BUSINESS LAW UPDATE: MARS Rule—Federal Government Launches Concerted Action Involving Fraud andCorruption in the Bank Mortgage Industry, Including Activities by Loan Modification Companies and Attorneys Operating in This Field
October 30, 2012
Charlene Hicks, Senior Attorney, National Legal Research Group
In recent days, federal officials have launched an all-out effort to halt the fraud and corruption plaguing the nation's bank mortgage industry. On October 9, 2012, the Federal Trade Commission ("FTC") filed three separate federal court lawsuits against allegedly phony mortgage-relief companies. These suits accuse the companies of having engaged in deceptive business practices by falsely assuring struggling homeowners that they could save their homes from foreclosure, charging thousands of dollars in up-front fees, and then providing little or no actual assistance. On the same day, the U.S. Attorney General, the Federal Bureau of Investigation ("FBI"), and the Department of Housing and Urban Development ("HUD") announced the results of the Distressed Homeowner Initiative, a year-long, coordinated, multilevel investigation targeting predatory foreclosure-rescue and mortgage-modification schemes. Meanwhile, on another front, the U.S. attorney's office in Manhattan filed a mortgage fraud lawsuit against Wells Fargo, accusing the major bank of having engaged in improper underwriting of home loans for over a decade. The following day, October 10, the FTC announced that it had reached a settlement with Equifax on allegations concerning the improper sale of information on late borrowers. The FTC alleged that Equifax had sold more than 17,000 lists of consumers who met specific criteria, such as being late on their mortgage payments, to Direct Lending Source, which, in turn, had sold the lists to various third parties.
A major source of ammunition in these federal efforts against mortgage fraud is the newest provision of the FTC's Mortgage Assistance Relief Services ("MARS") Rule, which was issued in November 2010. See 12 C.F.R. § 1015.5. This Rule prohibits mortgage-relief companies from collecting any fees until the homeowner has a written offer from his or her lender or servicer that the individual deems acceptable. Mortgage-relief services that charge advance fees to consumers may be held civilly or criminally liable for violation of the MARS Rule. See id. § 1015.10.
Notably, attorneys are generally exempt from MARS Rule prohibitions. Id. § 1015.7. To qualify for exemption from all MARS disclosure rules except the advance-fee ban, an attorney must satisfy three conditions: (1) The attorney must be engaged in the practice of law; (2) the attorney must be licensed in the state where the consumer or dwelling is located; and (3) the attorney must comply with state laws and regulations governing attorney conduct relating to the MARS Rule. Id. § 1015.7(a). To qualify for an exemption from the ban against advance fees, the attorney must also meet a fourth requirement: Any up-front fees collected must be placed in a client trust account, and the attorney must abide by state laws and regulations governing such accounts. Id. § 1015.7(b).
Broadly speaking, the sweeping actions just taken by various federal agencies may signal a general change in attitude from one that is "procreditor" to a more lenient "prodebtor" perspective. Such a shift in the law could potentially benefit debtors seeking relief from seemingly harsh creditor-imposed penalties of all types.
It should also be noted that the FBI's announcement of October 9, 2012 emphasized the role that unscrupulous attorneys have played in perpetrating mortgage fraud upon desperate consumers. In that announcement, the agency specifically stated it has "noticed a disturbing trend among these [distressed homeowner fraud] cases—an increasing number of lawyers playing primary or secondary roles in the fraud." Distressed Homeowner Initiative: Don't Let Mortgage Fraud Happen to You, http://www.fbi.gov/news/stories/2012/october/don't-let-mortgage-fraud-happen-to-you. According to the FBI, phony mortgage modification services have attempted to circumvent the MARS Rule advance-fee ban by "using attorneys—which by itself adds an air of legitimacy to their fraudulent schemes—and calling their upfront fees 'legal retainers.'" Id.
The FBI's singling out of the attorney exemption to the MARS Rule may be taken as a sign that the federal government intends to take steps to close this "loophole" by imposing more stringent requirements on attorneys engaged in the practice of assisting financially troubled homeowners. Attorneys for consumer-debtors should take care to stay abreast of any new developments in this regard. At a minimum, the imposition of more stringent federal regulations that limit, or even outright prohibit, the collection of advance or retainer fees from clients who may wish to obtain a modification of their underlying home mortgages would significantly impact the risks associated with the pursuit of such cases and the maintenance of client trust accounts.