorsement relating the experience of one or more
consumers on a central or key attribute of the product or service
also will likely be interpreted as representing that the endorser's
experience is representative of what consumers will generally
achieve with the advertised product or service. * * *''); In re
Cliffdale Assocs., 103 F.T.C. 110, 171-73 (1984); Porter & Dietsch,
Inc. v. FTC, 605 F.2d 294, 302-03 (7th Cir. 1979).
Although providers may use samples of their historical data to
substantiate savings claims, these samples must be representative of
the entire relevant population of past customers. Providers using
samples must, among other things, employ appropriate sampling
techniques, proper statistical analysis, and safeguards for reducing
bias and random error. Providers may not cherry-pick specific
categories of consumers or exclude others in order to inflate the
savings. See, e.g., In re Kroger Co., 98 F.T.C. 639, 741-46 (1979)
(initial decision), aff'd, 98 F.T.C. at 721 (1981) (claims based on
sampling were deceptive because certain categories were
systematically excluded and because the advertiser failed to ensure
that individuals who selected the sample were unbiased); FTC v.
Litton Indus., Inc., 97 F.T.C. 1, 70-72 (1981) (claims touting
superiority of microwave oven were deceptive because the advertiser
based them on a biased survey of ``Litton-authorized'' service
agencies), enforced as modified, 676 F.2d 364 (9th Cir. 1982);
Bristol Myers v. FTC, 185 F.2d 58 (1950) (holding advertisements to
be deceptive where they claimed that dentists used one brand of
toothpaste ``2 to 1 over any other [brand]'' when, in fact, the vast
majority of dentists surveyed offered no response). Additionally,
the relationship between past experience and anticipated future
results must be an ``apples-to-apples'' comparison. If there have
been material changes to the MARS that could affect the
applicability of historical experience to future results, any claims
made must account for the likely effect of those changes. See
Amended Franchise Rule, 16 CFR 437.5(s)(3)(ii).
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Providers cannot circumvent the substantiation requirements by
making general, non-specific claims. Thus, for example, if a MARS
provider makes only a general savings claim (e.g., ``we will help you
reduce your mortgage payments''), without specifying a percentage or
amount of savings, these claims are likely to convey that consumers can
expect to achieve a result that will be beneficial to them and that the
benefits will be substantial.\221\

[[Page 75111]]

Under the Final Rule, the provider must have competent and reliable
evidence showing that consumers obtain such results.
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\221\ An unqualified efficacy claim conveys to consumers that
the result or benefit will be meaningful and not de minimis. See P.
Lorillard Co. v. FTC, 186 F.2d 52, 57 (4th Cir. 1950) (challenging
advertising that claimed that a brand of cigarettes was lowest in
nicotine, tar, and resins in part because the difference from other
brands was insignificant); In re Sun Co., 115 F.T.C. 560 (1992)
(consent order) (alleging that advertising for high octane gasoline
represented that it would provide superior power ``that would be
significant to consumers''); Guides for the Use of Environmental
Marketing Claims, 16 CFR 260.6(c) (1998) (``Marketers should avoid
implications of significant environmental benefits if the benefit is
in fact negligible.''); FTC Enforcement Policy Statement on Food
Advertising, 59 FR 28388, 28395 & n.96 (June 1, 1994), available at
http://www.ftc.gov/bcp/policystmt/ad-food.shtm (``The Commission
shares FDA's view that health claims should not be asserted for
foods that do not significantly contribute to the claimed benefit. A
claim about the benefit of a product carries with it the implication
that the benefit is significant.'').
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D. Section 322.4: Disclosures Required in Commercial Communications

Proposed Sec. 322.4 would require that MARS providers disclose
certain material information to prevent deception and thereby assist
consumers in making informed decisions about purchasing MARS.\222\ The
Final Rule adopts all of these proposed disclosures. In addition, it
requires one new disclosure: To inform consumers of the potential
adverse consequences of not making mortgage payments. Further, the
Final Rule expands the proposed disclosure regarding the total cost of
the service to include: (1) Consumers' rights to withdraw from the
service and to accept or reject any offer of mortgage relief the
provider obtains from the lender or servicer; (2) the fact that
consumers do not have to pay the provider if they reject the offer; and
(3) the cost of the services if they accept the offer. The Final Rule
also modifies the structure of the proposal to clarify that the
disclosures in this provision almost all fall into three main
categories: (1) Disclosures that providers must make in all ``general
commercial communications'' (a term now defined in Sec. 322.2(c)(1)),
such as television or radio advertisements; (2) disclosures that
providers must make in all ``consumer-specific commercial
communications'' (a term now defined in Sec. 322.2(c)(2)), such as
telemarketing calls; and (3) disclosures that the provider must make in
all communications.\223\ The Final Rule broadens the conditions under
which the disclosures must be provided, such that all required
disclosures (except for one) must be provided in all general commercial
communications and in all consumer-specific commercial communications.
The disclosures regarding total cost and the consumer's right to
withdraw from the service and reject mortgage relief offers need only
be made in consumer-specific commercial communications.
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\222\ The Commission concludes that the disclosures adopted in
the Final Rule are consistent with the First Amendment. It is well
established that the government may ``require that a commercial
message appear in such a form, or to include such additional
information, warnings, and disclaimers, as are necessary to prevent
deception.'' Va. Bd of Pharmacy v. Va. Citizens Consumer Council,
425 U.S. 748, 771-72 n.24 (1976); see also Milavetz v. United
States, 130 S. Ct. 1324, 1340-41 (2010) (upholding the
constitutionality of a Bankruptcy Code provision that required debt
relief agencies to make certain disclosures in their advertisement);
Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985)
(``[W]arning[s] or disclaimer[s] might be appropriately required * *
* in order to dissipate the possibility of consumer confusion or
deception.'').
\223\ See supra note 140.
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1. Proposed Disclosures
The proposed rule \224\ required MARS providers to disclose, in
every commercial communication and every communication directed at a
specific consumer prior to the consumer entering an agreement to
purchase MARS, that the provider ``is a for-profit business not
associated with the government. This offer has not been approved by the
government or your lender.'' \225\ The proposed rule also included two
disclosures that were required only in communications directed at a
specific consumer prior to the consumer entering into an agreement to
purchase MARS: (1) The full amount the consumer must pay for the
service; and (2) that ``[e]ven if you buy our service, your lender may
not agree to change your loan.'' \226\ Commenters who addressed these
disclosures generally supported them, but some urged that all of the
disclosures be required in every communication or advocated for
requiring additional disclosures.\227\
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\224\ In the NPRM, the Commission sought comment and empirical
data bearing on the costs and benefits of the disclosure
requirements set forth in the proposed rule. No comments provided
such data.
\225\ Proposed Sec. Sec. 322.4(a), 322.3(b)(2).
\226\ The latter disclosure would not be required when a MARS
provider offers only to stop, prevent, or postpone a foreclosure
sale or repossession, as described in Sec. 322.2(i)(1).
\227\ See CUUS at 4 (stating that ``Consumers Union supports the
Rule's disclosure requirements listed in Sec. 322.4,'' but proposing
expanded distribution and additional disclosures); CSBS at 3
(stating that ``state regulators believe that the disclosures
required under Sec. 322.4 are generally appropriate,'' but
proposing expanded distribution and additional disclosures); MA AG
at 3 (stating that ``I support the types of disclosures required in
the proposed rule,'' but proposing expanded distribution); LOLLAF at
3 (stating that ``[t]he required disclosures enumerated in the
proposal will assist consumers who consider using a MARS provider,''
but proposing additional disclosures); NAAG at 4 (stating that ``we
do generally support enhanced disclosure requirements,'' but
proposing additional disclosures); NYC DCA at 5-8 (suggesting
expanded distribution and additional disclosures); see also NCLC at
3; OPLC at 3. One commenter suggested that MARS providers be
required to provide consumer disclosures in the form of an FTC-
drafted ``bill of rights,'' which would include information on
consumers' legal rights, the risks associated with purchasing MARS,
and information on free services. NYC DCA at 7. The Commission
recognizes the value of consumer education about MARS but declines
to adopt this recommendation. The Final Rule requires disclosure of
the key information in a manner that the Commission believes will
assist consumers in avoiding deception and will help ensure that
consumers will notice and comprehend it.
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2. Disclosures Required by the Final Rule
The Commission has determined to adopt the proposed rule with four
basic changes. First, the Final Rule adds headings to Sec. 322.4(a)-
(c), which clarify that the disclosures fall into three categories:
``Disclosures in All General Commercial Communications''; ``Disclosures
in All Consumer-Specific Commercial Communications''; and ``Disclosures
in All General Commercial Communications, Consumer-Specific Commercial
Communications, and Other Communications.'' Second, the Final Rule has
added a new triggered disclosure in Sec. 322.4(c): ``If you stop
paying your mortgage, you could lose your home and damage your credit
rating.'' MARS providers must make this disclosure if they advise
consumers, expressly or by implication, to discontinue making their
mortgage payments. Third, Sec. 322.4(b)(1) of the Final Rule expands
the proposed total cost disclosure to include the following
information:

``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. If you accept the offer, you will have to pay us (insert
amount or method for calculating the amount) for our services.'' For
the purposes of this paragraph, the amount ``you will have to pay''
shall consist of the total amount the consumer must pay to purchase,
receive, and use all of the mortgage assistance relief services that
are the subject of the sales offer, including, but not limited to,
all fees and charges.

Fourth, as suggested by the comments, the Final Rule provides that,
with one exception--the disclosure of total cost and the right to
cancel the service at any time--all of the required disclosures must be
made in every communication with consumers prior to the consumers
entering into an agreement to purchase MARS.\228\ As

[[Page 75112]]

explained below, the Commission believes the disclosures in the Final
Rule are appropriate, because each of them either is necessary to
prevent deception or is reasonably related to preventing
deception.\229\
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\228\ As discussed in Section II.B, MARS providers often
disseminate advertisements that instruct consumers to call a
telephone number or contact an email address, and once consumers do
so, the providers begin to interact with them on an individual
level. During these individual interactions, MARS providers commonly
contradict or obfuscate disclaimers made in general advertising.
See, e.g., FTC v. Fed. Loan Modification Law Ctr., LLP, No. SACV09-
401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009) (alleging that false
success rate claims and other deceptive claims often were made
during telemarketing calls with consumers); FTC v. Loss Mitigation
Servs., Inc., No. SACV09-800 DOC (ANX) (C.D. Cal. filed July 13,
2009) (same). As discussed below, the Commission therefore concludes
that it is not sufficient to make the disclosures only in general
advertisements.
\229\ The Final Rule also includes a small number of minor, non-
substantive modifications to ensure that these requirements are
clear and easy to understand.
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a. Disclosures Required Both in General Commercial Communications and
Consumer-Specific Commercial Communications
Sections 322.4(a)(1) and 322.4(b)(2) of the Final Rule adopt,
without substantive modification, the approach in the proposed rule and
require MARS providers to disclose clearly and prominently, in each
general commercial communication and consumer-specific commercial
communication, that the MARS provider ``is not associated with the
government, and * * * [the] service is not approved by the government
or your lender.'' As described above, there are many government,
nonprofit, lender and servicer programs providing a wide array of
services that MARS providers have mimicked. The Commission and state
law enforcement officials have brought numerous law enforcement actions
against for-profit MARS providers who have misrepresented their
affiliation with a government agency, lender, or servicer.\230\ These
providers have used a variety of misleading techniques, including
adopting trade names, URLs, or symbols that resemble those associated
with government programs.\231\ Given that the government, for-profit
entities, and nonprofit entities assist financially distressed
consumers with their mortgages and in light of the frequency of
deceptive affiliation claims, the Commission concludes that requiring
MARS providers to disclose their nonaffiliation with government or
other programs is reasonably related to the goal of preventing
deception.\232\
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\230\ See supra notes 72-74.
\231\ See, e.g., FTC v. Fed. Housing Modification Dep't, Inc.,
No. 09-CV-01753 (D.D.C. filed Sept. 16, 2009) (alleging use of
direct mail material with seal depicting U.S. Capitol with words
``NATIONS HOUSING MODIFICATION CENTER'' superimposed); FTC v. Ryan,
No. 1:09-00535 (HHK) (D.D.C., Amend. Compl. filed Mar. 25, 2009)
(alleging use of government-like seal that read ``United States--
Department of Housing'' on defendant's Web sites with URLs ``http://bailout.hud-gov.us'' and ``http://bailout.dohgov.us'' and that
featured prominent button linking to official U.S. government Web
site).
\232\ Supra note 105.
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Sections 322.4(a)(2) and 322.4(b)(3) of the Final Rule, which adopt
the proposal without substantive modification,\233\ require MARS
providers to disclose clearly and prominently in all their general and
consumer-specific commercial communications that ``[e]ven if you accept
this offer and use our service, your lender may not agree to change
your loan.'' \234\ In light of the widespread deceptive success and
``guarantee'' claims in this industry,\235\ this disclosure will ensure
that consumers do not use MARS under the misimpression that they will,
or are very likely to, receive a successful result. Thus, requiring
such a disclosure is reasonably related to the goal of preventing
deception.\236\
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\233\ In order to clarify the application of this provision,
however, the Final Rule includes two non-substantive modifications.
First, the Final Rule clarifies that this disclosure applies to any
MARS provider who represents, ``expressly or by implication, that
consumers will receive'' MARS. This replaces the language of the
proposed rule that stated that this disclosure applied to any MARS
provider that ``advertises any represented [mortgage relief].''
Second, the Final Rule replaces the word ``buy'' in the proposal
with the phrase ``accept this offer and use.''
\234\ This disclosure is required in all cases except when the
only MARS offered is the service or result described in Sec.
322.2(i)(1)--i.e., to stop, prevent or postpone any mortgage or deed
of trust foreclosure sale, any repossession of the consumer's
property, or otherwise save the consumer's dwelling from foreclosure
or repossession.
\235\ Supra note 75.
\236\ Supra note 105. In the absence of a qualification, an
efficacy claim may convey a greater likelihood of success than often
is the case.
---------------------------------------------------------------------------

Section 322.4(c) of the Final Rule, which was not included in the
proposed rule, also requires that if MARS providers advise consumers,
expressly or by implication, to stop making mortgage payments, they
must warn consumers: ``If you stop paying your mortgage, you could lose
your home and damage your credit rating.'' \237\ This disclosure must
be provided clearly and prominently in all communications in which the
triggering statement is made. Moreover, unlike the other disclosures in
Sec. 322.4, this disclosure is not limited to commercial
communications occurring prior to the consumer agreeing to enroll in
the service. Thus, even if the consumer has already agreed to use MARS,
the provider must make this disclosure if, and when, it advises
consumers to stop making timely payments. Additionally, this disclosure
must also be made in close proximity to the specific triggering claim,
to ensure that the net impression consumers take away reflects both the
information in the triggering claim and the information in the
triggered disclosure. The record demonstrates that MARS providers
frequently encourage consumers, often through deception, to stop paying
their mortgages and instead pay providers.\238\ Consumers who rely on
these deceptive statements frequently suffer grave financial harm.\239\
The Commission determines, therefore, that requiring MARS providers who
encourage consumers not to pay their mortgages to disclose the risks of
following this advice is necessary to prevent deception.\240\
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\237\ Commenters supported this requirement. See NAAG at 4 (Rule
should prohibit MARS providers ``from representing that a consumer
`should stop making mortgage payments'.''); CUUS at 5 (``[I]t would
also be beneficial for MARS providers to disclose to consumers the
consequences of not paying their mortgages (such as loss of their
home and damage to their credit rating).''); CSBS at 3
(``[D]isclosures should include the fact that consumers are not
exempt from making their home payments simply because they have
decided to pursue MARS.'').
\238\ See supra note 82; CUNA at 2 (Consumers ``are often
instructed to stop making mortgage payments.'').
\239\ Id.
\240\ It can be an unfair or deceptive practice to advise
consumers to take a certain action without disclosing the attendant
material adverse risks or consequences. See, e.g., In re North Am.
Philips Corp., 111 F.T.C. 139, 175-84 (1988); In re Int'l Harvester
Co., 104 F.T.C. 949, 1066-67 (unfair practice to conceal ``fuel-
geysering'' hazard when using tractors). In Int'l Harvester, the
Commission noted that it ``frequently has decided that the omission
of product safety information is an unfair and deceptive practice.''
Id. at 1045 (quoting Firestone Tire & Rubber Co., 81 F.T.C. 398, 456
(1972)).
---------------------------------------------------------------------------

b. Disclosure Required Only in Consumer-Specific Commercial
Communications
Section 322.4(b)(1) retains, but also expands, the requirement in
the proposed rule that MARS providers disclose, clearly and
prominently, in all communications directed at specific consumers, the
total amount the consumer will have to pay to purchase, receive, and
use the service. Specifically, in addition to this cost information,
the Final Rule requires that providers inform consumers that they (a)
may withdraw from the service at any time, and (b) have the right to
reject any offer of mortgage relief that the provider obtains from the
servicer or lender and, (c) if they do so, they owe nothing to the
provider. As detailed in Sec. III.E. of this SBP, the Final Rule

[[Page 75113]]

prohibits providers from collecting fees until the consumer has
accepted the result obtained by the provider. The Commission determines
that, to effectuate the advance fee ban, it also is necessary for the
provider to inform consumers that they may withdraw from the service,
and may accept or reject the result delivered by the provider. Thus,
this disclosure is reasonably related to preventing unfair and
deceptive acts and practices by MARS providers.
As in the proposed rule, Sec. 322.4(b)(1) of the Final Rule also
requires providers to disclose the total cost of their services.\241\
To the extent that a provider bases its fee on a fixed percentage of
the amount of money the consumer saves as a result of the service
(instead of charging a flat fee), it must disclose this
percentage.\242\ This disclosure is limited to communications directed
at a specific consumer because MARS providers often charge consumers
different amounts based on their individual circumstances. In such
cases, it would be very difficult or impossible to provide accurate
information about total cost in commercial communications directed at
general audiences. Nevertheless, the record shows that many MARS
providers do not inform individual consumers about their fees prior to
the time of contracting.\243\ The total cost of a MARS is perhaps the
most material information for consumers in making decisions whether to
enter into a transaction with the provider. Requiring this disclosure
will help protect consumers from being misled by providers who give
incomplete, inaccurate, or confusing cost information. This disclosure,
therefore, is reasonably related to the prevention of deception.
---------------------------------------------------------------------------

\241\ Providers may not evade this disclosure requirement, in
whole or in part, by labeling their fees or charges as ``penalties''
or other terms. This provision requires that providers disclose all
of the costs the consumer will have to pay the provider in
connection with the mortgage assistance relief service.
\242\ Further, regardless of whether the provider discloses its
fee as a flat amount or percentage of savings, it may not later
charge the consumer a larger amount or percentage than initially
disclosed. Doing so would clearly violate Sec. 322.3(b)(11) of the
Final Rule.
\243\ See NCRC Report, supra note 76, at 21.
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3. Disclosures Not Adopted
The Commission declines to adopt some modifications to the
disclosure requirements that some commenters suggested. The reasons are
set forth below. As a general matter, the disclosures required in the
Final Rule are focused on responding to the core unfair and deceptive
acts and practices that the Commission has identified through its law
enforcement actions and through public comments. Adding more disclosure
requirements, even to the extent they might provide some help to some
consumers, risks overshadowing more important information or
overloading consumers with too much information.\244\
---------------------------------------------------------------------------

\244\ Consumer research shows that the ability of consumers to
process information and make rational choices may be impaired if the
quantity of the information they receive is too great. See
generally, Yu-Chen Chen et al., The Effects of Information Overload
on Consumers' Subjective State Towards Buying Decision in the
Internet Shopping Environment, 8(1) Electronic Comm. Res. &
Applications 48 (2009); Byung-Kwan Lee & Wei-Na Lee, The Effect of
Information Overload on Consumer Choice Quality in an On-Line
Environment, 21(3) Psychol. & Marketing 159, 177 (2004).
---------------------------------------------------------------------------

Two commenters suggested that requiring MARS providers to disclose
their historical performance could help consumers understand the risks
in purchasing MARS from them.\245\ Performance data, if it could be
calculated in a useful, non-misleading way, likely would be valuable
information to consumers in deciding whether to purchase MARS. The
Commission has concluded, however, that requiring MARS providers to
disclose their performance data is impracticable. Given the broad
variety of results MARS providers might be able to obtain, they would
have to incorporate many potential variables to calculate success rates
for consumers. For example, one consumer may consider a short sale a
success, while another may consider only a loan modification to be a
success. It is, therefore, impracticable to develop accurate and
comparable performance data that providers could disclose to consumers.
Moreover, requiring disclosure of historical performance data would not
be feasible for the large number of MARS providers who are new market
entrants, because they lack past data on which to base a valid
historical performance claim. Further, shifting market conditions and
changes in government and other assistance programs could have
substantial effects on the reliability of historical performance data
as a predictor of future success.\246\ The Commission concludes that,
to prevent providers from deceiving consumers regarding their
performance, it is enough that: (1) Sec. 322.3(b)(1) of the Final Rule
prohibits MARS providers from misrepresenting the likelihood that
purchasing MARS will result in a successful outcome, and (2) Sec. Sec.
322.4(a)(2) and 322.4(b)(3) require providers to disclose that lenders
may not agree to modify loans even if consumers purchase MARS.\247\
---------------------------------------------------------------------------

\245\ LOLLAF at 4; CUUS at 5-6 (adding that historical
performance data would only be meaningful if a MARS provider had
been in business long enough to have amassed a sufficient record).
In contrast, a consortium of state regulators urged the Commission
to prohibit MARS providers from disclosing such information because
performance figures can be easily manipulated and could mislead
consumers. CSBS at 3.
\246\ For similar reasons, the Commission declined to require
providers to disclose their drop out rates in amending the TSR to
address debt relief services. See TSR; Final Rule, 75 FR 48458,
48497 & nn. 531-32 (Aug. 10, 2010).
\247\ See supra Sec. Sec. III.C.2.b. and III.D.2.
---------------------------------------------------------------------------

Four commenters suggested that MARS providers be required to
disclose that MARS are available for free or at lower cost from
nonprofit housing counseling agencies, such as those certified by HUD,
and disclose the contact information for these agencies.\248\ Although
some consumers would benefit from this information, it is already
available from other sources, including the agencies themselves. In
addition, the Commission is mindful of the need to limit the number of
disclosures to maximize their effectiveness. As noted above, the
greater the number of disclosures, the higher the risk of overloading
consumers such that they do not read or comprehend any of the
information. For these reasons, the Commission determines that the
Final Rule's prohibition on misrepresenting the availability,
performance, cost, or characteristics of any alternative means for
consumers to obtain MARS, which includes misrepresentations regarding
any nonprofit housing counseling agency or program, is sufficient.\249\
---------------------------------------------------------------------------

\248\ LOLLAF at 3-4 (require disclosure that MARS services are
available for free from HUD-certified counseling agencies); CSBS at
3 (require disclosure that MARS services can be obtained from non-
profit and government organizations for little or no cost); LFSV at
3; NAAG at 4-5.
\249\ See Sec. 322.3(b)(9).
---------------------------------------------------------------------------

Finally, one commenter suggested that MARS providers be required to
provide their physical address and landline telephone number.\250\ Many
MARS providers, like other businesses, routinely make contact
information available to prospective customers and do not need to be
compelled to do so. In addition, after the consumer agrees to use a
provider's services, the prohibition on advance fees in the Final Rule
means that the provider will have to communicate with the consumer to
proffer the results and obtain payment. There is no information in the
record to support the conclusion that MARS providers generally are not
already making their contact information available, or that they
generally would not make such information available to get paid. In the
absence of information

[[Page 75114]]

in the record SE showing that contact information is or will be
lacking, the Commission declines to include in the Final Rule a
requirement that MARS providers must disclose this information.
---------------------------------------------------------------------------

\250\ NYC DCA at 6.
---------------------------------------------------------------------------

E. Section 322.5: Prohibition on Collection of Advance Fees and Related
Disclosures

The proposed rule banned MARS providers from requiring that
consumers pay in advance for their services, i.e., prior to providers
delivering the promised results. The Commission has determined to adopt
an advance fee ban in the Final Rule, but with two significant
revisions to the ban in the proposed rule. First, the Final Rule
prohibits a provider of any mortgage assistance relief service--
including loan modifications or other forms of MARS--from collecting
any fees until the provider negotiates, and the consumer executes, a
written agreement for mortgage relief with the lender or servicer.
Second, to effectuate this provision, the Final Rule also requires MARS
providers, at the time of forwarding the offer of mortgage relief, to
disclose that consumers have the right to accept or reject the offer,
and to provide consumers with a notice from their lender or servicer
disclosing the material differences between the terms, conditions, and
limitations of consumers' current loans and those associated with the
offer for mortgage relief. These provisions supplant the proposed
rule's allowance of fees once (1) the provider delivers an offer from
the servicer or lender for a mortgage loan modification meeting certain
minimum requirements; or (2) in the case of providers offering MARS
other than loan modifications, the provider delivers the result that it
represented it would deliver. The reasons for these alterations to the
proposed rule are discussed below.
1. Proposed Rule and Public Comments Received
The advance fee ban in the proposed rule included two separate
provisions, one addressing the marketing of MARS generally and the
other addressing the marketing of MARS specifically to obtain loan
modifications. The first provision in the proposed rule, Sec.
322.5(a), prohibited MARS providers from requesting or receiving
payment until they achieved all of the results that: (1) The provider
had represented that the service would achieve; and (2) would be
consistent with consumers' reasonable expectations about the service.
The second provision, proposed Sec. 322.5(b), prohibited MARS
providers that represented that they would obtain a loan modification
from requesting or receiving payment until they had achieved a
modification meeting certain specifications, namely: The contractual
change to one or more terms of an existing dwelling loan between the
consumer and the owner of such debt that substantially reduces the
consumer's scheduled periodic payments, where the change is (1)
Permanent for a period of five years or more; or (2) Will become
permanent for a period of five years or more once the consumer
successfully completes a trial period of three months or less.
The proposed rule also required MARS providers, prior to collecting
payment, to furnish to consumers documentation showing that they have
secured an offer of mortgage relief from the consumer's lender or
servicer.
a. Comments Supporting the Advance Fee Ban
A large number of commenters supported the proposed advance fee
ban.\251\ NAAG's comment, representing 40 attorneys general, urged the
Commission to adopt proposed Sec. 322.5, arguing that it was
``critical'' and ``the linchpin of effective deterrence of fraudulent
practices'' by MARS providers.\252\ According to NAAG, ``[t]he
collection of advance fees virtually ensures that consumers will have
no recourse when consultants fail to perform services, as is generally
the case.'' \253\ Three state attorneys general who joined the NAAG
comment also submitted individual comments offering similar reasons for
supporting the proposed advance fee ban.\254\ In addition, a coalition
of state regulators of financial institutions supported the proposed
ban, arguing that it would curb abuses in the MARS industry.\255\ NAAG,
individual state attorneys general, and the financial institution
regulators specifically recommended that a final rule eliminate the
possibility of MARS providers evading the ban by charging fees on a
piecemeal basis before they have delivered all of the results they
represented.\256\ NAAG and the individual state attorneys general noted
that many MARS providers split their service into discrete steps and
then demand most of their fees after completing relatively
insignificant initial steps, such as answering a phone call or sending
the consumer preliminary forms.\257\
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\251\ As detailed in the NPRM, many of these commenters
recommended at the ANPR stage that the Commission include an advance
fee ban. See MARS NPRM, 74 FR at 10808 & nn.19-21. In addition, some
commenters who did not comment on the NPRM had advocated an advance
fee ban at the ANPR stage. See CRC (ANPR) at 4 (``Banning advance
fees is a crucial component to any effort to reduce * * * unfair and
deceptive practices in the loan modification industry and will
likely push many scam artists out of our communities. The FTC should
ban the collection of advance fees outright * * *.''); Shriver at 2
(recommending prohibition on up-front fees); NCLR at 1 (recommending
that up-front fees be banned); CMC at 8 (``The CMC would support a
ban or limitation on the collection of advance fees by MARS
providers.''); Chase at 3 (``[T]he payment of advance fees should be
banned because there is no guarantee the MARS provider will be
successful * * *.''); HPC at 2 (arguing that consumers should not be
required to pay up-front fees).
\252\ NAAG at 2-3; see also NAAG (ANPR) at 9 (``A ban on advance
fees * * * is necessary for any meaningful mortgage consultant
regulation * * *. A key provision of any rule regulating mortgage
consultants is that no fee may be charged or collected until after
the mortgage consultant has fully performed each and every service
the mortgage consultant contracted to perform or represented that he
or she would perform.'').
\253\ NAAG at 2.
\254\ See, e.g., MN AG at 2-3; MA AG at 1; OH AG at 1; see also,
e.g., NYC DCA at 3-5 (New York City Department of Consumer Affairs
stating support for advance fee ban).
\255\ See CSBS at 3.
\256\ See NAAG at 3; MN AG at 3; CSBS at 4; MA AG at 2. Some
commenters also noted that they have observed MARS providers that
charge fees piecemeal in order to circumvent state statutory advance
fee bans. See NAAG at 3; MN AG at 3; MA AG at 2.
\257\ NAAG at 3; MN AG at 3; MA AG at 2 (``[U]nder an exemption
for piecemeal fees, providers would continue the widespread current
practice of front loading piecemeal fees, so that the provider
quickly obtains a substantial payment that is disproportionate to
the amount of services provided.'').
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A wide array of consumer advocates, community organizations, and
legal service providers also submitted comments generally supporting
the proposed advance fee ban.\258\ These comments argued that a ban is
necessary to ensure that providers deliver the results they promise and
to curb deception and abuse.\259\ Like those of the state law
enforcement agencies and financial regulators, some of these comments
also urged the Commission to

[[Page 75115]]

prohibit MARS providers from collecting fees piecemeal.\260\
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\258\ See CRL; LFSV at 2-3; LCCR at 4; WMC at 1; NCLC at 3;
LOLLAF at 4; CUUS at 6-8.
\259\ See, e.g., CUUS at 7 (``The prohibitions on advance fee
payments is the most effective tool in this proposed rule to drive
bad actors from the marketplace, making room for the legitimate
companies to fill in the void and provide quality, honest services
and products to consumers.''); NCLC at 3 (``The single most
important provision is section 322.5 * * *. Wrongdoers are attracted
to mortgage assistance relief services by the potential for
extracting large payments from homeowners without performing any
work or providing anything of value. Requiring mortgage assistance
relief services (MARS) providers to earn their fee before being paid
will rid the market of those who specialize in nothing more than
`take the money and run.'''); LCCR at 4 (``The ban will also protect
struggling homeowners by incentivizing MARS providers to represent
their capabilities in a way that reflects services they can
realistically provide in a timely manner.'').
\260\ See LFSV at 2; LCCR at 8; LOLLAF at 5 (``Allowing any fees
to be collected prior to providing a permanent loan modification
presents MARS providers with a back door opportunity to extract
significant sums of money without any benefit provided to the
consumer.'').
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Comments from the financial services industry, including a trade
association representing mortgage brokers and another representing
financial institutions, also supported the advance fee ban.\261\ In
addition, several California attorneys who provide MARS supported an
advance fee ban for non-attorney MARS providers, asserting that it
would curb their abuses.\262\
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\261\ See, e.g., MBA at 2-3; AFSA at 5. AFSA argued that banning
advance fees is the best way to ensure that providers deliver a
beneficial service to consumers.
\262\ See Greenfield at 2 (``We applaud the basic restrictions
that are proposed on the ability of MARS providers * * * to request
and accept advance fees. These restrictions are warranted because
there is ample evidence from the state Attorneys General and other
sources in California and nationwide that persons who are looking to
take advantage of distressed consumers are gravitating toward this
relatively new field.'').
---------------------------------------------------------------------------

In the NPRM, the Commission requested comment on possible
alternatives to the proposed advance fee ban, e.g., permitting a
limited advance fee or allowing providers to require consumers to set
fees aside in a dedicated account.\263\ In response to this request,
state attorneys general and regulators argued that the alternatives on
which the Commission requested comment would be inadequate to prevent
deception and unfairness.\264\ Several consumer group comments
similarly recommended that the Commission not adopt either of these
alternatives. For example, three commenters specifically opposed
allowing providers to collect a fixed, limited advance fee; \265\ two
of the three argued that providers would collect any upfront fee amount
permitted and never provide any benefits to consumers.\266\ Other
commenters urged the Commission not to permit providers to force
consumers to set aside fees in dedicated accounts.\267\ Among other
reasons, these commenters asserted that allowing MARS providers to
require such accounts would place the onus on consumers to recover the
deposited funds if providers failed to perform.\268\
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\263\ 75 FR at 10730-31. For purposes of discussion in this
Section of the SBP, the Commission uses the phrase ``dedicated
account'' to include any account into which a MARS provider might
request or require consumers to set aside fees to ensure that the
provider can later collect them. The term encompasses an ``escrow
account,'' a phrase frequently used in the real estate context to
describe an account controlled by a third-party administrator into
which a consumer places a deposit for the purchase of a home. It
also encompasses a ``trust account,'' a phrase most commonly used to
describe funds paid by clients to attorneys, which attorneys set
aside and from which they later collect or withdraw their fees. The
public comments and other materials in the record sometimes use
these phrases interchangeably, and the Commission intends for
``dedicated accounts'' to include all of these mechanisms, and any
other variations, for setting aside consumer funds.
\264\ See NAAG at 2-3; MA AG at 2; CSBS at 4; see also NYC DCA
at 5. Specifically, NAAG raised concerns that the use of dedicated
accounts would not protect consumers because (as demonstrated in one
law enforcement action described in its comment) providers might
inappropriately access the funds set aside or refuse to return those
funds to consumers. NAAG at 2-3. In response to similar concerns
about permitting dedicated accounts in the provision of debt relief
services, for purposes of its recent amendments to the TSR, the
Commission imposed several conditions for using such accounts to
ensure that providers do not improperly obtain or control the funds.
See TSR; Final Rule, 75 FR at 49490-91.
\265\ CUUS at 6; LCCR at 4; LOLLAF at 5.
\266\ LOLLAF at 5; CUUS at 6.
\267\ LFSV at 3; CUUS at 7; WMC at 2; LOLLAF at 5.
\268\ LFSV at 3; LOLLAF at 5.
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b. Comments Opposing the Proposed Advance Fee Ban
A number of MARS providers, many of them attorneys,\269\ submitted
comments opposing the proposed advance fee ban.\270\ These commenters
offered several reasons for their opposition. First, MARS providers
argued that their services frequently confer substantial benefits on
consumers, including collecting, reviewing, and explaining to consumers
the paperwork sent by lenders and servicers; \271\ making repeated
phone calls on behalf of consumers to lenders and servicers to ensure
that they have received necessary information and documents; \272\
advising consumers on whether they would be eligible for a loan
modification or other alternative; \273\ recommending that consumers
consider bankruptcy; \274\ and offering emotional support.\275\ At
least two MARS providers submitted comments claiming that they have
secured loan modifications for a large number of their customers,\276\
although they offered no data or other substantiation for these claims.
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\269\ See, e.g., Mobley; Deal; Rogers; Dargon; Holler; Giles;
1st ALC. Many of the objections that MARS providers who are
attorneys raised to the proposed advance fee ban applied equally to
non-attorney MARS providers. Other objections were attorney-
specific.
\270\ See, e.g., MFP (non-attorney provider); Metropolis (same);
Rate Modifications (same); Fortress (same).
\271\ See, e.g., Giles at 3-4; Dargon at 2.
\272\ See, e.g., Dargon at 2; Goldberg at 2; Greenfield at 4.
\273\ See, e.g., 1st ALC at 8.
\274\ See, e.g., Giles at 3.
\275\ See, e.g., Giles at 3 (``I do the `hand holding'
throughout the process and I am the one that assures them they are
not going to lose their homes.''). One commenter also noted that,
even when unsuccessful at obtaining a loan modification, he often
can force a delay in his customers' foreclosure proceedings so that
they can remain in their homes for an additional period of time. See
Carr at 3.
\276\ See Rogers at 2 (stating that his firm has obtained trial
modifications for over 90% of its customers and has never failed to
convert a trial modification into a permanent modification);
Hawthorne at 1 (``I have over 600 success stories, and i [sic] get
80 loan modifications in a month for our clients.'').
---------------------------------------------------------------------------

Second, MARS providers asserted that, without the ability to
collect fees in advance, legitimate MARS providers would be unable to
stay in business and would stop providing services, leaving consumers
either without assistance or vulnerable to illegitimate providers.\277\
These commenters argued that MARS providers need advance fees to cover
their ongoing operating costs--e.g., for payroll, office space, and
equipment--as well as the direct costs of seeking modifications, all of
which they incur prior to obtaining the modifications.\278\ The
commenters claimed that, as a result of delays and other problems
lenders and servicers cause, it can take from several months to a year
to obtain a modification, a long time to go without being paid.\279\
The commenters also argued that they need consumers' payments upfront
because most consumers who purchase MARS are in financial distress and
may be unwilling or unable to pay the amount owed to the provider even
when the provider has completely fulfilled its promises.\280\
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\277\ See, e.g., Sygit at 1; Rate Modifications at 1; Rogers at
9-10; Wallace at 1; Holler at 1; Giles at 3; Dargon at 1, 3; Carr at
5; Goldberg at 1-2; Deal at 4. One comment submitted by a group of
attorneys who provide MARS suggested that many attorneys in
California have already stopped offering these services to consumers
as a result of that state's advance fee ban, which recently became
applicable to attorneys. See Greenfield at 4.
\278\ See, e.g., Rogers at 9; Dix at 1; GLS at 1; Hunter at 1
(``How are the lights, phones, computers, marketing, and payroll to
be met if we only receive compensation down the road?'').
\279\ See, e.g., Rogers at 9; Peters at 1; GLS at 1; Dargon at
3; Giles at 3 (noting that ``a successful loan modification takes a
year, and is never accomplished in less than six (6) months'');
Greenfield at 4 (``Mortgage loan modifications often take from six
months to a year to reach a resolution.'').
\280\ USHS at 1; Rogers at 9; ARS/Peters at 1; GLS at 1; ARS/
Peters at 1 (stating that, under California law barring upfront
fees, ``I am having to spend hours chasing down payments from
clients and getting the run around''); Deal at 5 (``I am not
interested in chasing clients who fail to pay. It is usually a waste
of time and money.'').
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2. Legal Basis
a. Unfairness
Based on the record in this proceeding, the Commission concludes
that it is an unfair act or practice for MARS providers to charge
advance fees, because: (1) It causes or is likely to

[[Page 75116]]

cause substantial injury to consumers; (2) the injury is not outweighed
by countervailing benefits to consumers or competition; and (3) the
injury is not reasonably avoidable by consumers themselves.\281\ To
prevent this injury, the Final Rule bans MARS providers from collecting
advance fees for their services.
---------------------------------------------------------------------------

\281\ 15 U.S.C. 45(n).
---------------------------------------------------------------------------

(1) Consumer Injury from Advance Fees
The record shows that charging fees for MARS prior to delivering
results--the most common business model in this industry \282\--causes
or is likely to cause substantial injury to consumers. Consumers in
financial distress suffer monetary harm--in the hundreds or thousands
of dollars--when, following sales pitches frequently characterized by
high pressure and deception, they use their scarce funds to pay in
advance for promised results that rarely materialize.\283\ When MARS
providers fail to perform, consumers may lose funds they need to make
monthly mortgage payments and thus may lose their homes as well.
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\282\ See supra notes 47-49 and accompanying text. In the
Commission's law enforcement actions, MARS providers uniformly have
charged advance fees to consumers. See FTC Case List, supra note 28.
But see USHS at 1 (MARS provider stating that he only collects fees
after obtaining a trial modification for his customers).
\283\ See TSR; Final Rule, 75 FR at 48482. Moreover, this
practice creates incentives for MARS providers that are
fundamentally at odds with the interests of consumers--to expend
their resources on soliciting customers and collecting fees, rather
than providing services. See also id. at 48484.
---------------------------------------------------------------------------

(a) Consumers Are Injured Because They Pay for Services That Are
Never Provided
The record shows that MARS providers do not achieve successful
results for the vast majority of their customers. Consumers who pay
advance fees but do not receive promised benefits lose the often
considerable sums they have paid for MARS services (typically hundreds
or thousands of dollars), funds financially-distressed consumers often
need to make mortgage payments or meet other basic needs.\284\
---------------------------------------------------------------------------

\284\ See, e.g., NCRC (ANPR) at 3 (``The high costs of loan
modification and foreclosure rescue services may also prevent
financially stressed consumers from being able to pay their regular
mortgage payment, if they buy into companies' promises. If the
company does not deliver, they may be unable to correct the
delinquency for lack of these funds.''); NAAG (ANPR) at 10 (``Paying
the fee upfront likely means that some of the consumer's other bills
will not be paid or that the consumer will have to use credit cards
or funds from friends or family.''); MN AG (ANPR) at 2 (``These
advance fees often make it even more difficult for the homeowner--
and the loan modification or foreclosure rescue consultant--to
effectively resolve the homeowner's financial dilemma.''); see also
TSR; Final Rule, 75 FR at 48484.
---------------------------------------------------------------------------

The FTC and state law enforcement agencies have collectively filed
over two hundred cases against MARS providers.\285\ These cases
typically have alleged that the defendants employed deceptive success
claims to entice consumers to purchase their services, and then did not
produce the results they promised.\286\ In one recent FTC action, for
example, the court found that defendants successfully obtained loan
modifications for fewer than 5% of their customers, despite their
frequent claims of a 90% or 100% success rate.\287\ Similarly, the
court in another FTC lawsuit concluded that the defendants had a
success rate of ``no more than between 1% and 10%.'' \288\ The Illinois
Attorney General likewise submitted a comment stating that in the
majority of its lawsuits against MARS providers, virtually none of the
defendants' customers appear to have receive promised services or
results.\289\
---------------------------------------------------------------------------

\285\ Financial Services and Products: The Role of the Federal
Trade Commission in Protecting Consumers, Hearing Before the S.
Comm. on Commerce, Sci. & Transp., 111th Cong. 6 (2010) (testimony
of FTC).
\286\ See, e.g., FTC Case List, supra note 28; NAAG (ANPR) at 6
(``In our experience, we have found that services provided by
foreclosure rescue services companies result only in costs to
consumers. There are no benefits. The companies collect an upfront
fee that consumers can ill-afford to pay. Consumers then submit
financial information to the companies and the companies promise to
forward the information to the consumers' loan servicers and obtain
a loan modification offer. In the majority of cases, the companies
do nothing with the consumers' information. The consumers then end
up turning to a non-profit for help, calling their servicers
themselves, or falling further behind on their mortgage payments as
they wait for the promised loan modification offer that never
materializes.''); see also, e.g., Press Release, Cal. Att'y Gen.,
Four Arrested, Five Wanted for Fleecing Hundreds of Homeowners
Seeking Foreclosure Relief (May 20, 2010) (criminal matter alleging
that, ``[i]n almost every case, no loan modifications were completed
[by defendants], as promised,'' although they promoted 90% to 100%
success rates), available at http://ag.ca.gov/newsalerts/release.php?id=1923; NAAG (ANPR) at 3 (``As of July 1, 2009, the
Office of the Illinois Attorney General had identified roughly 170
companies operating in Illinois that appeared to have offered or
were presently offering foreclosure rescue services that violated
Illinois state laws. The majority of these companies take
impermissible up-front fees and then fail to deliver promised
services.''); MN AG (ANPR) at 2 (``As a general rule, these
companies provide no service, or at most, simply submit paperwork to
the homeowner's mortgage company.''); Chase (ANPR) at 1 (``Chase's
experience has been that MARS entities disrupt the loan modification
process and provide little value in exchange for the high fees they
charge.'').
\287\ FTC v. Data Med. Capital, Inc., No. SA-CV-99-1266 AHS
(Eex), Contempt Or. at 55 (C.D. Cal. filed Jan. 15, 2010).
\288\ FTC v. Truman Foreclosure Assistance, LLC, No. 09-23543,
Order Granting Prelim. Injunct. at 11 (S.D. Fla. entered Jan. 11,
2010); see also, e.g., FTC v. Federal Loan Modification Ctr., LLP,
No. SACV 09-401 CJC (MLGx), Mem. Sup. Pls. Mot. Supp. Summ. J. at 13
(C.D. Cal. filed Oct. 6, 2010) (alleging that company obtained
results for consumers at a rate ranging from 8.9% to 17.76%); FTC v.
Loss Mitigation Servs., Inc., No. SACV09-800 DOC (ANX), Rep. Mem.
Supp. Prelim. Injunct. at 2 (C.D. Cal. filed Aug. 13, 2009)
(alleging that, even according to statistics self reported by
defendant, ``only 27% of [defendant's] clients were `approved' for a
loan modification, and only 16% found the modification
acceptable''); FTC v. US Foreclosure Relief Corp., No. SACV09-768
JVS (MGX), Second Int. Rep. Temp. Receiver at 4 (C.D. Cal. filed
Sept. 17, 2009) (estimating that 21% of defendants' customers were
approved for loan modifications); FTC v. LucasLawCenter ``Inc.'',
No. SACV-09-770 DOC (ANX), Mem. Supp. TRO at 19 (C.D. Cal. filed
July 7, 2009) (alleging that ``[n]early every consumer who is
promised a loan modification never received any offer to modify
their home loans''); FTC v. Freedom Foreclosure Prevention
Specialists, LLC, No. 2:09-cv-01167-FJM (D. Ariz. June 1, 2009)
(alleging that defendants only completed loan modifications for
about 6% of customers).
\289\ See IL AG (June 30, 2010) at 2-4; see also GAO Report,
supra note 45, Executive Summary (finding that ``the most active
[MARS] scheme is one in which individuals or companies charge a fee
for services not rendered'').
---------------------------------------------------------------------------

Consumers are especially unlikely to obtain the claimed results if
the MARS provider has promised a loan modification.\290\ Many consumers
who purchase services from MARS providers are not even eligible for the
government programs that offer incentives for lenders and servicers to
make loan modifications.\291\ Apart from these programs, lenders and
servicers often are unwilling to modify the terms of loans or forgive
fees and penalties as an alternative to foreclosure.\292\ Even if
lenders and servicers might be amenable to modification, many MARS
providers often do little or no work for their customers--for example,
neglecting to contact lenders or servicers or failing to respond to
their requests for basic information--thereby increasing the

[[Page 75117]]

odds even further that their customers will not receive the promised
results.\293\
---------------------------------------------------------------------------

\290\ See, e.g., FTC Case List, supra note 28.
\291\ See, e.g., Manuel Adelino et al., Why Don't Lenders
Renegotiate More Home Mortgages? Redefaults, Self-Cures, and
Securitization 3 (Federal Reserve Bank of Atlanta, Working Paper No.
2009-17a, 2009), available at http://www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf (finding that lender provided monthly payment-
lowering modifications to only 3% of seriously delinquent loans in
2007 and 2008); NCLC at 6 (pointing to ``[o]ne analysis of
statistics for modifications made in May 2009 [which] showed that
only 12% reduced the interest rate or wrote-off fees or
principal'').
\292\ See supra note 291; see also, e.g., Alan M. White,
Deleveraging the American Homeowner: The Failure of 2008 Voluntary
Mortgage Contract Modifications, 41 Conn. L. Rev. 1107, 1111 (2009)
(arguing, inter alia, that ``[n]o single servicer or group of
servicer * * * has any incentive to organize a pause in foreclosures
or organized deleveraging program to benefit the group''). But see
Press Release, HOPE NOW, HOPE NOW Reports More Than 476,000 Loan
Modifications in First Quarter of 2010 (May 10, 2010) (coalition
including mortgage servicers announcing that its members have
offered 2.88 million loan modifications to consumers), available at
http://www.hopenow.com/press_release/files/1Q%20Data%20Release_05_10_10.pdf.
\293\ See supra note 79.
---------------------------------------------------------------------------

In addition to past law enforcement actions, the significant and
growing number of consumer complaints about MARS providers strongly
suggests that they are continuing to fail to deliver the results they
promise. For example, one coalition of government and private groups
that collects consumer complaints regarding MARS received 3,461
consumer complaints against MARS providers between April and August of
2010.\294\ Similarly, state and local consumer protection agencies
reported that fraudulent offers of help to save homes from foreclosure
was the fastest growing complaint category in 2009.\295\
---------------------------------------------------------------------------

\294\ See Loan Modification Scam Prevention Network (LMSPN),
National Loan Modification Scam Database Report--August 2010,
available at http://www.preventloanscams.org/tools/assets/files/August-LMSPN-Report-Final.pdf; LMSPN, National Loan Modification
Scam Database Report--July 2010, available at http://www.preventloanscams.org/tools/assets/files/July-LMSPN-Report-Final.pdf; LMSPN, National Loan Modification Scam Database Report--
June 2010, available at http://www.preventloanscams.org/newsroom/publications_and_testimony?id=0011; LMSPN, National Loan
Modification Scam Database Report--May 2010, available at http://www.preventloanscams.org/tools/assets/files/May-LMSPN-Report-Final.pdf; LMSPN, National Loan Modification Scam Database Report--
April 2010, available at http://www.preventloanscams.org/tools/assets/files/April-LMSPN-Report-Final.pdf.
\295\ Consumer Fed'n of Am., 2009 Consumer Complaint Survey
Report 25 (July 27, 2010) (surveying state and local government
agencies regarding their consumer complaints), available at http://www.consumerfed.org/elements/www.consumerfed.org/file/Consumer_Complaint_Survey_Report072009.pdf. Moreover, the Financial Crimes
Enforcement Network reported that financial institutions submitted
about 3,000 suspicious activity reports related to loan modification
and foreclosure rescue scams in 2009. FinCEN, Loan Modification and
Foreclosure Rescue Scams--Evolving Trends and Patterns in Bank
Secrecy Act Reporting at 10 (May 2010), available at http://www.fincen.gov/news_room/rp/files/MLFLoanMODForeclosure.pdf
(FinCEN, Foreclosure Rescue Fraud Report May 2010).
---------------------------------------------------------------------------

The Commission's extensive experience with consumer complaints
teaches that such complaints--while not a representative sample of MARS
consumers--are the ``tip of the iceberg'' in terms of the actual levels
of consumer dissatisfaction.\296\ The Commission has decades of
experience in its law enforcement work in drawing inferences from the
number and types of consumer complaints. In this matter, the frequency
and consistency of the conduct described in consumer complaints raises,
at a minimum, a strong inference that this conduct is widespread in the
MARS industry. The complaint data corroborates the other evidence in
the record discussed above that MARS providers, after collecting
substantial advance fees, fail to deliver promised results for most
consumers.
---------------------------------------------------------------------------

\296\ See, e.g., Dennis E. Garrett, The Frequency and
Distribution of Better Business Bureau Complaints: An Analysis Based
on Exchange Transactions, 17 J. Consumer Satisfaction,
Dissatisfaction, & Complaining Behav. 88, 90 (2004) (noting that
only a small percentage of dissatisfied consumers complain to third-
party entities or agencies); Jeanne Hogarth et al., Problems with
Credit Cards: An Exploration of Consumer Complaining Behaviors, 14
J. Consumer Satisfaction, Dissatisfaction, & Complaining Behav. 88,
98 (2001) (finding that only 7% of consumers having problems with
their credit card company complain to third-party entities or
agencies).
---------------------------------------------------------------------------

(b) The Context in Which MARS Are Offered Has Contributed to the
Substantial Injury
The Commission concludes that several aspects of the marketing of
MARS have contributed to the substantial injury caused by charging
advance fees. First, MARS providers direct their claims to financially
distressed consumers who often are desperate for any solution to their
mortgage problems and thus are vulnerable to the providers' purported
solutions.\297\ The Commission has long held that the risk of injury is
exacerbated in situations in which sellers exercise undue influence
over susceptible classes of purchasers.\298\
---------------------------------------------------------------------------

\297\ See Unfairness Policy Statement, supra note 187, at 1074
(noting that the Commission may consider the ``exercise [of] undue
influence over highly susceptible classes of purchasers'' as part of
the unfairness analysis).
\298\ Id. at 1074 n.3.
---------------------------------------------------------------------------

Second, MARS providers frequently use high pressure sales tactics
in selling their services.\299\ Thus, the manner in which MARS are sold
impedes the free exercise of consumer decision making, a traditional
hallmark of an unfair practice.\300\
---------------------------------------------------------------------------

\299\ See, e.g., FTC v. Loss Mitigation Servs., Inc., No.
SACV09-800 DOC (ANX), Mem. Supp. TRO at 17 (C.D. Cal. filed July 13,
2009) (``Defendants [allegedly] create[d] an atmosphere of pressure
and urgency to encourage consumers to pay the up-front fee. In
numerous instances, Defendants' representatives have sent consumers
emails transmitting [defendants'] loan modification application that
includes arbitrary deadlines and other warnings to pressure
consumers to return the information fast * * * [including statements
that] `[i]f the Application Process and Mitigation Process are not
handled with precision and a sense of urgency you could very likely
lose your home' and `[i]t is extremely important that this
application be faxed back by the (3) day deadline to avoid
cancellation of the file.'''); FTC v. Truman Foreclosure Assistance,
LLC, No. 09-23543, Mem. Supp. P.I. at 14-15 (S.D. Fla. filed Nov.
23, 2009) (alleging that defendants' Web sites stated, ``[t]he
single-most important factor in stopping your foreclosure is SPEED!
Time is not your friend'' and that defendants' solicitations stated
``[y]ou must act immediately,'' and ``URGENT NOTICE: Please Call
Immediately!''); FTC v. Data Med. Capital Inc., No. SA-CV-99-1266
AHS (Eex), Mem. Supp. App. Contempt at 8 (C.D. Cal. filed May 27,
2009) (``The fuel for [defendant's alleged] scheme was the desperate
plight of consumers facing a recessionary economy and a free falling
real estate market. * * * [T]elemarketers were trained to * * *
`capitalize on fear' and `create urgency.' '').
\300\ See TSR; Final Rule, 75 FR at 48485 & n.379 (citing
Unfairness Policy Statement, supra note 187, at 1074); In re Amrep,
102 F.T.C. 1362 (1983), aff'd, 768 F. 2d 1171 (10th Cir. 1985); In
re Horizon Corp., 97 F.T.C. 464 (1981); In re Sw. Sunsites, 105
F.T.C. 7, 340 (1985), aff'd, 785 F. 2d 1431 (9th Cir. 1986).
---------------------------------------------------------------------------

Third, the transactions in which consumers agree to purchase MARS
and make advance payments often take place in the context of extensive
deception.\301\ To induce consumers to purchase their services and pay
advance fees, MARS providers make aggressive performance claims. As
discussed above, in their ads and in follow-up telemarketing and email
interactions with consumers, MARS providers commonly claim that there
is a high probability, or even a guarantee, that they will obtain
dramatic reductions in payments or other mortgage relief.\302\ To
increase the credibility of these claims, many MARS providers
misrepresent that they have special expertise in mortgage relief
assistance and a close affiliation with the government, a non-profit
program, or the consumer's lender or servicer.\303\ Morever, providers
seek to allay concerns consumers might have about paying in advance by
falsely claiming that they will provide refunds if they do not obtain
the promised results.\304\
---------------------------------------------------------------------------

\301\ As the Commission recently concluded in promulgating the
debt relief amendments to the TSR, transactions characterized by
deception exacerbate the potential for consumer injury. See TSR;
Final Rule, 75 FR at 48485.
\302\ Supra note 75.
\303\ Supra notes 72-74.
\304\ See supra note 77.
---------------------------------------------------------------------------

Finally, charging advance fees for MARS requires consumers to bear
the full risk of the possible failure of the provider to perform, even
though the provider is in a better position to assume risk. When
selling MARS to consumers, only the MARS provider knows how frequently,
and under what circumstances, it has been successful in the past.
Consumers, in contrast, are not likely to know whether a successful
outcome is likely for them. Consumers are injured by a business model
that forces them to bear the full risk of nonperformance and the
resulting harm, particularly, as in this context, where the seller is
in a better position to know and account for the risks.\305\
---------------------------------------------------------------------------

\305\ See TSR; Final Rule, 75 FR at 48485 (citing Cooling Off
Period For Door-to-Door Sales; Trade Regulations Rule and Statement
of Basis and Purpose, 37 FR 22934, 22947 (Oct. 26, 1972) (codified
at 16 CFR 429)); Preservation of Consumers' Claims and Defenses,
Statement of Basis and Purpose, 40 FR 53506, 53523 (Nov. 18, 1975)
(codified at 16 CFR 433) (same); In re Orkin Exterminating, 108
F.T.C. 263, 364 (``By raising the fees, Orkin unilaterally shifted
the risk of inflation that it had assumed under the pre-1975
contracts to its pre-1975 customers.''), aff'd 849 F.2d 1354 (11th
Cir. 1988); In re Thompson Med. Co., 104 F.T.C. 648 (1984) (noting
that marketers must provide a high level of substantiation to
support ``claim[s] whose truth or falsity would be difficult or
impossible for consumers to evaluate by themselves'').

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[[Page 75118]]

Thus, the Commission concludes that the practice of charging an
advance fee for MARS causes or is likely to cause substantial consumer
injury.\306\
---------------------------------------------------------------------------

\306\ For similar reasons, the TSR prohibits advance fees for
three types of services that often are promoted deceptively to
consumers in financial crisis: debt relief services, credit repair
services, and certain loan offers. See 16 CFR 310.4(a); TSR; Final
Rule, 75 FR at 48484-85. The Credit Repair Organizations Act also
bans the collection of advance fees for credit repair services. 15
U.S.C. 1679b(b).
---------------------------------------------------------------------------

(2) Benefits to Consumers or Competition From Advanced Fees
The second factor in the unfairness analysis under Section 5(n) of
the FTC Act is a consideration of whether an act or practice has
benefits to consumers and competition and, if so, whether they outweigh
the actual or likely harm to consumers. MARS provider commenters
posited two main arguments to support their contention that charging
advance fees is beneficial to consumers.
First, the providers argued that, in exchange for their upfront
fees, they provide significant benefits to consumers in the form of
completed services and successful results.\307\ However, the rulemaking
record demonstrates that the vast majority of consumers fail to receive
successful loan modifications or other forms of mortgage assistance
promised.\308\ In the ANPR and NPRM, the Commission specifically
requested empirical evidence on the success rates of MARS providers in
delivering promised results.\309\ No such evidence was submitted.
Although a few comments from MARS providers included anecdotes and
unsupported assertions of success,\310\ the bulk of the comments \311\
and the Commission's law enforcement experience provide strong evidence
that MARS providers rarely deliver the results they promise.
---------------------------------------------------------------------------

\307\ See supra Sec. III.E.1.b.
\308\ As noted earlier, MARS providers suggest that, even in
instances where they do not secure the promised result, they offer
consumers other services that are beneficial to them, such as day-
to-day assistance in communicating with servicers or lenders, delays
in foreclosure proceedings, and emotional support. See supra Sec.
III.E.1.b. There is no evidence in the record establishing the
frequency with which providers deliver these ``benefits.'' In any
event, providers generally do not advertise such services or
ancillary ``benefits,'' but instead solicit customers by touting the
end result, such as a modified loan. Presumably, this is because
consumers are much more interested in receiving, and much more
willing to pay for, the promised result. See TSR; Final Rule, 75 FR
at 48479 (dismissing arguments that debt relief service providers
offer ancillary services such as education and financial advice
because industry members did not provide evidence to establish how
many providers offer the services, how extensive they are, or how
much they cost to provide).
\309\ MARS ANPR, 74 FR at 26137; MARS NPRM, 75 FR at 10727,
10729.
\310\ Only one MARS commenter offered a self-reported success
rate, stating that he places over 90% of his clients into trial or
permanent loan modifications. See Rogers at 1. However, this
commenter did not submit any additional information or data
supporting this claim. Another commenter reported anecdotal accounts
of a small number of consumers for whom he purportedly obtained loan
modifications. See Parkey (audio files). Another MARS provider
reported that it has over ``600 success stories'' and secures over
80 loan modifications per month. See, e.g., Metropolis at 1. This
commenter also failed to submit information or data supporting this
claim, defining ``success story,'' or indicating the percentage of
its customers who received modifications out of the total who
purchased the services.
\311\ See supra Sec. III.E.1.
---------------------------------------------------------------------------

Second, MARS providers have asserted that an advance fee ban would
impose undue burdens on them, because: (1) They would not have the cash
flow necessary to fund their day-to-day operations; \312\ and (2) they
might not get paid for the services they rendered given the precarious
financial situation of their customers.\313\ As a result, according to
these commenters, many MARS providers could not afford to stay in
business, and would therefore no longer be able to provide consumers
the benefits of their services.\314\
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\312\ See supra Sec. III.E.1.b.; see also, e.g., Gutner (ANPR)
at 1 (``[L]oan modification is not as simple as filling out a few
forms and then it is done. Loan modification is a long and involved
process. * * * Loan modification companies have expenses just like
any other company--payroll, lease, insurance, equipment etc.'');
TNLMA (ANPR) at 5 (``[MARS providers] incur significant costs before
the consumer's mortgage is ready to be modified.'').
\313\ See supra Sec. III.E.1.b.; see also, e.g., TNLMA (ANPR)
at 5 (``Nearly all professions, from attorneys to accountants to
personal trainers, charge advance fees. * * * The reason these other
professions charge fees `up-front' is to avoid the risk of being
`stiffed' at the end of a laboriously costly effort.'').
\314\ See supra Sec. III.E.1.b. One commenter argued,
alternatively, that the advance fee ban would compel legitimate MARS
providers to charge consumers higher fees to account for the risk of
nonpayment. Rogers at 18. There is no evidence in the record
substantiating this theory. Assuming that MARS providers compete
with one another, it is not clear that they would be able to raise
prices with impunity, thereby passing this cost on to consumers.
---------------------------------------------------------------------------

There is scant evidence in the rulemaking record to support this
argument, and no industry members submitted cost data to back up this
claim.\315\ The Commission cannot predict with precision the impact of
an advance fee ban, but recognizes it may force some MARS providers to
capitalize adequately to fund their initial operations, until they
begin receiving fees generated by their delivery of services.\316\
Companies in many other lines of business capitalize for this purpose.
Thus, although the advance fee ban in the Final Rule may result in new
business models,\317\ there is no evidence in the record to
substantiate the claim that MARS providers will not be able to operate
if they are paid after they deliver results to their customers.\318\
---------------------------------------------------------------------------

\315\ Notably, FTC law enforcement actions suggest that a
predominant portion of providers' costs are dedicated to marketing
and sales, instead of the process of assisting consumers obtain
mortgage relief. See, e.g., FTC v. US Foreclosure Relief Corp., No.
SACV09-768 JVS (MGX), Prelim. Rep. Temp. Receiver at 9 (C.D. Cal.
filed July 15, 2009) (``[T]he typical commission [for a MARS
provider's telephone sales people] was $450 for a fully paid sale--
i.e., $2,500--with an extra $25 if the consumer paid by debit card
or wire transfer.'').
\316\ See, e.g., LCCR at 4 (``The for-profit business should be
able to capitalize its business in a manner so that it can carry
forward these nominal fees as operating costs and then incorporate
that operating cost into the fee obtained from the consumer after
the services are rendered.''). See generally TSR; Final Rule, 75 FR
48458 (Aug. 10, 2010).
\317\ In connection with the FTC's recent amendments to the TSR
to curb deception and abuse in debt relief services, industry
representatives similarly argued that they would be unable to pay
their operating costs without collecting advance fees. See TSR;
Final Rule, 75 FR at 48486. In fact, after the Commission issued the
TSR amendments, a major debt relief trade association stated that
the rule, while providing a ``significant capital challenge'' to the
industry, would ``allow good companies that are getting results for
consumers'' to survive. Press Release, The Ass'n of Settlement Cos.,
TASC Announces Support for FTC Debt Settlement Rules (Aug. 17,
2010), available at http://www.marketwire.com/press-release/TASC-Announces-Support-for-FTC-Debt-Settlement-Rules-1305731.htm.
\318\ See TSR; Final Rule, 75 FR at 48486; Truth in Lending--
Final Rule; Fed Res. Brd. Official Staff Commentary, 75 FR 58509,
58518 (Sept. 24, 2010) (compensation restrictions for mortgage
brokers may result in new business models, but ``the Board does not
believe mortgage brokerage firms will no longer be able to compete
in the marketplace unless they can continue to engage in
compensation practices the Board has found to be unfair.'').
---------------------------------------------------------------------------

A ban on advance fees would shift some of the risk of
nonperformance under the contract from consumers to MARS providers. At
present, consumers bear the full risk--typically, they must pay
thousands of dollars up front with no assurance that they will ever
receive any benefit in return. The poor performance of this industry
makes it likely that consumers will be harmed if they continue to bear
the full risk of nonperformance.\319\ Prohibiting the charging of
advance fees reallocates some of this risk to MARS providers and gives
them a powerful incentive to actually deliver results.
---------------------------------------------------------------------------

\319\ Increased revenue or profit for a seller, alone, is not a
benefit to consumers or competition for purposes of unfairness
analysis. See In re Orkin Exterminating Comp., Inc., 108 F.T.C. 263,
365-66 (1986), aff'd, 849 F.2d 1354, 1363 (11th Cir. 1988).
---------------------------------------------------------------------------

In short, the Commission concludes that charging advance fees for
MARS

[[Page 75119]]

does not provide benefits to consumers or competition, and, even if
such benefits were to exist, they would not outweigh the substantial
injury this practice demonstrably causes or is likely to cause to
consumers.
(3) Reasonably Avoidable Harm
The third prong of the unfairness analysis under Section 5(n) of
the FTC Act requires the Commission to consider whether consumers could
reasonably avoid the harm caused by an act or practice. The Commission
finds an act or practice unfair ``not to second-guess the wisdom of
particular consumer decisions, but rather to halt some form of seller
behavior that unreasonably creates or takes advantage of an obstacle to
the free exercise of consumer decision making.'' \320\ The extent to
which a consumer can reasonably avoid injury is determined in part by
whether the consumer can make an informed choice.\321\ In this regard,
the Unfairness Policy Statement explains that certain types of sales
techniques may effectively prevent consumers from making informed
decisions and that corrective action may therefore be necessary.\322\
---------------------------------------------------------------------------

\320\ Unfairness Policy Statement, supra note 187, at 1074.
\321\ Id.
\322\ Id.
---------------------------------------------------------------------------

For harm to be reasonably avoidable, consumers must have ``reason
to anticipate the impending harm and the means to avoid it.'' \323\ As
discussed above, the deceptive success and other claims MARS providers
disseminate prevent or substantially hinder the ability of consumers to
recognize the risks they face in paying advance fees to MARS providers.
This is especially so because consumers often are under dire pressure
to make decisions quickly. Moreover, consumers have little experience
with purchasing services to stave off foreclosure, which is not a
routine consumer transaction, whereas the provider has presumably
handled the transaction many times.
---------------------------------------------------------------------------

\323\ Orkin Exterminating Co., 108 F.T.C. 263, 366 (1986),
aff'd, 849 F.2d 1354, 1368 (11th Cir. 1988); see Int'l Harvester
Co., 104 F.T.C. 949, 1061 (1984) (``whether some consequence is
`reasonably avoidable' depends not just on whether they know the
physical steps to take in order to prevent it, but also whether they
understand the necessity of actually taking those steps.'').
---------------------------------------------------------------------------

Once they have paid in advance and learned that a MARS provider has
not obtained a result they are willing to accept, consumers cannot
reasonably eliminate or mitigate the harm.\324\ As discussed above,
MARS providers rarely provide refunds for nonperformance.\325\ In
addition, although consumers may have the right under state law to
bring breach of contract actions to recover advance fees from MARS
providers who do not perform, many consumers are unaware of their legal
rights or are unable to afford the costs and risks of litigation.\326\
Thus, the Commission finds that consumers cannot reasonably avoid the
injuries they face in connection with MARS providers charging advance
fees.
---------------------------------------------------------------------------

\324\ See Int'l Harvester Co., 104 F.T.C. at 366 (Consumers
``seek to mitigate the damage afterward if they are aware of
potential avenues toward that end.'').
\325\ Even if MARS providers granted refunds, it would not be
sufficient to eliminate the harm to consumers from paying the
advance fee because financially distressed consumers are deprived of
the use of the money from the time of payment to the time of refund
and because the process of obtaining a refund from a MARS provider
imposes costs on them. See FTC v. Think Achievement Corp., 312 F. 3d
259, 261 (7th Cir. 2002) (``This might be a tenable argument if
obtaining a refunds were costless, but of course it is not. No one
would buy something knowing that it was worthless and that therefore
he would have to get a refund of the purchase price.'').
\326\ See Unfairness Policy Statement, supra note 187, at 1074
n.19 (``In some senses any injury can be avoided--for example, * * *
by private legal actions for damages--but these courses may be too
expensive to be practicable for individual consumers to pursue.'');
see also In re Orkin Exterminating, 108 F.T.C. at 379-80 (Oliver,
Chmn., concurring) (suing for breach of contract is not a reasonable
means for consumers to avoid injury).
---------------------------------------------------------------------------

(4) Public Policy Concerning Advance Fees
Section 5(n) of the FTC Act permits the Commission to consider
established public policies in determining whether an act or practice
is unfair, although those policies cannot be the primary basis for that
determination.\327\ At least 20 states currently prohibit charging
advance fees for MARS because of its adverse impact on consumers.\328\
Consistent with these state statutes and their law enforcement
experience, over 40 attorneys general filed comments strongly
advocating an FTC rule prohibiting advance fees for MARS.\329\ Thus,
public policies embodied in state laws and law enforcement further
support the Commission's finding that this practice is unfair.\330\
---------------------------------------------------------------------------

\327\ 15 U.S.C. 45(n).
\328\ See supra note 98.
\329\ See NAAG at 2-3; NAAG (ANPR) at 9; MN AG (ANPR) at 4; MA
AG (ANPR) at 2; OH AG (ANPR) at 3.
\330\ Unfairness Policy Statement, supra note 187, at 1075
(``Conversely, statutes or other sources of public policy may
affirmatively allow for a practice that the Commission tentatively
views as unfair. The existence of such policies will then give the
agency reason to reconsider its assessment of whether the practice
is actually injurious in its net effects.'').
---------------------------------------------------------------------------

For the reasons set forth above, the Commission concludes that
charging an advance fee for MARS is an unfair act or practice under
Section 5(n) of the FTC Act.\331\
---------------------------------------------------------------------------

\331\ As noted earlier, the Commission reached the same
conclusion, for similar reasons, with respect to the charging of an
advance fee for four other products or services covered by the TSR
that have been routinely misrepresented: debt relief services,
credit repair services, money recovery services, and guaranteed
loans or other extensions of credit. See Telemarketing Sales Rule
Statement of Basis and Purpose, 68 FR 4580, 4614 (Jan. 29, 2003)
(codified at 6 CFR 310.4(a)). Although the TSR declares the charging
of advance fees in these contexts to be ``abusive''--the term used
in the Telemarketing Act--the Commission used the unfairness test
set forth in Section 5(n) of the FTC Act in finding that the
practice was abusive. See 75 FR at 48482-87; TSR: Notice of Proposed
Rulemaking, 67 FR 4492-4511 (Jan. 30, 2002).
---------------------------------------------------------------------------

b. The Advance Fee Ban Is Reasonably Related to the Goal of Preventing
Deception
As explained above, the Omnibus Appropriations Act, as clarified by
the Credit Card Act, authorized the FTC not only to prohibit conduct
that is itself unfair or deceptive, but also to adopt rules that are
reasonably related to preventing unfair or deceptive conduct in
connection with MARS.\332\ For the reasons detailed here, the
Commission concludes that an advance fee ban for MARS is reasonably
related to the goal of protecting consumers from the deception that is
widespread in the offering of these services.
---------------------------------------------------------------------------

\332\ See supra note 105.
---------------------------------------------------------------------------

As detailed in Section II of this SBP, MARS providers commonly make
deceptive claims as to the results they will obtain. These claims
induce consumers to pay advance fees of hundreds or thousands of
dollars for results the providers typically do not deliver. Because the
likelihood of consumers pursuing judicial remedies against
nonperformance is small,\333\ MARS providers have little incentive to
perform, and in fact many do not.\334\ The advance fee ban proposed in
Sec. 322.5 realigns the incentives of MARS providers to deliver on
their promises, because they will not be paid until they deliver
results that the consumer finds acceptable.\335\ As a result, the ban
is

[[Page 75120]]

likely to discourage providers from making deceptive claims and is thus
reasonably related to the goal of preventing deception.\336\ Although
the Final Rule prohibits deceptive representations and mandates certain
disclosures, there is no assurance that these measures will be
effective in every case or that all providers will abide by them. The
advance fee ban will provide additional protection against continued
deception in this industry,
---------------------------------------------------------------------------

\333\ See supra note 326.
\334\ See supra Sec. III.E.3. In addition, purchases of MARS
typically are a one-time event, and thus reputational costs are
unlikely to be a major deterrent for providers.
\335\ See, e.g., LOLLAF at 4; CRL at 5 (``[W]e are supportive of
the comprehensive ban on advance fees proposed by the FTC, which
would align the incentives of MARS providers and consumers.''); NAAG
at 5 (``Requiring these companies to obtain the promised loan
modification as a condition of being paid will substantially reduce
their incentive for making false or inflated promises of foreclosure
assistance.''); LCCR at 4 (``The ban will * * * incentiviz[e] MARS
providers to represent their capabilities in a way that reflects
services they can realistically provide in a timely manner. After
all, the sooner the providers are able to make good on the
representations to the consumer, the sooner they will be able to
charge their fees.''); CUUS at 6 (``[W]e believe that imposing this
requirement will force for-profit MARS providers to sell their
services only to those they can reasonably expect to help rather
than anyone they can sign up to generate advance fees even when
there is no hope of offering them the help they seek.''); MARS NPRM,
75 FR at 10719 n.148.
\336\ See supra note 105.
---------------------------------------------------------------------------

3. The Ban on Advance Payments
Section 322.5 of the Final Rule provides that:
It is a violation of this rule for any mortgage assistance relief
service provider to:
(a) Request or receive payment of any fee or other consideration
until the consumer has executed a written agreement between the
consumer and the consumer's dwelling loan holder or servicer
incorporating the offer of mortgage assistance relief the provider
obtained from the consumer's dwelling loan holder or servicer;
(b) Fail to disclose, at the time the mortgage assistance relief
service provider furnishes the consumer with the written agreement
specified in paragraph (a) of this section, the following information:
``This is an offer of mortgage assistance we obtained from your lender
[or servicer]. You may accept or reject the offer. If you reject the
offer, you do not have to pay us. If you accept the offer, you will
have to pay us [same amount as disclosed pursuant to Sec. 322.4(b)(1)]
for our services.'' The disclosure required by this paragraph must be
made in a clear and prominent manner, on a separate written page, and
preceded by the heading: ``IMPORTANT NOTICE: Before buying this
service, consider the following information.'' The heading must be in
bold face font that is two point-type larger than the font size of the
required disclosure; or
(c) Fail to provide, at the time the mortgage assistance relief
service provider furnishes the consumer with the written agreement
specified in paragraph (a) of this section, a notice from the
consumer's dwelling loan holder or servicer that describes all material
differences between the terms, conditions, and limitations associated
with the consumer's current mortgage loan and the terms, conditions,
and limitations associated with the consumer's mortgage loan if he or
she accepts the dwelling loan holder's or servicer's offer, including
but not limited to differences in the loan's:
(i) Principal balance;
(ii) Contract interest rate, including the maximum rate and any
adjustable rates, if applicable;
(iii) Amount and number of the consumer's scheduled periodic
payments on the loan;
(iv) Monthly amounts owed for principal, interest, taxes, and any
mortgage insurance on the loan;
(v) Amount of any delinquent payments owing or outstanding;
(vi) Assessed fees or penalties; and
(vii) Term
The notice must be made in a clear and prominent manner, on a separate
written page, and preceded by the heading: ``IMPORTANT INFORMATION FROM
YOUR [name of lender or servicer] ABOUT THIS OFFER.'' The heading must
be in bold face font that is two-point-type larger than the font size
of the required disclosure.
(d) Fail to disclose in the notice specified in paragraph (c) of
this section, in cases where the offer of mortgage assistance relief
the provider obtained from the consumer's dwelling loan holder or
servicer is a trial mortgage loan modification, the terms, conditions,
and limitations of this offer, including but not limited to, (i) the
fact that the consumer may not qualify for a permanent mortgage loan
modification, and (ii) the likely amount of the scheduled periodic
payments and any arrears, payments, or fees that the consumer would owe
in failing to qualify.
This provision is intended to prevent MARS providers from
requesting or receiving any fees or any other form of compensation,
including an equity stake in consumers' property, until they have
delivered a loan modification or another result the consumer accepts.
a. The Consumer Acceptance Requirement
Section 322.5(a) of the Final Rule prohibits a MARS provider from
collecting a fee until ``the consumer has executed a written agreement
between the consumer and the consumer's dwelling loan holder or
servicer incorporating the offer of mortgage assistance relief the
provider obtained from the consumer's dwelling loan holder or
servicer.'' This provision will ensure that MARS providers only collect
fees after they have delivered a concession or other result from the
lender or servicer and the consumer has accepted that result.
The proposed rule did not require such acceptance, but instead
allowed a provider to collect a fee once it had (1) in the case of
providers promoting mortgage loan modifications, ``[o]btained a
mortgage loan modification [as defined in the proposed rule] for the
consumer'' and delivered a written offer from the lender or servicer
for a loan modification to the consumer; or (2) in the case of
providers offering MARS other than loan modifications, ``[a]chieved all
of the results that * * * [t]he provider represented, expressly or by
implication, to the consumer that the service would achieve, and * * *
[that are] consistent with consumers' reasonable expectations about the
service'' and delivered documentation of these results to consumers.
Under the proposed rule, payment was contingent upon either delivering
a specific result defined in the rule (e.g., a ``mortgage loan
modification'') or obtaining the results the MARS provider promised at
the time the consumer agreed to use the service. The Final Rule,
however, requires that payment be contingent upon consumer acceptance
of results the provider presents.\337\ Regardless of how the result the
provider delivers compares to what it promoted or promised at the time
the consumer agreed to use its service, the provider still must secure
a written agreement between the consumer and his or her lender or
servicer accepting the results delivered before collecting any fees.
The Commission has adopted an approach different from that in the
proposed rule because it concludes that the new approach strikes a
better balance between protecting consumers and ensuring that MARS
providers can collect fees for beneficial results they achieve.
---------------------------------------------------------------------------

\337\ The Commission cautions that providers not attempt to
evade the requirements of Sec. 322.5(a) by entering a contract with
consumers signed at the outset specifying the consumer's
preapproval, for example, that any offer that involves a certain
type of concession from the lender or servicer will be deemed
acceptable. Moreover, the provider may not rely on authority
obtained through a power of attorney at the time or before the time
of contracting to execute an agreement incorporating the offer of
mortgage relief from the lender or servicer on the consumer's
behalf, because the Commission would not regard the consumer as
having accepted the offer--as required under Sec. 322.5(a). The
Commission further cautions that providers not use deceptive or
unfair practices to convince consumers to accept concessions to
which they would not otherwise agree, as doing so may constitute a
violation of Sec. 322.5(a) and other provisions of the Rule,
including Sec. 322.3(b)(12).
---------------------------------------------------------------------------

At the same time, the Final Rule permits providers to collect fees
if they

[[Page 75121]]

deliver results that, although different from what they promised to
consumers, are ultimately acceptable to consumers. It avoids disputes
over what the provider actually promised, and allows consumers to make
the decision about whether the offered mortgage relief is satisfactory
to them. It also ensures that the consumer receives a result that he or
she determines to be beneficial--for example, a loan modification with
a particular reduction in monthly payments \338\ or lasting a specific
duration. This approach is similar to the one taken in the TSR's
advance fee ban for debt relief services.\339\
---------------------------------------------------------------------------

\338\ In response to the proposed rule, which sets forth
specific requirements as to the result that entities promoting loan
modifications must deliver before collecting fees, some commenters
recommended that the Final Rule add requirements that MARS providers
obtain a ``sustainable'' or ``affordable'' loan modification for the
consumer. See, e.g., LOLLAF at 4, 6; LFSV at 3; CSBS at 4; NCLC at
18; LCCR at 4-5 (``We believe that MARS providers who negotiate
mortgage loan modifications for homeowners in exchange for
compensation must confer a real benefit in the form of a modified
mortgage that is affordable and sustainable.''). Some of these
commenters noted that many consumers who have obtained loan
modifications have subsequently re-defaulted, or are at risk of
doing so, and therefore that the Commission should adopt specific
benchmarks for determining if a loan modification will benefit the
consumer (for example, by reducing their monthly payments by at
least 20% for five years or by employing HAMP guidelines for
interest rates).
Because the Final Rule requires that the consumer consent to the
result delivered by the provider, it will help ensure that consumers
only pay fees for loan modifications that they believe to be
affordable and sustainable. Consumers' ability to make monthly
payments vary depending on their circumstances and over time. The
requirements of government programs like the MHA and servicer
policies also may change. By making payment of fees contingent upon
consumer acceptance, the Final Rule gives each consumer the ability
to determine, based on her individual circumstances, the type of
loan modification that would best assist her. Therefore, the
Commission believes it is unnecessary to adopt an affordability
requirement for loan modifications.
\339\ See 16 CFR 310.4(a)(5)(i)(A) (prohibiting debt relief
providers from collecting fees until, inter alia, the customer has
executed the debt relief agreement).
---------------------------------------------------------------------------

The Commission warns that securing consumer acceptance to an offer
will not immunize a provider from other violations of the Rule.
Providers cannot misrepresent the results consumers will receive if
they use MARS. For example, if a provider represents to a consumer that
it will obtain a reduction in the amount of interest, principal
balance, or monthly payments, but only obtains a forbearance agreement,
then, regardless of whether the consumer accepts the forbearance
agreement, that provider has made a misrepresentation in violation of
Sec. 322.3(b) of the Final Rule. In order to comply with Sec.
322.3(b), the provider should qualify its claims sufficiently so that a
reasonable consumer would understand that he or she may not receive a
reduction in the amount of interest, principal balance, or monthly
payments.
Further, as described above, Sec. 322.5(b) of the Final Rule
requires providers to inform consumers: (a) that they do not have to
pay any fees to the MARS provider unless and until they accept the
result that the provider has delivered, and (b) the total amount in
fees consumers will have to pay the provider if they accept that
result. Additionally, Section 322.5(c) of the Final Rule requires
providers to furnish the consumer with a written notice from the
consumer's lender or servicer describing all ``material differences''
between the terms, conditions, and limitations of the consumer's
current mortgage loan and those associated with the offer for mortgage
relief, including but not limited to differences in the principal
balance; contract interest rate, including the maximum rate and any
adjustable rates, if applicable; amount and number of the consumer's
scheduled periodic payments on the loan; monthly amounts owed for
principal, interest, taxes, and any mortgage insurance on the loan;
amount of any delinquent payments owing or outstanding; assessed fees
or penalties; or term of the loan. Based on its law enforcement
experience and the rulemaking record, the Commission concludes that
these factors are essential to consumers' ability to compare the
mortgage relief offered with their current mortgage loan and, thus,
whether they should accept it. Requiring that the lender or servicer
prepare the written disclosure also better ensures that the information
provided is consistent with the terms of the offer, and mitigates
against the risk that MARS providers would mislead consumers about the
offer.
Section 322.5(d) also specifies that in cases where the mortgage
relief offer obtained from the lender or servicer is a trial loan
modification, the notice from the lender or servicer that the provider
must furnish to the consumer with the offer of mortgage assistance must
include: (1) that the consumer may not qualify for a permanent
modification, and (2) if the consumer does not qualify, the likely
amount of the scheduled periodic payments that he will have to pay and
any arrearages or fees that may accumulate. Some commenters recommended
that the proposed rule be changed to prohibit providers from collecting
fees for obtaining a trial modification, because most consumers who
receive trial modifications do not receive permanent modifications that
would substantially reduce the amount they pay on their loans.\340\ The
Commission has determined that, in light of the changes in the Final
Rule, including the advance fee ban and related disclosures, such a
prohibition is unnecessary. As noted above, Sec. 322.5 will ensure
that consumers are told that they are being offered a trial
modification and ensure that they have the opportunity to reject the
offer.
---------------------------------------------------------------------------

\340\ See, e.g., NYC DCA at 4; NCLC at 17-18 (also arguing that
consumers who enter trial modifications frequently suffer a number
of negative consequences, including harm to their creditworthiness
and, if they do not qualify for a permanent modification,
significant arrearages that can result in foreclosure).
---------------------------------------------------------------------------

Given that, under the advance fee ban provision, providers must
deliver a written agreement from the servicer or lender to the
consumer, and obtain the consumer's written acceptance of that
agreement, the Final Rule requires that the disclosures in Sec. Sec.
322.5(b)-(d) also be made in writing, each on a separate page from the
agreement. These disclosures must also be made ``at the time that the *
* * provider furnishes the consumer with a written agreement to be
executed'' by the consumer. Sections 322.5(b)-(d) will ensure that
consumers receive this critical information when they are in a position
either to accept or reject the result secured by the provider.\341\
These disclosures are necessary to effectuate the advance fee ban and,
accordingly, are reasonably related to the prevention of deceptive or
unfair practices.
---------------------------------------------------------------------------

\341\ This disclosure also complements Sec. 322.3(b)(7), which
prohibits providers from misrepresenting that they have the right to
claim or charge a fee. Under Sec. 322.3(b)(7), providers may not
circumvent this written disclosure by misrepresenting expressly or
by implication--orally or otherwise--that the consumer must pay
providers' fees.
---------------------------------------------------------------------------

b. Prohibition on Advance Fees for Piecemeal Services
As detailed above, NAAG and several other commenters strongly
supported the proposed rule's prohibition on the practice of collecting
advance fees for piecemeal services.\342\ The Commission agrees that
without such a prohibition, many MARS providers would attempt to
collect fees for discrete tasks that fall short of, and often may never
lead to, the result promised. These individual tasks might include:
conducting an initial consultation with the consumer;

[[Page 75122]]

reviewing or auditing the consumer's mortgage loan documents; \343\
gathering financial or other information from the borrower; sending an
application or other request to the lender or servicer; facilitating
communications between the borrower and the lender or servicer; or
responding on behalf of the consumer to requests from the lender or
servicer. The record demonstrates that many MARS providers currently
charge discrete fees for these types of tasks, in some instances to
evade state advance fee bans.\344\
---------------------------------------------------------------------------

\342\ See, e.g., NAAG (ANPR) at 5 (``We are now seeing
consultants offering these services piecemeal. For example, some
companies represent they will help consumers gather their financial
documents and prepare the information to submit to their mortgage
servicer for a fee. Then, for another fee, the companies represent
that they will facilitate communication between the consumers and
their mortgage servicer.''); see also CSBS at 4; LCCR at 8; MA AG at
2; NAAG at 3.
\343\ See supra note 56 and accompanying text.
\344\ See supra note 342.
---------------------------------------------------------------------------

Section 322.5 of the Final Rule, although modified, still prohibits
MARS providers from collecting fees for piecemeal services. Section
322.5(a) requires the provider to secure the consumer's written
agreement to accepting the mortgage relief it has obtained; thus,
providers will be unable to charge a fee for intermediate services
unless and until the consumer accepts the result the MARS provider
obtains from the consumer's lender or servicer.
c. Documentation Requirement
Under Sec. 322.5 of the Final Rule, MARS providers must provide
consumers with documentary proof of the results they achieved before
requesting or receiving payment. Section 322.5(a) of the Final Rule
requires providers to give consumers a written offer--for the consumer
to accept or reject--from the lender or servicer setting forth the
mortgage relief they have obtained for the consumer, such as a
forbearance agreement, short sale, or deed-in-lieu of foreclosure
transaction; waiver of an acceleration clause; opportunity to cure
default or reinstate a loan; or repayment plan. The documentation
required is a comprehensive written instrument that memorializes a
lender's or servicer's agreement to offer the concession.
4. Additional Provisions Not Adopted in the Final Rule
In the NPRM, the Commission requested comment on whether the Final
Rule should: (1) Limit or cap providers' advance fees; (2) allow
providers to use independent third-party escrow accounts to hold fees
until they achieve results; and (3) include a right to cancel. Based on
the record, the Commission declines to adopt any of these approaches.
a. Fee Caps
Some commenters recommended that the Commission allow advance fees,
but set limits (or caps) on them.\345\ Other commenters argued that the
FTC should not adopt caps as a substitute for an advance fee ban.\346\
Two of the latter group of commenters asserted that providers would
abuse such a provision by simply signing up as many consumers as
possible and collecting any fees permitted upfront without providing
any benefits to consumers.\347\ A third group of commenters, although
supportive of an advance fee ban, argued that the Commission should
also limit MARS providers to charging back-end fees that are
``reasonable'' or ``not excessive.'' \348\
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\345\ Baughman at 1; Hunter at 1; Casey at 1. Some state
statutes include fee caps for MARS providers. For example, Maine
limits providers to a $75 up-front fee. See Me. Rev. Stat. Ann. tit.
32, Sec. 6174-A.
\346\ See, e.g., MBA at 3; CSBS at 4; MA AG at 1; CUUS at 6; CRL
at 2.
\347\ LOLLAF at 5 (``Allowing any fees to be collected prior to
providing a permanent loan modification presents MARS providers with
a back door opportunity to extract significant sums of money without
any benefit provided to the consumer.''); CUUS at 6 (``It may seem
innocent enough to allow a small initial fee of $25.00 or $50.00. At
first glance, this fee may not seem particularly burdensome to
consumers. However, this may incentivize certain for-profit MARS
providers to simply sign up as many people as possible only for the
initial fee, and nothing else. The small fees could potentially add
up to sizeable profits for MARS companies, depending on the
aggressive nature of the MARS provider's marketing campaign.'').
\348\ LFSV at 2-3; LOLLAF at 5; NCLC (ANPR) at 13; see also MA
AG at 2 (recommending that the Commission consider a ``sliding
scale'' fee cap as a complement to the advance fee ban); LCCR at 7-8
(same).
---------------------------------------------------------------------------

As in the recent adoption of debt relief amendments to the TSR, and
for the same reasons,\349\ the Commission declines to set caps on the
fees MARS providers can receive. While the FTC concludes that the
collection of advance fees by MARS providers is an unfair act or
practice, it has made no such determination about the amount of fees
charged.\350\ In general, the competitive market should establish the
prices MARS providers charge,\351\ and the Commission's role is to
remove obstacles to consumers making the informed choices that are
necessary to a properly functioning market.
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\349\ See TSR; Final Rule, 75 FR at 48488 (finding that fee
setting is best done by a competitive market, that the Commission's
role is to remove obstacles to consumers making informed choices in
the market, and that the amended TSR is designed to ensure that the
debt relief market functions properly).
\350\ The purpose of the FTC's unfairness doctrine is not to
allow the Commission to obtain better bargains for consumers than
they can obtain in the marketplace. See, e.g., Am. Fin. Servs. Ass'n
v. FTC, 767 F.2d 957, 964 (DC Cir. 1985). Instead, it is to prohibit
acts and practices that may unreasonably create or take advantage of
an obstacle to consumers' ability to make informed choices. See id.
at 976.
\351\ A federally established maximum advance fee might well
become the de facto actual fee for MARS. F.M. Scherer, Focal Point
Pricing and Conscious Parallelism, in Competition Pol'y, Domestic &
Int'l 89-97 (2000); F. M. Scherer, Industrial Market Structure and
Economic Performance 190-93, 204 (1st ed. 1980). Further, fee caps
can quickly become obsolete, as changes in market conditions and
technologies render the fixed maximum fee too low (e.g., if the
costs of providing the service rise) or too high (e.g., if new
technology lowers the cost of providing the service or if market
participants would compete on price absent regulation). United
States. v. Trenton Potteries Co., 273 U.S. 392, 397 (1927) (``The
reasonable price fixed today may through economic and business
changes become the unreasonable price of tomorrow.'').
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b. Use of Dedicated Accounts
In the NPRM, the Commission requested comment on whether, in the
event the Rule bans advance fees, MARS providers should be allowed to
request or require that consumers place any such fees in a dedicated
bank account.\352\ The Final Rule does not permit MARS providers, other
than attorneys, to request or require consumers to pay fees into any
type of account prior to completing their services.\353\ The
overwhelming weight of comments opposed allowing the use of such
accounts,\354\ because, among other things, some unscrupulous MARS
providers might misuse funds held in dedicated accounts,\355\ and
permitting dedicated accounts would place undue burdens on consumers to
recover money they paid into the accounts if providers do not deliver
the results consumers finds acceptable.\356\ There is nothing in

[[Page 75123]]

the record indicating that non-attorney MARS providers currently use
dedicated accounts with any frequency to deposit advance fees or that
an infrastructure to support such accounts exists. Without more
information as to how MARS providers would use dedicated accounts and
whether consumers would be adequately protected, and in light of
widespread deceptive and unfair acts and practices by MARS providers,
the Commission declines to permit providers to request or require that
consumers place advance fees for MARS in such accounts.\357\
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\352\ See 75 FR at 10721, 10729-30.
\353\ As discussed in Sec. III.G., the Final Rule exempts
attorneys from the advance fee ban if they meet certain conditions,
including depositing such fees into their client trust accounts.
\354\ See, e.g., CUUS at 7; CSBS at 4. Only a single commenter
recommended that the Rule allow providers (other than attorneys) to
use such accounts, and that commenter provided no analysis of the
costs and benefits of his proposal. See Goldberg at 4 (``Even
escrowing funds through dedicated trust accounts is a better
alternative and less of a financial burden on the consumer.''). An
additional comment noted that MARS providers may use dedicated
accounts under Nevada's relevant statute. See Hirsch at 1; see also
Nev. Rev. Stat. Sec. 645F.300, et seq.
\355\ OPLC at 1; NYC DCA at 5 (``Given the high cost and
potential for improper access to funds by MARS providers, the FTC
should apply the prohibition on collection of fees in advance of
permanent loan modifications to payments held in escrow
accounts.''); NAAG at 2 (``Likewise, third-party escrow accounts
will not protect consumers' interests in the same manner as an
advance fee prohibition. Indeed, there is evidence that third-party
escrow accounts are subject to manipulation that renders their
purported protections ineffective.'').
\356\ LFSV at 3; NCLC at 15; LOLLAF at 5 (``[E]scrowing funds
and not allowing MARS providers to access them without providing a
benefit, does not provide a significant safeguard to protect
consumers from abusive MARS providers. Consumers who seek to recover
fees may have to bring a lawsuit to either recover them from escrow
or to claw back the fees paid to a MARS provider.'').
\357\ The amended TSR allows debt relief providers to establish
dedicated accounts for consumer payments pending completion of the
services, subject to several conditions to ensure that consumers are
protected. 16 CFR 310.4(a)(5)(ii). There are fundamental differences
between debt settlement services and MARS, however, that make this
distinction an appropriate one. Consumers typically pay for debt
settlement services by making monthly payments, which include a
portion of the provider's fees as well as savings towards
settlements. It is only after consumers save enough money to fund a
likely settlement--a process that can take many months or years--
that the provider begins negotiating with the creditor to reduce the
debt. MARS services, on the other hand, generally do not include
this ``forced savings'' function; rather, consumers simply pay the
provider's fees in a single or small number of payments. Any relief,
such as a loan modification, that the MARS provider obtains
typically would not involve a lump sum payment for which the
consumer would have to save. Moreover, the record in the TSR
proceeding showed that it is the usual practice in the debt
settlement industry to use dedicated accounts and that a structure
is already in place to administer these accounts, consisting of
established, independent firms that manage accounts that the
consumers own and control. TSR; Final Rule, 75 FR at 48490-91 &
n.451. One such firm manages approximately 250,000 accounts for
consumers enrolled with various debt settlement companies. Global
Client Solutions, (Oct. 9, 2009) at 2, available at http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00138.pdf. No such
infrastructure exists in the MARS industry.
---------------------------------------------------------------------------

c. Right To Cancel
The proposed rule did not include a right to cancel. However, the
NPRM solicited comments on whether the Final Rule should give consumers
the right to cancel their contracts with MARS providers without
obligation for a certain period of time often referred to as a
``cooling off period.''
Several commenters recommended including a right to cancel in the
Final Rule as a complement to the advance fee ban.\358\ Many of these
commenters observed that consumers considering whether to purchase MARS
often are facing an immediate crisis and may not take the time they
need to make well-informed decisions.\359\ They further noted that MARS
providers often engage in aggressive sales tactics that may overcome
any hesitancy on the part of consumers.\360\ According to these
commenters, a right to cancel would provide consumers with an
opportunity to discuss purchasing MARS with trusted confidants,\361\
reconsider their decision free of aggressive sales tactics,\362\ and
assess whether the service is beneficial for them.
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\358\ See LOLLAF at 6; NCLC at 13; CUUS at 7; LFSV at 1-2.
\359\ See, e.g., CSBS at 4; CUUS at 7; LFSV at 2; NYC DCA at 10;
NCLC at 14; LOLLAF at 6.
\360\ Id.
\361\ See NCLC at 14; LFSV at 2.
\362\ See LOLLAF at 6; NCLC at 14.
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The Commission declines to include a right to cancel provision in
the Final Rule. Under Sec. 322.5 of the Final Rule, even if a consumer
enters into an agreement to use a MARS provider in circumstances
undermining his or her ability to make a well-informed decision, the
consumer has no obligation to pay any money to the MARS provider until
he or she accepts an offered result. The consumer is free to reject
offers that he or she believes are unsatisfactory. If the consumer
never accepts an offer, he or she is never obligated to pay the
provider. Thus, a right to cancel would provide little additional
benefit to consumers.\363\
---------------------------------------------------------------------------

\363\ The Commission also declined to include a right to cancel
in the debt relief amendments to the TSR. See TSR; Final Rule, 75 FR
at 48488.
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F. Section 322.6: Substantial Assistance or Support

The proposed rule prohibited any person within the FTC's
jurisdiction under the FTC Act \364\ from providing ``substantial
assistance or support'' to any MARS provider if the person ``knows or
consciously avoids knowing that the provider is engaged in any act or
practice that violates this rule.'' The Final Rule adopts the proposed
provision with a single, minor modification.
Public comments generally supported a prohibition on providing
substantial assistance or support to another who is violating the
Rule.\365\ Several commenters asserted that such a measure would
prevent MARS providers from using ``lead generators'' or mortgage
brokers to supply contact information for potential customers,\366\
thus making it more difficult for deceptive MARS providers to operate.
For example, a consumer group explained that such a provision would be
valuable because entities that assist and facilitate fraudulent MARS
providers often receive a substantial portion of the funds obtained
from consumers for mortgage assistance relief services.\367\ As
discussed below, a number of commenters supported a substantial
assistance or support provision, but recommended including a different
knowledge standard in a final rule than in the proposed rule.\368\
---------------------------------------------------------------------------

\364\ The Final Rule explicitly exempts from the definition of
``person'' any individuals or entities outside the FTC's
jurisdiction. See Sec. 322.2(k).
\365\ See CSBS at 4 (``The state regulators support the
Commission's proposal to prohibit any person from providing
substantial assistance or support to a MARS provider if that person
knows or consciously avoids knowing that the provider is violating
any provision of the proposed rule.''); see also CUUS at 8
(supporting prohibition but suggesting alternate standard); NYC DCA
at 9 (same); NAR at 2 (same).
\366\ See, e.g., CUUS at 8; NY DCA at 9.
\367\ CUUS at 8.
\368\ See CUUS at 8; NYC DCA at 9.
---------------------------------------------------------------------------

1. Substantial Assistance
Many MARS providers rely on, or work in conjunction with, other
entities to advertise their services and operate their businesses. The
Final Rule provision applies to substantial--i.e., more than casual or
incidental--assistance or support that such entities provide to MARS
providers.\369\ Substantial assistance could include such critical
support functions as lead generation, telemarketing and other marketing
support,\370\ payment processing,\371\ back-end handling of consumer
files,\372\ and customer referrals.
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\369\ See TSR Statement of Basis and Purpose, 60 FR 43842, 43852
(1995) (``The Commission further believes that the ordinary
understanding of the qualifying word `substantial' encompasses the
notion that the requisite assistance must consist of more than mere
casual or incidental dealing with a seller or telemarketer that is
unrelated to a violation of the Rule.'').
\370\ See, e.g., FTC v. Kirkland Young, LLC, No. 09-23507, Mem.
Supp. TRO at 9 (S.D. Fla. filed Nov. 24, 2009) (alleging that
Defendant employed another entity to make some of its telemarketing
calls to consumers).
\371\ Frequently, MARS providers rely on the services of payment
processors to handle credit card payments. See, e.g., FTC v. Loss
Mitigation Servs., Inc., No. SACV09-800 DOC (ANx) (C.D. Cal. filed
July 13, 2009); FTC v. LucasLawCenter ``Inc.'', No. SACV09-770
DOC(ANx) (C.D. Cal. filed July 7, 2010) (third-party papers filed by
payment processor); Pls. Opp. Mot. Decl. Relief (C.D. Cal. filed
Nov. 20, 2009). In other industries, the FTC has sued payment
processors that billed consumers for products or services despite
indications that those products or services were illusory on an
assistance and facilitating theory. See, e.g., FTC v. InterBill,
Ltd., No. 06-cv-01644-JCM-PAL (D. Nev. Dec. 26, 2006); FTC v. Your
Money Access, LLC, No. 07-5174 (E.D. Pa. filed Dec. 6, 2007).
\372\ See, e.g., FTC v. Fed. Loan Modification Law Ctr., LLP,
No. SACV09-401 CJC (MLGx), Reply to Resp. Order To Show Cause at 9
(C.D. Cal. filed April 22, 2009) (alleging that defendants
contracted with another entity to process backlog of consumer files
and negotiate with lenders on behalf of those consumers).
---------------------------------------------------------------------------

A common example of those who provide substantial assistance to
MARS providers are so-called ``lead generators.'' Lead generators
obtain the contact information of consumers, i.e. leads, who have
indicated interest in MARS by visiting the lead generator's

[[Page 75124]]

website in response to advertisements disseminated either by the lead
generators themselves,\373\ or through a network of Internet
advertisers.\374\ Lead generators then sell the consumer information to
MARS providers.\375\ In some instances, lead generators route consumers
who run Internet searches for government foreclosure assistance
programs directly to MARS providers' websites.\376\
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\373\ Lead generators themselves often may also qualify as
``mortgage assistance relief service providers'' and thus be liable
for primary violations of the Rule, because many of these entities
``arrang[e] for others to provide'' MARS. See Sec. 322.2(j). For
example, if a lead generator disseminates advertisements containing
misrepresentations to entice consumers to provide their contact
information, and then passes that information on to another entity
that will provide MARS, the lead generator would likely be in
violation of Sec. 322.3 of the Final Rule. The Commission also has
brought actions under Section 5 of the FTC Act against lead
generators for the deceptive claims they disseminated. See e.g. FTC
v. Dominant Leads, LLC, No. 1:10-cv-0997 (D.D.C. filed Jun. 15,
2010); see also United States v. Ryan, No. 09-00173-CJC (C.D. Cal.
filed July 14, 2009) (criminal complaint against lead generator
named as defendant in FTC action); FTC v. Ryan, No. 1:09-00535 (HHK)
(D.D.C. filed Mar. 25, 2009); FTC v. Cantkier, No. 1:09-cv-00894
(D.D.C. Am. Complaint filed July 10, 2009).
\374\ Additionally, advertising affiliate network companies may
serve as intermediaries between advertisers and lead generator Web
sites. Such companies also could be held liable if they knowingly
provide substantial assistance to MARS providers who violate the
Rule.
\375\ See, e.g., FTC v. Kirkland Young, LLC, No. 09-23507, Mem.
Supp. TRO at 9 (S.D. Fla. filed Nov. 24, 2009) (alleging that
defendant employed lead generators to leave messages with consumers
via outbound telemarketing calls); FTC v. Truman Foreclosure
Assistance, LLC, No. 09-23543 (S.D. Fla. filed Nov. 23, 2009); FTC
v. Hope Now Modifications, LLC, No. 1:09-cv-01204-JBS-JS (D.N.J.
filed Mar. 17, 2009).
\376\ See, e.g., FTC v. One or More Unknown Parties
Misrepresenting their Affiliation with the Making Home Affordable
Program, No. 09-894 (D.D.C. filed May 14, 2009).
---------------------------------------------------------------------------

2. The Knowledge Standard
Under the proposed rule, those who provided substantial assistance
to MARS providers would be liable if they knew or consciously avoided
knowing that the providers were violating the rule. Some commenters
suggested modifications to this knowledge standard. Specifically, two
commenters advocated changing the ``knows or consciously avoids
knowing'' standard to a ``knew or should have known'' standard,
claiming that the former standard would allow those who provide
substantial assistance to escape liability by failing to monitor the
conduct of the MARS providers they are assisting.\377\ Conversely,
another commenter argued that the ``knows or consciously avoids
knowing'' standard in the proposed rule was too strong, expressing
concern that those who provide substantial assistance would be presumed
to know of the rule violations of the MARS providers they are
assisting.\378\
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\377\ See CUUS (Mar. 26, 2010) at 8 (``Failure to verify a
company's integrity in the face of clear and reasonable evidence to
the contrary should expose an entity or individual to liability.'');
NYC DCA (Mar. 29, 2010) at 9.
\378\ See NAR at 2 (provision would implicate real estate
professionals who help consumers conduct short sales, when the
consumers are referred to them by MARS providers).
---------------------------------------------------------------------------

The Commission retains the ``knows or consciously avoids knowing''
standard in the Final Rule. As the Commission stated in including the
same standard in the assisting and facilitating provision of the TSR:

[t]he `conscious avoidance' standard is intended to capture the
situation where actual knowledge cannot be proven, but there are
facts and evidence that support an inference of deliberate ignorance
on the part of a person that [the wrongdoer] is engaged in an act or
practice that violates [the Rule].'' \379\
---------------------------------------------------------------------------

\379\ TSR Statement of Basis and Purpose, 60 FR 43842, 43852
(Aug. 23, 1995).

The standard thus neither permits third parties providing
substantial assistance and support to turn a ``blind eye'' to the Rule
violations of MARS providers, nor presumes that such third parties have
the requisite knowledge simply because they provided the assistance or
support. If those who provide substantial assistance or support to MARS
providers receive or become aware of information that reasonably calls
into question the legality of the MARS provider's practices, they will
be liable if they continue to assist and support that provider.\380\ In
general, the determination of whether a person had the requisite
knowledge will depend on a variety of factors such as the person's
relationship to the MARS provider, the nature and extent of the
person's degree of involvement in the operations of the MARS provider,
and the nature of the provider's violations.
---------------------------------------------------------------------------

\380\ United States. v. Dish Network, L.L.C., 667 F. Supp. 2d
952, 961 (C.D. Ill. 2009) (finding United States properly pled
knowledge or conscious avoidance of knowledge when it alleged that
defendant received complaints that its dealers were violating the
TSR but continued paying the dealers to telemarket); FTC v. Global
Mkting Group, Inc., 594 F. Supp. 2d 1281, 1288 (M.D. Fla. 2008)
(finding that defendant at a minimum consciously avoided knowing of
TSR violations where it processed consumer payments to
telemarketers; reviewed, edited, and approved telemarketers' sales
scripts; and handled complaints and law enforcement inquiries).
---------------------------------------------------------------------------

3. Legal Basis
a. Preventing Deception
The Commission concludes that Sec. 322.6 is reasonably related to
preventing deceptive conduct by MARS providers. As noted above, MARS
providers frequently rely upon the assistance and support of other
persons for essential tasks such as identifying potential customers,
marketing, back-room operations, and payment processing. This support
makes it possible for MARS providers engaged in deception to
efficiently operate on a wide scale. Prohibiting such persons from
providing substantial and knowing assistance or support to MARS
providers is likely to make it more difficult for providers to engage
in deceptive conduct.
b. Unfairness
Applying the three-prong test under Section 5(n) of the FTC Act,
the Commission concludes that it is an unfair practice to knowingly, or
with conscious avoidance of knowledge, provide substantial assistance
to a MARS provider engaged in violations of the Rule.\381\ First, this
practice causes or is likely to cause substantial consumer injury by
enhancing and expanding the provider's ability to engage in the harmful
conduct. For example, using lead generators often allows MARS providers
to promote their services more widely and effectively, leading to
substantial injury to consumers if those providers engage in violations
of the Rule.\382\ Second, no commenters submitted information
suggesting that there were any benefits to consumers or competition
from knowingly giving substantial assistance to MARS providers who are
violating the Rule,\383\

[[Page 75125]]

and the Commission is not aware of any such benefits. To the extent any
such benefits exist, they clearly are outweighed by the substantial
injury this conduct causes consumers. Finally, the consumer injury
caused by Rule violations that are substantially facilitated by third
parties is not reasonably avoidable by consumers, who have no way of
knowing that the MARS providers with whom they contract are engaged in
violations of the Rule.
---------------------------------------------------------------------------

\381\ Federal courts have held that providing knowing
substantial assistance to others who engaged in unlawful conduct is
an unfair practice. See, e.g., FTC v. Neovi, Inc., 598 F. Supp. 2d
1104 (S.D. Cal. 2008), aff'd, 604 F.3d 1150 (9th Cir. 2010) (holding
that defendants engaged in unfair acts by creating checks they knew
were often requested by unauthorized parties); FTC v. Accusearch,
Inc., No. 06-CV-105-D, 2007 WL 4356786 (D. Wyo. Sept. 28, 2007)
(holding that defendants engaged in unfair practices by selling
phone records obtained by other parties through deception); FTC v.
Windward Mktg., No. Civ.A. 1:96-CV-615F, 1997 WL 33642380 (N.D. Ga.
Sept. 30, 1997) (holding that defendants engaged in unfair acts by
depositing unauthorized bank drafts obtained by a deceptive
telemarketing operation).
\382\ Lead generators may possess the contact information of
thousands of consumers that otherwise might be unavailable to a
small MARS provider. The MARS provider can use that information to
target more consumers with deceptive advertisements, contact
consumers less expensively, or both, than it could in the absence of
such information. See, e.g., CUUS at 8, NY DCA at 9.
\383\ To the extent the substantial assistance and facilitation
provision makes it more difficult or expensive for MARS providers to
hire third-party service providers, the Commission concludes that
any such costs are outweighed by the benefits of more effectively
preventing deceptive or unfair conduct by MARS providers.
---------------------------------------------------------------------------

G. Section 322.7: Exemptions

The proposed rule exempted attorneys licensed to practice law in
the state where the consumer resides from: (1) The prohibition on
instructing consumers not to contact or communicate with their lenders;
and (2) the advance fee ban, but only if the attorney was providing
legal counsel in connection with preparing or filing legal documents in
a bankruptcy or other legal proceeding. As the Commission explained in
the NPRM, this proposed exemption was intended to allow attorneys who
provide MARS as part of the practice of law to perform without undue
burden useful legal services for consumers, while still covering
attorneys who might harm consumers in offering or providing MARS.\384\
---------------------------------------------------------------------------

\384\ MARS NPRM, 75 FR at 10724-25.
---------------------------------------------------------------------------

The Commission received numerous comments on this proposed
exemption from attorneys and attorney organizations, consumer groups,
and others. Indeed, the proposed rule's treatment of attorneys was the
issue most addressed in the comments. Several commenters, including
NAAG, an association of mortgage bankers, consumer groups, and others
supported a limited exemption like that in the proposed rule.\385\
Other commenters, including several consumer groups, a public interest
law firm, and a consortium of state banking regulators, supported a
broader exemption (especially with regard to the prohibition on advance
fees),\386\ or a complete exemption for attorneys.\387\
---------------------------------------------------------------------------

\385\ NAAG at 3-4; MBA at 4 (The definition in the rule should
retain the integrity of the licensed attorney within state laws and
rules regulating the practice of law to remain effective and those
outside that standard should be prosecuted.''); NYC DCA at 4
(recommending that the Commission prohibit collection of advance
fees by attorneys ``not directly involved with legal services in
connection with either the preparation and filing of a bankruptcy
petition or court proceedings to avoid a foreclosure''); IL AG
(ANPR) at 2; MA AG (ANPR) at 9 (recommending that the Commission
adopt a provision similar to Massachusetts state law). One commenter
argued that attorneys should not be exempted from the advance fee
ban restrictions, even when performing legal services in connection
with a bankruptcy petition or some other legal proceeding. CUUS at
8-9.
\386\ NCLC at 7 (``[L]egitimate attorneys play a critical role
in providing bona fide and valuable assistance to consumers seeking
loan modifications and other forms of mortgage-related
assistance.''); LSFV at 4 (``Those seeking advice, who are likely in
or facing mortgage default, may need specific advice regarding the
contractual and tax implications of a loan modification, which HUD-
approved counselors may not be qualified to provide.''); Lawyers'
Committee at 9 (``[I]n many situations short of legal action, there
is a legitimate need for attorneys to provide legal advice or
transactional services to their clients.''); CSBS at 4 (``[W]e
believe that limiting the exemption to preparing and filing for
bankruptcy petitions or other documents in a bankruptcy or other
court or administrative proceeding, is unduly narrow and might
interfere with the ability of attorneys to offer legitimate counsel
and advice to their clients.'').
\387\ ABA at 1 (``[T]he ABA urges the FTC to modify the rule to
expand its existing attorney exemption to exclude lawyers engaged in
the practice of law from the entire proposed rule, not just certain
narrow provisions of the rule.''); Rogers at 15 (``Prohibit loan
modification companies from taking up-front fees unless they are
licensed attorneys regularly conducting business out of publicly
accessible office space in the state in which they provide loan
modification services.''); IL RELA at 1.
---------------------------------------------------------------------------

Based on the record, the Commission has determined to include a
broader exemption for attorneys in the Final Rule. Generally speaking,
attorneys who provide MARS are exempt from the Rule if they: (1)
Provide MARS as part of the practice of law; (2) are licensed to
practice law in the state where their clients or their clients'
dwellings are located; and (3) comply with all state laws and licensing
regulations covering the same subjects as the Final Rule. Attorneys who
meet these standards are exempt from all of the provisions of the Final
Rule except its advance fee ban. Such attorneys will be exempt from the
advance fee ban in Sec. 322.5, but only if they deposit advance fees
received from their clients into a ``client trust account'' (as defined
in a new provision, Sec. 322.2(b)) and comply with all state laws and
licensing regulations governing these accounts.\388\
---------------------------------------------------------------------------

\388\ As discussed in Section I.A, the Dodd-Frank Act will
transfer rulemaking authority with respect to this Rule to a new
Bureau of Consumer Financial Protection, effective as of the
transfer date, Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376,
which is currently designated as July 21, 2011. BCFP; Designated
Transfer Date, 75 FR 57252. The new Bureau will not have authority
with respect to activities engaged in as part of the practice of
law, but will retain authority over attorneys to the extent they
offer consumer financial products or services outside the scope of
an attorney-client relationship and to the extent they are subject
to certain enumerated consumer laws or authorities transferred to
the agency, including the Final Rule in this proceeding. Dodd-Frank
Act Sec. 1027(e)(3). The Commission will continue to have authority
to enforce the Rule, including against attorneys.
---------------------------------------------------------------------------

1. Comments in Support of a Limited Exemption
In support of a limited attorney exemption, several commenters
cited significant (and increasing) attorney involvement in MARS, both
in affiliation with non-attorney providers or as providers
themselves.\389\ According to these commenters, attorneys frequently
have engaged in the same deceptive or unfair conduct as that of other
MARS providers.\390\ For example, the Illinois Attorney General
asserted that, since approximately December 2009, attorneys played some
role (including participating in or assisting others in the conduct at
issue) in 40% of the MARS companies reviewed by that agency in response
to complaints.\391\
---------------------------------------------------------------------------

\389\ See, e.g., Lawyers' Committee at 9 (attorneys team up with
MARS providers, or act independently to scam consumers); NAAG at 3
(attorneys' participation ranged from working as employees of MARS
companies to operating their own companies); MBA at 4 (``[W]e are
aware of attorneys who have `rented' their licenses to mortgage
assistance relief providers.''); see also IL AG (ANPR) (reporting
that ``33 percent of the [MARS] companies we have dealt with are
owned by attorneys, while 38 percent have some link to the legal
profession'').
\390\ See, e.g., CSBS at 4 (``[A]n increasing number of
attorneys have engaged in deception and unfairness in connection
with mortgage assistance relief services.''); NAAG at 3 (by way of
example reporting that attorneys participated in half of the
mortgage foreclosure rescue companies for which the Illinois
Attorney General received complaints on March 18 and 19, 2010); CUUS
at 8 (commenter has ``received many complaints about attorneys'
involvement in fraudulent MARS schemes''); Lawyers' Committee at 9
(``The intersection between legal services and mortgage assistance
relief services is well documented in the increasing number of
reports of attorneys teaming up with MARS providers to scam
consumers.''); NCLC at 4 (acknowledging that ``attorneys have been
among those perpetrating abusive MARS activities''); see also NAAG
(ANPR) at 13 (``[W]e have received many complaints regarding
attorneys who are offering loan modification business. These
attorneys generally provide no legal services for consumers and
present the same problems as mortgage consultants in general.'').
\391\ IL AG at 2.
---------------------------------------------------------------------------

In addition, NAAG asserted that attorneys, and MARS providers who
affiliate with them, have been successful in circumventing state MARS
laws by invoking attorney exemptions in these laws.\392\ NAAG's comment
also discussed the propensity of attorneys to act as fronts for MARS
companies and the recent trend of national MARS providers to retain
``local counsel'' to attempt to take advantage of attorney exemptions
in state MARS laws.\393\ Other commenters, echoing the concerns of
state law enforcers, contended that unscrupulous MARS providers would
evade the Rule if its

[[Page 75126]]

attorney exemption were not sufficiently limited.\394\
---------------------------------------------------------------------------

\392\ NAAG at 3 (``The exemption for attorneys has been
particularly abused.''); MN AG (ANPR) at 5 (``This Office is aware
of several loan modification and foreclosure rescue companies that
have affiliated with licensed attorneys in other states in an effort
to circumvent state law.'').
\393\ NAAG at 3.
\394\ NCLC at 2-3; Lawyers' Committee at 9; LSFV at 4.
---------------------------------------------------------------------------

2. Comments in Support of a Broader Exemption
Despite their recognition that some attorneys have engaged in
unfair or deceptive practices in connection with MARS, several
commenters argued that broadening the attorney exemption was necessary
to preserve consumers' access to valuable legal services.\395\ These
commenters contended that many consumers who are having difficulty
paying their mortgages may benefit from legal services, but that such
assistance may be considered MARS and thus subject to the Rule.\396\
The commenters claimed the proposed rule would cover legal services
such as advising consumers on bankruptcy laws, unwinding sale-leaseback
transactions,\397\ resolving violations of fair lending laws, disputing
charges that servicers had assessed improperly, and counseling on the
tax implications of short sales.\398\ The commenters asserted that a
significant portion of the MARS work attorneys perform does not involve
litigation and thus would not be eligible for the proposed rule's
exemption from the advance fee ban.\399\ Absent a broader exemption
from the advance fee ban, according to these commenters, many attorneys
would stop performing legal services for consumers seeking to avoid
foreclosure.\400\
---------------------------------------------------------------------------

\395\ NCLC at 7 (``[L]egitimate attorneys play a critical role
in providing bona fide and valuable assistance to consumers seeking
loan modifications and other forms of mortgage-related
assistance.''); LSFV at 4 (``Those seeking advice, who are likely in
or facing mortgage default, may need specific advice regarding the
contractual and tax implications of a loan modification, which HUD-
approved counselors may not be qualified to provide.''); Lawyers'
Committee at 9 (``[I]n many situations short of legal action, there
is a legitimate need for attorneys to provide legal advice or
transactional services to their clients.'').
\396\ See supra note 395. Attorney commenters also asserted that
they provide useful legal services to consumers facing the possible
loss of their homes. See, e.g., ABA at 1 (``[T]he rule would 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''); Mobley at 1 (``It is essential to have competent legal
representation when negotiating a loan modification. While the
government and servicers continually advise homeowners that loan
modifications can be done without a third party's help and that free
help is available, statistics show that this advice has done nothing
to help homeowners.''); Carr at 2 (``[M]any lawyers also offer their
client a defense against foreclosure, mitigation or diversionary
representation (where available) and ultimately (if necessary) a
bankruptcy petition filing to protect their homes if the negotiation
attempt should fail. Further, lawyers are uniquely qualified to
assist the homeowner to understand the legal implications of and
determine which of the bewildering panoply of alternatives facing
them will be the most effective in their unique circumstances.'');
E. Davidson at 1 (``Involvement of an attorneys at the earliest
possible time, is an important vehicle for borrowers in either
litigating or settling with the servicer or holder of the loan.'');
Legalprise at 1 (adversarial system works best if both lender and
consumer have legal counsel); Greenfield at 3 (distressed homeowners
have a ``significant need for legal services''); Dargon at 3 (``But
don't strangle legitimate attorneys in your efforts to regulate
hucksters and scam artists. Putting us out of business would harm
our clients greatly, and will only make the foreclosure crisis worse
and punish the very people who most need the services.''); Giles at
1-2 (discussing representation of clients in foreclosure mediation
with lenders).
\397\ See supra note 43.
\398\ See supra notes 396-97; see also NCLC (ANPR) at 14 (noting
that ``an attorney's more beneficial and traditional role of
analyzing a client's paperwork and advising the client of potential
claims and options may also fit within the definition of mortgage
assistance relief'').
\399\ In its survey of NACA and NABCA members, see supra note
44, NCLC reported that 38% of the 298 attorneys who responded
claimed that they perform MARS ``not in connection with a court or
administrative proceeding or bankruptcy petition.'' NCLC at 6.
\400\ LFSV at 4 (``Licensed attorneys and public accountants in
our community are prepared and capable of providing this important
and potentially useful advice, but may choose to avoid contracting
with consumers to address these questions for fear that they may run
afoul of the Commission's proposed Rule.''); NCLC at 6 (``Attorneys
are likely to cease representing homeowners because of the risk that
clients with unreasonable expectations would not pay.''); see also
CSBS at 4.
---------------------------------------------------------------------------

The comments favoring a broader attorney exemption suggested a
number of changes to the proposed rule. A few commenters asserted that
the exemption from the advance fee ban should apply to all legal
services, not just legal services related to litigation \401\ or those
provided by attorneys in the same state where the consumer
resides.\402\ Several commenters recommended that, in lieu of an
advance fee ban, attorneys be permitted to place fees in a client trust
account and draw on them as legal work is completed.\403\ State banking
regulators asked the Commission to consider creating an exemption based
on state law attorney exemptions, noting that the Michigan Credit
Services Act exempts attorneys who do not provide covered credit
services on a regular and continuing basis.\404\
---------------------------------------------------------------------------

\401\ See, e.g., CSBS at 4 (``[W]e believe that limiting the
exemption to preparing and filing for bankruptcy petitions or other
documents in a bankruptcy or other court or administrative
proceeding, is unduly narrow and might interfere with the ability of
attorneys to offer legitimate counsel and advice to their
clients.'').
\402\ See, e.g., NCLC at 8 (``The [proposed rule] overlooks
circumstances in which a homeowner would need to retain an attorney
in another state. This is most likely to occur with second homes and
rental properties. When a mortgage holder or servicer initiates a
foreclosure action, the foreclosure process will take place where
the dwelling is located and the homeowner will need an attorney
licensed in that jurisdiction, even if it is not where the homeowner
resides.'').
\403\ See, e.g., NCLC at 15; see also Mobley at 2; Rogers at 20-
21; Carr at 10; Bronson at 9. A coalition of consumer groups
cautioned that attorneys should be allowed to collect fees in client
trust accounts only if they offer MARS as part of the authorized
practice of law and do not split fees with non-attorneys. NCLC at
15.
\404\ CSBS at 5; see also NCLC at 13 (suggesting that the
Commission should consider allowing the states to adopt alternative
methods of regulating attorney conduct). But see NAAG at 3 (``It is
important that exemptions to the rule's coverage be limited and
narrow. As detailed in our earlier submission, companies are now
exploiting exemptions in state mortgage rescue statutes in order to
evade compliance with state laws. The exemption for attorneys has
been particularly abused.'').
---------------------------------------------------------------------------

Many commenters, nearly all of whom are attorneys who provide MARS
\405\ or organizations that represent them,\406\ including the American
Bar Association (ABA) \407\ and some state bars,\408\ recommended that
the Commission completely exempt attorneys engaged in the practice of
law.\409\ In particular, the ABA proposed that the Commission exempt
any ``licensed attorney engaged in the practice of law and those
individuals acting under the direction of the attorney.'' \410\
---------------------------------------------------------------------------

\405\ See, e.g., Deal; Greenfield; Rogers; Carr, Davidson, Dix,
Holler, Shaw, Peters, Dargon; Giles.
\406\ See, e.g., IL RELA.
\407\ ABA at 11.
\408\ IL St. Bar Assoc.; ME St. Bar Assoc., MO Bar, WI St. Bar,
MI St. Bar., GA St. Bar, OR St. Bar.
\409\ See, e.g., ABA at 1 (``[T]he ABA urges the FTC to modify
the rule to expand its existing attorney exemption to exclude
lawyers engaged in the practice of law from the entire proposed
rule, not just certain narrow provisions of the rule.''); Rogers at
15 (``Prohibit loan modification companies from taking up-front fees
unless they are licensed attorneys regularly conducting business out
of publicly accessible office space in the state in which they
provide loan modification services.''); IL RELA at 1.
\410\ ABA at 11. The issue of the jurisdiction in which an
attorney must be licensed to qualify for the exemption is discussed
infra Sec. III.G.3.c.(2).
The ABA also urged the Commission to reconcile the exemption in
the Final Rule with the attorney exemption in HUD's proposed rule
under the SAFE Act. See supra notes 99-103 and accompanying text. As
discussed in Section II.C., HUD's proposed rule imposes standards
for the licensing and registration of loan originators, which HUD
intends to encompass third-party loan modification specialists. The
HUD proposed rule would exempt licensed attorneys who provide
covered services ``as an ancillary matter to the attorney's
representation of the client,'' unless the attorney is compensated
by a mortgage loan originator. Safe Mortgage Licensing Act, 24 CFR
3400.103(e)(6). The Commission declines to adopt the exemption
proposed by HUD. As a matter of law, the Commission in this
proceeding would not be bound by a decision on the part of HUD to
adopt a certain exemption for licensed attorneys based on a
rulemaking record in a different proceeding to implement a different
statute. In any event, reconciliation of two rules is premature
given that the HUD Rule is only at the proposal stage. As discussed
below, the FTC has concluded that the record in this proceeding
warrants a different treatment of attorneys than the exemption in
the proposed HUD Rule.

---------------------------------------------------------------------------

[[Page 75127]]

a. General Objections to Covering Attorneys
Comments advocating for a broader or complete attorney exemption
made the following main points: (1) It is unnecessary to cover
attorneys because strict state laws and licensing regulations governing
attorney behavior already provide adequate protection for consumers;
\411\ (2) the proposed rule's requirements conflict with the manner in
which attorneys traditionally have offered and charged for their legal
services; \412\ and (3) the proposed rule would cause attorneys to stop
providing legal services to financially distressed consumers.\413\
---------------------------------------------------------------------------

\411\ See ABA at 8 (``The primary reason to regulate those
providing mortgage assistance relief services to consumers is to
keep them honest and ensure proper government oversight over them.
But because lawyers already have substantial fiduciary duties to
their clients that are strictly enforced by the state supreme courts
and state bars that license and oversee the lawyers, this rationale
for regulating MARS providers simply does not apply to lawyers who
are already licensed by their state courts and bars.''); Lawson at 1
(``Attorneys are regulated by the bar associations, they do not need
to be regulated on another level.''); Mobley at 2 (``In deciding to
provide broader attorney exemptions in the rule, the FTC should
consider that attorneys already are regulated by the states, are
subject to strict ethical standards, and misconduct leads to severe
sanctions. In fact, the Rules of Professional Conduct implemented in
most states already provide for the investigation and discipline of
the majority of the dishonest and unfair acts this rule is written
to prevent.''); Carr at 5 (``In addition lawyers are licensed
professionals bound to follow a code of ethics promulgated by the
bar associations in the states in which they practice and hence the
activities described in the rule are already in effect `policed' at
the state level, when in my opinion all regulation of this type more
properly resides.'').
\412\ See ABA at 3-5; Deal at 8 (``Attorneys are well regulated
by their bar associations.''); Carr at 5.
\413\ See ABA at 8 (``As a result of these burdensome mandates,
many lawyers who currently help consumers renegotiate their
mortgages or avoid foreclosure as a part of their practice might
stop handling these types of cases altogether rather than comply
with these new regulations.''); Greenfield at 3-4 (reporting that
many attorneys, including herself, discontinued providing MARS after
California passed a law that prohibited attorneys from collecting
advance fees); Mobley at 2 (``Reputable attorneys experienced in
loan modifications and other mortgage law issues would not be able
to continue to practice. * * *''); Carr at 5 (``I and many others in
the profession predict that lawyers will henceforth shun this field
if the rule is adopted in its present form. * * *''); Deal at 4
(``The practical effect of [the Rule] is that attorneys will not be
willing to work for clients needing these services, and people who
need legal services will not be able to obtain them.''); Giles at 4
(``If you pass this rule, it will drive lawyers like myself out of
the market, and the number of permanent HAMPs that are executed will
drop precipitously.''); Rogers at 1 (``The proposed FTC rules, as
they stand, will result in the wholesale elimination of reputable
and capable attorneys who help desperate homeowners.'').
---------------------------------------------------------------------------

Attorney commenters contended that federal regulation of attorneys
who provide MARS is unnecessary, because existing state laws and
licensing regulations impose extensive restrictions and duties on
attorneys.\414\ For example, according to commenters, these laws and
regulations obligate attorneys to work diligently and competently on
behalf of their clients and to charge only reasonable fees.\415\
Several commenters also argued that state laws and regulations offer
unique protections when attorneys collect fees and expenses in advance
of providing services.\416\ According to the ABA, nearly every state
court system has adopted laws and regulations requiring attorneys to
deposit advance payments of fees and expenses into a client trust
account that must comply with certain requirements.\417\ Violations of
state laws and regulations governing attorney conduct can result in
sanctions and other disciplinary action, including disbarment.\418\
Accordingly, these commenters urged the Commission to exempt attorneys
entirely from the Final Rule and defer entirely to state enforcement
against attorneys who violate applicable state laws or licensing
regulations.\419\
---------------------------------------------------------------------------

\414\ See, e.g., Deal at 1 (``[The FTC] proposes to regulate the
relationship between the attorney and client, which up until now has
been the jurisdiction of state bar associations and state supreme
courts.''). The ABA also emphasized that the agents and employees of
attorneys must comply with the same ethical rules. ABA at 8.
\415\ See, e.g., ABA at 8.
\416\ See, e.g., ABA at 6-9; Mobley at 2; Rogers at 16; Bronson
at 5.
\417\ ABA at 9; see also NCLC at 11 (``Attorneys in many states
have long been required to escrow unearned fees, and client trust
accounts are recognized as an appropriate method of protecting money
that remains the property of the client until earned by the
attorney.'').
\418\ ABA at 9; Mobley at 2; Rogers at 16, 20-21 (``Violation of
the rules of an IOLTA account, which is often audited, can easily
result in the disbarment of an attorney. Therefore, it is unlikely
attorneys would often violate the escrow requirements.''); Carr at
10; see also NCLC (``A client who is injured by an attorney removing
funds from a trust account will have recourse to the jurisdiction's
attorney discipline system, many of which include client recovery
funds to provide redress in exactly this situation.''); Deal at 1
(``If I fail to behave ethically and fairly towards my clients I can
be disciplined and ordered to refund fees.'').
\419\ See, e.g., ABA at 9; Mobley at 2.
---------------------------------------------------------------------------

b. Objections to Specific Provisions Covering Attorneys
In addition to their general objections to the proposed rule
applying to attorneys, the commenters objected to applying some of its
provisions to attorneys. These comments, submitted by attorneys and
organizations representing them, contended that a number of the
proposed rule's provisions were inconsistent with the practice of law
and the state laws and regulations that govern it.\420\ In some
instances, according to these commenters, the requirements would
undermine attorneys' ethical obligations to their clients. In other
instances, the requirements would be cumbersome or excessive in light
of comprehensive state laws governing how attorneys promote and charge
for their services. In particular, they raised concerns about
subjecting attorneys to the advance fee ban, the prohibition on
instructing consumers not to communicate with their lenders or
servicers, the required disclosures, and recordkeeping and compliance
requirements.
---------------------------------------------------------------------------

\420\ See, e.g., ABA at 3-7; IL RELA at 1-2; IL St. Bar Assoc.
at 1; Carr at 4-5; Bronson at 9.
---------------------------------------------------------------------------

First, several commenters urged the FTC to exempt attorneys
entirely from the advance fee ban. According to the ABA, the advance
fee ban in the proposed rule, which conditioned the receipt of payment
on achieving the promised result, conflicted with well-established
state laws and regulations permitting attorneys and clients to agree to
a variety of fee arrangements, including flat fees, contingency fees,
or hourly fees.\421\ According to the ABA, the advance fee ban
effectively would restrict attorneys to charging contingency fees for
MARS.\422\
---------------------------------------------------------------------------

\421\ See, e.g., ABA at 6-7; see also Bronson at 2
(``Historically, attorneys have billed either on an hourly basis, a
flat rate basis or on a contingency basis. All of these methods are
legal and within the boundaries of the rules of ethics governing
attorneys as long as they are clearly described in a written
retainer agreement provided to the client.''); Dargon at 2 (charges
clients a flat fee of $2500; clients value a ``predictable,
definitive fee that includes representation throughout the process
regardless of the complexity or duration'').
\422\ ABA at 7; see also Bronson at 2 (``Without the ability to
take a retainer and charge for their time and effort regardless of
whether they are successful, most attorneys will not be able to
offer expert loan modification advice and services.''); Greenfield
at 5 (``An attorney who attempts to negotiate but is unable to
achieve a mortgage loan modification for her client is still
entitled to be paid for legal services actually rendered.''); Dargon
at 2 (``If the FTC removes the up-front fee, it will effectively
create a contingency area of law akin to personal injury--only
without an insurance company or solvent defendant at the end of the
case to absorb the attorneys' fees.'').
---------------------------------------------------------------------------

Attorney commenters contended that an advance fee ban would render
them unable to pay their operating costs \423\ and expose them to a
high risk of non-payment,\424\ thereby causing many

[[Page 75128]]

attorneys to discontinue providing these types of services.\425\
According to the commenters, the proposed rule's limitation of the
exemption to attorneys engaged in bankruptcy or other legal proceedings
would exclude many forms of legal work for which attorneys regularly
collect fees in advance.\426\ Therefore, these commenters recommended
that a final rule should allow them to place advance fees in a client
trust account and withdraw them as they perform services.\427\
---------------------------------------------------------------------------

\423\ See, e.g., Mobley at 2 (``Attorneys simply cannot operate
a firm without collecting upfront fees.''); Greenfield at 5
(``Requiring an attorney to wait to be paid until a permanent
modification is approved by the servicer is unreasonable when the
actual time that elapses could be six months to one year.''); Rogers
at 9-10; Giles at 3; Dargon at 1, 3; Carr at 5; Deal at 4.
\424\ See, e.g., ABA at 8 (``[L]awyers who try to help their
consumer clients to renegotiate their mortgages or avoid foreclosure
* * * would be prohibited from charging an advance fee, thereby
greatly increasing the risk that the lawyer would not receive
payment for the legal services provided.''); Mobley at 2 (``It is
unreasonable for anyone to believe that clients are just as likely
to pay their attorney bill after their legal matter is resolved as
before.''); Greenfield at 5 (``The Commission's position that
attorneys who represent that they will `negotiate' a mortgage loan
modification cannot be compensated until a permanent modification is
offered to the borrower is unreasonable and unrealistic.''); Rogers
at 8, 10 (``[The proposal] will virtually eradicate the practical
ability of ethical, law abiding loan modification attorneys to ever
get paid.''); Carr at 4 (``[T]he attorneys is relegated to filing a
multitude of small claims cases against clients who are largely
`judgment proof.'''); GLS at 1 (``You are telling attorneys, many of
them younger (like myself), newly out of law school (like myself),
and with little to no ability to carry the overhead costs of
providing assistance absent receipt of some fees, that they can't
collect a fee from clients who are the very definition of a credit
risk until the very close of the matter. These matters typically
take over 6 months to as long as a year. Statistically something
like only 10% of these are `successful'. * * * As a result, your
attorneys are under mountains of debt from student loans and
struggling to stay out of foreclosure themselves have only a 10%
chance of getting paid after 6 months to a year of work.'').
\425\ See, e.g., Greenfield at 4; Giles at 3 (``If the FTC says
I can't collect a fee in advance, I will have to exit this field of
practice.''); Lawson at 2 (``Without the ability to take a retainer
and charge for their time and effort regardless of whether they are
successful, most attorneys will not be able to offer expert loan
modification advice and services.''); Dargon at 3 (``Attorneys will
be loathe to take modification cases if they have no assurance of
being paid for their time and effort''); IL RELA at 1; WI St. Bar at
1.
\426\ See, e.g., Greenfield at 5; ABA at 6-7. Alternatively,
some commenters argued that the proposed rule would create
incentives for attorneys to file a lawsuit or a petition for
bankruptcy on behalf of their client instead of finding another
potentially appropriate solution. See, e.g., Mobley at 2; FL Bar at
1; OR St. Bar at 1; IL RELA at 2.
\427\ See, e.g., Greenfield at 4-6 (arguing that ``attorneys
should be permitted to request a client retainer to be held in a
regulated account, and to bill a client for legal work performed on
an interim basis''); Rogers at 20-21; Mobley at 2; Carr at 10;
Bronson at 9.
---------------------------------------------------------------------------

Second, some attorney commenters recommended exempting attorneys
from the prohibition on instructing consumers not to contact their
lenders or servicers. According to the ABA, clients typically expect
attorneys they retain to act as their representative in dealing with
other parties, such as lenders and servicers.\428\ In general, the
commenters argued that imposing this prohibition would undermine
attorneys' effectiveness as legal counsel and possibly jeopardize the
attorney-client privilege.\429\ Some commenters also recommended that
the exemption from this prohibition apply to attorneys who are lawfully
licensed in any state,\430\ noting that the exemption in the proposed
rule would prevent attorneys from giving such an instruction to their
out-of-state clients.\431\
---------------------------------------------------------------------------

\428\ ABA at 4.
\429\ See, e.g., ABA at 4-5 (``Section 322.3 of the Proposed
Rule would seriously undermine the confidential attorney-client
relationship by prohibiting lawyers from giving certain proper legal
advice to their consumer clients who live in another state,
including advice to `not contact or communicate with his or her
lender or servicer'.''); IL St. Bar at 1 (arguing that proposed rule
``prohibits lawyers from giving their clients who live in another
state appropriate legal advice by prohibiting them from advising
these clients not to communicate directly with the lenders''); IL
RELA at 2 (same); CCRL at 10 (arguing that it is unclear why rule
should cover attorneys engaged in the ``ethical practice of law'');
Bronson at 9 (arguing that it is ``dangerous to pass a rule that
supercedes the judgment of attorneys as to whether their clients
should talk to the lender or servicer''); MI St. Bar at 1; Rogers at
10-12.
\430\ See ABA at 5; Bronson at 5.
\431\ See supra note 430. A consortium of consumer groups also
argued that the proposed exemption would not permit attorneys to
represent consumers who own property in a state other than where
they reside, for example, members of the military who commonly rent
property in one state but reside in another. See NCLC at 8.
---------------------------------------------------------------------------

Third, some commenters argued that attorneys should not be subject
to the proposed rule's disclosure requirements.\432\ The ABA criticized
two disclosures in particular: (1) The disclosure that providers are
for-profit businesses not affiliated with the government or the
consumer's lender or servicer, because in the attorney context this
non-affiliation disclosure is unnecessary and potentially confusing to
consumers;\433\ and (2) the total cost disclosure, because it would
mandate that attorneys charge a flat fee for their services even though
they commonly charge fees on an hourly or other basis.\434\
---------------------------------------------------------------------------

\432\ See ABA at 4, 8 ; MO Bar at 1; OR St. Bar at 1; IL St. Bar
Assoc. at 1; IL RELA at 2; MI St. Bar at 1; FL Bar at 1; ME St. Bar
Assoc. at 1; GA St. Bar at 1; WI St. Bar at 1.
\433\ ABA at 3. A consumer group also opposed requiring
attorneys to make this disclosure, contending that there is little
evidence that the misimpression that the disclosure is designed to
cure--that the provider is affiliated with the government or the
consumer's lender or servicer--actually exists with respect to
attorneys. NCLC at 9.
\434\ ABA at 7.
---------------------------------------------------------------------------

Finally, several commenters argued that attorneys should be exempt
from the proposed rule's record keeping and compliance requirements.
The ABA and other attorney organizations claimed that requiring
attorneys to comply with the requirements to maintain records of their
interactions and transactions with clients and to produce them for FTC
inspection during an investigation or law enforcement action would
undermine attorney-client confidentiality and the attorney-client
relationship.\435\
---------------------------------------------------------------------------

\435\ See, e.g., ABA at 4; IL St. Bar Assoc. at 1; OR St. Bar at
1; FL Bar at 1; NCLC at 9; Rogers at 22.
---------------------------------------------------------------------------

3. The Attorney Exemption in the Final Rule
In the Final Rule, the Commission has broadened the attorney
exemption. An attorney is exempt from the Rule, except the advance fee
ban, if he or she: (1) Provides MARS as part of the practice of law;
(2) is licensed to practice law in the state where the client or the
client's dwelling is located; and (3) complies with applicable state
laws and regulations relating to the same general types of conduct the
Rule addresses, namely, the competent and diligent provision of legal
services, communication with clients, charging and receipt of fees,
promotion of services, and not engaging in fraudulent or deceitful
conduct. In addition, an attorney that meets these criteria is exempt
from the advance fee ban if the attorney deposits any advance fees in a
client trust account and complies with all state laws and licensing
regulations relating to the use of those accounts. The attorney
exemption in the Final Rule strikes a balance between allowing
consumers to continue to have access to bona fide legal
assistance,\436\ while at the same time preventing or deterring unfair
or deceptive practices by attorneys.\437\
---------------------------------------------------------------------------

\436\ As discussed above, both attorney practitioners, see,
e.g., ABA at 7, and consumer advocates, see, e.g., NCLC at 7; LFSV
at 4, have argued that the Final Rule should not curtail consumer
access to legal help.
\437\ As discussed above, consumer groups, law enforcers, and
regulators have argued that the Final Rule should protect consumers
from harm by attorneys. See NCLC at 8; CSBS at 4; LSFV at 4;
Lawyers' Committee at 9; see also NAAG at 3-4; MBA at 4; NYC DCA at
4; IL AG (ANPR) at 2; MA AG (ANPR) at 9; CUUS at 8-9.
---------------------------------------------------------------------------

a. The Commission's Determination Not To Exempt All Attorneys
As discussed above, some commenters advocated exempting from the
Rule all attorneys, regardless of their activities. The Commission
declines such a blanket exemption to attorneys. The record shows that a
substantial number of attorneys have engaged in the types of deceptive
and unfair conduct the Rule prohibits. For example, approximately 22%
of the complaints that a coalition of government agencies, nonprofits,
and service providers has received from consumers about loan
modification fraud involve some form of

[[Page 75129]]

attorney participation.\438\ Similarly, of the 342 MARS companies
investigated by the Illinois Attorney General's Office, over 38%
appeared to have had some attorney involvement, and attorneys owned--at
least in part--over 17% of those companies.\439\ This data is
consistent with the many FTC \440\ and state \441\ law enforcement
actions in which attorneys were found or alleged to have engaged in
unfair or deceptive practices in offering or providing MARS to
consumers.
---------------------------------------------------------------------------

\438\ Of the 6,473 total complaints in the LMSPN database as of
August 25, 2010, see supra note 75, the Network determined that
1,510 involved legal representation. This level of reported attorney
involvement has remained consistent over the past several months.
See Loan Modification Scam Prevention Network June 2010 National
Loan Modification Scam Database Report, at 1 (``(LMSPN, June 2010
Report),''), available at http://www.preventloanscams.org/tools/assets/files/June-LMSPN-Report-Final.pdf. (noting that 33% percent
of persons aged 51 and older reported attorney involvement in the
loan modification scam); Loan Modification Scam Prevention Network
May 2010 National Loan Modification Scam Database Report, at 1
(``LMSPN, May 2010 Report), available at http://www.preventloanscams.org/tools/assets/files/May-LMSPN-Report-Final.pdf. (``At the end of May, almost one-third of our reports
indicated that legal representation was a part of the reported
scam.''); Loan Modification Scam Prevention Network April 2010
National Loan Modification Scam Database Report, at 2 (``LMSPN,
April 2010 Report), available at http://www.preventloanscams.org/tools/assets/files/April-LMSPN-Report-Final.pdf. (noting that 20% of
complaints involve attorney representation). A May 2010 LMSPN Report
also found that the names of more than 20 law firms or attorneys had
appeared in multiple complaints. See LMSPN, May 2010 Report at 1.
\439\ See IL AG (June 30, 2010) at 2. More specifically, this
comment stated that 17.5% of these companies were owned, at least in
part, by attorneys; 15% had affiliations with attorneys; and 6%
showed evidence of attorneys on their staffs.
\440\ See, e.g., FTC v. Washington Data Res., Inc., No. 8:09-cv-
02309-SDM-TBM (M.D. Fla. filed Nov. 12, 2009); FTC v. LucasLawCenter
``Inc.'', No. SACV09-770 DOC (ANX) (C.D. Cal. filed July 7, 2009);
FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS (MGX) (C.D.
Cal., Amd. Compl. filed Mar. 8, 2010); FTC v. Fed. Loan Modification
Law Ctr., LLP, Case No. SACV09-401 CJC (MLGx) (C.D. Cal., Am. Compl.
filed Oct. 1, 2010).
\441\ See, e.g., Florida v. Kirkland Young, No. 09-90945-CA-03
(Fla. Cir. Ct. Dade-County Dec. 17, 2009); North Carolina v.
Campbell Law Firm, P.A., No. 09cv023738 (N.C. Super. Ct.--Wake filed
Nov. 11, 2009); Assurance of Voluntary Compliance & Discontinuance
In re Airan2 (Nov. 9, 2009), available at http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/Airan2.pdf; Press Release, Conn. Att'y Gen., Attorney General Warns
Consumers About Foreclosure Rescue Company Masquerading As Law Firm
(Aug. 10, 2009), available at http://www.ct.gov/ag/cwp/view.asp?Q=444786&A=3673; California v. United First, Inc., No. BC
417194 (Cal Super. Ct. Los Angeles filed July 6, 2009) (alleging
attorney Mitchell Roth and his law firm MW Roth, PLC falsely
promised to eliminate mortgages on consumers' homes and improve
their credit); Assurance of Voluntary Compliance & Discontinuance In
re Law Office of Eugene S. Alkana (Jun. 12, 2009), available at
http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/Legal%20Home%20Solutions.pdf; Assurance of Voluntary Compliance &
Discontinuance In re Traut Law Group (Jun. 11, 2009), available at
http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/Traut%20Law%20Group.pdf; see also Press Release, Office of the Cal.
Att'y Gen., Brown Sues 21 Companies and 14 Individuals Who Ripped
Off Consumers Desperate For Mortgage Relief (July 15, 2009),
available at http://ag.ca.gov/newsalerts/release.php?id=1767 (among
the defendants that the California Attorney General sued were 4
attorneys and three law firms); Cincinnati Bar Ass'n. v. Mullaney,
119 Ohio St. 3d 412 (2008). Federal and state criminal authorities
also have prosecuted attorneys who have engaged in foreclosure
rescue fraud. See, e.g., Amanda Bronstad, Crackdown on California
Attorneys For Mortgage Fraud a State-Federal Joint Effort, Nat'l
L.J., Oct. 12, 2010 (Orange County district attorney's office
brought criminal charges against an attorney in connection with his
defrauding more than 400 homeowners with promises to modify mortgage
loans in exchange for advance fees); Ameet Sachdev, Lawyer Convicted
of Mortgage-Rescue Fraud, Chi. Trib., July 13, 2010 (Attorney radio
personality found guilty of federal criminal charges in connection
with bilking homeowners in fraudulent foreclosure rescue scheme),
available at http://www.chicagotribune.com/business/ct-biz-0713-chicago-law-20100713,0,3981512.column; Press Release, Dist, Att'y
Queens Cnty., Seventeen Individuals--Including Two Attorneys--
Charged in Massive Multi-Million Dollar Real Estate Fraud:
Ringleaders Allegedly Targeted Distressed Homeowners in Mortgage
Rescue Scams (May 13, 2010), available at http://www.queensda.org/newpressreleases/2010/may/huggins_sookraj_et%20al_05_13_2010_cmp.pdf.
---------------------------------------------------------------------------

Additionally, the record, including FTC and state law enforcement
actions,\442\ demonstrates that MARS providers have used state law
exemptions for attorneys to circumvent the law and harm consumers.\443\
The NAAG comment, for example, explained that the attorney exemptions
in many state MARS laws have created loopholes that MARS providers have
exploited to harm consumers.\444\ As discussed above, these state MARS
laws often exempt attorneys if they have attorney-client relationships
with the consumers for whom they are providing services.\445\ An
attorney-client relationship by itself, however, provides no guarantee
that the attorney will act in a fair and honest fashion. Not only have
MARS attorneys engaged in unfair and deceptive acts and practices and
used such exemptions to circumvent state law requirements, but many
non-attorney MARS providers have employed or affiliated with attorneys
for that same purpose.\446\ MARS providers

[[Page 75130]]

increasingly have induced consumers to purchase their services by
making claims that their services include specialized legal assistance
from attorneys,\447\ with some attorneys lending their names and
credentials to these operations.\448\ In these arrangements, however,
the attorneys often do little or no work on behalf of consumers,\449\
with non-attorneys handling most functions, including communicating
with the lender or servicer.\450\
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\442\ See supra notes 55-61 and accompanying text; see also FTC
v. Truman Foreclosure Assistance, LLC, No. 09-23543 (S.D. Fla. filed
Nov. 23, 2009) (alleging that defendants told consumers that they
were affiliated with law firm or attorneys); FTC v. Fed. Housing
Modification Dep't, No. 09-CV-01753 (D.D.C. filed Sept. 16, 2009)
(alleging that defendants falsely claim to have attorneys or
forensic accountants on staff); FTC v. Loan Modification Shop, Inc.,
No. 3:09-cv-00798 (JAP), Mem. Supp. TRO at 14 (D.N.J. filed Aug. 4,
2009) (alleging that defendants misrepresent ``that it is an
attorney-based company'').
\443\ See, e.g., NAAG at 3 (``As detailed in our earlier
submission, companies are now exploiting exemptions in state
mortgage rescue statutes in order to evade compliance with state
laws. The exemption for attorneys has been particularly abused.'');
IL AG (ANPR) at 2 (``Attorneys are using the [state] exemption to
market and sell the same mortgage consulting services provided by
non-attorneys.''); see also NAAG at 3-4 (arguing that it is a
``difficult and fact-intensive inquiry'' to prove attorneys are not
engaged in the practice of law, and thus they are not exempted from
state laws exempting those activities).
In addition, some state consumer fraud statutes explicitly
exempt attorneys, further impeding state enforcers from prosecuting
attorney MARS providers for unfair or deceptive practices. See D.C.
Code Ann. Sec. 28-3903(c)(2)(C) (prohibiting the Department of
Consumer Protection from applying the statute to the ``professional
services of clergymen, lawyers [and others]''); Md. Code Ann., Com.
Law Sec. 13-104(1) (the statute ``does not apply to * * * [t]he
professional services of a * * * lawyer''); N.C. Gen. Stat. Sec.
75-1.1 (2005) (exempting ``member[s] of a learned profession''); see
also Sharp v. Gailor, 510 S.E.2d 702, 704 (N.C. App. 1999) (holding
that unfair and deceptive trade practice claims against attorney are
barred by a statutory exemption for ``member[s] of learned
profession''); Ohio Rev. Code Ann. Sec. 1345.01(A) (consumer
transactions under the Ohio Consumer Sales Practices Act do not
include ``transactions between attorneys, physicians, or dentists
and their clients or patients'').
\444\ NAAG at 4 (``We expect the trend of using attorneys as
fronts for mortgage rescue companies to continue. We have noticed
that national companies are recruiting for attorney `partners' or
`local counsel' in all of the states they work in to evade states'
mortgage rescue fraud statutes * * * Based on the continued--and
increasing--number of complaints we are receiving against companies
exploiting the attorney exemption, we support only a narrowly-
crafted exemption for attorney services.''); IL AG (ANPR) at 2
(``Attorneys are using the exemption to market and sell the same
mortgage consulting services provided by non-attorneys.'').
\445\ See supra notes 58-60, 98; see also, e.g., Colo. Rev.
Stat. Sec. 6-1-1103(4)(b)(I) (exempts Colorado attorneys ``while
performing any activity related to the person's attorney-client
relationship with a homeowner''); 765 Il. Comp. Stat. Ann. 940/5
(exempts Illinois attorneys engaged in the practice of law); Mo.
Rev. Stat. Sec. 407.935(2)(b)a9 (exempts Missouri attorneys
rendering service in the course of practice); see also NAAG (ANPR)
at 13 (``Currently, most states exempt attorneys from their mortgage
rescue consultant laws.''); CMC (ANPR) at 9-10. In California, the
state legislature eliminated the attorney exemption from its law
regulating foreclosure consultants because of concerns about
evasion. See supra note 61.
\446\ See, e.g., CSBS (ANPR) at 2 (noting ``attorneys who lend
their name to a loan modification company, but play, little, if any
direct role, in helping consumers obtain actual loan
modifications''); MN AG (ANPR) at 5 (``The Office is aware of
several loan modification and foreclosure rescue companies that have
affiliated with licensed attorneys in other states in an effort to
circumvent state law.''); CRC (ANPR) at 2 (``An increasing number of
attorneys are involving themselves in these unethical practices
without providing any legal (or other) services, sometimes engaging
in fee-splitting or even simply acting as fronts for loan
modification companies who are seeking to avoid state laws that
prohibit some of the practices described above but exempt
attorneys.''); Cal. State Bar Ethics Alert at 2 (``There is evidence
that some foreclosure consultants may be attempting to avoid the
statutory prohibition on collecting a fee before any services have
been rendered by having a lawyer work with them in foreclosure
consultations.'').
\447\ The FTC's review of the information produced by a media
monitoring company, see supra note 66, showed that 25 of the 140
companies advertising MARS made reference to being attorneys or
providing some form of legal assistance.
\448\ See, e.g., FTC v. Loss Mitigation Servs., Inc., No.
SACV09-800 DOC (ANX), Mem. Supp. Pls. Ex Parte App. at 3 (C.D. Cal.
filed Aug. 3, 2009) (alleging that ``Walker Law Group'' was ``a sham
legal operation designed to evade state law restrictions on the
collection of up-front fees for loan modification and foreclosure
relief''); FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS
(MGX), Prelim. Rep. Temp. Receiver at 2-3 (C.D. Cal. filed July 7,
2009) (stating that defendants' ``relationship with two different
lawyers was nominal at best and served primarily as a cover to
dignify the business and invoke the attorney exception to advance
fee prohibitions''); FTC v. LucasLawCenter ``Inc.'', No. SACV-09-770
DOC (ANX), Mem. Supp. TRO at 19 (C.D. Cal. filed July 7, 2009)
(alleging that ``[d]espite promises to the contrary, consumers have
no contact with the purported attorneys who are supposed to be
negotiating with their lenders''); FTC v. Fed. Loan Modification Law
Ctr., LLP, No. SACV09-401 CJC (MLGx), Mem. Supp. Ex Parte TRO at 6 &
n.2; (C.D. Cal. filed Apr. 6, 2009) (alleging non-attorney
defendants partnered with a California-licensed attorney to exploit
attorney exemption in state law); see also Drexel Testimony at 6
(``In exchange for the use of the attorney's name and his or her
ability to charge and receive advance fees, the foreclosure
consultant typically offers to perform most or all of the loan
modification services. * * *''); Press Release, State Bar of Cal.,
State Bar Takes Action to Aid Homeowners in Foreclosure Crisis (Nov.
25, 2009) (``[T]he attorneys work with untrained non-attorney staff
engaging in the unlawful practice of law by offering legal advice to
prospective clients. [The Office of Trial Counsel] also is
investigating the non-attorney staff for possible referral to law
enforcement.''), available at http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96395; CMC (ANPR) at 10 (``[The
attorneys'] communications [with the consumer] are generally
`boilerplate' that does not appear to reflect any considered review
by an attorney.''); OH AG (ANPR) at 5 (``[O]ur office sees
foreclosure rescue companies advertise that they will provide a
lawyer or legal help to that consumer. The lawyer's client, however,
is actually the company, not the consumer, and at most the lawyer
will file a brief template response on behalf of the consumers.'');
IL AG (ANPR) at 2. Similarly, financial service companies report
receiving letters from attorneys who do no work but lend their names
to out-of-state attorneys. AFSA at 5.
\449\ IL AG (ANPR) at 2 (``While attorney mortgage consultants
charge a premium for their services and aggressively market their
status as legal professionals, they generally exclude--either
expressly or in practice--actual legal representation or legal work
from the scope of provided services.''). Some MARS providers
advertise the provision of legal services to consumers but then
later disclaim, in fine print contracts, that they will actually
provide such services. See id. at 2-4, 7.
\450\ See, e.g., FTC v. US Foreclosure Relief Corp., No. SACV09-
768 JVS (MGX) (C.D. Cal., Amd. Compl. filed Mar. 8, 2010) (alleging
defendants falsely claimed a lawyer would negotiate the terms of
consumers' home loans); FTC v. FTC v. Fed. Loan Modification Law
Ctr., LLP, No. SACV09-401 CJC (MLGx), Mem. Supp. Ex Parte TRO at 6 &
n.2 (C.D. Cal. filed Apr. 6, 2009) (alleging ``despite promises to
the contrary, consumers have no contact with purported attorneys who
are supposed to be negotiating with their lenders''); see also Chase
(ANPR) at 5 (``Many MARS providers claim to be affiliated with
attorneys, but typically the people performing the services are not
attorneys, and the connection with the attorney is very tenuous.
Calls to the MARS provider do not go to the attorney's office and
addresses used by the providers are not the same as the
attorney's.''); OH AG (ANPR) at 5 (``[A]t most the lawyer
[advertised to consumers by foreclosure rescue companies] will file
a brief template response on behalf of the consumers.'').
---------------------------------------------------------------------------

Given the prevalence of attorneys engaged in unfair and deceptive
practices in providing MARS and the experience of the states with
categorical exemptions for all attorneys, the Commission has decided
not to exempt attorneys across-the-board from the Final Rule. The
record demonstrates that such a categorical exemption would open a
large loophole to the Rule that MARS providers would exploit to the
detriment of consumers.
b. The Rationale for the Attorney Exemption in the Final Rule
As discussed above, attorneys' activities related to mortgage
assistance relief run the gamut. At one end of the spectrum, attorneys
may provide a host of valuable services for consumers unable to pay
their mortgages.\451\ For instance, some attorneys represent in legal
proceedings consumers who are in or at risk of foreclosure,\452\ or
provide such consumers with non-litigation legal services, such as
advising them on bankruptcy laws, unwinding sale-leaseback
transactions, resolving violations of fair lending laws, disputing
charges that servicers had assessed improperly, and counseling on the
tax implications of short sales.\453\ The Commission concludes that
some attorneys might cease providing such beneficial services if they
were required to comply with the provisions of the Rule.
---------------------------------------------------------------------------

\451\ In today's financial crisis, many consumers have turned to
attorneys for help with their mortgages. See, e.g., LFSV at 1
(``During the recent mortgage crisis, we have been dealing with a
flood of borrowers whose mortgages are distressed and who have been
subject to abuses by companies and individuals promising assistance
with obtaining modification of those loans.''); Central California
Legal Services: State Bar's First Foreclosure Forum in Fresno,
available at http://www.centralcallegal.org/ccls/index.php (call
for volunteer assistance to handle the sheer number of clients who
need assistance to avoid foreclosure). Many consumers at risk of
losing their homes must rely on for-profit attorneys to receive
legal assistance because their income levels disqualify them for
non-profit legal aid. See Income Levels for Individuals Eligible for
Assistance, 45 CFR part 1611 (2010) (publishing 2010 maximum income
levels for individuals who are permitted to receive free or low cost
legal help from programs funded by the Legal Services Corporation).
\452\ As one example, in several states borrowers have the right
to participate in supervised mediation with lenders before the home
goes into judicial foreclosure. See, e.g., Conn. Gen. Stat. Ann.
Sec. 8-265ee (2009) (providing for court-sponsored mediation prior
to foreclosure); Nev. Rev. Stat. Ann. Sec. 107.086 (2009)
(providing for court-supervised mediation prior to foreclosure).
Attorneys often represent clients in these mediation proceedings and
may in some states file a petition for review on behalf of consumers
if the mediation fails because lenders have acted in bad faith. See,
e.g., Giles at 1-2; see also Nev. Rev. Stat. Ann. Sec. 107.086(5)
(requiring loan holder to participate in mediation in good faith and
to bring all necessary documents).
\453\ See, e.g., NCLC (ANPR) at 14 (noting that ``an attorney's
more beneficial and traditional role of analyzing a client's
paperwork and advising the client of potential claims and options
may also fit within the definition of mortgage assistance relief'');
LSFV at 4 (``Those seeking advice, who are likely in or facing
mortgage default, may need specific advice regarding the contractual
and tax implications of a loan modification, which HUD-approved
counselors may not be qualified to provide.'').
---------------------------------------------------------------------------

At the other end of the spectrum, individuals with law licenses
frequently engage in deceptive or unfair MARS practices or assist
others who do. As with other services sold routinely through deceptive
or unfair means, a broad attorney exemption can become an easy way for
fraud artists to ply their trade without fear of law enforcement. Thus,
the Commission concludes that merely possessing a law degree or a
license to practice law is not an adequate basis for an exemption from
the Rule.
The Commission's goal is to craft an exemption that enables
attorneys to engage in the bona fide practice of law, but does not
create a loophole for unscrupulous attorneys who themselves engage in
unfair or deceptive acts and practices in selling MARS or lend their
credentials to others who do so. The attorney exemption described below
is designed to achieve that goal.
c. Requirements for the Exemption
(1) Practice of Law
As described above, the services that attorneys may deliver to
consumers with mortgage problems can be legal or non-legal in nature.
Limiting the exemption to attorneys engaged in the ``practice of law''
is intended to draw the distinction between legal and non-legal
services, even though performed or supervised by an attorney. The
``practice of law'' generally encompasses providing advice or counsel
that requires knowledge of the law and preparing documents, including
court

[[Page 75131]]

pleadings and contracts, to secure clients' legal rights.\454\ The
activities that constitute the ``practice of law,'' however, may vary
based on state laws and licensing regulations, as interpreted by state
courts and state bars. The Final Rule only allows an exemption for
attorneys who are engaged in the ``practice of law,'' as interpreted by
the jurisdiction where the consumer or the consumer's dwelling is
located.
---------------------------------------------------------------------------

\454\ See, e.g., Baron v. Los Angeles, 469 P.2d 353, 357 (Cal.
1970) (adopting the definition articulated in In re Eley v. Miller,
34 N. E. 836, 837-38 (Ind. App. 1893), that the practice of law
``includes legal advice and counsel, and the preparation of legal
instruments and contracts by which legal rights are secured although
such matter may or may not be pending in a court.''); State Bar
Ass'n of Conn. v. Conn. Bank & Trust Co., 140 A.2d 863, 870 (Conn.
1958) (The practice of law ``embraces the giving of legal advice on
a large variety of subjects and the preparation of legal instruments
covering an extensive field.''); Ga. Code Ann. Sec. 5-19-50
(defining practice of law as ``(1) Representing litigants in court
and preparing pleadings and other papers incident to any action or
special proceedings in any court or other judicial body; (2)
Conveyancing; (3) The preparation of legal instruments of all kinds
whereby a legal right is secured; (4) The rendering of opinions as
to the validity or invalidity of titles to real or personal
property; (5) The giving of any legal advice; and (6) Any action
taken for others in any matter connected with the law.'').
---------------------------------------------------------------------------

(2) Licensing Jurisdiction
To qualify for the exemption in the Final Rule, attorneys must be
licensed to practice law in the state where their clients reside or
where their clients' dwellings that are the subject of the MARS are
located. State attorney licensing regulations can provide an important
check on the conduct of attorneys. The record shows, however, that in
many cases attorneys have provided MARS in jurisdictions in which they
are not licensed.\455\ To ensure that exempt attorneys would be subject
to the oversight and regulation of state officials, the proposed rule
limited the exemption to those attorneys who were licensed to practice
in the state where the consumer resides.
---------------------------------------------------------------------------

\455\ See, e.g., FTC v. Fed. Loan Modification Law Ctr., LLP,
No. SACV09-401 CJC (MLGx) (law firm advertised MARS nationally while
attorneys who purportedly worked for company were only licensed to
practice law in California); Assurance of Voluntary Compliance &
Discontinuance In re: Airan2, (Nov. 9, 2009) (out-of-state attorney
provided MARS to Colorado consumers), available at http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/Airan2.pdf; see also CMC at 9-10 (``These attorneys are often not
licensed to practice in either the borrower's or servicer's state *
* *.''); CSBS at 2 (``This [increase of involvement by attorneys]
includes out-of-state attorneys, many of whom are not licensed to
practice law in the state where the homeowner lives * * *.'').
---------------------------------------------------------------------------

Some commenters, including several consumer groups, argued that the
exemption in the proposed rule was too narrow because it did not
include attorneys who represent clients who live in one state, but
whose dwelling that is the subject of the MARS is located in another
state.\456\ The Commission recognizes that some consumers who are in or
at risk of foreclosure may need legal assistance concerning dwellings
located in a state other than the one where they reside. As an example,
older persons who live in assisted living facilities located close to
family may continue to own homes in other states.\457\ Therefore, the
Final Rule expands the attorney exemption to encompass attorneys who
are licensed in the state where the consumer resides or where the
dwelling is located.
---------------------------------------------------------------------------

\456\ See, e.g., Greenfield at 5; NCLC at 10.
\457\ See NCLC at 4.
---------------------------------------------------------------------------

The Commission declines to expand the exemption to attorneys
licensed in any state, as recommended by some commenters.\458\ The
record, including state and FTC law enforcement, consumer complaints,
and comments, demonstrates that many attorneys who have engaged in
deceptive and unfair conduct that harms consumers operated on an
interstate basis, including in states where they were not
licensed.\459\ Requiring that attorneys be licensed where the consumer
or the property is located makes it more likely that state bar
officials will be a ``cop on the beat,'' deterring and preventing
unlawful conduct by attorneys.
---------------------------------------------------------------------------

\458\ See ABA at 5; Bronson at 5.
\459\ See, e.g., FTC Case List, supra note 28; Assurance of
Voluntary Compliance & Discontinuance In re Airan2 (Nov. 9, 2009),
available at http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/Airan2.pdf (alleging out-of-state attorney sold MARS
without proper licenses to Colorado residents); Assurance of
Voluntary Compliance & Discontinuance In re Law Office of Eugene S.
Alkana (Jun. 12, 2009) (same), available at http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/Legal%20Home%20Solutions.pdf; Assurance of Voluntary Compliance &
Discontinuance In re Traut Law Group (Jun. 11, 2009) (same),
available at http://www.coloradoattorneygeneral.gov/sites/default/files/uploads/Traut%20Law%20Group.pdf; cf. Model Rules of Prof'l.
Conduct R. 5.5 (prescribing that an attorney may practice law in a
jurisdiction other than the one in which she is admitted only under
limited circumstances, and even then only on a temporary basis).
---------------------------------------------------------------------------

(3) Compliance With State Laws and Licensing Regulations
In addition to being licensed, attorneys must comply with all
relevant state laws and licensing regulations governing their conduct
for the state in which the client or the client's dwelling is located
to qualify for the exemption. Specifically, these attorneys must abide
by all such laws and regulations relating to the following subject
matters: (1) Competent and diligent representation of clients; (2)
disclosure of material information regarding their services to clients;
(3) the accuracy of representations of material aspects of their legal
services; (4) the request, receipt, handling, and distribution of fees
from clients; and (5) prohibitions on fee-splitting with non-attorneys
or aiding others in the unauthorized practice of law.
The record in this proceeding demonstrates that many attorneys
involved in the provision of MARS have engaged in practices that
violate one or more aspects of the applicable state laws or licensing
regulations.\460\ To protect consumers and avoid duplicative or
inconsistent standards, the Commission has determined that it is
appropriate to

[[Page 75132]]

generally exempt from the Final Rule attorneys who comply with the
applicable state laws and regulations. Attorneys not in compliance with
those laws and regulations, however, remain subject to the Rule.
Examples of activities that may be in violation of state laws and
regulations, and thus would render attorneys ineligible for the
exemption, include: (1) Failing to work diligently and competently on
behalf of clients, i.e., not taking reasonable efforts to obtain
mortgage assistance relief; \461\ (2) neglecting to keep clients
reasonably informed as to the status of their matters, including the
potential for adverse outcomes; \462\ (3) misrepresenting any material
aspect of the legal services,\463\ including the likelihood they will
achieve a favorable result,\464\ an affiliation with a government
agency,\465\ or the cost of their services; \466\ (4) sharing legal
fees for MARS-related services with non-attorneys; \467\ (5) forming
partnerships with non-attorneys in connection with offering MARS; \468\
and (6) aiding MARS providers in engaging in the unauthorized practice
of law, i.e., providing legal services without a license to do so.\469\
If attorneys do not comply with all of these state requirements, they
must comply with all of the requirements in the Final Rule.
---------------------------------------------------------------------------

\460\ See, e.g., Press Release State Bar of Cal., State Bar
Takes Action to Aid Homeowners in Foreclosure Crisis (Sept. 18,
2009) (alleging that attorneys took ``fees for promised services and
then failed to perform those services, communicate with their
clients or return the unearned fees''), available at http://www.calbar.ca.gov/AboutUs/News/200934.aspx; see also Helen
Hierschbiel, Working with Loan Modification Agencies, Or. St. Bar
Bull. (Aug./Sept. 2009) (warning Oregon attorneys of potential
ethical violations associated with working with loan modification
companies), available at http://www.osbar.org/publications/bulletin/09augsep/barcounsel.html; Bob Lipson & David Huey, Lawyers and
Buyers Beware, Was. St. Bar J. (Aug. 2009) (warning attorneys of the
``potential ethical pitfalls'' of ``working with a loan modification
company in conjunction with your practice''), available at http://www.wsba.org/media/publications/barnews/aug09-lawyersbeware.htm; N.
J. Sup. Ct. Adv. Comm. On Prof. Ethics, Op. 716, Lawyers Performing
Loan or Mortgage Modification Services for Homeowners, 197 N.J.L.J.
59 (Jun. 26, 2009) (citing two ethics opinions in holding that
attorneys cannot pay fees to loan modification companies for
referring clients, act as in-house counsel to a for-profit loan
modification company, or engage in prohibited fee sharing with loan
modification companies), available at http://www.state.nj.us/dobi/bulletins/ACPE_716_UPL_45_loanmod.pdf; Diane Karpman, Beware the
Meltdown's Temptations, Cal. Bar J. (Dec. 2008) (warning the legal
community about the potential ethical violations that could occur if
attorneys were to go into business with non-attorneys in the loan
modification market) available at http://calbar.ca.gov/state/calbar/calbar_cbj.jsp?sCategoryPath=/Home/Attorney%20Resources/California%20Bar%20Journal/December2008&MONTH=December&YEAR=2008&sCatHtmlTitle=Discipline&sJournalCategory=YES&sCatHtmlPath=cbj/2008-12_Discipline_Ethics-Byte.html&sSubCatHtmlTitle=Ethics%20Byte; Florida Bar, Ethics Alert:
Providing Legal Services to Distressed Homeowners (cautioning
attorneys against entering into arrangements with non-lawyers to
provide services associated with loan modifications, short sales,
and other forms of foreclosure-related rescue), available at http://
www.floridabar.org/TFB/TFBResources.nsf/Attachments/
872C2A9D7B71F05785257569005795DE/$FILE/loanModification20092.pdf.
Additionally, the Ohio Supreme Court has sanctioned attorneys hired
by a foreclosure rescue company for, inter alia, failing to engage
in adequate preparation and failing to properly pursue clients'
individual objectives. See Cincinnati Bar Ass'n v. Mullaney, 894
N.E. 2d 1210 (Ohio 2008).
\461\ See, e.g., Model Rules of Prof'l Conduct R. 1.1 & 1.3
(requiring attorneys to provide competent and diligent legal
services).
\462\ See, e.g., Model Rules of Prof'l Conduct R. 1.4 (governing
attorney communications with clients about their cases); see also
Model Rules of Prof'l Conduct R. 2.1 (calling for attorneys to
exercise independent professional judgment and render candid
advice).
\463\ See, e.g., Model Rules of Prof'l Conduct R. 7.1 (general
prohibition on making ``false or misleading communications about the
lawyer or the lawyer's services''). Attorneys also cannot engage in
conduct that is dishonest, fraudulent, or deceitful. See Model Rules
of Prof'l Conduct R. 8.4.
\464\ Id. In some cases, state laws and regulations would
prohibit attorneys from promising that they will obtain any
particular mortgage relief for their clients. See, e.g., FL. Rules
of Prof'l Conduct R. 4-7.2(c)(F) & (G) (2010) (prohibits any
communication that ``contains any reference to past successes or
results obtained'' or ``promises results'').
\465\ Id.; see also Model Rules of Prof'l Conduct R. 7.5
(generally prohibits use of firm name, letterhead, or other
professional designation that is misleading, and specifies that
attorneys in private practice cannot use a trade name that implies a
connection with a government agency).
\466\ See Model Rules of Prof'l Conduct R. 7.1, 7.2, & 8.4; see
also Model Rules of Prof'l Conduct R. 1.5 (must communicate to
clients the scope of representation and the basis and rate for fees,
preferably in writing, before or within a reasonable time after
commencing the representation).
\467\ See Model Rules of Prof'l Conduct R. 5.4 (only under
certain circumstances can lawyers or law firms share legal fees with
non-lawyers).
\468\ Id. (lawyers cannot form business partnerships with non-
lawyers if any of the activities involve the practice of law). State
bars have warned attorneys about the ethical problems of partnering
with non-attorneys to perform MARS. See, e.g., Helen Hierschbiel,
Working with Loan Modification Agencies, Or. St. Bar Bull. (Aug./
Sept. 2009) (warning Oregon attorneys of potential ethical
violations associated with working with loan modification
companies), available at http://www.osbar.org/publications/bulletin/09augsep/barcounsel.html; Bob Lipson & David Huey, Lawyers and
Buyers Beware, Wash. St. Bar J. (Aug. 2009) (warning attorneys of
the ``potential ethical pitfalls'' of ``working with a loan
modification company in conjunction with your practice''), available
at http://www.wsba.org/media/publications/barnews/aug09-lawyersbeware.htm; N. J. S. Ct. Adv. Comm. Prof. in Ethics & Comm.
on Unauthorized Practice of Law, Lawyers Performing Loan or Mortgage
Modification Services for Homeowners, (Jun. 26, 2009) (citing two
ethics opinions in holding that attorneys cannot pay fees to loan
modification companies for referring clients, act as in-house
counsel to a for-profit loan modification company, or engage in
prohibited fee-sharing with loan modification companies), available
at http://www.state.nj.us/dobi/bulletins/ACPE_716_UPL_45_loanmod.pdf.
\469\ See Model Rules of Prof'l Conduct R. 5.5 (lawyer is not
permitted to practice law in violation of the laws that regulate the
legal profession in that state, nor assist another to do so). In
addition, attorneys who operate what have come to be known as ``loan
modification mills'' may violate state law if they provide MARS as
part of their legal services, but delegate most of the work to non-
attorneys without properly supervising the delegated work or
retaining control over it. See Model Rules of Prof'l Conduct R. 5.3.
---------------------------------------------------------------------------

Some state bars have initiated an increasing number of
investigations of attorneys who provide MARS and, in many instances,
have brought misconduct cases against them.\470\ For example, the
Florida Bar submitted a comment stating that it is investigating 155
pending complaints against 42 lawyers engaged in providing MARS.\471\
The California Bar is currently conducting roughly 2,000 investigations
related to MARS providers.\472\ Vigorous state monitoring and
enforcement play a vital role in reducing the incidence of unfair or
deceptive conduct by attorneys involved in the provision of MARS.
---------------------------------------------------------------------------

\470\ See, e.g., Press Release, State Bar of Cal., State Bar
Continues Pursuit of Attorney Modification Fraud (Aug. 12, 2009),
available at http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10144&n=96096; Fl. Bar, Ethics Alert: Providing
Legal Services to Distressed Homeowners, available at http://
www.floridabar.org/TFB/TFBResources.nsf/Attachments/
872C2A9D7B71F05785257569005795DE/$FILE/loanModification20092.pdf?;
see also Cincinnati Bar Assoc. v. Mullaney, 119 Ohio St. 3d 412
(2008) (disciplining attorneys involved in mortgage assistance
relief services).
\471\ FL Bar (July 1, 2010) at 1. In the past year, Florida has
brought 32 cases alleging neglect by attorneys in providing loan
modification services, which resulted in disciplinary action against
four attorneys. During that time, the Florida Bar disciplined
another four attorneys in connection with their advertising of MARS.
Id.
\472\ Press Release, State Bar of Cal., Two More Loan
Foreclosure Lawyers Placed on Involuntary Inactive Enrollment (June
2, 2010), available at http://www.calbar.ca.gov/AboutUs/News/201012.aspx.
---------------------------------------------------------------------------

Nevertheless, many state bars have limited resources for
investigating and taking action against unethical attorneys involved in
providing MARS.\473\ State bars also typically respond only to client
and competitor complaints rather than actively monitoring and
investigating possible violations on their own initiative.\474\ As a
result, as the record demonstrates, numerous attorneys have engaged and
continue to engage in unfair or deceptive practices in the provision of
MARS without states taking action against them. The Commission
encourages all state courts and bars to follow the example of states
like Florida and California and aggressively enforce their laws and
regulations covering attorneys who provide MARS as part of the practice
of law. The record demonstrates, however, that the threat of bar
sanctions has not been a sufficient deterrent to attorney misconduct in
the sale or provision of MARS, and thus it is necessary to cover
certain conduct of attorneys under the Final Rule.
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\473\ See, e.g., Deborah L. Rhode, Institutionalizing Ethics, 44
Case W. Res. L. Rev. 665, 694 (1994) (discussing funding constraints
of bar disciplinary system).
\474\ See ABA, Ctr. For Prof'l Responsibility. Lawyer Regulation
for A new Century: Report of the Commission on the Evaluation of
Disciplinary Enforcement vi-vii, 9-11, 75 (1992); see also Fred C.
Zacharias, The Future Structure and Regulation of Law Practice:
Confronting Lies, Fictions, and False Paradigms in Legal Ethics
Regulation, 44 Ariz. L. Rev. 829, 871 (2002) (``[State bars] have
tended to focus exclusively on cases that come to their attention
easily, through complaints by allegedly aggrieved persons.''); Julie
Rose O'Sullivan, Professional Discipline For Law Firms? A Response
to Professor Scheneyer's Proposal, 16 Geo. J. Legal Ethics 1, 51-52
(2002) (``[O]verwhelming majority of [bar disciplinary] proceedings
continue to be founded upon complaints rather than proactive
investigations'').
The Commission, in contrast, frequently initiates investigations
based on its own monitoring of industry practices or information
from third party sources, even in the absence of a consumer or
competitor complaint. The Commission also has a number of important
remedial powers that bar associations may lack, including the
ability to file an immediate action in Federal court for a temporary
restraining order to halt ongoing violations and freeze the
defendant's assets for ultimate return to injured consumers. See 15
U.S.C 53(b).
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d. Exemption From the Advance Fee Ban
The practices of attorneys who meet the conditions listed in
322.7(a) are entitled to a general exemption from the Final Rule. The
one exception relates to the prohibition on advance fees. Under Sec.
322.7(b) of the Final Rule, attorneys are exempt from the advance fee
ban only if they: (1) Meet all of the conditions required for the
general exemption; (2) deposit any advance fees they receive into a
client trust account; and (3) comply with all state laws and licensing
regulations governing the use of such accounts.

[[Page 75133]]

Given the frequency with which attorneys, and those affiliated with
attorneys, have engaged in unfair and deceptive practices in connection
with MARS, the Commission believes that a blanket exemption from the
advance fee ban for attorneys is unwarranted and would not adequately
protect consumers. At the same time, the Commission is mindful of the
possible adverse consequences from imposing unnecessary fee
restrictions on attorneys that would reduce the availability of
beneficial legal services. On balance, the Commission has concluded
that a modified, broader attorney exemption with regard to the advance
fee ban is appropriate. The Final Rule therefore permits attorneys who
provide MARS as part of their provision of legal services to collect
advance fees if, in compliance with applicable state laws and licensing
regulations, the attorney deposits such payments into a client trust
account \475\ and draws on them as work is performed.
---------------------------------------------------------------------------

\475\ The Final Rule defines ``client trust account'' to mean a
``separate account created by a licensed attorney for the purpose of
holding client funds, which is: (1) [m]aintained in compliance with
all applicable state laws and regulations, including licensing
regulations; and (2) [l]ocated in the state where the attorney's
office is located, or elsewhere in the United States with the
consent of the consumer on whose behalf the funds are held.'' Sec.
322.2(b). This definition is consistent with the requirements of the
Model Rules of Professional Conduct. See Model Rules of Prof'l
Conduct R. 1.15.
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Unlike other MARS providers, attorneys commonly deposit advance
fees in client trust accounts and, in some jurisdictions, are legally
required to do so.\476\ State laws and licensing regulations strictly
limit attorneys' use of funds in these accounts.\477\ For example,
state laws and licensing regulations mandate that attorneys keep fees
deposited in the client trust accounts separate from their own
funds,\478\ only withdraw funds as fees are earned or expenses are
incurred,\479\ maintain complete records as to transactions,\480\
notify clients of any withdrawals,\481\ and keep the client's funds
separate from other clients' funds if a dispute as to ownership of the
funds is pending.\482\ In some cases, attorneys also are prohibited
from ``front-loading'' fees to expedite their withdrawal of funds from
client trust accounts.\483\ In addition, as discussed above, in the
event attorneys misappropriate funds, state court systems and bars can
take, and have taken, disciplinary action, including license
revocation. Finally, state bars typically maintain client-security
funds, which are capitalized by licensing fees that attorneys pay, for
the purpose of compensating injured clients.\484\
---------------------------------------------------------------------------

\476\ Indeed, some state laws and licensing regulations mandate
that attorneys deposit flat fees, also known as fixed fees,
collected in advance of performing legal services into client trust
accounts, unless the client provides informed consent to a contrary
fee arrangement. See, e.g., In re Mance, 980 A.2d 1196 (DC 2009); DC
Bar, Formal Op. 355 (2010) (providing guidance to attorneys on Mance
opinion); Minn. Lawyers Prof'l. Responsibility Bd., Formal Op. 15
(1991) (advising that attorneys must deposit advance payments into
lawyer trust accounts); see also Colo. Rules of Prof'l Conduct R.
1.15.
\477\ See, e.g., Model Rules of Prof'l Conduct R. 1.15
(restrictions on the safekeeping of client property that is ``in a
lawyer's possession in connection with a representation''); see also
Cal. Rules of Prof'l Conduct R. 4-100 (Preserving Identity of Funds
and Property of a Client); Fla. Rules of Prof'l Conduct R. 4-1.15
(Safekeeping of Property); Ill. Rules of Prof'l Conduct R. 1.15
(same); Nev. Rules of Prof'l Conduct R. 169 (same).
\478\ Model Rules of Prof'l Conduct R. 1.15(a) (funds shall be
held ``separate from the lawyers' own property and in a separate
account where the lawyer's office is situated, or elsewhere with the
consent of the client or third person'').
\479\ See Model Rules of Prof'l Conduct R. 1.15(c) (``A lawyer
shall deposit into a client trust account legal fees and expenses
that have been paid in advance, to be withdrawn by the lawyer only
as fees are earned or expenses incurred.''); see also, e.g., Cal.
Rules of Prof'l Conduct R. 3-700 (when client representation
terminates, attorneys must promptly return any part of a fee paid in
advance that has not been earned); Fla. Rules of Prof'l Conduct R.
4-1.16 (same); Ill. Rules of Prof'l Conduct R. 116 (same); Nev.
Rules of Prof'l Conduct R. 166 (same).
\480\ Attorneys must retain complete records as to transactional
activity on the accounts. See Model Rules of Prof'l Conduct R.
1.15(a) (``Complete records of such account funds and other property
shall be kept by the lawyer and shall be preserved for a period of
[five years] after termination of the representation.''); see also
Cal. Rules of Prof'l Conduct R. 4-100; Fla. Rules of Prof'l Conduct
R. 4-1.15; Ill. Rules of Prof'l Conduct R. 1.15; Nev. Rules of
Prof'l Conduct R. 169.
\481\ See, e.g. Mance, 980 A. 2d at 1204 (attorney should notify
client of any withdrawal so that she has an opportunity to review
the amount withdrawn and, if warranted, contest it).
\482\ Model Rules of Prof'l Conduct R. at 1.15(e) (``When in the
course of representation a lawyer is in possession of property in
which two or more persons (one of whom may be the lawyer) claims
interests, the property shall be kept separate by the lawyer until
the dispute is resolved. The lawyer shall promptly distribute all
portions of the property as to which the interests are not in
dispute.'').
\483\ State courts have advised that attorneys should avoid
excessive ``front-loading'' of fees. See, e.g., Mance, 980 A. 2d at
1204-05. Fees are withdrawn from client trust accounts pursuant to a
mutual agreement between the attorney and client, which allows for
withdrawals once attorneys achieve certain milestones. See, e.g.,
id. at 1202; see also Model Rules of Prof'l Conduct R. 1.15(a).
\484\ See, e.g. State Bar of California: Client Security Funds,
available at http://www.calbar.ca.gov/Attorneys/LawyerRegulation.aspx (``client security fund'' hyperlink) (fund set
up to reimburse losses resulting from attorney dishonesty); Florida
State Bar: Clients' Security Fund, available at http://www.floridabar.org/tfb/flabarwe.nsf (follow ``pubic information''
hyperlink, then follow ``clients' security fund'' hyperlink) (fund
created to help compensate losses of money or property due to
attorney misappropriation or embezzlement); Attorney Registration
and Disciplinary Commission of the Supreme Court of Illinois: Client
Protection Program, available at https://www.iardc.org/index.html
(``client protection program'' hyperlink) (fund provided to
reimburse losses resulting from dishonest conduct by attorneys);
State Bar of Nevada: Clients' Security Fund, available at http://www.nvbar.org/clientsecurityfund.htm (fund reimburses losses to
clients when attorney ``betrays client's trust or misappropriates
the client's funds''). There is no guarantee that consumer losses
will be reimbursed from these funds. In some cases, the amount in
dues collected from attorneys may be insufficient to cover reported
losses from attorney misconduct. See, e.g., Valerie Miller, New
President Points State Bar Toward Future, Las Vegas Business Press,
July 12, 2010 available at http://www.lvbusinesspress.com/articles/2010/07/12/news/iq_36736725.txt (reporting that in 2009, claims
against the State Bar of Nevada's client-security account exceeded
the amount in dues collected from attorneys). In addition, state
bars often impose strict limitations on what types of losses qualify
for reimbursement. For example, the Illinois client security fund
limits reimbursement to losses that result from ``intentional
dishonesty'' by the attorney. See Attorney Registration and
Disciplinary Commission of the Supreme Court of Illinois: Client
Protection Program, available at https://www.iardc.org/index.html
(``client protection program'' hyperlink).
---------------------------------------------------------------------------

To qualify for the exemption from the requirements of the advance
fee ban, the Commission concludes that attorneys not only must deposit
advance fees in a client trust account, but also must comply with all
state laws and licensing regulations governing their use of client
trust accounts for these funds.\485\ The Rule does not restrict
attorneys as to the type of fees they charge clients, including flat
fees, contingency fees, or hourly fees, but requires that they withdraw
their fees from the client trust accounts consistent with state laws
and licensing regulations. These conditions are appropriate for
ensuring that such attorneys do not collect and handle fees in a manner
harmful to consumers. Attorneys who do not comply with all of these
state requirements must comply with the advance fee ban in the Final
Rule.\486\
---------------------------------------------------------------------------

\485\ As noted in Sec. III.E.5. of this SBP, the advance fee
ban does not take effect until 60 days after issuance of the Final
Rule. However, given that some states' attorney regulations require
the use of client trust accounts, many lawyers who have accepted
advance fees from consumers for MARS should have already placed them
in trust accounts to comply with these regulations.
\486\ A public interest law firm recommended that the Commission
also allow state-licensed accountants to collect fees for
preliminary mortgage default counseling to consumers. LFSV at 4. The
comment did not elaborate on this recommendation. The Commission
declines to exempt accountants from the advance fee ban. Apart from
this one comment, nothing submitted on the record indicates that
accountants regularly perform MARS. No accountant or organization
representing that profession submitted comments in this proceeding.
Moreover, accountants typically do not receive payment prior to
completing their services, nor do laws or licensing regulations
governing the accounting profession address this issue. See, e.g.,
Va. Code Ann. Sec. 54.1-4400, et seq.
---------------------------------------------------------------------------

H. Section 322.8: Waiver Not Permitted

Section 322.8 of the Final Rule, which includes only non-
substantive

[[Page 75134]]

modifications to the proposal, provides that ``[i]t is a violation of
this rule for any person to obtain, or attempt to obtain, a waiver from
any consumer of any protection provided by or any right of the consumer
under this rule.'' \487\ No comments were received addressing this
provision. Several states include similar provisions in their statutes
restricting MARS.\488\ The Commission concludes that this provision is
necessary to prevent MARS providers from attempting to circumvent the
Rule, and, therefore, adopts this prohibition.
---------------------------------------------------------------------------

\487\ The Commission merely modified this provision to make it
clearer and easier to understand. The proposed provision stated that
``[a]ny attempt by any person to obtain a waiver from any consumer
of any protection provided by or any right of the consumer under
this rule constitutes a violation of the rule.'' MARS NPRM, 75 FR at
10737.
\488\ See supra note 98.
---------------------------------------------------------------------------

I. Section 322.9: Recordkeeping and Compliance Requirements

Section 322.9 of the proposed rule set forth specific categories of
records MARS providers were required to retain. It also contained four
compliance requirements. The Final Rule is very similar to the proposed
rule, except that MARS providers no longer are required to record
telephone communications with consumers unless they telemarket their
services.\489\
---------------------------------------------------------------------------

\489\ The Commission also made minor, non-substantive changes to
the language of Sec. 322.9 in the proposed rule, to make the Final
Rule provisions clearer and easier to understand.
---------------------------------------------------------------------------

1. Proposed Recordkeeping and Compliance Requirements
Section 322.9(a) of the proposed rule set forth specific categories
of records MARS providers would be required to keep and contained a
time period for retention. Specifically, for a period of 24 months from
the date records are produced, the proposed rule required MARS
providers to keep:
(1) All contracts or other agreements between the provider and any
consumer for any mortgage assistance relief service;
(2) Copies of all written communications between the provider and
any consumer occurring prior to the date on which the consumer enters
into a contract or other agreement with the provider for any mortgage
assistance relief service;
(3) Copies of all documents or telephone recordings created in
connection with Sec. 322.9 (b), which sets forth compliance
requirements;
(4) All consumer files containing the names, phone numbers, dollar
amounts paid, quantity of items or services purchased, and descriptions
of items or services purchased, to the extent MARS providers obtain
such information in the ordinary course of business;
(5) Copies of all materially different sales scripts, training
materials, commercial communications, or other marketing materials,
including websites and weblogs; and
(6) Copies of the documentation provided to the consumer in order
to comply with the advance fee ban in Sec. 322.5.
In addition, Sec. Sec. 322.9(b)(1)-(4) of the proposed rule
contained four compliance requirements. To monitor whether their
employees and contractors are complying with the Rule, Sec.
322.9(b)(1) required providers to:
Conduct random, blind recording and testing of the oral
representations made by persons in sales or other customer service
functions;
Establish a procedure for receiving and responding to
consumer complaints; and
Ascertain the number and nature of consumer complaints
regarding transactions handled by individual employees or independent
contractors.

Proposed Sec. Sec. 322.9(b)(2) and (3) required that MARS providers
investigate promptly and fully any consumer complaints they receive and
take corrective action with respect to any employee or contractor whom
the provider determines is not complying with the Rule. Finally,
proposed Sec. 322.9(b)(4) required MARS providers to create and retain
documentation of their compliance with proposed Sec. 322.9(b)(1)-(3).
2. Comments Regarding Proposed Recordkeeping and Compliance
Requirements
State attorneys general and other state regulators, legal aid
groups, and consumer advocates, while not addressing these
recordkeeping and compliance requirements specifically, endorsed the
proposed rule generally.\490\ One commenter expressly stated that it
supported the recordkeeping and compliance provisions.\491\ Several
comments proposed additional or modified compliance or recordkeeping
requirements,\492\ including mandating that MARS providers: (1) Upon
request, provide consumers with copies of any contracts or other
documents in the providers' files related to the services provided to
them; \493\ (2) maintain records in a form in which searches can be
conducted electronically based on the name, address, and zip code of
the consumer; \494\ (3) keep comprehensive records of all consumers
contacted, as well as the employees, independent contractors, and
subcontractors of the provider; \495\ (4) make available to the FTC all
data, records, and other information collected in processing a
consumer's case; \496\ and (5) respond to consumer complaints within 14
days of receipt, resolve complaints within 30 days, and submit records
of complaints and their resolution to the FTC.\497\ Two commenters also
recommended that the Rule require a longer recordkeeping retention
period.\498\
---------------------------------------------------------------------------

\490\ See, e.g., NAAG at 2,5; OH AG at 1; MA AG at 1; MN AG at
1, 3; NY DCA at 2; CSBS at 1; CUUS at 9; LOLLAF at 1; Lawyer's
Committee at 11; LFSV at 1.
\491\ CUUS at 9.
\492\ OPLC at 3-4; NYC DCA at 9-10; CUUS at 9; LFSV at 4.
\493\ OPLC at 3-4 (provide documents in a timely manner upon
written request); LFSV at 4 (provide documents within 10 days of a
consumer's requests).
\494\ NYC DCA at 9.
\495\ Id. at 9-10.
\496\ CUUS at 9.
\497\ Id.
\498\ See LFSV at 4; CUUS at 9 (recommending a retention period
of five years, the statute of limitations for FTC civil penalty
actions).
---------------------------------------------------------------------------

A number of commenters--in particular, members of the legal
profession--objected to the recordkeeping and compliance
requirements.\499\ Those commenters generally argued that the
recordkeeping and compliance requirements in the proposed rule were
ill-suited to attorneys and would interfere with their client
relationships. These comments and the Commission's response to them are
discussed above in Sec. III.G. of this SBP.
---------------------------------------------------------------------------

\499\ See ABA at 4, 8 ; MO Bar at 1; OR Bar at 1; IL BA at 1;
IRELA at 2; MI Bar at 1; FL Bar at 1; ME BA at 1; GA Bar at 1; WI
Bar at 1; Shaw at 1; GLS at 1.
---------------------------------------------------------------------------

3. Final Recordkeeping and Compliance Provisions
With one exception, the Commission adopts in the Final Rule
recordkeeping and compliance requirements that are very similar to
those set forth in the proposed rule. As discussed throughout this SBP,
the rulemaking record, including the Commission's law enforcement
experience, indicates that MARS providers frequently engage in unfair
and deceptive acts and practices. The recordkeeping and compliance
requirements in the Final Rule will assist the Commission in
investigating and prosecuting law violations, including identifying
injured consumers for purposes of paying consumer redress. Both the
recordkeeping \500\ and

[[Page 75135]]

compliance \501\ requirements are similar to those imposed in other FTC
consumer protection rules. In addition, MARS providers would likely
retain these records in the ordinary course of business even in the
absence of the Rule. The Commission adopts these recordkeeping and
compliance requirements to promote effective and efficient enforcement
of the Rule, thereby deterring and preventing deception and unfairness.
---------------------------------------------------------------------------

\500\ The recordkeeping requirements in the Final Rule are
similar to those imposed in the TSR, 16 CFR part 310; The Franchise
Rule, 16 CFR part 436; and the Funeral Industry Practices Rule, 16
CFR part 453.
\501\ The compliance requirements in the Final Rule are similar
to those imposed in the Standards for Safeguarding Customer
Information, 16 CFR part 314; the TSR, 16 CFR part 310; and the
Trade Regulation Pursuant to the Telephone Disclosure and Dispute
Resolution Act of 1992 (900 Number Rule), 16 CFR part 308.
---------------------------------------------------------------------------

The Commission has decided to make one substantive modification to
the compliance requirements in the proposed rule. The proposed rule
required all MARS providers to conduct random blind recording of their
sales and customer service calls. Some MARS providers who do not
telemarket their services, including many attorneys, argued that it
would be unduly costly for them to record such calls.
To foster compliance with the Rule without imposing undue burdens,
the Commission has decided to modify the telephone call recording
requirement so that it applies to MARS providers only if they
telemarket their services.\502\ Specifically, Sec. 332.9(b)(1)(i) of
the Final Rule states:
---------------------------------------------------------------------------

\502\ The Commission notes, however, that MARS providers who do
not telemarket their services remain subject to the other
recordkeeping and compliance requirements in the Final Rule.

If the mortgage assistance relief service provider is engaged in
the telemarketing of mortgage assistance relief services, [it must
perform] random, blind recording and testing of the oral
representations made by individuals engaged in sales or other
---------------------------------------------------------------------------
customer service functions

Further, in order to effectuate this provision, the Final Rule defines
``telemarketing'' as ``a plan, program, or campaign which is conducted
to induce the purchase of any service, by use of one or more telephones
and which involves more than one interstate telephone call.'' \503\
This is similar to the definition of this term used in the TSR.\504\
---------------------------------------------------------------------------

\503\ Section 322.2(m). This definition was not included in the
proposed rule.
The Final Rule also clarifies, in Sec. 322.9(b)(4), that
providers must ``maintain any information and material necessary to
demonstrate [their] compliance''--as opposed, merely, to
``maintain[ing] documentation'' of compliance--as the proposal
required. This modification makes it clear that the information
providers must maintain to demonstrate compliance is not limited to
paper documents, but instead includes other media such as audio or
computer files.
\504\ Unlike the TSR, the definition of telemarketing in the
MARS Rule does not cover the purchase of goods or a charitable
contribution.

The Commission declines to make the other changes in the
recordkeeping and compliance requirements advocated in the comments.
With respect to suggestions that the Rule require the retention of
additional records, the FTC concludes that the records specified in
Sec. 322.9(a) are sufficient for the Commission to make an initial
determination about whether a provider's practices merit further
investigation. If its practices do, the Commission has substantial
authority under the FTC Act \505\ to compel MARS providers and others
to produce additional information and records. With regard to comments
suggesting that the recordkeeping retention period be extended, the
Commission concludes,\506\ based on its law enforcement experience,
that a two-year retention period is sufficient to investigate
violations of the Rule. Extending the retention period beyond two years
also might impose additional costs on MARS providers.
---------------------------------------------------------------------------

\505\ See 15 U.S.C. 46, 49, 57b-1; 19 CFR 2.7.
\506\ See LFSV at 4; CUUS at 9 (recommending a retention period
of five years because it is similar to the FTC statute of limitation
for civil penalties).
---------------------------------------------------------------------------

Finally, comments suggested that the Final Rule should include
provisions intended to make it easier for consumers to obtain
information about the conduct of the MARS providers with whom they
contract. In particular, comments recommended that the Commission
require that MARS providers create and maintain electronically
searchable records \507\ and give consumers copies of any documents
related to the services they provided or promised to provide.\508\
Although having such information or having access to it may make the
conduct of MARS providers more transparent to their customers, it is
not clear to what extent these requirements prevent unfairness or
deception, or are reasonably related to the prevention of such conduct.
In addition, there is no information in the rulemaking record assessing
possible benefits to consumers that might result from such
requirements, nor is there anything addressing the costs to MARS
providers of creating, maintaining, and providing access to information
in their files and databases. The Commission therefore declines to
impose these suggested recordkeeping and compliance requirements.\509\
---------------------------------------------------------------------------

\507\ NYC DCA at 9.
\508\ OPLC at 3-4 (provide documents in a timely manner upon
written request); LFSV at 4 (provide documents within 10 days of a
consumer's requests).
\509\ Another comment suggested that the Commission mandate that
MARS providers respond to consumer complaints within 14 days of
receipt and resolve complaints within 30 days of receipt. LFSV at 4.
Prompt resolution of consumer complaints certainly is good business
practice, but in the absence of information as to the costs and the
benefits of such requirements, as well as information as to whether
they prevent unfairness or deception or are reasonably related to
the prevention of such conduct, the Commission declines to specify
such requirements in the Final Rule.
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J. Section 322.10: Actions by States

The Omnibus Appropriations Act, as clarified by the Credit CARD
Act, permits states to enforce the Rules issued in connection with the
MARS rulemaking.\510\ States may enforce the Rules, subject to the
notice requirements of the Omnibus Appropriations Act, by bringing
civil actions in federal district court or another court of competent
jurisdiction. Section 322.10 tracks the statute, stating that states
have the authority to file actions against those who violate the
Rule.\511\
---------------------------------------------------------------------------

\510\ Credit CARD Act Sec. 511(b).
\511\ NAAG stated that the Rule ``would work harmoniously with
existing state laws.'' NAAG at 5.
---------------------------------------------------------------------------

K. Section 322.11: Severability

Section 322.11 states that the provisions of the Rule are separate
and severable from one another. This provision, which is modeled after
a similar provision in the TSR,\512\ also states that if a court stays
or invalidates any provisions in the proposed rule, the Commission
intends the remaining provisions to continue in effect. This provision
was included in the proposed rule and no comments were received
addressing it. The Commission has determined to adopt the proposed
provision as the Final Rule.
---------------------------------------------------------------------------

\512\ See 16 CFR 310.9.
---------------------------------------------------------------------------

L. Effective Dates

The Final Rule, with the exception of the advance fee ban in Sec.
322.5, becomes effective on December 29, 2010. Given the widespread
deceptive and unfair conduct of MARS providers, and the urgency of
protecting consumers of these services, the Commission concludes that
this effective date is appropriate.
The advance fee ban provision, Sec. 322.5 of the Final Rule, takes
effect on January 31, 2011.\513\ The Commission is providing MARS
providers an additional month after the effective date of the other
provisions of the Rule because compliance with the advance

[[Page 75136]]

fee ban may entail substantial adjustments to many providers'
operations.
---------------------------------------------------------------------------

\513\ The Final Rule does not apply retroactively; thus, the
advance fee ban does not apply to contracts with consumers executed
prior to the effective date.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

The Commission is submitting this Final Rule and a Supplemental
Supporting Statement to the Office of Management and Budget for review
under the Paperwork Reduction Act (PRA), 44 U.S.C. 3501-21. The
disclosure and recordkeeping requirements of the Rule constitute
``collection[s] of information'' for purposes of the PRA.\514\ The
associated PRA burden analysis follows.
---------------------------------------------------------------------------

\514\ See 44 U.S.C. 3502(3)(A).
---------------------------------------------------------------------------

A. Disclosure Requirements

As discussed above, the Rule requires several disclosures that MARS
providers must place in commercial communications for MARS and must
state to specific consumers who seek such services. Generally,
commenters strongly supported the disclosures.\515\
---------------------------------------------------------------------------

\515\ See, e.g., NAAG at 4; MA AG at 3; CUUS at 4-5; LOLLAF at
3; CSBS at 2-3; AFSA at 4-5.
---------------------------------------------------------------------------

In each general commercial communication and consumer-specific
communication, providers must state that: (1) ``(Name of company) is
not associated with the government, and our service is not approved by
the government or your lender;'' and (2) ``Even if you accept this
offer and use our service, your lender may not agree to change your
loan.'' In consumer-specific communications, providers also must
disclose the total cost of MARS.
Based on the rulemaking record,\516\ the Final Rule adds two new
disclosures to consumers seeking MARS, and it modifies one existing
disclosure substantially. First, if MARS providers advise consumers,
expressly or by implication, to stop making mortgage payments, they
must warn consumers in all communications that: ``If you stop paying
your mortgage, you could lose your home and damage your credit
rating.'' \517\ Second, at the time providers furnish the consumer with
a written agreement from the lender or servicer memorializing the
result the providers have obtained, they must disclose: ``This is an
offer of mortgage assistance we obtained from your lender [or
servicer]. You may accept or reject the offer. If you reject the offer,
you do not have to pay us. If you accept the offer, you will have to
pay us [same amount as disclosed pursuant to Sec. 322.4(b)(1)] for our
services.'' At the same time, providers also must provide consumer's
with a notice from the consumer's loan holder or servicer that
describes material differences between the terms, conditions, and
limitations associated with the consumer's current mortgage and the
terms, conditions, and limitations associated with the consumer's
mortgage if he or she accepts the loan holder's or servicer's offer.
---------------------------------------------------------------------------

\516\ See supra Sec. III.D.2.
\517\ Section 322.4 sets forth the format and content of the
notice, which varies depending upon the medium used.
---------------------------------------------------------------------------

The Final Rule also expands the proposed disclosure of total cost
in Sec. 322.4(b)(1), such that the provider must now disclose: ``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. If you
accept the offer, you will have to pay us (insert amount or method for
calculating the amount) for our services.'' The Rule also broadens when
the required disclosures must be made in commercial communications,
such that all of the disclosures--with the exception of the disclosures
regarding total cost and the obligation to pay fees--must be made in
every general and consumer-specific commercial communication.

B. Recordkeeping Requirements

The Rule also imposes several recordkeeping requirements. Several
commenters argued generally that the proposed recordkeeping
requirements were burdensome, in particular for attorney
providers.\518\ To address those concerns, the Final Rule exempts
attorney providers from the recordkeeping provision. Most record
retention requirements, however, pertain to records customarily kept in
the ordinary course of business. This includes copies of contracts and
consumer files containing the name and address of the borrower,
telephone correspondence and written communications, and materially
different versions of sales scripts and related promotional materials.
As such, their retention does not constitute a ``collection of
information,'' as defined by OMB's regulations that implement the
PRA.\519\
---------------------------------------------------------------------------

\518\ See supra Sec. III.H.2 and accompanying text and Sec.
III.G.
\519\ See 5 CFR 1320.3(b)(2).
---------------------------------------------------------------------------

In other instances, the Rule requires MARS providers to create as
well as retain documents demonstrating their compliance with specific
Rule requirements. These include the requirement that providers
document the following activities: (1) The mortgage relief obtained by
the provider from the lender or servicer before seeking payment from a
consumer; (2) monitoring of sales presentations by recording and
testing of oral representations if they engage in the telemarketing of
their services; (3) establishing a procedure for receiving and
responding to consumer complaints; (4) ascertaining, in some instances,
the number and nature of consumer complaints; and (5) taking corrective
action if sales persons fail to comply with the Rule, including
training and disciplining sales persons. To lessen the burden of
providers who do not telemarket their services, the Commission
streamlined the compliance requirements by limiting the need to record
communications to providers who telemarket their services.

C. Estimated Hours Burden and Associated Labor Costs

Commission staff believes that the above noted disclosure and
recordkeeping requirements will impact approximately 500 MARS
providers. No comments specifically addressed and refuted this estimate
nor staff's associated PRA burden assumptions and calculations. Apart
from more recent available data to update staff's labor cost estimates,
the FTC retains its previously published estimates without
modification. The related PRA burden assumptions and calculations
follow.
(1) Disclosure Requirements
The Final Rule calls for the disclosure of specific items of
information to consumers and adds two additional disclosures for MARS
providers. Largely, the content of the disclosures is prescribed. Thus,
the PRA burden on providers is greatly reduced.\520\ Staff
conservatively estimates, however, that the incremental burden to
prepare these documents will be approximately 2 hours. Staff assumes
that management personnel will implement the disclosure requirements,
at an hourly rate of $46.65.\521\ Based upon these estimates and
assumptions, total labor cost for 500 MARS providers to prepare the
required documents is $46,650 (500 providers x 2 hours each x $46.65
per hour).
---------------------------------------------------------------------------

\520\ According to OMB, the public disclosure of information
originally supplied by the Federal government to a recipient for the
purpose of disclosure to the public is excluded from the definition
of a ``collection of information.'' See 5 CFR 1320.3(c)(2).
\521\ This estimate is based on an averaging of the mean hourly
wages for sales and financial managers provided by the Bureau of
Labor Statistics. Bur. of Labor Statistics, National Compensation
Survey: Occupational Earnings in the United States, 2009, tbl. 3, at
3-1 (2010), available at http://www.bls.gov/ncs/ncswage2009.htm
(``Occupational Earnings Survey'').

---------------------------------------------------------------------------

[[Page 75137]]

(2) Recordkeeping Requirements
As noted above, the Rule contemplates that MARS providers will
create and retain records demonstrating their compliance with several
obligations set forth in the Rule. Staff estimates that each of the
estimated 500 providers will spend approximately 25 hours to institute
procedures to monitor sales presentations. Although Commission staff
cannot estimate with precision the time required to document compliance
with the Rule provisions, it is reasonable to assume that providers
will each spend approximately 100 hours to do so. This includes
preparing records demonstrating steps taken to seek payment for
services performed, handling consumer complaints, and conducting
training. Additionally, staff estimates that retention and filing of
these records will require approximately 3 hours per year per provider.
Commission staff assumes that management personnel will prepare the
required disclosures at an hourly rate of $46.65.\522\ Based upon the
above estimates and assumptions, the total labor cost to prepare the
required documents to demonstrate compliance is $2,915,625 (500
providers x 125 hours each x $46.65 per hour).
---------------------------------------------------------------------------

\522\ Id.
---------------------------------------------------------------------------

Commission staff further assumes that office support file clerks
will handle the Rule's record retention requirements at an hourly rate
of $13.63.\523\ Based upon the above estimates and assumptions, the
total labor cost to retain and file documents is $20,445 (500 providers
x 3 hours each x $13.63 per hour).
---------------------------------------------------------------------------

\523\ This estimate is based on mean hourly wages for office
file clerks found at Occupational Earnings Survey, supra note 521,
tbl. 3, at 3-23.
---------------------------------------------------------------------------

D. Estimated Capital/Other Non-Labor Cost Burden

The Rule should impose no more than minimal non-labor costs. Staff
assumes that each of the estimated 500 MARS providers will make
required disclosures in writing to approximately 1,000 consumers
annually.\524\ Under these assumptions, non-labor costs will be limited
mostly to printing and distribution costs. At an estimated $1 per
disclosure, total non-labor costs would be $1,000 per provider or,
cumulatively for all providers, $500,000.
---------------------------------------------------------------------------

\524\ Associated costs would be reduced if the disclosures are
made electronically.
---------------------------------------------------------------------------

V. Regulatory Analysis and Regulatory Flexibility Act Requirements

The Regulatory Flexibility Act of 1980 (``RFA'') \525\ requires a
description and analysis of proposed and Final Rule that will have a
significant economic impact on a substantial number of small
entities.\526\ The RFA requires an agency to provide an Initial
Regulatory Flexibility Analysis (``IRFA'') \527\ with the proposed rule
and a Final Regulatory Flexibility Analysis (``FRFA'') \528\ with the
Final Rule, if any. The Commission is not required to make such
analyses if a Rule would not have such an economic effect.\529\
---------------------------------------------------------------------------

\525\ 5 U.S.C. 601-612.
\526\ The RFA definition of ``small entity'' refers to the
definition provided in the Small Business Act, which defines a
``small-business concern'' as a business that is ``independently
owned and operated and which is not dominant in its field of
operation.'' 15 U.S.C. 632(a)(1).
\527\ 5 U.S.C. 603.
\528\ 5 U.S.C. 604.
\529\ 5 U.S.C. 605.
---------------------------------------------------------------------------

As of the date of the NPRM, the Commission did not have sufficient
empirical data regarding the MARS industry to determine whether the
Rule would impact a substantial number of small entities as defined in
the RFA. It was also unclear whether the Rule would have a significant
economic impact on small entities. Thus, to obtain more information
about the impact of the proposed rule on small entities, the Commission
decided to publish an IRFA pursuant to the RFA and to request public
comment on the impact on small businesses of its proposed amended Rule.
In response to questions in the NPRM, the Commission did not receive
any comprehensive empirical data regarding the revenues of MARS
providers or the impact on small businesses of the Rule.

A. Need for and Objectives of the Rule

The objective of the proposed rule is to curb deceptive and unfair
practices occurring in the MARS industry. As described in Sections II
and III, above, the Rule is intended to address consumer protection
concerns regarding MARS and is based on evidence in the record that
deceptive and unfair acts are common in the provision of MARS to
consumers.

B. Significant Issues Raised by Public Comment, Summary of the Agency's
Assessment of These Issues, and Changes, If Any, Made in Response to
Such Comments

As discussed in Section III above, commenters raised concerns about
the burden of the proposed rule. One consumer advocacy group stated
that the Rule would ``not eliminate competition; it will simply get rid
of bad actors who take consumers money while failing to deliver
results. MARS providers who are engaged in legitimate practices should
have no added burden.'' \530\ In contrast, another consumer advocacy
group stated that complying with the disclosure and compliance
requirements would be ``prohibitively expensive'' for consumer
protection attorneys with small practices and impossible for sole
practicioners.\531\ However, commenters raised more significant
concerns about the potential costs and burdens of the advance fee ban,
as discussed in Sections III.E.1.b. Several small firms and sole
practitioners owned by attorneys asserted that they would go out of
business if the Commission imposed an advance fee ban.\532\ Many of the
commenters did not focus specifically on the costs faced by small
businesses relative to those that would be borne by other firms.
Rather, they argued that the costs to be borne by all firms--including
small firms--would be excessive.
---------------------------------------------------------------------------

\530\ CUUS at 9-10.
\531\ NCLC at 4. The commenter does not indicate how many
attorney MARS providers are small business or solo practitioners.
\532\ See, e.g., SJMA at 2; Rogers at 1; GLS at 1; LCL at 8;
Holler at 1.
---------------------------------------------------------------------------

The Commission concludes that the Final Rule's modifications to the
recordkeeping and compliance requirements and the advance fee ban
reduce the economic impact of compliance on all MARS providers,
including small businesses. For example, attorney providers who meet
certain conditions are exempt from the recordkeeping and compliance
requirements and only providers who engage in telemarketing must comply
with the telephone call taping requirement. Moreover, the Final Rule
permits attorney providers who are exempt to receive payments from a
client trust account, provided certain conditions are met.
As noted above, the Rule will prevent unfair and deceptive conduct
by MARS providers through a combination of conduct prohibitions,
disclosures, affirmative compliance obligations, and recordkeeping
provisions. As discussed in detail in the NPRM, the Rule's reach is
limited. First, the Rule will only cover entities that are within the
FTC's jurisdiction under the FTC Act. The FTC Act specifically excludes
banks, thrifts, and federal credit unions from the agency's
jurisdiction. Further, the definition of ``mortgage assistance relief
service provider'' is limited to third parties offering for-fee
services and does not extend to free services provided by lenders or
mortgage servicers and their agents. In addition, the Rule would give
attorney providers who meet certain conditions with a limited exemption
from the advance fee ban, as well as

[[Page 75138]]

with an exemption from the conduct prohibitions, disclosures,
substantial assistance or support prohibition, and recordkeeping and
compliance provisions of the Rule.

C. Description and Estimate of the Number of Small Entities Subject to
the Final Rule or Explanation Why No Estimate Is Available

The Rule will apply to MARS providers. Based upon its knowledge of
the industry, the Commission believes that a variety of individuals and
companies provide or purport to provide such services, including
telemarketers, mortgage brokers, lead generators, payment processors,
contractors that provide back-room services, and attorneys.
Comments in response to the NPRM suggest that the number of MARS
providers purporting to assist distressed homeowners is growing in
response to the crisis in the home mortgage industry, but do not offer
empirical data on the number of such entities.\533\ The available data
suggest that there are a few hundred such providers. For example, FTC
staff sent warning letters to 71 MARS providers in the course of its
investigation of the industry. In its comments to the ANPR, NAAG stated
that its members have investigated 450 companies and brought suits
against 130 under state law.\534\ Accordingly, Commission staff has
taken a conservative approach and estimates that there are
approximately 500 MARS providers. Determining a precise estimate of how
many of these are small entities, or describing those entities further,
is not readily feasible because the staff is not aware of published
data that reports annual revenue figures for MARS providers.\535\
Further, the Commission's requests for information about the number and
size of MARS providers yielded virtually no information. Based on the
absence of available data, the Commission believes that a precise
estimate of the number of small entities that fall under the Rule is
not currently feasible.
---------------------------------------------------------------------------

\533\ See, e.g., MN AG at 1; CRL at 2-3; CUUS at 2.
\534\ NAAG (ANPR) at 4.
\535\ Covered entities under the proposed rule are classified as
small businesses under the Small Business Size Standards component
of the North American Industry Classification System (``NAICS'') as
follows: All Other Professional, Scientific and Technical Services
(NAICS code 541990) with no more than $7.0 million dollars in
average annual receipts (no employee size limit is listed). See SBA,
Table of Small Business Size Standards Matched to North American
Industry Classification System codes (Aug. 22, 2008), available at
http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------

D. Description of the Projected Reporting, Recordkeeping and Other
Compliance Requirements of the Proposed Rule, Including an Estimate of
the Classes of Small Entities Which Will Be Subject to the Rule and the
Type of Professional Skills That Will Be Necessary to Comply

The Final Rule sets forth specific recordkeeping requirements to
ensure efficient and effective law enforcement, to identify individual
wrongdoers, and to identify potential injured consumers. In large
measure, the recordkeeping provisions require MARS providers to retain
documents--consumer files and documentation of consumer transactions--
that are kept in the ordinary course of business. Other recordkeeping
requirements would ensure covered entities can demonstrate compliance
with specific Rule provisions, which are discussed below.
The Rule has three other kinds of compliance requirements: (1)
Prohibited acts and practices that are deceptive or unfair; (2)
disclosures to ensure that consumers receive the truthful and accurate
information they need to make an informed decision whether to purchase
MARS; and (3) compliance obligations to monitor sales promotions and
consumer complaints. As discussed above, these requirements are
necessary to prevent unfair or deceptive acts and practices, to ensure
compliance with the Rule, and to achieve effective law enforcement.
The classes of small entities, if any, covered by the rule have
been discussed in the preceding section of this analysis.\536\ The
professional or other skills necessary for compliance with the Rule are
discussed in the Paperwork Reduction Act analysis elsewhere in this
document.\537\
---------------------------------------------------------------------------

\536\ See supra Sec. V.C.
\537\ See supra Sec. IV.
---------------------------------------------------------------------------

E. Steps the Agency Has Taken To Minimize Any Significant Economic
Impact on Small Entities, Consistent With the Stated Objectives of the
Applicable Statutes

As previously noted, the Final Rule is intended to prevent
deceptive and unfair acts and practices in the MARS industry. In
drafting the Rule, the Commission has made every effort to avoid unduly
burdensome requirements for entities. The Commission believes that the
Rule--including the conduct prohibitions, disclosures, advance fee ban,
affirmative compliance obligations and recordkeeping provisions--are
necessary in order to protect consumers considering the purchase of
MARS. For each of these provisions, the Commission has attempted to
tailor the provision to the concerns evidenced by the record to date.
For example, to reduce the burden on business, including small
entities, the Commission limited the compliance requirement to record
telephone calls to MARS providers who telemarket. On balance, the
Commission believes that the benefits to consumers of each of the
Rule's requirements outweighs the costs to industry of implementation.
The Commission considered, but decided against, providing an
exemption for small entities in the Rule. The protections afforded to
consumers are equally important regardless of the size of the MARS
provider with whom they transact. Indeed, small MARS providers have no
unique attributes that would warrant exempting them from provisions,
such as the required disclosures or conduct prohibitions. The
information provided in the disclosures is material to the consumer
regardless of the size of the entity offering the services. Similarly,
the protections afforded to consumers by the advance fee ban are
equally necessary regardless of the size of the entity providing the
services. Thus, the Commission believes that creating an exemption for
small businesses from compliance with the Rule would be contrary to the
goals of the Rule because it would arbitrarily limit its reach to the
detriment of consumers.
Nonetheless, the Commission has taken care in developing the Rule
to set performance standards, which establish the objective results
that must be achieved by regulated entities, but do not establish a
particular technology that must be employed in achieving those
objectives. For example, the Commission does not specify the form in
which records required by the Rule must be kept. Moreover, the Rule's
disclosure requirements are format-neutral; they would not preclude the
use of electronic methods that might reduce compliance burdens. In sum,
the agency has worked to minimize any significant economic impact on
small entities.

[[Page 75139]]

List of Commenters and Short-Names/Acronyms
------------------------------------------------------------------------
Short-name/Acronym Commenter
------------------------------------------------------------------------
1st ALC...................... 1st American Law Center, Inc.
ABA.......................... American Bar Association
Am. Bankers Assoc............ American Bankers Association
AFSA......................... American Financial Services Association
ALMSC........................ American Loss Mitigation Solutions Corp.
ARS.......................... ARS Financial Group (Rob Peters)
Baker........................ David Baker, Esq.
Baughman..................... Derek Baughman
Carr......................... Christopher C. Carr, Esq.
Casey........................ Catherine Casey
CRC.......................... California Reinvestment Coalition, et al.
CRL.......................... Center for Responsible Lending
CMC.......................... Consumer Mortgage Coalition
CUUS......................... Consumers Union of United States, Inc.
CSBS......................... Conference of State Bank Supervisors
CUNA......................... Credit Union National Association
Chase........................ Chase Home Finance, LLC
Chucales..................... Nick Chucales
CJI.......................... Civil Justice, Inc. (Phillip Robinson)
Dargon....................... Dargon Law Firm PLLC
Davidson..................... [Unidentified] Davidson
E. Davidson.................. EDLAW (Edward Davidson)
Deal......................... James Robert Deal, Esq.
Dix.......................... Chris Dix
FL Bar....................... The Florida Bar
Francis...................... Crystal Francis
Franzen...................... Terry Franzen and Michael Pierce
GLS.......................... Gabel Legal Services, L.L.C. (John Gabel)
Giles........................ Geoffrey Lynn Giles
GA........................... Bar Georgia State Bar
Goldberg..................... [Unidentified] Goldberg
Greenfield................... Julia Leah Greenfield, Esq.
Gutner....................... John Gutner
HPC.......................... Housing Policy Counsel
Hirsch....................... Ian Hirsch
Holler....................... George Holler
Hunter....................... Josiah Hunter
IL AG........................ Illinois Office of the Attorney General
IL RELA...................... Illinois Real Estate Lawyers Association
IL BA........................ Illinois State Bar Association
Lawson....................... Carol Lawson
Lawyer's Committee........... The Lawyers Committee for Civil Rights
Under Law
LAF.......................... The Legal Assistance Foundation of
Metropolitan Chicago
Legalprise................... Legalprise, Inc.
LCL.......................... Liberty Credit Law (H. Bruce Bronson,
Jr.)
LOLLAF....................... Land of Lincoln Legal Assistance
Foundation, Inc.
LFSV......................... Law Foundation of Silicon Valley
ME BA........................ Maine State Bar Association
MA AG........................ Massachusetts Office of the Attorney
General
Matejcek..................... Karen Matejcek
McLaughlin................... Heidi McLaughlin
Metropolis................... Metropolis Loans (Camerin Hawthorne)
MBA.......................... Mortgage Bankers Association
MI Bar....................... Michigan State Bar
MN AG........................ Office of the Minnesota Attorney General
MO Bar....................... The Missouri Bar
NAAG......................... National Association of Attorneys General
NAR.......................... National Association of Relators
NCRC......................... National Community Reinvestment Coalition
NCLC......................... National Consumer Law Center, et al.
NCLR......................... National Council of La Raza
NV DML....................... Nevada Division of Mortgage Lending
NYC DCA...................... New York City Department of Consumer
Affairs
OTS.......................... Office of Thrift Supervision
OH AG........................ Ohio Attorney General
OPLC......................... Ohio Poverty Law Center
OR Bar....................... Oregon State Bar
Parkey....................... Aaron Parkey
Peters....................... Michele Peters
RMI.......................... Rate Modifications, Inc. (David Deal)
Rodriguez.................... Jesse Rodriguez
Rogers....................... The Rogers Law Group (Rick Rogers)

[[Page 75140]]

SJMA......................... S.J. Mobley & Associates, LLC (Sara
Mobley)
Schertzing................... Eric Schertzing, Treasurer, Ingham
County, MI
Seise........................ Char Seise
Shriver...................... Sargent Shriver National Center on
Poverty Law
Shaw......................... Ann Shaw, Esq.
Smith........................ Stewart Smith
Sygit........................ Drew Sygit
TNLMA........................ The National Loss Mitigation Association
USHLA........................ US Home Loan Advocates
USHS......................... U.S. HomeSupport (Thomas Kim)
Wallace...................... Lawrence Wallace
WMC.......................... Westside Ministers Coalition
WI Bar....................... Wisconsin State Bar
------------------------------------------------------------------------

List of FTC MARS Law Enforcement Actions

FTC v. Residential Relief Found., Inc., No. 1:10-cv-3214-
JFM (D. Md. filed Nov. 15, 2010)
FTC v. U.S. Homeowners Relief, Inc., No. SA-CV-10-1452 JST
(PJWx) (C. D. Cal. filed Sept. 27, 2010)
FTC v. Nat'l Hometeam Solutions, LLC, No. 4:08-cv-067
(E.D. Tex. filed Aug. 30, 2010) (contempt action)
FTC v. Dominant Leads, LLC, No. 1:10-cv-00997-PLF (D. D.C
filed June 15, 2010)
FTC v. First Universal Lending, LLC, No. 09-CV-82322 (S.D.
Fla. filed Nov. 18, 2009)
FTC v. Truman Foreclosure Assistance, LLC, No. 09-23543
(S.D. Fla. filed Nov. 23, 2009)
FTC v. Debt Advocacy Ctr, LLC, No. 1:09CV2712 (N.D. Ohio
filed Nov. 19, 2009)
FTC v. Kirkland Young, LLC, No. 09-23507 (S.D. Fla. filed
Nov. 18, 2009)
FTC v. 1st Guar. Mortgage Corp., No. 09-CV-61840 (S.D.
Fla. filed Nov. 17, 2009)
FTC v. Washington Data Res., Inc., No. 8:09-cv-02309-SDM-
TBM (M.D. Fla. filed Nov. 12, 2009)
FTC v. Fed. Housing Modification Dep't, Inc, No. 09-CV-
01753 (D.D.C. filed Sept. 16, 2009)
FTC v. Infinity Group Servs., No. SACV09-00977 DOC (MLGx)
(C.D. Cal. filed Aug. 26, 2009)
FTC v. United Credit Adjusters, Inc., No. 3:09-cv-00798
(JAP) (D.N.J., Amend. Compl. filed Aug. 4, 2009)
FTC v. Apply2Save, Inc., No. 2:09-cv-00345-EJL-CWD (D.
Idaho filed July 14, 2009)
FTC v. Loss Mitigation Servs., Inc., No. SACV09-800 DOC
(ANX) (C.D. Cal. filed July 13, 2009)
FTC v. Cantkier, No. 1:09-cv-00894 (D.D.C., Amend. Compl.
filed June 18, 2009)
FTC v. LucasLawCenter ``Inc.'', No. SACV09-770 DOC (ANX)
(C.D. Cal. filed July 7, 2009)
FTC v. US Foreclosure Relief Corp., No. SACV09-768 JVS
(MGX) (C.D. Cal. filed July 7, 2009)
FTC v. Freedom Foreclosure Prevention Specialists, LLC,
No. 2:09-cv-01167-FJM (D. Ariz. filed June 1, 2009)
FTC v. Data Med. Capital, Inc., No. SACV-99-1266 AHS (Eex)
(C.D. Cal., App. Contempt filed May 27, 2009)
FTC v. Dinamica Financiera LLC, No. 09-CV-03554 CAS PJWx
(C.D. Cal. filed May 19, 2009)
FTC v. Fed. Loan Modification Law Ctr., LLP, No. SACV09-
401 CJC (MLGx) (C.D. Cal. filed Apr. 3, 2009)
FTC v. Ryan, No. 1:09-00535 (HHK) (D.D.C., Amend. Compl.
filed Mar. 25, 2009)
FTC v. Home Assure, LLC, No. 8:09-CV-00547-T-23T-Sm (M.D.
Fla. filed Mar. 24, 2009)
FTC v. New Hope Prop. LLC, No. 1:09-cv-01203-JBS-JS
(D.N.J. filed Mar. 17, 2009)
FTC v. Hope Now Modifications, LLC, No. 1:09-cv-01204-JBS-
JS (D.N.J. filed Mar. 17, 2009)
FTC v. Nat'l Foreclosure Relief, Inc., No. SACV09-117 DOC
(MLGx) (C.D. Cal. filed Feb. 2, 2009)
FTC v. United Home Savers, LLP, 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., No. 8:08-cv-
388-T-23EAJ (M.D. Fla. filed Feb. 26, 2008)
FTC v. Nat'l Hometeam Solutions, LLC., No. 4:08-cv-067
(E.D. Tex. filed Feb. 26, 2008)
FTC v. Safe Harbour Found. of Florida, Inc., No. 08-C-1185
(N.D. Ill. filed Feb. 27, 2008).

VI. Final Rule

List of Subjects in 16 CFR Part 322

Consumer protection, Trade practices, Telemarketing.

0
For the reasons set forth in the preamble, the Federal Trade Commission
amends title 16, Code of Federal Regulations, by adding a new part 322,
to read as follows:

PART 322--MORTGAGE ASSISTANCE RELIEF SERVICES

Sec.
322.1 Scope of regulations in this part.
322.2 Definitions.
322.3 Prohibited representations.
322.4 Disclosures required in commercial communications.
322.5 Prohibition on collection of advance payments and related
disclosures.
322.6 Assisting and facilitating.
322.7 Exemptions.
322.8 Waiver not permitted.
322.9 Recordkeeping and compliance requirements.
322.10 Actions by states.
322.11 Severability.

Authority: Public Law 111-8, section 626, 123 Stat. 524, as
amended by Public Law 111-24, section 511, 123 Stat. 1734.

Sec. 322.1 Scope of regulations in this part.

This part implements the 2009 Omnibus Appropriations Act, Public
Law 111-8, section 626, 123 Stat. 524 (Mar. 11, 2009), as clarified by
the Credit Card Accountability Responsibility and Disclosure Act of
2009, Public Law 111-24, section 511, 123 Stat. 1734 (May 22, 2009).

Sec. 322.2 Definitions.

For the purposes of this part:
(a) ``Clear and prominent'' means:
(1) In textual communications, the required disclosures shall be
easily readable; in a high degree of contrast from the immediate
background on which it appears; in the same languages that are
substantially used in the commercial communication; in a format

[[Page 75141]]

so that the disclosure is distinct from other text, such as inside a
border; in a distinct type style, such as bold; parallel to the base of
the commercial communication, and, except as otherwise provided in this
rule, each letter of the disclosure shall be, at a minimum, the larger
of 12-point type or one-half the size of the largest letter or numeral
used in the name of the advertised website or telephone number to which
consumers are referred to receive information relating to any mortgage
assistance relief service. Textual communications include any
communications in a written or printed form such as print publications
or words displayed on the screen of a computer;
(2) In communications disseminated orally or through audible means,
such as radio or streaming audio, the required disclosures shall be
delivered in a slow and deliberate manner and in a reasonably
understandable volume and pitch;
(3) In communications disseminated through video means, such as
television or streaming video, the required disclosures shall appear
simultaneously in the audio and visual parts of the commercial
communication and be delivered in a manner consistent with paragraphs
(a)(1) and (2) of this section. The visual disclosure shall be at least
four percent of the vertical picture or screen height and appear for
the duration of the oral disclosure;
(4) In communications made through interactive media, such as the
Internet, online services, and software, the required disclosures
shall:
(i) Be consistent with paragraphs (a)(1) through (3) of this
section;
(ii) Be made on, or immediately prior to, the page on which the
consumer takes any action to incur any financial obligation;
(iii) Be unavoidable, i.e., visible to consumers without requiring
them to scroll down a webpage; and
(iv) Appear in type at least the same size as the largest character
of the advertisement;
(5) In all instances, the required disclosures shall be presented
in an understandable language and syntax, and with nothing contrary to,
inconsistent with, or in mitigation of the disclosures used in any
communication of them; and
(6) For program-length television, radio, or Internet-based multi-
media commercial communications, the required disclosures shall be made
at the beginning, near the middle, and at the end of the commercial
communication.
(b) ``Client trust account'' means a separate account created by a
licensed attorney for the purpose of holding client funds, which is:
(1) Maintained in compliance with all applicable state laws and
regulations, including licensing regulations; and
(2) Located in the state where the attorney's office is located, or
elsewhere in the United States with the consent of the consumer on
whose behalf the funds are held.
(c) ``Commercial communication'' means any written or oral
statement, illustration, or depiction, whether in English or any other
language, that is designed to effect a sale or create interest in
purchasing any service, plan, or program, whether it appears on or in a
label, package, package insert, radio, television, cable television,
brochure, newspaper, magazine, pamphlet, leaflet, circular, mailer,
book insert, free standing insert, letter, catalogue, poster, chart,
billboard, public transit card, point of purchase display, film, slide,
audio program transmitted over a telephone system, telemarketing
script, onhold script, upsell script, training materials provided to
telemarketing firms, program-length commercial (``infomercial''), the
Internet, cellular network, or any other medium. Promotional materials
and items and Web pages are included in the term ``commercial
communication.''
(1) ``General Commercial Communication'' means a commercial
communication that occurs prior to the consumer agreeing to permit the
provider to seek offers of mortgage assistance relief on behalf of the
consumer, or otherwise agreeing to use the mortgage assistance relief
service, and that is not directed at a specific consumer.
(2) ``Consumer-Specific Commercial Communication'' means a
commercial communication that occurs prior to the consumer agreeing to
permit the provider to seek offers of mortgage assistance relief on
behalf of the consumer, or otherwise agreeing to use the mortgage
assistance relief service, and that is directed at a specific consumer.
(d) ``Consumer'' means any natural person who is obligated under
any loan secured by a dwelling.
(e) ``Dwelling'' means a residential structure containing four or
fewer units, whether or not that structure is attached to real
property, that is primarily for personal, family, or household
purposes. The term includes any of the following if used as a
residence: an individual condominium unit, cooperative unit, mobile
home, manufactured home, or trailer.
(f) ``Dwelling loan'' means any loan secured by a dwelling, and any
associated deed of trust or mortgage.
(g) ``Dwelling Loan Holder'' means any individual or entity who
holds the dwelling loan that is the subject of the offer to provide
mortgage assistance relief services.
(h) ``Material'' means likely to affect a consumer's choice of, or
conduct regarding, any mortgage assistance relief service.
(i) ``Mortgage Assistance Relief Service'' means any service, plan,
or program, offered or provided to the consumer in exchange for
consideration, that is represented, expressly or by implication, to
assist or attempt to assist the consumer with any of the following:
(1) Stopping, preventing, or postponing any mortgage or deed of
trust foreclosure sale for the consumer's dwelling, any repossession of
the consumer's dwelling, or otherwise saving the consumer's dwelling
from foreclosure or repossession;
(2) Negotiating, obtaining, or arranging a modification of any term
of a dwelling loan, including a reduction in the amount of interest,
principal balance, monthly payments, or fees;
(3) Obtaining any forbearance or modification in the timing of
payments from any dwelling loan holder or servicer on any dwelling
loan;
(4) Negotiating, obtaining, or arranging any extension of the
period of time within which the consumer may:
(i) Cure his or her default on a dwelling loan,
(ii) Reinstate his or her dwelling loan,
(iii) Redeem a dwelling, or
(iv) Exercise any right to reinstate a dwelling loan or redeem a
dwelling;
(5) Obtaining any waiver of an acceleration clause or balloon
payment contained in any promissory note or contract secured by any
dwelling; or
(6) Negotiating, obtaining or arranging:
(i) A short sale of a dwelling,
(ii) A deed-in-lieu of foreclosure, or
(iii) Any other disposition of a dwelling other than a sale to a
third party who is not the dwelling loan holder.
(j) ``Mortgage Assistance Relief Service Provider'' or ``Provider''
means any person that provides, offers to provide, or arranges for
others to provide, any mortgage assistance relief service. This term
does not include:
(1) The dwelling loan holder, or any agent or contractor of such
individual or entity.
(2) The servicer of a dwelling loan, or any agent or contractor of
such individual or entity.
(k) ``Person'' means any individual, group, unincorporated
association,

[[Page 75142]]

limited or general partnership, corporation, or other business entity,
except to the extent that any person is specifically excluded from the
Federal Trade Commission's jurisdiction pursuant to 15 U.S.C. 44 and
45(a)(2).
(l) ``Servicer'' means the individual or entity responsible for:
(1) Receiving any scheduled periodic payments from a consumer
pursuant to the terms of the dwelling loan that is the subject of the
offer to provide mortgage assistance relief services, including amounts
for escrow accounts under section 10 of the Real Estate Settlement
Procedures Act (12 U.S.C. 2609); and
(2) Making the payments of principal and interest and such other
payments with respect to the amounts received from the consumer as may
be required pursuant to the terms of the mortgage servicing loan
documents or servicing contract.
(m) ``Telemarketing'' means a plan, program, or campaign which is
conducted to induce the purchase of any service, by use of one or more
telephones and which involves more than one interstate telephone call.

Sec. 322.3 Prohibited representations.

It is a violation of this rule for any mortgage assistance relief
service provider to engage in the following conduct:
(a) Representing, expressly or by implication, in connection with
the advertising, marketing, promotion, offering for sale, sale, or
performance of any mortgage assistance relief service, that a consumer
cannot or should not contact or communicate with his or her lender or
servicer.
(b) Misrepresenting, expressly or by implication, any material
aspect of any mortgage assistance relief service, including but not
limited to:
(1) The likelihood of negotiating, obtaining, or arranging any
represented service or result, such as those set forth in Sec.
322.2(i);
(2) The amount of time it will take the mortgage assistance relief
service provider to accomplish any represented service or result, such
as those set forth in Sec. 322.2(i);
(3) That a mortgage assistance relief service is affiliated with,
endorsed or approved by, or otherwise associated with:
(i) The United States government,
(ii) Any governmental homeowner assistance plan,
(iii) Any Federal, State, or local government agency, unit, or
department,
(iv) Any nonprofit housing counselor agency or program,
(v) The maker, holder, or servicer of the consumer's dwelling loan,
or
(vi) Any other individual, entity, or program;
(4) The consumer's obligation to make scheduled periodic payments
or any other payments pursuant to the terms of the consumer's dwelling
loan;
(5) The terms or conditions of the consumer's dwelling loan,
including but not limited to the amount of debt owed;
(6) The terms or conditions of any refund, cancellation, exchange,
or repurchase policy for a mortgage assistance relief service,
including but not limited to the likelihood of obtaining a full or
partial refund, or the circumstances in which a full or partial refund
will be granted, for a mortgage assistance relief service;
(7) That the mortgage assistance relief service provider has
completed the represented services or has a right to claim, demand,
charge, collect, or receive payment or other consideration;
(8) That the consumer will receive legal representation;
(9) The availability, performance, cost, or characteristics of any
alternative to for-profit mortgage assistance relief services through
which the consumer can obtain mortgage assistance relief, including
negotiating directly with the dwelling loan holder or servicer, or
using any nonprofit housing counselor agency or program;
(10) The amount of money or the percentage of the debt amount that
a consumer may save by using the mortgage assistance relief service;
(11) The total cost to purchase the mortgage assistance relief
service; or
(12) The terms, conditions, or limitations of any offer of mortgage
assistance relief the provider obtains from the consumer's dwelling
loan holder or servicer, including the time period in which the
consumer must decide to accept the offer;
(c) Making a representation, expressly or by implication, about the
benefits, performance, or efficacy of any mortgage assistance relief
service unless, at the time such representation is made, the provider
possesses and relies upon competent and reliable evidence that
substantiates that the representation is true. For the purposes of this
paragraph, ``competent and reliable evidence'' means tests, analyses,
research, studies, or other evidence based on the expertise of
professionals in the relevant area, that have been conducted and
evaluated in an objective manner by individuals qualified to do so,
using procedures generally accepted in the profession to yield accurate
and reliable results.

Sec. 322.4 Disclosures required in commercial communications.

It is a violation of this rule for any mortgage assistance relief
service provider to engage in the following conduct:
(a) Disclosures in All General Commercial Communications--Failing
to place the following statements in every general commercial
communication for any mortgage assistance relief service:
(1) ``(Name of company) is not associated with the government, and
our service is not approved by the government or your lender.''
(2) In cases where the mortgage assistance relief service provider
has represented, expressly or by implication, that consumers will
receive any service or result set forth in Sec. 322.2(i)(2) through
(6), ``Even if you accept this offer and use our service, your lender
may not agree to change your loan.''
(3) The disclosures required by this paragraph must be made in a
clear and prominent manner, and--
(i) In textual communications the disclosures must appear together
and be preceded by the heading ``IMPORTANT NOTICE,'' which must be in
bold face font that is two point-type larger than the font size of the
required disclosures; and
(ii) In communications disseminated orally or through audible
means, wholly or in part, the audio component of the required
disclosures must be preceded by the statement ``Before using this
service, consider the following information.''
(b) Disclosures in All Consumer-Specific Commercial
Communications--Failing to disclose the following information in every
consumer-specific commercial communication for any mortgage assistance
relief service:
(1) ``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. If you accept the offer, you will have to pay us (insert amount or
method for calculating the amount) for our services.'' For the purposes
of this paragraph, the amount ``you will have to pay'' shall consist of
the total amount the consumer must pay to purchase, receive, and use
all of the mortgage assistance relief services that are the subject of
the sales offer, including, but not limited to, all fees and charges.
(2) ``(Name of company) is not associated with the government, and
our service is not approved by the government or your lender.''

[[Page 75143]]

(3) In cases where the mortgage assistance relief service provider
has represented, expressly or by implication, that consumers will
receive any service or result set forth in Sec. 322.2(i)(2) through
(6), ``Even if you accept this offer and use our service, your lender
may not agree to change your loan.''
(4) The disclosures required by this paragraph must be made in a
clear and prominent manner, and--
(i) In textual communications the disclosures must appear together
and be preceded by the heading ``IMPORTANT NOTICE,'' which must be in
bold face font that is two point-type larger than the font size of the
required disclosures; and
(ii) In communications disseminated orally or through audible
means, wholly or in part, the audio component of the required
disclosures must be preceded by the statement ``Before using this
service, consider the following information'' and, in telephone
communications, must be made at the beginning of the call.
(c) Disclosures in All General Commercial Communications, Consumer-
Specific Commercial Communications, and Other Communications--In cases
where the mortgage assistance relief service provider has represented,
expressly or by implication, in connection with the advertising,
marketing, promotion, offering for sale, sale, or performance of any
mortgage assistance relief service, that the consumer should
temporarily or permanently discontinue payments, in whole or in part,
on a dwelling loan, failing to disclose, clearly and prominently, and
in close proximity to any such representation that ``If you stop paying
your mortgage, you could lose your home and damage your credit
rating.''

Sec. 322.5 Prohibition on collection of advance payments and related
disclosures.

It is a violation of this rule for any mortgage assistance relief
service provider to:
(a) Request or receive payment of any fee or other consideration
until the consumer has executed a written agreement between the
consumer and the consumer's dwelling loan holder or servicer
incorporating the offer of mortgage assistance relief the provider
obtained from the consumer's dwelling loan holder or servicer;
(b) Fail to disclose, at the time the mortgage assistance relief
service provider furnishes the consumer with the written agreement
specified in paragraph (a) of this section, the following information:
``This is an offer of mortgage assistance we obtained from your lender
[or servicer]. You may accept or reject the offer. If you reject the
offer, you do not have to pay us. If you accept the offer, you will
have to pay us [same amount as disclosed pursuant to Sec. 322.4(b)(1)]
for our services.'' The disclosure required by this paragraph must be
made in a clear and prominent manner, on a separate written page, and
preceded by the heading: ``IMPORTANT NOTICE: Before buying this
service, consider the following information.'' The heading must be in
bold face font that is two point-type larger than the font size of the
required disclosure; or
(c)(1) Fail to provide, at the time the mortgage assistance relief
service provider furnishes the consumer with the written agreement
specified in paragraph (a) of this section, a notice from the
consumer's dwelling loan holder or servicer that describes all material
differences between the terms, conditions, and limitations associated
with the consumer's current mortgage loan and the terms, conditions,
and limitations associated with the consumer's mortgage loan if he or
she accepts the dwelling loan holder's or servicer's offer, including
but not limited to differences in the loan's:
(i) Principal balance;
(ii) Contract interest rate, including the maximum rate and any
adjustable rates, if applicable;
(iii) Amount and number of the consumer's scheduled periodic
payments on the loan;
(iv) Monthly amounts owed for principal, interest, taxes, and any
mortgage insurance on the loan;
(v) Amount of any delinquent payments owing or outstanding;
(vi) Assessed fees or penalties; and
(vii) Term
(2) The notice must be made in a clear and prominent manner, on a
separate written page, and preceded by heading: ``IMPORTANT INFORMATION
FROM YOUR [name of lender or servicer] ABOUT THIS OFFER.'' The heading
must be in bold face font that is two-point-type larger than the font
size of the required disclosure.
(d) Fail to disclose in the notice specified in paragraph (c) of
this section, in cases where the offer of mortgage assistance relief
the provider obtained from the consumer's dwelling loan holder or
servicer is a trial mortgage loan modification, the terms, conditions,
and limitations of this offer, including but not limited to:
(1) The fact that the consumer may not qualify for a permanent
mortgage loan modification; and
(2) The likely amount of the scheduled periodic payments and any
arrears, payments, or fees that the consumer would owe in failing to
qualify.

Sec. 322.6 Assisting and facilitating.

It is a violation of this rule for a person to provide substantial
assistance or support to any mortgage assistance relief service
provider when that person knows or consciously avoids knowing that the
provider is engaged in any act or practice that violates this rule.

Sec. 322.7 Exemptions.

(a) An attorney is exempt from this part, with the exception of
Sec. 322.5, if the attorney:
(1) Provides mortgage assistance relief services as part of the
practice of law;
(2) Is 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 consumer's dwelling is located; and
(3) Complies with state laws and regulations that cover the same
type of conduct the rule requires.
(b) An attorney who is exempt pursuant to paragraph (a) of this
section is also exempt from Sec. 322.5 if the attorney:
(1) Deposits any funds received from the consumer prior to
performing legal services in a client trust account; and
(2) Complies with all state laws and regulations, including
licensing regulations, applicable to client trust accounts.

Sec. 322.8 Waiver not permitted.

It is a violation of this rule for any person to obtain, or attempt
to obtain, a waiver from any consumer of any protection provided by or
any right of the consumer under this rule.

Sec. 322.9 Recordkeeping and compliance requirements.

(a) Any mortgage assistance relief provider must keep, for a period
of twenty-four (24) months from the date the record is created, the
following records:
(1) All contracts or other agreements between the provider and any
consumer for any mortgage assistance relief service;
(2) Copies of all written communications between the provider and
any consumer occurring prior to the date on which the consumer entered
into an agreement with the provider for any mortgage assistance relief
service;
(3) Copies of all documents or telephone recordings created in
connection with compliance with paragraph (b) of this section;

[[Page 75144]]

(4) All consumer files containing the names, phone numbers, dollar
amounts paid, and descriptions of mortgage assistance relief services
purchased, to the extent the mortgage assistance relief service
provider keeps such information in the ordinary course of business;
(5) Copies of all materially different sales scripts, training
materials, commercial communications, or other marketing materials,
including websites and weblogs, for any mortgage assistance relief
service; and
(6) Copies of the documentation provided to the consumer as
specified in Sec. 322.5 of this rule;
(b) A mortgage assistance relief service provider also must:
(1) Take reasonable steps sufficient to monitor and ensure that all
employees and independent contractors comply with this rule. Such steps
shall include the monitoring of communications directed at specific
consumers, and shall also include, at a minimum, the following:
(i) If the mortgage assistance relief service provider is engaged
in the telemarketing of mortgage assistance relief services, performing
random, blind recording and testing of the oral representations made by
individuals engaged in sales or other customer service functions;
(ii) Establishing a procedure for receiving and responding to all
consumer complaints; and
(iii) Ascertaining the number and nature of consumer complaints
regarding transactions in which all employees and independent
contractors are involved;
(2) Investigate promptly and fully each consumer complaint
received;
(3) Take corrective action with respect to any employee or
contractor whom the mortgage assistance relief service provider
determines is not complying with this rule, which may include training,
disciplining, or terminating such individual; and
(4) Maintain any information and material necessary to demonstrate
its compliance with paragraphs (b)(1) through (3) of this section.
(c) A mortgage assistance relief provider may keep the records
required by Sec. 322.10(a) through this section in any form, and in
the same manner, format, or place as it keeps such records in the
ordinary course of business.
(d) It is a violation of this rule for a mortgage assistance relief
service provider not to comply with this section.

Sec. 322.10 Actions by states.

Any attorney general or other officer of a state authorized by the
state to bring an action under this part may do so pursuant to Section
626(b) of the 2009 Omnibus Appropriations Act, Public Law 111-8,
section 626, 123 Stat. 524 (Mar. 11, 2009), as amended by Public Law
111-24, section 511, 123 Stat. 1734 (May 22, 2009).

Sec. 322.11 Severability.

The provisions of this rule are separate and severable from one
another. If any provision is stayed or determined to be invalid, it is
the Commission's intention that the remaining provisions shall continue
in effect.

By direction of the Commission.
Donald S. Clark,
Secretary.
The following statement will not appear in the Code of Federal
Regulations.

Statement of Commissioner J. Thomas Rosch

Mortgage Assistance Relief Services Rule, File No. R911003

I support the Commission's adoption today of the final Mortgage
Relief Services Rule (``MARS Rule'') and its accompanying Statement of
Basis and Purpose. I write this separate statement to explain my
decision to vote in favor of the MARS Rule in light of my dissenting
vote against the issuance of the debt relief services amendments to the
Telemarketing Sales Rule (``the TSR'').\1\
---------------------------------------------------------------------------

\1\ My opinion as to the record in the debt relief services TSR
rulemaking proceeding is limited to that rulemaking proceeding
alone. Any individual case, alleging either violations of Section 5
or violations of the debt relief services amendments to the TSR,
would have to be judged on the particular facts of that case.
---------------------------------------------------------------------------

Although I had concerns about certain aspects of the record in the
TSR rulemaking proceeding relating to the need for an advance fee ban,
I believe that the record in the MARS rulemaking proceeding supports a
ban. In coming to this conclusion, I draw two distinctions. First, the
business model for the provision of mortgage assistance relief services
differs from debt relief services in that it does not require consumer
participation in order to achieve a successful result. Rather, the
likelihood of attaining a particular, promised result rests solely on
the MARS provider's own efforts. Second, the length of time it takes to
attain a mortgage assistance relief result (and hence the duration of
the advance fee ban) is much shorter than the time it typically takes
to obtain settlements of a consumer's debts.

[FR Doc. 2010-29694 Filed 11-30-10; 8:45 am]
BILLING CODE 6750-01-P