Mortgage Assistance Relief Services Final Rule CFR by jolinmilioncherie


                                                                                                                                    December 1, 2010

                                                                                                                                    Part VI

                                                                                                                                    Federal Trade
                                                                                                                                    16 CFR Part 322
                                                                                                                                    Mortgage Assistance Relief Services; Final
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                                              75092            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              FEDERAL TRADE COMMISSION                                 the Commission to commence, within                           The Omnibus Appropriations Act, as
                                                                                                       90 days of enactment, a rulemaking                        clarified by the Credit CARD Act, also
                                              16 CFR Part 322                                          proceeding with respect to mortgage                       permits both the Commission and the
                                              RIN 3084–AB18                                            loans.2 Section 626 also directed the                     states to enforce the rules the FTC
                                                                                                       FTC to use notice and comment                             issues.11 The Commission can use its
                                              Mortgage Assistance Relief Services                      procedures under Section 553 of the                       powers under the FTC Act to investigate
                                                                                                       Administrative Procedure Act (APA), 5                     and enforce the rules, and the FTC can
                                              AGENCY: Federal Trade Commission                         U.S.C. 553, to promulgate these rules.3                   seek civil penalties under the FTC Act
                                              (FTC or Commission).                                        On May 22, 2009, President Obama                       against those who violate them. In
                                              ACTION: Final rule.                                      signed the Credit CARD Act.4 Section                      addition, states can enforce the rules by
                                                                                                       511 of this statute clarified the                         bringing civil actions in Federal district
                                              SUMMARY: Pursuant to the 2009                            Commission’s rulemaking authority                         court or another court of competent
                                              Omnibus Appropriations Act (Omnibus                      under the Omnibus Appropriations Act.                     jurisdiction to obtain civil penalties and
                                              Appropriations Act), as clarified by the                 First, Section 511 specified that the                     other relief. Before bringing such an
                                              Credit Card Accountability                               rulemaking ‘‘shall relate to unfair or                    action, however, states must give 60
                                              Responsibility and Disclosure Act of                     deceptive acts or practices regarding                     days advance notice to the Commission
                                              2009 (Credit CARD Act), the                              mortgage loans, which may include                         or other ‘‘primary federal regulator’’ of
                                              Commission issues a Final Rule and                       unfair or deceptive acts or practices                     the proposed defendant, and the
                                              Statement of Basis and Purpose (SBP)                     involving loan modification and                           regulator has the right to intervene in
                                              concerning the practices of for-profit                   foreclosure rescue services.’’5 The                       the action.
                                              companies that, in exchange for a fee,                   Omnibus Appropriations Act, as                               On July 21, 2010, President Obama
                                              offer to work on behalf of consumers to                  clarified by the Credit CARD Act, does                    signed the Dodd-Frank Wall Street
                                              help them obtain modifications to the                    not specify any particular types of                       Reform and Consumer Protection Act.12
                                              terms of mortgage loans or to avoid                      provisions that the Commission should                     The Dodd-Frank Act made substantial
                                              foreclosure on those loans. The Final                    include, or refrain from including, in a                  changes in the federal regulatory
                                              Rule, among other things, would:                         rule addressing loan modification and                     framework for providers of financial
                                              prohibit providers of such mortgage                      foreclosure rescue services, but rather                   services. Among the changes, the Dodd-
                                              assistance relief services from making                   directs the Commission to issue rules                     Frank Act will transfer the
                                              false or misleading claims; mandate that                 that ‘‘relate to’’ unfairness or deception.6              Commission’s rulemaking authority
                                              providers disclose certain information                   Accordingly, the Commission interprets                    under the Omnibus Appropriations Act
                                              about these services; bar the collection                 the Omnibus Appropriations Act to                         to a new Bureau of Consumer Financial
                                              of advance fees for these services;                      allow it to issue rules that prohibit or                  Protection (BCFP)13 on July 21, 2011,
                                              prohibit anyone from providing                           restrict conduct that may not be unfair                   which is the ‘‘designated transfer date’’
                                              substantial assistance or support to                     or deceptive itself, but that are                         that the Treasury Department has set.14
                                              another they know or consciously avoid                   reasonably related to the goal of                         In addition, on the designated transfer
                                              knowing is engaged in a violation of the                 preventing unfairness or deception.7                      date, the FTC’s authority to ‘‘prescribe
                                              Rule; and impose recordkeeping and                          Second, Section 511 of the Credit                      rules’’ and ‘‘issue guidelines’’ under the
                                              compliance requirements.                                 CARD Act clarified that the                               Omnibus Appropriations Act will
                                              DATES: This final rule is effective on                   Commission’s rulemaking authority was                     transfer to the BCFP.15 Both the
                                              December 29, 2010, except for § 322.5,                   limited to entities that are subject to                   Commission and the BCFP, however,
                                              which is effective on January 31, 2011.                  enforcement by the Commission under                       will have authority to bring law
                                              ADDRESSES: Requests for copies of this                   the FTC Act.8 The rules the Commission                    enforcement actions to enforce the rules
                                              Rule and this Statement of Basis and                     promulgates to implement the Omnibus                      promulgated under the Omnibus
                                              Purpose (SBP) should be sent to: Public                  Appropriations Act, therefore, cannot                     Appropriations Act, including the Final
                                              Reference Branch, Federal Trade                          cover the practices of banks, thrifts,                    Rule in this Proceeding.
                                              Commission, 600 Pennsylvania Avenue,                     Federal credit unions,9 or certain
                                                                                                       nonprofits.10                                             B. The Rulemaking and Public
                                              NW., Room 130, Washington, DC 20580.                                                                               Comments Received
                                              The complete record of this proceeding                     2 Id. § 626(a).                                           On June 1, 2009, the Commission
                                              is also available at that address.                         3 Id. Because Congress directed the Commission
                                              Relevant portions of the proceeding,                                                                               published in the Federal Register an
                                                                                                       to use these APA rulemaking procedures, the FTC
                                              including the Final Rule and SBP, are                    did not use the procedures set forth in Section 18        Advance Notice of Proposed
                                              available at (                       of the FTC Act, 15 U.S.C. 57a.
                                                                                                         4 Credit Card Accountability Responsibility and         business for their profit or that of their members.
                                              FOR FURTHER INFORMATION CONTACT:                         Disclosure Act of 2009, Public Law 111–24, 123            15 U.S.C. 44, 45(a)(2). The FTC does, however, have
                                              Laura Sullivan or Evan Zullow,                           Stat. 1734 (Credit CARD Act).                             jurisdiction over for-profit entities that provide
                                              Attorneys, Division of Financial                           5 Id. § 511(a)(1)(B).                                   mortgage-related services as a result of a contractual
                                              Practices, Federal Trade Commission,                       6 Id.                                                   relationship with a nonprofit organization. See
                                                                                                         7 Unlike Section 18 of the FTC Act, 15 U.S.C. 57a,      Nat’l Fed’n of the Blind v. FTC, 420 F.3d 331, 334–
                                              600 Pennsylvania Avenue, NW.,                                                                                      35 (4th Cir. 2005). In addition, the Commission has
                                                                                                       see Katharine Gibbs Sch. v. FTC, 612 F.2d 658 (2d
                                              Washington, DC 20580, (202) 326–3224.                    Cir. 1979), the Omnibus Appropriations Act, as            jurisdiction over sham non-profits that in fact
                                              SUPPLEMENTARY INFORMATION:                               clarified by the Credit CARD Act, does not require        operate as for-profit entities. See infra note 176.
                                                                                                                                                                   11 Omnibus Appropriations Act § 626(b); Credit
                                                                                                       that the Commission identify with specificity in the
                                              I. Background                                            rule the unfair or deceptive acts or practices that the   CARD Act § 511(a)(1)(B).
                                                                                                       prohibitions will prevent. Omnibus Appropriations           12 Dodd-Frank Wall Street Reform and Consumer
                                              A. Statutory Authority
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                                                                                                       Act § 626(a); Credit CARD Act § 511(a)(1)(B).             Protection Act, Pub. L. 111–203, 124 Stat. 1376
                                                                                                         8 Credit CARD Act § 511(a)(1)(C).                       (2010) (Dodd-Frank Act).
                                                On March 11, 2009, President Obama                                                                                 13 Id. § 1061.
                                                                                                         9 15 U.S.C. 45(a)(2).
                                              signed the Omnibus Appropriations Act                      10 15 U.S.C. 44. Bona fide nonprofit entities are         14 Dep’t of the Treasury, Bureau of Consumer
                                              of 2009.1 Section 626 of the Act directed                exempt from the jurisdiction of the FTC Act.              Financial Protection; Designated Transfer Date, 75
                                                                                                       Sections 4 and 5 of the FTC Act confer on the             FR 57252, 57253 (Sept. 20, 2010); see also Dodd-
                                                1 Omnibus Appropriations Act, 2009, Public Law         Commission jurisdiction over persons,                     Frank Act § 1062.
                                              111–8, 123 Stat. 524 (Omnibus Appropriations Act).       partnerships, or corporations organized to carry on         15 Dodd-Frank Act § 1061.

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                     75093

                                              Rulemaking (ANPR) addressing the acts                    of comments—a total of 30—were                            many consumers struggling to make
                                              and practices of for-profit companies                    submitted either by attorneys who                         their mortgage payments have been
                                              that offer to work on behalf of                          provide MARS 20 or entities                               searching for ways to avoid default and
                                              consumers to help them modify the                        representing attorneys, including the                     foreclosure. There are a number of
                                              terms of their loans or to avoid                         American Bar Association and several                      options that may be available to them,
                                              foreclosure. The ANPR described these                    state bar associations.21 These                           including: (1) Short sales or deeds-in-
                                              services generically as ‘‘Mortgage                       comments focused on the scope of the                      lieu of foreclosure transactions, in
                                              Assistance Relief Services,’’ or                         proposed rule’s exemption for attorneys,                  which the proceeds of a sale of the
                                              ‘‘MARS.’’ 16 On March 9, 2010, the                       asserting that the Commission should                      home or the receipt of the deed to the
                                              Commission published17 a Notice of                       expand the exemption. Other                               home, respectively, are treated by the
                                              Proposed Rulemaking (NPRM) and                           commenters, including some consumer                       mortgage lender as repayment of the
                                              proposed rule addressing Mortgage                        groups and a coalition of state bank                      outstanding mortgage balance;
                                              Assistance Relief Services (MARS).18                     examiners, also advocated that the                        (2) forbearance or repayment plans that
                                              Among other things, the proposed rule                    proposed exemption for attorneys be                       do not reduce the amount that
                                              included provisions that would:                          broadened, although to a lesser extent                    consumers must pay but give them more
                                                 • Prohibit MARS providers from                        than the attorneys and their                              time to bring their balance current; and
                                              making false or misleading claims;                       representatives advocated.22 By                           (3) loan modifications that reduce
                                                 • Mandate that providers disclose                     contrast, comments from NAAG 23 and                       consumers’ indebtedness or the amount
                                              certain information about their services;                others24 urged the Commission not to                      of their monthly payments. Because
                                                 • Bar the collection of advance fees                  change the attorney exemption in the                      loan modifications allow consumers to
                                              for the provision of MARS, except in                     proposed rule.                                            stay in their homes and reduce their
                                              certain circumstances for attorneys who                     Apart from comments that focused on                    debt, this possible solution often has
                                              collect them in connection with                          the coverage of attorneys, most                           great appeal to them. The Commission’s
                                              preparing or filing documents in                         comments supported the proposed rule                      law enforcement experience suggests
                                              bankruptcy, court, or administrative                     and its specific provisions. Most                         that loan modifications are the type of
                                              proceedings;                                             significantly, these comments generally                   MARS most frequently marketed and
                                                 • Prohibit anyone from providing                      supported an advance fee ban,25                           sold.28
                                              substantial assistance or support to                     although a few non-attorney MARS                             In response to the mortgage crisis,
                                              another they know or consciously avoid                   providers opposed it.26                                   government and private sector programs
                                              knowing is engaged in a violation of the                                                                           have been initiated to assist distressed
                                              rule; and                                                II. Mortgage Assistance Relief Services
                                                                                                                                                                 homeowners.29 In March 2009, the
                                                 • Impose recordkeeping and                            A. The Mortgage Crisis and Assistance                     Obama Administration launched the
                                              compliance requirements.                                 for Consumers
                                                 In response to the NPRM, the                                                                                    Making Home Affordable (MHA)
                                              Commission received 75 comments                            As discussed in the ANPR and NPRM,                      program and the MHA’s Home
                                              from stakeholders, including for-profit                  historically high levels of consumer                      Affordable Modification Program
                                              MARS providers, state law enforcers,                     debt, increased unemployment, and a                       (HAMP), through which the government
                                              consumer and community groups, state                     stagnant housing market have                              provides mortgage owners and servicers
                                              bars and bar associations, and financial                 contributed to high rates of mortgage                     with financial incentives to modify and
                                              service providers.19 The largest number                  loan delinquencies, which in many                         refinance loans.30 Under the program,
                                                                                                       cases lead to foreclosures.27 As a result,
                                                16 See
                                                                                                                                                                 Record 2.8 Million U.S. Properties With Foreclosure
                                                        Mortgage Assistance Relief Services, 74 FR
                                                                                                         20 See,                                                 Filings in 2009 (Jan. 14, 2010), available at http://
                                              26130 (June 1, 2009) (MARS ANPR). In response to                    e.g., Deal; Greenfield.
                                              the ANPR, the Commission received a total of 46             21 See, e.g., Am. Bar Ass’n (ABA); ME BA at
                                                                                                                                                                 pressrelease.aspx?itemid=8333; Credit Suisse Fixed
                                              comments, which are available at http://                 1–2; OR Bar at 1; WI Bar at 1; GA Bar at 1; FL Bar        Income Research 2 (2008) (forecasting a total of 9
                                                     at 1.
                                              Notably, a wide spectrum of these commenters,                                                                      million foreclosures for the period 2009 through
                                                                                                          22 See, e.g., NCLC at 10–13; CSBS at 4–5.
                                              including a consortium of over 40 state attorneys                                                                  2012), available at
                                                                                                          23 See NAAG at 3–4.
                                              general, consumer and community organizations,                                                           
                                                                                                          24 See, e.g., CUUS at 8–9.                             ForeclosureUpdateCreditSuisse.pdf.
                                              and financial service providers, strongly urged the
                                                                                                          25 See, e.g., MN AG at 3; OH AG at 1; MBA at              28 See List of MARS Law Enforcement Actions,
                                              Commission to propose a rule prohibiting or
                                              restricting the collection of fees for mortgage relief   2–3 (supporting ‘‘strict prohibition’’ of advance         following Section V of the SBP, for a list of cases
                                              services until the promised services have been           fees); NAAG at 2 (‘‘The advance fee ban is the            that the FTC has prosecuted (‘‘FTC Case List’’).
                                              completed. Additionally, a majority of the               linchpin of effective deterrence of fraudulent            Unless otherwise specified, all citations to FTC
                                              comments expressed concern regarding pervasive           practices by providers of mortgage relief services.’’);   actions in this SBP refer to the complaints in these
                                              deception and abuse in the marketing of MARS,            NCLC at 3 (‘‘The single most important provision is       lawsuits.
                                              including misrepresentations regarding the services      section 322.5, which prohibits the collection of any         29 See, e.g., HOPE NOW, About Us (‘‘HOPE NOW
                                              MARS providers will perform and regarding their          fee before providing tangible results of real value to    is an alliance between counselors, mortgage
                                              affiliation with the government, nonprofits, lenders,    consumers.’’); AFSA at 5 (‘‘Banning upfront fees is       companies, investors, and other mortgage market
                                              or loan servicers.                                       the best way for the FTC to ensure that MARS              participants. This alliance will maximize outreach
                                                 This SBP cites to comments submitted in               providers do really provide consumers with a              efforts to homeowners in distress to help them stay
                                              response to both the ANPR and the NPRM. To               beneficial service.’’); see also CSBS at 3; CUUS at       in their homes and will create a unified,
                                              distinguish the comments submitted in response to        6; NYC DCA at 3.                                          coordinated plan to reach and help as many
                                              the ANPR, the notation ‘‘(ANPR)’’ is included in any        26 See, e.g., Metropolis; RMI; Hirsch.                 homeowners as possible.’’), available at http://
                                              citations to them.                                          27 See, e.g., MARS NPRM, 75 FR at 10708–09;  
                                                 17 See Press Release, FTC, FTC Proposes Rule
                                                                                                       MBA, Delinquencies, Foreclosure Starts Increase in           30 For example, the program offers servicers that
                                              That Would Bar Mortgage Relief Companies From            Latest MBA National Delinquency Survey (May 19,           modify loans according to its guidelines an up-front
                                              Charging Up-Front Fees (Feb. 4, 2010), available at      2010) (‘‘The delinquency rate for mortgage loans on       fee of $1,000 for each modification, ‘‘pay for
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                                                    one-to-four-unit residential properties increased to      success’’ fees on still-performing loans of $1,000 per
                                                 18 See Mortgage Assistance Relief Services, 75 FR     a seasonally adjusted rate of 10.06 percent of all        year, and one-time bonus incentive payments of
                                              10707 (Mar. 9, 2010) (MARS NPRM).                        loans outstanding as of the end of the first quarter      $1,500 to lender/investors, and $500 to servicers,
                                                 19 The comments submitted in response to the          of 2010, an increase of 59 basis points from the          for a modification made while a borrower is still
                                              NPRM are available at             fourth quarter of 2009, and up 94 basis points from       current on his or her mortgage payments. Dep’t of
                                              comments/mars-nprm/index.shtm. A list of those           one year ago.’’), available at       the Treasury, Making Home Affordable Summary of
                                              who submitted comments appears following                 NewsandMedia/PressCenter/72906.htm; NCLC at 2;            Guidelines 2 (March 4, 2010), available at
                                              Section V of this SBP.                                   Press Release, Realtytrac, Year-end Report Shows                                                      Continued

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                                              75094            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              lenders and servicers have approved                      profit companies who act as                             consumers are eligible for government
                                              roughly 500,000 permanent loan                           intermediaries between consumers and                    programs or assistance directly from
                                              modifications.31 The Treasury                            their lenders or servicers in obtaining                 their servicers or lenders, many housing
                                              Department has also recently expanded                    mortgage assistance relief services—                    counselors and servicers have struggled
                                              the MHA program to assist more                           including loan modifications. This may                  to respond in a timely manner to the
                                              borrowers, for example, by introducing                   be happening for a number of reasons.                   extraordinary number of consumers
                                              additional incentives for servicers to                   First, MARS have been advertised and                    who are seeking loan modifications.39
                                              write down the outstanding principal                     marketed widely in mass media and                       Finally, the Treasury Department also
                                              balance for borrowers who are ‘‘under                    online, with the result that consumers                  has observed that some servicers have
                                              water,’’ that is, who owe more on their                  may be more aware of the services                       not adequately met consumer demand
                                              mortgages than the value of their                        offered by for-profit entities than they                for loan modifications under the HAMP
                                              homes.32                                                 are of other available programs. Second,                program.40
                                                 On April 5, 2010, the Administration                  many consumers who are seeking loan                       Many consumers who have been
                                              launched the Home Affordable                             modifications or other relief are not                   unable to obtain mortgage assistance
                                              Foreclosure Alternatives (HAFA)                          eligible for the MHA program or other                   relief services through their own efforts
                                              Program, which provides servicers with                   government and private assistance                       have turned to for-profit MARS
                                              incentives to enter into short sales or                  programs. While the Treasury                            providers for help. Providers promoting
                                              deeds-in-lieu of foreclosure transactions                Department has estimated that the MHA                   their ability to negotiate with lenders
                                              with consumers who do not qualify for                    program will help 3–4 million                           and servicers to obtain loan
                                              a loan modification under the MHA                        borrowers by February 2012,36 industry                  modifications or some other type of
                                              program.33 In addition, state and local                  reports estimate that roughly twice that                mortgage relief have proliferated in the
                                              governments, nonprofit organizations,                    number of mortgage loans currently are                  past few years.41 Responding to
                                              housing counselors, and private sector                   in delinquency or foreclosure.37 Third,                 consumer demand, many providers
                                              entities34 have offered a variety of other               even among consumers who may be                         have promised to obtain loan
                                              programs and services to help                            eligible to obtain a temporary loan                     modifications,42 but others have begun
                                              homeowners in financial distress.35                      modification under the MHA program,
                                                 Despite these public and private                      many do not qualify for a permanent                        39 See, e.g., CRL at 3 (noting that MARS have

                                                                                                       loan modification.38 Fourth, even if                    flourished as ‘‘consumers’ demand for relief
                                              programs and services, consumers also                                                                            outpaces the capacity of mortgage servicers and
                                              continue to seek assistance from for-                                                                            government programs alike’’); The Recently
                                                                                                          36 See, e.g., Press Release, MHA, Making Home
                                                                                                                                                               Announced Revisions to the Home Affordable
                                                                                                       Affordable Program on Pace to Offer Help to             Modification Program (HAMP): Hearing Before the
                                               Millions of Homeowners (Aug. 4, 2009) available at
                                              guidelines_summary.pdf.                                                                                          Subcomm. on Hous. & Cmty. Opportunity of the H.
                                                                                                              Comm. on Fin. Servs., 111th Cong. 131 (2010)
                                                 31 See, e.g., Dep’t of the Treasury, Making Home
                                                                                                       08042009.html; Dep’t of the Treasury, Making            (statement of Alan White, Assistant Professor,
                                              Affordable Program: Servicer Performance Report          Home Affordable Program: Servicer Report Through        Valparaiso Univ.), available at http://financial
                                              Through September 2010 (Oct. 25, 2010), available        June 2010 at 7 n.2 (June 2010) (‘‘Selected Outreach
                                              at               Measures’’ table), available at    Printed%20Hearings/111-122.pdf. (‘‘Modification
                                              Sept%20MHA%20Public%202010.pdf. Further, if                   requests are languishing for as long as a year,
                                              trial modifications are added to permanent               Revised%20080610.pdf.                                   servicers repeatedly ask borrowers to resubmit
                                              modifications, over 1.6 million modifications have          37 See Alan Zibel, Foreclosures Down 2 Percent
                                                                                                                                                               documentation that has been lost or become
                                              been approved. Id., Testimony of Herbert M.              From Last Year, Associated Press, May 13, 2010          outdated, and housing counselors and mediators are
                                              Allison, Dep’t of the Treasury, ‘‘Foreclosure            (noting that as of March 2010, ‘‘[n]early 7.4 million   unable to get timely information and responses
                                              Prevention: Is the Home Affordable Modification          borrowers, or 12 percent of all households with a       from servicers.’’); NCLC (ANPR) at 2 (noting that
                                              Program Preserving Homeownership?,’’ before the          mortgage, had missed at least one month of              servicers have failed to meet borrower demand for
                                              H. Comm. on Oversight and Gov’t Reform, at 5             payments or were in foreclosure’’), available at        loan modifications); NAAG (ANPR) at 7 (noting that
                                              (Mar. 25, 2010), available at http://                               borrowers have had difficulty reaching servicers
                                                 Story?id=10632332; see also Press Release,              and obtaining their assistance).
                                              Committee_on_Oversight/2010/032510_HAMP/                 Mortgage Bankers Ass’n, Delinquencies, Foreclosure         40 See, e.g., Holding Banks Accountable: Are
                                              TESTIMONY-Allison.pdf.                                   Starts Fall in Latest MBA National Delinquency          Treasury and Banks Doing Enough to Help Families
                                                 32 See Press Release, Making Home Affordable          Survey (Feb. 19, 2010) (noting that roughly 15% of      Save Their Homes?: Hearing Before the S.
                                              (‘‘MHA’’) Housing Program Enhancements Offer             mortgage loans were delinquent or in foreclosure        Subcomm. on Fin. Servs. & Gen. Gov’t of the S.
                                              Additional Options for Struggling Homeowners             and that ‘‘[t]he percentages of loans 90 days or more   Comm. on Appropriations, 111th Cong. (2010)
                                              (Mar. 26, 2010), available at http://                    past due and loans in foreclosure set new record        (statement of Timothy Geithner, Sec’y, Dep’t of the
                                                   highs’’), available at
                                                                                                                                                               Treasury) (‘‘[W]e do not believe that servicers are
                                                 33 See MHA, Home Affordable Foreclosure               Media/PressCenter/71891.htm; Stephanie Armour,
                                                                                                                                                               doing enough to help homeowners.’’)
                                              Alternatives (HAFA) Program, available at http://        Home Foreclosure Rates Posts First Annual Decline          41 See MARS ANPR, 74 FR at 26134–35.
                                                                                                       in Five Years, USA Today (May 13, 2010) (noting
                                                                                                                     42 See, e.g., Safe Mortgage Licensing Act: HUD
                                                 34 Loan holders also have exhibited a growing
                                                                                                       that nearly one-fourth of borrowers owe more on
                                                                                                       their mortgages that the value of their homes).         Responsibilities Under the Safe Act, Proposed Rule,
                                              willingness to modify loan terms for borrowers who          38 See, e.g., Dep’t of the Treasury: MHA Servicer    74 FR 66548, 66554 (Dec. 15, 2009) (‘‘HUD has seen
                                              do not qualify for loan modifications under                                                                      a substantial increase in the number of third-party
                                                                                                       Report June 2010 at 1; NCRC, NCRC Home
                                              government programs such as HAMP. These are              Affordable Modification Program Survey 2010, at 2       actors (i.e., individuals other than lenders and loan
                                              known as ‘‘proprietary loan modifications.’’ See         (noting that, as of February 2010, only 12.5% of        servicers) offering their services as intermediaries
                                              Press Release, HOPE NOW, HOPE NOW Reports                trial modifications had been converted into             putatively to work on behalf of borrowers to
                                              More Than 476,000 Loan Modifications in the First        permanent modifications), available at                  negotiate modifications of existing loan terms.’’);
                                              Quarter of 2010 (May 10, 2010), available at            NAAG (ANPR) at 2 (‘‘[T]he [loan modification]
                                                  reports/hamp_report_2010.pdf; Foreclosure               consulting business model is dominating the
                                              1Q%20Data%20Release_05_10_10.pdf (reporting              Prevention: Is the Home Affordable Modification         marketplace. Consultants are by far the most
                                              that the industry completed 312,329 proprietary          Program Preserving Homeownership: Hearing               common source of consumer complaints received
                                              loan modifications in the first quarter of 2010).        Before the H. Comm. on Oversight & Gov’t Reform,        by our offices in the area of mortgage assistance
                                                 35 See, e.g., Freddie Mac, Foreclosure Prevention                                                             services.’’); OH AG (ANPR) at 2 (‘‘For those
                                                                                                       111th Cong. (2010) (statement of Gene Dodaro,
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                                              Workshops for Consumers, http://                         Acting Comptroller General, Government                  companies that actually do put some effort into
                                                         Accountability Office) (prepared statement at 7),       helping the consumer, the most common business
                                              workshops.html (describing local credit counseling       available at         model is an offer to negotiate a loan modification
                                              events by local governments and nonprofits); FTC,        stories/Hearings/Committee_on_Oversight/2010/           or repayment plan with the consumer’s servicer.’’);
                                              Mortgage Payments Sending You Reeling? Here’s            032510_HAMP/TESTIMONY–Dodaro.pdf (noting                CRC (ANPR) at 1 (‘‘In California, advertisements
                                              What to Do (2009), available at      that 32% of trial modifications lasting three months    promising loan modification success are
                                              bcp/edu/pubs/consumer/homes/rea04.pdf                    or more had been approved for conversion into           inescapable.’’); FinCEN, Loan Modification and
                                              (describing various credit counseling alternatives).     permanent modifications).                               Foreclosure Rescue Scams—Evolving Trends and

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                          75095

                                              to market short sales and other forms of                   500 such providers in the United                         their hiring of former mortgage brokers
                                              relief.43 The Commission’s law                             States.46                                                and real estate agents 52 to bolster their
                                              enforcement experience shows that                             Typically, MARS providers charge                      claims of purported expertise. In
                                              MARS providers typically are small and                     consumers hundreds or thousands of                       addition, some attorneys—including
                                              relatively new businesses,44 and thus it                   dollars 47 in advance fees, i.e., fees prior             solo practitioners and small law firms
                                              is difficult to estimate their numbers.45                  to providing their services. In its law                  that represent financially distressed
                                              Based on the law enforcement actions                       enforcement actions, the FTC has                         individuals—increasingly have been
                                              brought by the FTC and the states,                         observed that some providers collect                     offering MARS in connection with their
                                              however, it appears that there are over                    their entire fee at the beginning of the                 legal practice.53
                                                                                                         transaction,48 while others collect two                     A number of non-attorney MARS
                                                                                                         to three large installment payments from                 providers are employing or affiliating
                                              Patterns in Bank Secrecy Act Reporting 10 (May
                                              2010), available at            consumers.49 NAAG and other                              with lawyers, with the providers
                                              room/rp/files/MLFLoanMODForeclosure.pdf                    commenters also stated that many                         representing that they are offering
                                              (FinCEN Report) (‘‘Reports of foreclosure rescue           MARS providers have begun to offer                       traditional legal services.54 Although
                                              scams increased substantially in the last eight            their services piecemeal, collecting fees                these providers often tout the expertise
                                              months of calendar year 2009.’’).                                                                                   of these attorneys in negotiating with
                                                 43 Although the dominant trend among MARS
                                                                                                         upon reaching various stages in the
                                                                                                         process, such as assembling the                          lenders and servicers, in many instances
                                              providers is to offer loan modifications, over the
                                              past few years some providers also have offered            documentation required by the lender or                  the attorneys do little or no bona fide
                                              other purported types of loss mitigation and               servicer, mailing paperwork to the                       legal work.55 In some cases, MARS
                                              foreclosure avoidance. See, e.g., FTC v. Foreclosure       lender or servicer, and negotiating with
                                              Solutions, LLC, No. 1:08–cv–01075 (N.D. Ohio filed                                                                  insiders.’’); NAAG (ANPR) at 4; FTC v. Fed Housing
                                              Apr. 28, 2008) (alleging that provider offered to stop     a lender’s loss mitigation department.50
                                                                                                                                                                  Modification Dep’t, No. 09–CV–01759 (D.D.C. filed
                                              foreclosure proceedings and secure workout plans              As discussed in the ANPR and NPRM,                    Sept. 15, 2009) (alleging defendants’ Web sites state
                                              with consumers’ lenders or servicers); FTC v.              MARS providers often claim to possess                    that many of their ‘‘skilled negotiators’’ have
                                              Mortgage Foreclosure Solutions, Inc., No. 8:08-cv-         specialized knowledge of the mortgage                    ‘‘worked for the lenders they are dealing with’’); FTC
                                              388–T–23EAJ (M.D. Fla. filed Feb. 26, 2008) (same).                                                                 v. US Foreclosure Relief Corp., No. SACV09–768
                                              Providers may adjust their marketing to offer newly-
                                                                                                         lending industry,51 sometimes touting                    JVS (MGX), Mem. Supp. TRO. at 4–5 (C.D. Cal. filed
                                              minted forms of mortgage relief—for example, the                                                                    July 7, 2009) (alleging that defendants ‘‘boasted of
                                                                                                             46 See NAAG (ANPR) at 4 (noting that state
                                              possibility of entering a short sale under the HAFA                                                                 twenty years’ experience’’ and that they had
                                              program. See, e.g., Illinois v. Home Foreclosure           attorneys general have investigated more than 450        ‘‘extensive experience in the industry’’); FTC v.
                                              Solutions LLC, No. 08CH43259 (Ill. Cir. Ct. Cook           MARS providers); FTC Case List, supra note 28;           Truman Foreclosure Assistance, LLC, No. 09–
                                              County 2008) (alleging MARS provider offered to            Press Release, FTC, Federal and State Agencies           23543, Mem. Supp. P.I. at 20 (S.D. Fla. filed Nov.
                                              assist consumers to enter short sales). Another new        Crack Down on Mortgage Modification and                  23, 2009) (alleging that defendants’ Web sites
                                              variation of MARS is charging an advance fee to            Foreclosure Rescue Scams (Apr. 6, 2009), available       represented that they have ‘‘extensive loss
                                              purportedly ‘‘eliminate’’ mortgage debts by                at               mitigation experience’’ and that ‘‘they are led by a
                                              challenging the legality of the original mortgages.        (reporting that the Commission sent warning letters      seasoned and proven team of professionals’’); see
                                                                                                         to 71 companies offering MARS).                          also FTC v. LucasLawCenter ‘‘Inc.’’, No. 09–CV–770
                                              See FinCEN, Foreclosure Rescue Fraud Report May
                                                                                                             47 See, e.g., infra notes 48–49; GAO Report, supra   (C.D. Cal filed July 7, 2009).
                                              2010, supra note 42 at 9. MARS providers also have
                                              offered ‘‘sale-leaseback’’ or ‘‘title reconveyance’’       note 45, at 7 (noting that MARS typically charge a          52 See, e.g., NCLC (ANPR) at 11 (‘‘Mortgage

                                              transactions. In these transactions, MARS providers        fee of thousands of dollars); Dargon at 2 (‘‘We charge   brokers—often cited as one of the driving forces in
                                              instruct consumers to transfer title to their homes        $2,500 as a flat fee’’ in advance.); CRC (ANPR) at       the growth of bad subprime loans—are in demand
                                                                                                         2 (‘‘The average fee that we are seeing borrowers        to work for loan modification companies. One
                                              to the providers and then the consumers rent the
                                                                                                         charged is $3,000; we have seen fees as high as          MARS advertised for consultants with mortgage and
                                              homes from them. The providers promise to
                                                                                                         $9,500. In nearly every instance, these fees are         real estate experience to join its cadre of loan
                                              reconvey title at some later date, yet often do not
                                                                                                         charged up front, before any services have been          modification specialists.’’); GAO Report, supra note
                                              do so, thereby taking the equity in the homes. Sale-
                                                                                                         rendered.’’); NCRC (ANPR) at 3 (noting that              45, at 10 (‘‘Federal and state officials and
                                              leaseback and title reconveyance transactions
                                                                                                         ‘‘[t]ypically, loan modification companies request a     representatives of nonprofit organizations told us
                                              appear to have become less prevalent, in part              significant fee upfront’’ and that a study performed     that persons who have conducted foreclosure
                                              because many consumers do not have sufficient              by NCRC ‘‘documented a median fee of $2,900,’’           rescue schemes include former mortgage industry
                                              equity in their homes to make this strategy                although ‘‘[f]ees ranged as high as $5,600’’); NCLR      professionals who had been involved in the
                                              profitable. See, e.g., FinCEN, Foreclosure Rescue          (ANPR) at 1 (observing fees as high as $8,000);          subprime market. * * *’’).
                                              Fraud Report May 2010, supra note 42 at 4.                 NCLC (ANPR) at 5–6 (estimating typical advance              53 See generally Greenfield; Deal; Giles. See also
                                                 44 See FTC Case List. Some of these small and
                                                                                                         fees to be between $2,000 and $4,000).                   NCLC at 4.
                                              relatively new businesses are law firms. For                   48 See, e.g., supra note 47; FTC v. Infinity Group      54 See, e.g., NAAG at 3–4 (‘‘We have noticed that
                                              example, NCLC surveyed members of the National             Servs., No. SACV09–00977 DOC (MLGx) (C.D. Cal.           national companies are recruiting for attorney
                                              Association of Consumer Advocates (NACA) and               filed Aug. 26, 2009); FTC v. Freedom Foreclosure         ‘‘partners’’ or ‘‘local counsel’’ in all of the states they
                                              the National Association of Consumer Bankruptcy            Prevention Specialists, LLC, No. 2:09–cv–01167–          work in to evade states’ mortgage rescue fraud
                                              Attorneys (NACBA); 298 attorneys responded that            FJM (D. Ariz. June 1, 2009); FTC v. Fed. Loan            statutes.’’); IL AG at 1; FTC v. Loss Mitigation Servs.,
                                              they provided some form of MARS. NCLC at 5; see            Modification Law Ctr., LLP, No. SACV09–401 CJC           Inc., No. SACV09–800 DOC (ANX), Mem. Supp.
                                              also IRELA at 1 (stating that many of the 2,000            (MLGx) (C.D. Cal. filed Apr. 3, 2009).                   Pls. Ex Parte App. at 3 (Aug. 3, 2009) (alleging that
                                              members of the Illinois Real Estate Lawyers                    49 See, e.g., FTC v. Truman Foreclosure
                                                                                                                                                                  defendants engaged in ‘‘misrepresentations
                                              Association are ‘‘engaged in the process of trying to      Assistance, LLC, No. 09–23543 (S.D. Fla. filed Nov.      prohibited by the TRO, behind a new facade: the
                                              assist their consumer clients in dealing with              23, 2009); FTC v. Washington Data Res., Inc., No.        ‘Walker Law Group,’’’ which was ‘‘nothing more
                                              foreclosures, mortgage loan workouts, and related          8:09-cv-02309–SDM–TBM (M.D. Fla. filed Nov. 12,          than a sham legal operation designed to evade state
                                              matters’’).                                                2009); FTC v. First Universal Lending, LLC, No. 09–      law restrictions on the collection of up-front fees for
                                                 45 See, e.g., U.S. Gov’t Accountability Office,         CV–82322, Mem. Supp. TRO at 5 (S.D. Fla. filed           loan modification and foreclosure relief’’); FTC v.
                                              GAO–10–787, Federal Efforts to Combat                      Nov. 24, 2009); see also, e.g., Dargon at 2; Rogers      LucasLawCenter ‘‘Inc.’’, No. SACV–09–770 DOC
                                              Foreclosure Rescue Schemes are Under Way, but              at 13.                                                   (ANX) (C.D. Cal. filed July 7, 2009); FTC v. Data
                                              Improved Planning Elements Could Enhance                       50 See, e.g., LFSV at 2 (‘‘[W]e have seen MARS       Med. Capital Inc., No. SA–CV–99–1266 AHS (Eex)
                                              Progress 12–16 (July 2010) (‘‘GAO Report’’) (noting        providers who are effectively evading the advance        (C.D. Cal., contempt application filed May 27,
                                              that data on MARS providers is limited); NAAG              fee prohibition in California law by charging for        2009); FTC v. US Foreclosure Relief Corp., No.
                                              (ANPR) at 3 (‘‘It is difficult to gather exact empirical   their ‘services’ in ‘phases.’ ’’); NAAG at 3; LCCR at    SACV09–768 JVS (MGX) (C.D. Cal. filed July 7,
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                                              data on companies providing loan modification and          5; see also FTC v. Debt Advocacy Ctr., LLC, No.          2009); FTC v. Fed. Loan Modification Law Ctr., LLP,
                                              foreclosure rescue services due to the                     1:09CV2712 (N.D. Ohio filed Nov. 19, 2009).              No. SACV09–401 CJC (MLGx) (C.D. Cal. filed Apr.
                                              predominance of Internet-based companies and                   51 See, e.g., NCLC (ANPR) at 3 (‘‘Some               3, 2009); see also Cincinnati Bar Assoc. v. Mullaney,
                                              their ephemeral nature.’’); OH AG (ANPR) at 2              modification firms claim superior expertise even         119 Ohio St. 3d 412 (2008) (disciplining attorneys
                                              (‘‘There is little reliable data about the foreclosure     though there are no recognized qualifications other      involved in mortgage assistance relief services).
                                              rescue industry.’’); CRL at 3 (‘‘With few barriers to      than the training programs offered by HUD to                55 See supra note 54. The experiences detailed in

                                              entry and little to no oversight, scams are                certified agencies. Instead, some for-profit entities    one comment from an attorney illustrate the role
                                              flourishing in the current environment.’’).                tout their experience as mortgage industry                                                               Continued

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                                              75096            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              providers also offer ‘‘forensic audits,’’                 has since passed a new law that                           one recent survey of state and local
                                              during which attorneys purportedly                        removes this attorney exemption.60                        consumer agencies found that the fastest
                                              conduct a legal analysis of mortgage                                                                                growing category of consumer
                                                                                                        B. Unfair or Deceptive Practices in the
                                              loan documents to find law violations,                                                                              complaints concerned the failure of
                                                                                                        Marketing of MARS
                                              thereby supposedly helping consumers                                                                                MARS providers to fulfill their promises
                                              acquire leverage over their lenders or                      The FTC, state attorneys general, and                   to help save consumers’ homes from
                                              servicers to obtain a better loan                         other law enforcement agencies, have                      foreclosure.65
                                              modification.56 Providers offering                        extensive experience with MARS                               MARS providers commonly initiate
                                              forensic audits also assert that, because                 providers. In the past three years, the                   contact with prospective customers
                                              of their relationships with attorneys,                    Commission has filed 32 law                               through Internet, radio, television, or
                                              state laws that prohibit non-attorneys                    enforcement actions against providers of                  direct mail advertising.66 Although
                                              from collecting advance fees for loan                     loan modification and foreclosure                         MARS providers did not submit
                                              modification services do not apply to                     rescue services.61 State attorneys                        information for the record relating to the
                                              them.57 For example, California law                       general have investigated at least 450                    extent and cost of their marketing
                                              previously imposed a number of                            MARS providers and sued hundreds of                       efforts, they appear to use a variety of
                                              restrictions on ‘‘foreclosure consultants,’’              them for alleged state law violations.62                  media to target large numbers of
                                              but allowed ‘‘licensed attorneys * * *                    Additionally, the Department of Justice                   consumers who are struggling to pay
                                              [to] charge advance fees under certain                    and other agencies, working both                          their mortgages. For example, one
                                              limited circumstances.’’ 58 The State Bar                 individually and jointly, have pursued                    MARS provider that was the subject of
                                              of California subsequently observed that                  MARS providers for illegal conduct.63                     an FTC enforcement action spent $9
                                              ‘‘foreclosure consultants may be                          As discussed in more detail below, the                    million in one year to broadcast
                                              attempting to avoid the statutory                         evidence in the record, including                         deceptive advertisements nationwide on
                                              prohibition on collecting a fee before                    extensive law enforcement experience,                     major television and cable networks, as
                                              any services have been rendered by                        demonstrates that the unfair or                           well as on radio stations and the
                                              having a lawyer work with them in                         deceptive practices of MARS providers                     Internet.67 Typical MARS
                                              foreclosure consultations.’’ 59 California                are widespread and are causing                            advertisements instruct consumers to
                                                                                                        substantial consumer harm.64 Indeed,                      call a toll-free telephone number or to
                                              that attorneys play or have been asked to play in                                                                   e-mail the provider. One provider’s
                                              connection with MARS:                                     Consultants on Loan Modifications (‘‘Cal. State Bar       advertisements allegedly yielded 1,500
                                                 I had numerous non-attorney modification               Ethics Alert’’) 2, Ethics Hotliner (Feb. 2, 2009),        inbound calls per day.68 Another such
                                              companies ask me to serve as their lawyer and             available at
                                              accept a flat fee on each file. I would get this money    ethics/Ethics-Alert-Foreclosure.pdf ; see also            provider disseminating direct mail
                                              and do little or no work for it. In some cases I would    Florida Bar, Ethics Alert: Providing Legal Services       advertisements reported receiving
                                              take in the advance fee and then disburs[e] a share       to Distressed Homeowners 1, available at http://          approximately 500 inbound calls per
                                              to the loan officer producing the deal and a share                  day.69
                                              to the company actually doing the work. Or I would        Attachments/
                                              be collecting the advance fee and then holding all        872C2A9D7B71F05785257569005795DE/$FILE/
                                                                                                                                                                     Customary representations in the ads
                                              or part of it in my trust account until the               loanModification20092.pdf?OpenElement (‘‘The              and ensuing telemarketing and email
                                              modification was completed. I declined to get             Florida Bar’s Ethics Hotline recently has received        pitches claim that the MARS provider
                                              involved in such arrangements.                            numerous calls from lawyers who have been                 (1) will obtain for the consumer a
                                                 Deal at 6.                                             contacted by non-lawyers seeking to set up an
                                                 56 See, e.g., MN AG at 2 (‘‘Recently, so-called        arrangement in which the lawyers are involved in
                                                                                                                                                                  substantial reduction in a mortgage
                                              forensic loan auditors have emerged as a new type         loan modifications, short sales, and other                loan’s interest rate, principal amount, or
                                              of mortgage assistance relief ‘service.’’’); 1st ALC at   foreclosure-related rescue services on behalf of          monthly payments; (2) will achieve
                                              3 (MARS provider stating it engages in forensic           distressed homeowners. * * * The [Florida]                these results within a specific period of
                                              audits); Dargon at 2 (same); see also FTC v. Debt         Foreclosure Rescue Act * * * imposed restrictions
                                              Advocacy Ctr., LLC, No. 1:09CV2712 (N.D. Ohio             on non-lawyer loan modifiers to protect distressed
                                                                                                                                                                  time; 70 (3) has special relationships
                                              Am. Compl. filed May 14, 2010) (alleging                  homeowners. The new statute appears to be the
                                              defendants purporting to offer forensic audits            impetus for these inquiries.’’).                          of borrowers whose mortgages are distressed and
                                              misrepresented that ‘‘between 80–90% of all loans            60 Cal Civ. Code § 2944.7; see also Press Release,     who have been subject to abuses by companies and
                                              [they] have audited have some form of rights              Office of the Att’y Gen.l, Cal. Dep’t of Justice, Brown   individuals promising assistance with obtaining
                                              violations’’); FTC v. Data Med. Capital Inc., No. SA–     Alerts Homeowners that New Law Prohibits Up-              modification of those loans.’’)
                                              CV–99–1266 AHS (Eex), Mem. Supp. App.                     front Fees for Foreclosure Relief Services (Oct. 15,        65 See Consumer Fed’n of Am. et al., 2009
                                              Contempt at 18 (C.D. Cal. filed May 27, 2009); FTC        2009), available at          Consumer Complaint Survey Report 3 (July 27,
                                              v. Fed. Loan Modification Law Ctr., LLP, No.              release.php?id=1821.                                      2010), available at
                                              SACV09–401 CJC (MLGx) (C.D. Cal. filed Apr. 3,               61 See FTC Case List, supra note 28.                   elements/
                                              2009).                                                                                                              Consumer_Complaint_Survey_Report2009.pdf.
                                                                                                           62 NAAG (ANPR) at 4; IL AG (ANPR) at 1 (noting
                                                 Since publication of the NPRM, the Commission                                                                      66 The FTC procured information from a media
                                              has released an alert to warn consumers about             that Illinois has over 240 open investigations of
                                                                                                        MARS providers and filed 28 lawsuits against              monitoring company on the occurrence of broadcast
                                              entities purporting to provide forensic audits. FTC,                                                                advertising for MARS. The company located 68
                                              Forensic Mortgage Loan Audit Scams: A New Twist           them); Press Release, FTC, Federal and State
                                                                                                        Agencies Target Mortgage Relief Scams (Nov. 24,           radio ads and 71 television and cable ads
                                              on Foreclosure Rescue Fraud (Mar. 2010), available
                                                                                                        2009) (announcing 118 actions by 26 federal and           containing the terms ‘‘save your home,’’ ‘‘mortgage
                                                                                                        state agencies), available at     modification,’’ or ‘‘loan modification.’’ These ads
                                              alerts/alt177.shtm; see also, e.g., Cal. Dep’t of Real
                                                                                                        2009/11/stolenhope.shtm; Press Release, FTC,              aired between the dates of September 1, 2008 and
                                              Estate, Consumer Alert 6 (Mar. 2009) (warning
                                              consumers of ‘‘forensic loan reviews’’), available at     Federal and State Agencies Target Mortgage                September 1, 2010. These ads were attributable to
                                                               Foreclosure Rescue and Loan Modification Scams            139 different companies.
                                                                                                                                                                    67 See FTC v. Fed. Loan Modification Law Ctr.,
                                              FraudWarningsCaDRE03_2009.pdf.                            (July 15, 2009) (announcing operation involving 189
                                                 57 See supra notes 51–56; see also IL AG (ANPR)        actions by 25 federal and state agencies), available      LLP, No. SACV09–401 CJC (MLGx), Mem. Supp. Ex
                                              at 2 (‘‘Attorneys are using the [state] exemption to      at;          Parte TRO at 6–7 (C.D. Cal. filed Apr. 6, 2009).
                                              market and sell the same mortgage consulting              Press Release, Financial Fraud Enforcement Task             68 Id. at 6–8.
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                                              services provided by non-attorneys.’’).                   Force, Financial Fraud Enforcement Task Force               69 See FTC v. Loss Mitigation Servs., Inc., No.
                                                 58 Press Release, Office of the Att’y Gen., Cal.       Announces Results of Broadest Mortgage Fraud              SACV–09–800 DOC (ANX), Mem. Supp. TRO at 7
                                              Dep’t of Justice, Brown Alerts Homeowners that            Sweep in History (June 17, 2010), available at            (C.D. Cal filed Jul. 13, 2009).
                                              New Law Prohibits Up-front Fees for Foreclosure –                70 See, e.g., FTC v. First Universal Lending, LLC,

                                              Relief Services (Oct. 15, 2009), available at http://     02.html.                                                  No. 09–CV–82322, Mem. Supp. TRO at 4–5 (S.D.
                                                        63 See infra notes 92–96 and accompanying text.
                                                                                                                                                                  Fla. filed Nov. 24, 2009); FTC v. 1st Guar. Mortgage
                                                 59 See State Bar of Cal., Ethics Alert: Legal             64 See, e.g., LFSV at 1 (‘‘During the recent           Corp., No. 09–DV–61846 (S.D. Fla. filed Nov. 17,
                                              Services to Distressed Homeowners and Foreclosure         mortgage crisis, we have been dealing with a flood        2009); FTC v. Freedom Foreclosure Prevention

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                     75097

                                              with lenders and servicers; 71 and (4) is                providers do not disclose to consumers                     Based on the FTC’s law enforcement
                                              closely affiliated with the government,72                in their promotions the cost of their                    experience, the public comments, and
                                              nonprofit programs,73 or the consumer’s                  services.76 In some cases, MARS                          consumer complaints, it appears that
                                              lender or servicer.74 Providers also                     providers entice consumers to make                       the vast majority of consumers do not
                                              commonly represent that there is a high                  substantial up-front payments with false                 receive the results MARS providers
                                              likelihood, and in some instances a                      claims that they will be able to obtain                  promise.78 After collecting their up-
                                              ‘‘guarantee,’’ of success.75 Many MARS                   a refund if consumers do not receive an                  front fees, MARS providers often fail to
                                                                                                       acceptable result.77                                     make initial contact with the
                                              Specialists, LLC, No. 2:09–cv–01167–FJM (D. Ariz.                                                                 consumer’s lender or servicer for
                                              filed June 1, 2009); FTC v. Fed. Loan Modification       23, 2009) (alleging defendants falsely claimed           months, if at all, or to have substantive
                                              Law Ctr., LLP, No. SACV09–401 CJC (MLGx) (C.D.           success rate of 97 to 100%); FTC v. Debt Advocacy
                                              Cal. filed Apr. 3, 2009).
                                                                                                                                                                discussions or negotiations with the
                                                                                                       Ctr., LLC, No. 1:09CV2712 (N.D. Ohio filed Nov. 19,
                                                 71 See, e.g., FTC v. Debt Advocacy Ctr., LLC, No.
                                                                                                       2009) (alleging defendants falsely claimed a 90%
                                                                                                                                                                lender or servicer.79 In many cases,
                                              1:09CV2712 (N.D. Ohio filed Nov. 19, 2009); FTC          success rate); FTC v. Loss Mitigation Servs., Inc.,      MARS providers fail to perform even
                                              v. 1st Guar. Mortgage Corp., No. 09–DV–61846 (S.D.       No. SACV09–800 DOC (ANX) (C.D. Cal. filed July           the most basic promised services or
                                              Fla filed Nov. 17, 2009); FTC v. LucasLawCenter          13, 2009) (alleging ‘‘[d]efendants have told             achieve any beneficial results.
                                              ‘‘Inc.,’’ No. SACV–09–770 DOC (ANX) (C.D. Cal.           homeowners that their success rate is above ninety
                                              filed July 7, 2009); FTC v. US Foreclosure Relief        percent’’); FTC v. LucasLawCenter ‘‘Inc.,’’ No.
                                                                                                                                                                   In some cases, providers also cause
                                              Corp., No. SACVF09–768 JVS (MGX) (C.D. Cal. filed        SACV–09–770 DOC (ANX) (C.D. Cal. filed July 7,           harm to consumers by instructing them
                                              July 7, 2009).                                           2009) (alleging ‘‘[d]efendants’ representatives tell     to stop communicating with their
                                                 72 See, e.g., FTC v. Dominant Leads, LLC, No.         consumers that Defendants have a success rate in         lenders and servicers.80 Consumers who
                                              1:10–cv–00997 (D.D.C. filed June 16, 2010) (alleging     the ninetieth percentile with their lender’’); FTC v.
                                              that defendants’ Web sites featured official             Freedom Foreclosure Prevention Specialists, LLC,
                                              government seals and logos, and deceptively              No. 2:09–cv–01167–FJM (D. Ariz. filed June 1,            little or no work and had promised consumers
                                              appeared to be affiliated with the government); FTC      2009) (alleging defendants claimed to have 97%           money-back guarantees. In some cases, the
                                              v. Washington Data Res., Inc., No. 8:08–cv–02309–        success rate); FTC v. Data Med. Capital Inc., No.        companies had closed or changed locations by the
                                              SDM–TBM (M.D. Fla. filed Nov. 12, 2009) (alleging        SA–CV–99–1266 AHS (Eex), Mem. Supp. App.                 time the consumers discovered there was a
                                              that defendants falsely represented that they were       Contempt at 8 (C.D. Cal. filed May 27, 2009)             problem, thereby preventing the consumers from
                                              affiliated with the United States government); FTC       (alleging defendants represented 100% success rate       even requesting a refund.’’); see also, e.g., FTC v.
                                              v. Fed. Housing Modification Dep’t, No. 09–CV–           to consumers).                                           Home Assure, LLC, No. 8:09–CV–00547–T–23T–
                                              01753 (D.D.C. filed Sept. 15, 2009); FTC v. Sean                                                                  Sm, Mot. S.J., App.1 at 6 (M.D. Fla. filed Jan. 25,
                                                                                                           The Loan Modification Scam Prevention Network
                                              Cantkier, No. 1:09–cv–00894 (D.D.C. filed July 10,                                                                2010) (Expert Report of Dr. Kivetz survey reporting
                                                                                                       (LMSPN)—a coalition of Federal and state
                                              2009) (alleging defendants placed advertisements                                                                  that 56% of consumers requested that defendant
                                                                                                       organizations led by the Lawyers’ Committee for          provide a refund; 65% of those who requested a
                                              on Internet search engines that refer consumers to       Civil Rights—has created a nationwide complaint          refund did so because defendant failed to perform
                                              Web sites that deceptively appear to be affiliated       reporting system for loan modification fraud. The        its services; but only 12% of consumers who
                                              with government loan modification programs); FTC         Network, formed in February 2010, has received           requested refunds received them).
                                              v. Thomas Ryan, No. 1:09–00535 (HHK) (D.D.C.             complaints through a variety of channels, including          78 See, e.g., infra Section III.E.2.a.; LOLLAF at 1
                                              filed Mar. 25, 2009); FTC v. Fed. Loan Modification      a form posted on its Web site, the Homeowners’
                                              Law Ctr., LLP, No. SACV09–401 CJC (MLGx) (C.D.                                                                    (‘‘We have worked with many homeowners who
                                                                                                       Hope Hotline, and referrals from non-profit housing
                                              Cal. filed Apr. 3, 2009) (charging defendant with                                                                 have paid money to a Mortgage Assistant Relief
                                                                                                       counselors. As of August 25, 2010, the LMSPN
                                              misrepresenting that it is part of or affiliated with                                                             Services (MARS) provider, only to discover that
                                                                                                       database contained a total of 6,473 complaints of
                                              the federal government); see also LOLLAF at 2                                                                     they received absolutely no service in exchange for
                                                                                                       loan modification fraud, dating as far back as April
                                              (‘‘Other clients have been deceived into believing                                                                the fee.’’); CMC (ANPR) at 1 (‘‘CMC members and
                                                                                                       8, 2008. FTC staff reviewed a random sample of 100       other mortgage servicers found that MARS
                                              the MARS provider will assist them because it            of these complaints and found that 63 reported that      providers consistently misrepresent their ability to
                                              claimed to be a ‘non-profit,’ used a government          MARS providers had guaranteed consumers loan             obtain concessions from servicers * * *.’’); Chase
                                              symbol or claimed to be affiliated with the HOPE         modifications. In projecting this finding to the         (ANPR) at 3 (‘‘They collect their fees up-front and
                                              hotline.’’); OH AG (ANPR) at 4 (‘‘Our office has seen    entire LMSPN database, the FTC estimates that            promise the borrower they can get a loan
                                              many companies that have names or advertisements         between 52% and 72% of the complaints report the         modification or other foreclosure relief, when, in
                                              that make it sound like they are government              same information.                                        fact, this is only a determination that the servicer
                                              sponsored.’’); NCLC (ANPR) at 3 (‘‘One website,              76 In a recent report summarizing the results of
                                                                                                                                                                can make after reviewing the borrower’s financial
                                    , even claims to be ‘America’s Only             undercover calls made to MARS providers, the             information and investor agreements.’’).
                                              Free Foreclosure Resource’ even though HUD-              National Community Reinvestment Coalition                    79 See, e.g., FTC v. Truman Foreclosure
                                              certified agencies also offer free assistance            (NCRC) found that in 54% of the calls the providers
                                              regardless of income.’’).                                                                                         Assistance, LLC, No. 09–23543 (S.D. Fla. filed Nov.
                                                                                                       did not inform consumers about their fees. See           23, 2009) (alleging that defendant often failed to
                                                 73 See FTC v. New Hope Prop. LLC, No. 1:90–cv–
                                                                                                       NCRC, Foreclosure Rescue Scams: A Nightmare              return borrowers’ phone calls and failed to contact
                                              01203–JBS–JS (D.N.J. filed Mar. 17, 2009); FTC v.        Complicating the American Dream, at 21 (Mar.             and negotiate with lenders); FTC v. Apply2Save,
                                              New Hope Modifications, LLC, No.1:09–cv–01204–           2010) (‘‘NCRC Report’’), available at http://            Inc., No. 2:09–cv–00345–EJL–CWD (D. Idaho filed
                                              JBS–JS (D.N.J. filed Mar. 17, 2009).                           July 14, 2009) (complaint alleging that ‘‘[m]any
                                                 74 See, e.g., FTC v. Kirkland Young, LLC, No. 09–     foreclosure%20rescue%20scams%20-                         consumers learned from their lenders that
                                              23507 (S.D. Fla. filed Nov. 18, 2009) (alleging that     %20%20nightmare%20complicating%20the                     Defendants had not even contacted the lender or
                                              defendants falsely represented an affiliation with       %20american%20dream.pdf.                                 that Defendants had only minimal, non-substantive
                                              borrowers’ lenders); FTC v. Loss Mitigation Servs.,          77 See, e.g., FTC v. Truman Foreclosure
                                                                                                                                                                contact with the lender’’); FTC v. Loss Mitigation
                                              Inc., No. SACV–09–800 DOC (ANX) (C.D. Cal. filed         Assistance, LLC, No. 09–23543 (S.D. Fla. filed Nov.      Servs., Inc., No. SACV09–800 DOC (ANX) (C.D. Cal.
                                              July 13, 2009) (alleging that defendants deceptively     23, 2009) (alleging that defendant falsely claimed to    filed July 13, 2009) (alleging that ‘‘[d]efendants have
                                              claimed affiliation with consumers’ lenders); see        provide ‘‘100% money back guarantee’’); Debt             misrepresented that negotiations were underway,
                                              also Am. Bankers Ass’n (ANPR) at 7 (‘‘They often         Advocacy Ctr., LLC, No. 1:09CV2712 (N.D. Ohio            although Defendants had not yet contacted the
                                              misuse the intellectual property of lenders and          filed Nov. 19, 2009) (alleging that defendants falsely   lender’’); FTC v. LucasLawCenter ‘‘Inc.’’, No. SACV–
                                              servicers by claiming in mailings, on Web sites, and     represented they will refund borrower fee if             09–770 DOC (ANX), Mem. Supp. TRO at 19 (C.D.
                                              in other communications that they either are             unsuccessful); FTC v. Infinity Group Servs., No.         Cal. filed July 7, 2009) (alleging that consumers who
                                              affiliated with the lenders and servicers or have        SACV09–00977 DOC (MLGx) (C.D. Cal. filed Aug.            contact their lenders ‘‘learn that [Defendant] never
                                              special relationships with them that do not exist.       26, 2009); FTC v. Loan Modification Shop, Inc., No.      even contacted the lender, or merely verified the
                                              They use the names, trademarks and logos of these        3:09–cv–00798 (JAP), Mem. Supp. TRO at 1 (D.N.J.         consumer’s loan information’’); FTC v. Freedom
                                              lenders and servicers in their advertising to deceive    amended complaint filed Aug. 4, 2009) (alleging          Foreclosure Prevention Specialists, LLC, No. 2:09–
                                              consumers into believing they can obtain                 defendants represented that advance fees were fully      cv–01167–FJM (D. Ariz. June 1, 2009) (alleging that
                                              modification relief for them that these consumers        refundable); FTC v. Freedom Foreclosure                  defendants failed to act on homeowners’ cases for
jlentini on DSKJ8SOYB1PROD with RULES6

                                              could not otherwise obtain for themselves at no          Prevention Specialists, LLC, No. 2:09–cv–01167–          more than four to six weeks without completing—
                                              cost.’’); Chase (ANPR) at 3 (‘‘These MARS entities       FJM (D. Ariz. June 1, 2009) (alleging defendants         or in some cases, even starting—negotiations and
                                              also may lead the borrower to believe that they are      promised ‘‘100% money-back guarantee’’ but then          ‘‘failed to return consumers’ repeated telephone
                                              associated with the servicer or that they have           failed to provide refunds); see also NAAG at 2           calls, even when homeowners were on the brink of
                                              special agreements with the servicer for processing      (‘‘[MARS providers] generally ignore their own           foreclosure’’).
                                              loan modifications, when, in fact, they do not.’’).      refund policies. In the vast majority of complaints          80 See, e.g., FTC v. Truman Foreclosure
                                                 75 See, e.g., FTC v. Truman Foreclosure               received by our offices, consumers were unable to        Assistance, LLC, No. 09–23543 (S.D. Fla. filed Nov.
                                              Assistance, LLC, No. 09–23543 (S.D. Fla. filed Nov.      get refunds even though the consultants performed                                                     Continued

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                                              75098            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              sever contact with lenders and servicers                     The Commission’s law enforcement                        number of attorneys themselves market
                                              unwittingly diminish their ability to                      experience,83 state law enforcement,84                    and sell MARS. Many of them engage in
                                              learn that their MARS provider is doing                    the comments received,85 and state bar                    unfair and deceptive acts and practices,
                                              little or nothing on their behalf. These                   actions 86 indicate that a growing                        such as making the specific claim that
                                              consumers may never learn of                                                                                         they offer legal services,87 when in fact,
                                              concessions their lenders or servicers                     CV–82322 (S.D. Fla. filed Nov. 24, 2009); FTC v.          no attorneys are employed by the
                                              would be willing to make—or, worst of                      Fed. Housing Modification Dep’t, No. 09–CV–01753          company, or if they are, they do little or
                                                                                                         (D.D.C. filed Sept. 15, 2009); FTC v. Loss Mitigation
                                              all, may never discover that foreclosure                   Servs., Inc., No. SACV09–800 DOC(ANx) (C.D. Cal.
                                                                                                                                                                   no legal work for customers.88
                                              is imminent.81 In some cases, MARS                         filed July 13, 2009); FTC v. US Foreclosure Relief        C. Continued Law Enforcement and
                                              providers also advise consumers to                         Corp., No. SACV09–768 JVS (MLGx) (C.D. Cal.,
                                                                                                         Amd. Compl. filed Mar. 8, 2009); FTC v. New Hope          Other Responses
                                              discontinue making their mortgage
                                                                                                         Property LLC, No. 1:09–cv–01203–JBS–JS (D.N.J.               The Commission has taken aggressive
                                              payments even though doing so could                        filed Mar. 17, 2009); NCRC Report, supra note 76,
                                              result in the loss of their homes and                      at 24 (‘‘[I]n over 50% of the tests service providers     action to protect consumers from
                                              damage to their credit ratings.82                          advised testers that they should not pay their            deceptive MARS providers. As noted
                                                                                                         mortgage.’’); NAAG (ANPR) at 10 (‘‘In some cases,         above, the FTC has filed 32 lawsuits 89
                                                                                                         the mortgage consultants will actually counsel the        in the last three years against MARS
                                              23, 2009); FTC v. Kirkland Young, LLC, No. 09–
                                                                                                         consumer not to make a mortgage payment, which
                                              23507 (S.D. Fla filed Nov. 18, 2009); FTC v.
                                                                                                         of course frees up funds for the consultants’ fee.’’).    providers for engaging in deceptive
                                              Washington Data Res., Inc., No. 8:09–cv–02309–                 83 See infra notes 89–90.                             practices in violation of the FTC Act
                                              SDM–TBM (M.D. Fla. filed Nov. 12, 2009); FTC v.
                                              Loss Mitigation Servs., Inc., No. SACV09–800 DOC
                                                                                                             84 See, e.g., Florida v. Kirkland Young, No. 09–      and, in several instances, the
                                              (ANX) (C.D. Cal. filed July 13, 2009); FTC v. US           90945 (Fla. Cir. Ct. Miami-Dade Cty., filed Dec. 17,      Telemarketing Sales Rule (TSR).90 In
                                              Foreclosure Relief Corp., No. SACV09–768 JVS               2009), available at            addition, the FTC has coordinated its
                                              (MGX) (C.D. Cal. filed July 7, 2009); see also NCRC        webfiles.nsf/WF/MRAY-7YXQF7/$file/
                                                                                                         Complaint.121709.pdf. Press Release, N.C. Dep’t of        efforts with state law enforcement and
                                              Report, supra note 76, at 4 (noting that, on 25% of
                                              its undercover calls, MARS providers instructed the        Justice, AG Cooper Targets California Schemes that        other federal agencies, including the
                                              caller to cease communicating with his or her              Prey on NC Homeowners (July 15, 2009), available          Department of Justice (DOJ), the
                                              lender).                                                   at             Department of Housing and Urban
                                                 81 See, e.g., FTC v. Truman Foreclosure                 Releases-and-Advisories/Press-Releases/AG-
                                                                                                         Cooper-targets-California-schemes-that-prey-on-           Development (HUD), the Treasury
                                              Assistance, LLC, No. 09–23543 (S.D. Fla. filed Nov.
                                              23, 2009) (alleging that ‘‘[w]hen consumers speak          .aspx; Press Release, Colo. Att’y Gen. Office,            Department, and the Office of the
                                              with their lenders directly, they often discover that      Attorney General Announces Actions Against Seven          Special Inspector General for the
                                              Defendants had not yet contacted the lender or only        Loan-Modification Companies As Part of Multistate         Troubled Asset Relief Program (SIG–
                                              had left messages or had non-substantive contacts          Sweep (July 15, 2009), available at http://
                                                                                                              TARP).91 The Commission also is a
                                              with the lender’’); FTC v. Loss Mitigation Servs.,
                                              Inc., No. SACV09–800 DOC (ANX), Mem. Supp.                 2009/07/15/attorney_general_announces_                    member of the Financial Fraud
                                              TRO at 18–19 (C.D. Cal. filed July 13, 2009)               actions_against_seven_loan_modification_
                                              (detailing ‘‘devastating effects’’ of consumers            companies_p; Press Release, Ill. Att’y Gen., Illinois        87 See, e.g., FTC v. Fed. Housing Modification

                                              learning too late of lack of effort by loan                Attorney General Sues 14th Company for Mortgage           Dep’t, No. 09–CV–01753 (D.D.C. filed Sept. 16,
                                              modification company); CRC (ANPR) at 7 (‘‘People           Rescue Fraud (Aug. 28, 2009), available at http://        2009) (alleging that defendants falsely claim to have
                                              who do have a chance of keeping the home are                     attorneys or forensic accountants on staff); FTC v.
                                              being steered away from legitimate, free homeowner         2008_08/20080828.html.                                    Loan Modification Shop, Inc., No. 3:09–cv–00798
                                                                                                             85 See, e.g., Deal at 5–6 (‘‘Some non-attorney
                                              counseling services or are failing to take any action                                                                (JAP), Mem. Supp. TRO at 14 (D.N.J. filed Aug. 4,
                                              before it is too late because they have been assured       modification companies claimed to have attorneys          2009) (alleging that defendants misrepresent ‘‘that it
                                              everything is being taken care of for them already.’’).    on staff or available to review the work or to            is an attorney-based company’’); see also FTC v.
                                                 82 See NAAG at 4 (‘‘We are aware of a number of         negotiate with lenders. A few lawyers ‘rented’ their      LucasLawCenter ‘‘Inc.’’, No. SACV–09–770 DOC
                                              rescue consultants who incorrectly claim that              names to non-attorney MARS providers while                (ANX), Mem. Supp. TRO at 19 (C.D. Cal. filed July
                                              consumers’ lenders will not work with them until           providing little service.’’); IL AG (ANPR) at 1 (noting   7, 2009) (alleging that ‘‘[d]espite promises to the
                                              they are behind on their mortgage payments. We are         that ‘‘33 percent of the [MARS] companies we have         contrary, consumers have no contact with the
                                              also aware of consultants who advise consumers             dealt with are owned by attorneys, while 38 percent       purported attorneys who are supposed to be
                                              not to make mortgage payments so that they will            have some link to the legal profession’’); CRC            negotiating with their lenders’’).
                                              be able to afford mortgage loan modification fees.’’);     (ANPR) at 2 (‘‘An increasing number of attorneys are         88 See, e.g., FTC v. Truman Foreclosure

                                              CUNA at 2 (consumers ‘‘are often instructed to stop        involving themselves in these unethical practices         Assistance, LLC, No. 09–23543 (S.D. Fla. filed Nov.
                                              making mortgage payments’’); NCLC at 7 (family             without providing any legal (or other) services. . .      23, 2009); FTC v. Washington Data Res., Inc., No.
                                              told ‘‘to stop paying their mortgage payments and          .’’); MN AG (ANPR) at 5 (‘‘This Office is aware of        8:09–cv–02309–SDM–TBM (M.D. Fla. filed Nov. 12,
                                              promised a loan modification with lower                    several loan modification and foreclosure rescue          2009); see also FTC v. US Foreclosure Relief Corp.,
                                              payments.’’); Rodriguez at 1 (‘‘I have had clients face    companies that have affiliated with licensed              No. SACV09–768 JVS (MGX), Prelim. Rep. Temp.
                                              foreclosure because of these companies telling them        attorneys in other states in an effort to circumvent      Receiver at 2–3 (C.D. Cal. filed July 7, 2009) (stating
                                              to stop paying their mortgage and pay them!’’); FTC        state law.’’); NAAG (ANPR) at 4 (‘‘Attorneys * * *        that defendants’ ‘‘relationship with two different
                                              v. Fed. Loan Modification Law Ctr., LLP, No.               have an increasing presence in this industry and          lawyers was nominal at best and served primarily
                                              SACV09–401 CJC (MLGx) (C.D. Cal., Am. Compl.               have been found working in conjunction with or            as a cover to dignify the business and invoke the
                                              filed June 24, 2009) (‘‘In numerous instances,             serving as referral sources for mortgage                  attorney exception to advance fee prohibitions’’).
                                              Defendants have [allegedly] encouraged consumers           consultants.’’).                                             89 See FTC Case List, supra note 28.
                                                                                                             86 See, e.g., Legislative Solutions for Preventing       90 16 CFR 310.1, et seq. (2003); see, e.g., FTC v.
                                              to stop paying their mortgages, telling consumers
                                              that delinquency will demonstrate the consumer’s           Loan Modification and Foreclosure Rescue Fraud:           Kirkland Young, LLC, No. 09–23507 (S.D. Fla. filed
                                              hardship to the lender and make it easier to obtain        Hearing Before the Subcomm. on Hous. & Cmty.              Nov. 18, 2009); FTC v. Washington Data Res., Inc.,
                                              a loan modification.’’); FTC v. LucasLawCenter             Opportunity of the H. Comm. on Fin. Servs., 111th         No. 8:09–cv–02309–SDM–TBM (M.D. Fla. filed
                                              ‘‘Inc.’’, No. SACV–09–770 DOC (ANX) (C.D. Cal.             Cong. 58 (2009) (statement of Scott J. Drexel, Chief      Nov. 12, 2009); FTC v. First Universal Lending, LLC,
                                              filed July 9, 2009) (alleging that ‘‘[i]n numerous         Trial Counsel, State Bar of California), available at     No. 09–CV–82322 (S.D. Fla. filed Nov. 24, 2009);
                                              instances, Defendants’ representative encourages             FTC v. Fed. Housing Modification Dep’t, No. 09–
                                              consumers to stop paying their mortgages, telling          hearings/111/111-28.pdf at 2, 4 (Drexel Testimony)        CV–01753 (D.D.C. filed Sept. 15, 2009); FTC v.
                                              consumers that delinquency will demonstrate the            (noting that attorney misconduct in connection            Hope Now Modifications, LLC, No. 1:09–cv–01204–
                                              consumers’ hardship to the lender and make it              with MARS ‘‘is a problem of extremely significant—        JBX–JS (D.N.J. filed Sept. 14, 2009); FTC v. US
                                              easier to obtain a loan modification.’’); FTC v.           if not crisis—proportions in California,’’ and that       Foreclosure Relief Corp., No. SACV09–768 JVS
                                              Foreclosure Solutions, LLC, No. 1:08–cv–01075              the state bar has initiated over 175 associated           (MGX) (C.D. Cal. filed July 7, 2009).
jlentini on DSKJ8SOYB1PROD with RULES6

                                              (N.D. Ohio filed Apr. 28, 2008) (‘‘Defendants              investigations of attorneys); Polyana Da Costa,              91 See Press Release, FTC, Federal and State

                                              [allegedly] instruct the consumer to open a savings        Record Number of Complaints Target Florida Loan           Agencies Target Mortgage Foreclosure Rescue and
                                              account and deposit, every month until further             Modification Lawyers, (Oct. 1, 2009) (‘‘The       Loan Modification Scams (July 15, 2009), available
                                              notice from Defendants, the consumer’s monthly             [Florida] state attorney general has received a           at;
                                              mortgage payment plus an additional [25%].                 record 756 complaints through August of this year         Press Release, FTC, Federal and State Agencies
                                              Defendants claim this money will be used to                about loan modifications involving attorneys.’’),         Crack Down on Mortgage Modification and
                                              negotiate with the lender to reinstate the loan.’’); see   available at                  Foreclosure Rescue Scams (Apr. 6, 2009), available
                                              also FTC v. First Universal Lending, LLC, No. 09–          LawArticleFriendly.jsp?id=1202434223147.                  at

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                     75099

                                              Enforcement Task Force (FFETF), a                        hundreds of them for alleged state law                     licensed in each state, containing such
                                              coalition of federal and state law                       violations.97 Individual states also have                  information as their employment
                                              enforcement agencies that has worked to                  continued to enact statutes and                            history, consumer complaints, and any
                                              combat illegal activity by MARS                          regulations to address practices related                   enforcement and disciplinary actions
                                              providers.92 In the past 15 months, the                  to MARS.98                                                 brought against them. State regulators
                                              FTC has participated in three                              In addition to federal and state law                     and the public will be able to access this
                                              interagency nationwide sweeps:                           enforcement, on December 15, 2009,                         database, thus allowing them to find
                                              ‘‘Operation Stolen Dreams’’ (June 17,                    HUD published a proposed rule in the                       and track mortgage loan originators
                                              2010), in which the Commission                           Federal Register that would require                        throughout the country.102 The goal of
                                              secured consent orders against 16                        states to adopt uniform licensing                          the proposed HUD Rule is to reduce the
                                              marketers of MARS;93 ‘‘Operation Stolen                  requirements for MARS providers.99                         incidence of fraud by encouraging states
                                              Hope’’ (November 24, 2009), in which                     The proposed HUD Rule targets the                          to establish minimum licensing and
                                              the Commission joined with 20 states                     practices of ‘‘loan originators,’’ a term                  registration standards, thereby making
                                              collectively to file over one hundred                    that encompasses third-party loan                          originators, including MARS providers,
                                              lawsuits against MARS providers;94 and                   modification services.100 Under the                        more accountable.103
                                              ‘‘Operation Loan Lies’’ (July 15, 2009), in              proposed HUD Rule, loan originators
                                                                                                       must undergo a background check,                           III. Discussion of the Rule
                                              which the FTC coordinated with 25
                                              federal and state agencies to bring 189                  complete 20 hours of pre-licensing                            As detailed in this SBP, the Final Rule
                                              actions against MARS defendants.95                       education, and pass a written test to                      prohibits and seeks to prevent unfair
                                              Prior to these nationwide sweeps, the                    obtain a license.101 The proposed HUD                      and deceptive acts and practices in
                                              Commission, jointly with the DOJ, the                    Rule also requires the creation of a                       connection with mortgage assistance
                                              Treasury Department, HUD, and the                        centralized database of loan originators                   relief services. It includes provisions
                                              Illinois Attorney General, had                                                                                      that:
                                              announced several law enforcement                          97 See  supra note 62.                                      1. Define several key terms, including
                                              actions targeting MARS.96                                  98 At  least 30 states and the District of Columbia      ‘‘mortgage assistance relief service’’ and
                                                 In addition to their coordination with                have enacted such statutes or regulations. See, e.g.,      ‘‘mortgage assistance relief service
                                                                                                       Ariz. Rev. Stat. § 44–1378 (2010 Ariz. ALS 143);
                                              the Commission, the states have                          Cal. Civ. Code § 2944.7; id. § 2945, et seq.; Colo.
                                              continued to engage in their own                         Rev. Stat. § 6–1–1101, et seq.; 2009 Conn. Gen. Stat.         2. Prohibit providers from instructing
                                              aggressive law enforcement.                              § 36a–489; 6 Del. Code Ann. § 2400B, et seq.; D.C.         consumers to cease communication
                                              Collectively, the states have investigated               Code § 42–2431, et seq.; Fla. Stat. § 501.1377; Haw.       with their lenders or servicers;
                                                                                                       Rev. Stat. § 480E–1, et seq.; Idaho Code Ann. § 45–           3. Bar providers from misrepresenting
                                              at least 450 MARS providers and sued                     1601, et seq.; 765 Ill. Comp. Stat. Ann. 940/1, et seq.;
                                                                                                       24 Ind. Admin. Code § 5.5–1–1, et seq.; Iowa Code
                                                                                                                                                                  any material aspect of their services,
                                                92 See Press Release, Financial Fraud                  § 741E.1, et seq.; Me. Rev. Stat. Ann. tit. 32, § 6171,    including but not limited to several
                                              Enforcement Task Force (FFETF), President Obama          et seq. & 6191, et seq.; Md. Code Ann., Real Property      specific misrepresentations;
                                              Establishes Interagency Financial Fraud                  § 7–301, et seq.; 940 Mass. Code Regs. § 25.01,               4. Mandate that providers disclose:
                                              Enforcement Task Force (Nov. 17, 2009), available        et seq.; Mich. Comp. Law § 445.1822, et seq.; Minn.        (a) That they are for-profit businesses
                                              at          Stat. § 325N.01, et seq.; Mo. Rev. Stat. § 407.935,
                                              01.html. The FFETF was established by President          et seq.; Neb. Rev. Stat. § 76–2701, et seq.; Nev. Rev.     not affiliated with the consumers’
                                              Obama in late 2009 and is chaired by the Attorney        Stat. § 645F.300, et seq.; N.H. Rev. Stat. Ann. § 479–     lenders or the government, (b) that
                                              General. The Commission has played an active role        B:1, et seq.; 2010 N.M. ALS 58; N.Y. Real Prop. Law        consumers’ lenders or servicers may not
                                              on the Task Force through, among other things, its       § 265–B; N.C. Gen. Stat. § 14–423, et seq.; 2008 Or.       agree to change their loans, (c) that
                                              membership on the Task Force’s Mortgage Fraud            Laws Ch. 19; R.I. Gen. Laws § 5–79–1, et seq.; Tenn.
                                              Working Group.                                           Code Ann. § 47–18–5501, et seq.; Utah Admin. Code          consumers could lose their homes and
                                                93 See Press Release, FTC, FTC Settlement Orders       § 61.2; Va. Code Ann. § 59.1–200.1; Wash. Rev.             damage their credit ratings if they stop
                                              Ban More Than A Dozen Marketers from Selling             Code § 19.134.010, et seq.; Wis. Stat. § 846.45.           making their mortgage payments (a
                                              Mortgage Relief Services; Repeat Offender Ordered           These laws generally include a number of                disclosure triggered if providers instruct
                                              to Pay $11.4 Million for Contempt (June 17, 2010),       requirements and restrictions, including:                  consumers to stop making payments),
                                              available at             (1) Banning covered entities from requiring or
                                              loanmods.shtm. This sweep was organized by the           collecting advance fees before fully performing            and (d) that consumers are not required
                                              FFETF, and member agencies filed hundreds of             contracted or promised services to the consumer;           to stay in the service or accept the
                                              civil and criminal mortgage fraud cases, including       (2) requiring written contracts containing certain         results delivered, and the total cost of
                                              numerous cases against MARS providers.                   provisions and disclosures; and (3) providing              the service if they do accept the results.
                                                94 Press Release, FTC, Federal and State Agencies      consumers with the right to cancel the contract in
                                              Target Mortgage Relief Scams (Nov. 24, 2009),            certain circumstances.
                                                                                                                                                                    102 74 FR at 66548–49.
                                              available at                Where, as here, Congress has not foreclosed state
                                                                                                                                                                    103 74 FR at 66548. The proposed rule also would
                                              stolenhope.shtm.                                         regulation, a state statute is preempted only if it
                                                95 Press Release, FTC, Federal and State Agencies      conflicts with a federal statute. Ray v. Atl. Richfield    authorize HUD to examine loan originators’ records,
                                              Target Mortgage Foreclosure Rescue and Loan              Co., 435 U.S. 151, 158 (1978). State laws are              conduct enforcement proceedings, and collect civil
                                                                                                       preempted only to the extent there is a conflict—          penalties for violations of HUD and state licensing
                                              Modification Scams (July 15, 2009), available at
                                                                                                       compliance with both federal and state regulations         requirements. See 74 FR at 66550, 66555.
                                                96 Press Release, FTC, Federal and State Agencies      is impossible or the state law is an obstacle to              A coalition of state bank regulators argued in its
                                                                                                       effectuating the purposes and objectives of                comment that the FTC’s proposed rule would
                                              Crack Down on Mortgage Modification and
                                                                                                       Congress. Id. Thus, state laws can impose                  provide important additional protections not
                                              Foreclosure Rescue Scams (Apr. 6, 2009), available                                                                  included in the HUD proposal. See CSBS at 1
                                              at In           additional requirements as long as they do not
                                                                                                       directly conflict with the Final Rule. See, e.g., TSR      (‘‘SAFE Act-compliant state licensing laws are
                                              connection with these joint efforts, the Commission                                                                 primarily focused toward the origination of new
                                              also sent warning letters to 71 companies marketing      Final Rule, 75 FR at 48481.
                                                                                                          99 See Safe Mortgage Licensing Act: HUD
                                                                                                                                                                  mortgage loans and may not directly address the
                                              potentially deceptive mortgage loan modification                                                                    particular dangers associated with mortgage
                                              and foreclosure assistance programs on the Internet.     Responsibilities under the Safe Act; Proposed rule,        assistance relief services. The proposed FTC rule
                                              Id.                                                      74 FR 66548 (Dec. 15, 2009) (proposed HUD Rule).           will establish a floor to protect consumers from
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                                                Moreover, the Justice Department and other             Pursuant to the Dodd-Frank Act, responsibility for         abusive MARS practices nationwide. By banning
                                              members of the FFETF have pursued many MARS              HUD’s proposed rule will transfer to the BCFP as           up-front fees, implementing disclosure
                                              providers for illegal conduct, including criminal        of the transfer date selected by the Treasury              requirements, prohibiting certain
                                              activity. See Press Release, FFETF, Financial Fraud      Department. Dodd-Frank Act § 1061; which has               misrepresentations, and instituting various record-
                                              Enforcement Task Force Announces Results of              been designated as July 21, 2011. BCFP; Designated         keeping requirements for MARS providers, the
                                              Broadest Mortgage Fraud Sweep in History (June 17,       Transfer Date, 75 FR 57252.                                FTC’s proposal, if adopted, will go a long way in
                                                                                                          100 74 FR at 66554.
                                              2010), available at                                                                  rooting out fraudulent practices among these
                                              news-06172010-02.html.                                      101 74 FR at 66552.                                     individuals wherever they operate.’’).

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                                              75100            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                                 5. Prohibit the collection of fees until              As discussed above, the Commission’s                       acceleration clause or balloon payment;
                                              providers have: (a) Secured a written                    rulemaking authority is limited by the                     and (4) a short sale, deed-in-lieu of
                                              and executed agreement between the                       Credit CARD Act to persons over whom                       foreclosure, or any other disposition of
                                              consumer and the lender or servicer                      the FTC has jurisdiction under the FTC                     the property except a sale to a third-
                                              and, (b) before that agreement has been                  Act.                                                       party that is not the loan holder.107 The
                                              executed, (i) disclosed that the                                                                                    Rule covers instances in which a third
                                                                                                       B. Section 322.2: Definitions
                                              consumer can accept or reject the                                                                                   party itself works with lenders or
                                              lender’s or servicer’s offer for mortgage                1. Section 322.2(i): Mortgage Assistance                   servicers to obtain mortgage relief as
                                              relief and (ii) provided a separate                      Relief Service                                             well as instances in which a third party
                                              written notice from the consumer’s                         As discussed above, the Rule is                          markets services to aid consumers who
                                              lender or servicer summarizing the                       intended to regulate for-profit providers                  themselves work with lenders or
                                              material differences between the                         of mortgage assistance relief services.                    servicers to obtain relief.108
                                              consumer’s current mortgage loan and                     Section 322.2(i) of the Rule adopts,                       Accordingly, § 322.2(i) is intended to
                                              the relief offered;                                      without substantive modification, the                      apply to every service MARS providers
                                                 6. Enjoin persons from providing                      proposed rule’s definition of ‘‘mortgage                   offer,109 expressly or by implication, for
                                              substantial assistance or support to                     assistance relief service’’ (MARS) as                      the purpose of obtaining loan
                                              another whom they know or                                including ‘‘any service, plan, or                          concessions, avoiding foreclosure, or
                                              consciously avoid knowing is engaged                     program, offered or provided to the                        saving their homes.110
                                              in a violation of the Rule;                              consumer in exchange for consideration,                      Mortgage assistance relief services
                                                 7. Require that providers maintain                    that is represented, expressly or by                       under the Rule are limited to services
                                              records and monitor Rule compliance;                     implication, to assist or attempt to assist
                                              and                                                      the consumer’’ in negotiating a                            year), available at
                                                 8. Exempt attorneys providing MARS                    modification of a dwelling loan that                       foreclosure-laws/foreclosure-laws-comparison.asp.
                                              as part of the practice of law from most                 reduces the amount of interest,
                                                                                                                                                                     107 Several commenters supported the adoption of

                                              provisions of the Rule if they: (a) Are                                                                             this definition. See, e.g., NCLC at 3 (‘‘[T]he broad
                                                                                                       principal balance, monthly payments, or                    definition of MARS and MARS provider are also
                                              licensed in the state where the                          fees; stopping, preventing, or                             important aspects of the rule that will help ensure
                                              consumer or the dwelling is located,                     postponing a foreclosure or                                its effectiveness. By including all possible forms of
                                              and (b) comply with relevant state                       repossession; or obtaining one of several
                                                                                                                                                                  mortgage relief assistance, including those
                                              licensing and bar requirements. Such                                                                                represented by implication to assist or attempt to
                                                                                                       other types of relief to avoid                             assist consumers, the FTC has reduced the
                                              attorneys are exempt from the Rule’s                     delinquency or foreclosure. Sections                       possibility of scammers evading the rule with tricks
                                              advance fee ban if they set aside MARS                   322.2(i)(3)–(6) define these additional                    or loopholes.’’); CUUS at 2 (‘‘[T]he definition of
                                              fees in a client trust account and                       types of relief to include obtaining: (1)
                                                                                                                                                                  ‘mortgage assistance relief services’ in [the
                                              withdraw funds only as the fees are                                                                                 proposed rule] is sufficiently broad to include the
                                                                                                       A forbearance or repayment plan; (2) an                    types of companies offering the services which are
                                              earned.                                                  extension of time to cure default,                         the subject of abuses.’’); CSBS at 2 (‘‘The state
                                                                                                       reinstate a loan, or redeem a                              regulators believe that the proposed definition of
                                              A. Section 322.1: Scope                                                                                             ‘mortgage assistance relief service’ is generally
                                                                                                       property; 106 (3) a waiver of an                           adequate in covering the scope of the NPR[M].’’).
                                                Section 322.1 states that the Final
                                                                                                                                                                     108 The Rule, however, is not intended to cover
                                              Rule implements the mandate of the                       legislative judgment and judgmental or predictive          those who provide general financial advice to
                                              Omnibus Appropriations Act, as                           determinations such as those involved in fashioning        consumers—such as accountants or financial
                                              clarified by the Credit CARD Act. These                  remedies. In making such determinations, the               planners—that consumers could potentially use to
                                              statutes state that the Commission ‘‘shall               Commission is entitled to rely on its judgment,            avoid foreclosure or obtain loan modifications from
                                                                                                       based on experience as to the appropriate remedy           their lenders or servicers. Nevertheless, if an entity
                                              initiate a rulemaking proceeding,’’ and                  to impose in the rule.                                     that provides financial advice or that reviews
                                              that ‘‘[s]uch rulemaking shall relate to                    FTC, Funeral Industry Practices; Final Trade            consumers’ mortgage loan paperwork (e.g., performs
                                              unfair or deceptive acts or practices                    Regulation Rule, 47 FR 42269, 42272 (Sept. 24,             a ‘‘forensic audit’’), see infra note 110, promotes its
                                              regarding mortgage loans, which may                      1982) (citing, inter alia, FTC v. Ruberoid, 343 U.S.       services in such a manner that consumers take away
                                              include unfair or deceptive acts or                      470, 473 (1952)) (internal citations and quotations        the express or implied claim that the entity’s
                                                                                                       omitted); see also Am. Fin. Servs Ass’n v. FTC., 767       service will result in a loan modification or other
                                              practices involving loan modification                    F.2d 957, 988 (DC Cir. 1985) (noting that the              mortgage relief, the entity is a ‘‘mortgage assistance
                                              and foreclosure rescue services.’’ 104 As                Commission ‘‘has wide latitude for judgment’’ in           relief service provider’’ under the Final Rule. In that
                                              noted earlier, this language authorizes                  crafting rules to curb unfair or deceptive practices).     instance, if consumers do not obtain the
                                              rules that not only prohibit or restrict                    The Commission exercises similar discretion in          represented result, the entity will have made a
                                                                                                       crafting orders to resolve law violations. See FTC         misrepresentation in violation of Section 322.3(b) of
                                              practices that are themselves unfair or                  v. Nat’l Lead Co., 352 U.S. 419, 428 (1957) (‘‘[T]he       the Final Rule. See infra § III.3.a. The Commission
                                              deceptive, but also rules that prohibit or               Commission is clothed with wide discretion in              emphasizes that fine-print or pro forma disclaimers
                                              restrict other practices if such rules are               determining the type of order that is necessary to         generally are not sufficient to qualify performance
                                              reasonably related to the goal of                        bring an end to the unfair practices found to exist.’’);   or success claims. See, e.g., Deception Policy
                                                                                                       Ruberoid, 343 U.S. at 473 (‘‘If the Commission is to       Statement, infra note 200, at 180; infra note 220.
                                              preventing unfairness or deception.105                   attain the objectives Congress envisioned, it cannot          109 See, e.g., MN AG at 2 (‘‘Any rule adopted by

                                                                                                       be required to confine its road block to the narrow        the Commission should clearly regulate all forms of
                                                104 See Omnibus Appropriations Act § 626(a);
                                                                                                       lane the transgressor has traveled; it must be             mortgage assistance relief servicers.’’).
                                              Credit CARD Act § 511.                                   allowed effectively to close all roads to the                 110 This provision encompasses ‘‘forensic audits’’
                                                105 In articulating the scope of its rulemaking        prohibited goal, so that its order may not be by-          and other services in which the provider purports
                                              authority to remedy unfair and deceptive acts and        passed with impunity.’’); Jacob Seigel Co. v. FTC,         to review, and identify potential errors in, loan
                                              practices under the FTC Act, the Commission has          327 U.S. 608, 611–12 (1946) (‘‘The Commission has          documents or documents sent by a consumer’s
                                              explained:                                               wide discretion in its choice of a remedy deemed           lender or servicer in order to avert foreclosure or
                                                In exercising this remedial authority, the             adequate to cope with the unlawful practices in this       obtain concessions from the lender or servicer. See
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                                              Commission has not been limited to proscribing           area of trade and commerce.’’).                            supra note 56; MARS NPRM, 75 FR at 10720 n.160.
                                              only the precise practices found to exist, but rather       106 In many states, mortgagors have the right to        For example, if, for these purposes, a provider offers
                                              has been free to close all roads to the prohibited       ‘‘redeem,’’ i.e., regain possession of, a property for     to examine and find mistakes in foreclosure
                                              goal. * * * The Commission’s discretion to               a period of time following foreclosure. See, e.g.,         documents which the lender or servicer signed by
                                              formulate an appropriate means of preventing the         RealtyTrac, Foreclosure Laws and Procedures By             automatic means (sometimes referred to as ‘‘robo-
                                              unfair or deceptive acts or practices found to exist     State (chart showing that, depending on the state          signing’’) without checking them for accuracy, this
                                              also takes into account the nature of rulemaking,        and the borrower’s circumstances, redemption               service would fall within § 322.2(i) of the Final
                                              which involves predictions based upon pure               periods can last anywhere from 10 days to over one         Rule.

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                      75101

                                              that are offered to consumers 111 who                      ‘‘dwelling’’ applies only to residences                 governing how such sales must be
                                              are obligated under loans secured by a                     that are ‘‘primarily for personal, family,              structured.121 One group of state
                                              ‘‘dwelling’’ or residence. A ‘‘dwelling’’ is               or household purposes.’’ 114 The                        regulators, however, advocated that the
                                              defined in Section 322.2(e) of the Rule                    definition of ‘‘dwelling’’ includes second              Commission address the underlying
                                              to be a residential structure containing                   homes and rental properties of                          sale-leaseback transaction in a
                                              four or fewer units, regardless of                         consumers, because the Commission’s                     subsequent rulemaking if addressing it
                                              whether it is attached to real property.                   law enforcement experience indicates                    now would delay the issuance of the
                                              The term dwelling includes ‘‘an                            that consumers who own such                             Final Rule.122
                                              individual condominium unit,                               properties may seek help to avoid                          Many states have enacted laws that
                                              cooperative unit, mobile home,                             foreclosure on these properties.115                     comprehensively regulate sale-leaseback
                                              manufactured home, or trailer.’’ 112 In                    However, ‘‘dwelling’’ does not cover                    and title reconveyance transactions,
                                              response to comments on the NPRM, the                      MARS offered in connection with                         imposing, for example, specific
                                              Rule adds the term ‘‘manufactured                          commercial properties.116                               valuation requirements on the property
                                              home’’ to the definition of ‘‘dwelling’’ to                                                                        transfers and obligations to determine
                                              ensure that the Rule’s protections                         a. Sale-Leaseback and Title                             that the consumer can reasonably afford
                                              extend to consumers whose homes are                        Reconveyance Transactions                               to repurchase the property.123 On the
                                              constructed at a site (e.g., factory floor)                   In the NPRM, the Commission                          other hand, the record shows that sale-
                                              other than the final location of the                       advised that the proposed definition of                 leaseback and title reconveyance
                                              structure.113 Finally, the definition of                   MARS would cover offers of sale-                        transactions have been commonly
                                                                                                         leaseback and title reconveyance                        touted as a means to avert foreclosure
                                                 111 ‘‘Consumer’’ is broadly defined to include ‘‘any
                                                                                                         transactions,117 but only if they were                  and its consequences.124 Although the
                                              natural person who is obligated under any loan                                                                     Final Rule does not regulate the terms
                                              secured by a dwelling.’’ Section 322.2(d). For the
                                                                                                         marketed ‘‘to save the consumer’s home
                                              purposes of clarity, the Final Rule’s definition of        from foreclosure or repossession.’’ 118                 of sale-leaseback and title reconveyance
                                              ‘‘consumer’’ replaces ‘‘owes on’’ in the proposed          The Commission specifically solicited                   transactions, if such transactions are
                                              definition with ‘‘is obligated under.’’ The                comment on this aspect of the proposed                  represented, expressly or impliedly, as a
                                              Commission intends to cover consumers at every                                                                     way for a consumer to avoid foreclosure,
                                              stage of the process and does not limit the Rule’s         rule, including whether and how a final
                                              protections to those who are in default or                 rule should address these                               they present the same risks to
                                              foreclosure. See NAAG at 3 (‘‘We support broad             transactions.119                                        consumers as other forms of MARS.125
                                              application of the rule to cover all homeowners,              In response to the FTC’s request for                 The FTC thus has determined that the
                                              regardless of whether they are in foreclosure or                                                                   Final Rule will cover offers of sale-
                                              have defaulted on their loans.’’). Covering                comments, state law enforcers and
                                              consumers who are not in default or foreclosure is         consumer groups endorsed the proposed
                                                                                                                                                                   121 Supra   note 120.
                                              necessary because many of them seek assistance             rule’s coverage of sale-leaseback or title
                                              from MARS providers before they are actually                                                                         122 CSBS   at 2 (‘‘The state regulators believe that
                                              delinquent on their loans. See CMC (ANPR) at 8             reconveyance transactions when they                     it is important for the FTC to address abuses with
                                              (‘‘Many of the abuses that servicers have                  are marketed as ways to avoid                           respect to sale-leaseback transactions. However,
                                              encountered have occurred before the consumer has          foreclosure.120 These organizations                     given the current prevalence of loan modification
                                              received a notice of default. MARS providers               asserted that this limited coverage is                  scams, regulations addressing those practices must
                                              sometimes solicit customers who are not in default                                                                 receive priority. If the development of sale-
                                              but who live in areas with high numbers of                 sufficient in light of existing state laws              leaseback regulations will delay the promulgation
                                              distressed borrowers. Any rule should apply to                                                                     of final regulations to address loan modification
                                              MARS providers at any stage of the process.’’);               114 This language is derived from Regulation Z.      scams, we believe that the sale-lease back
                                              NCLC (ANPR) at 4 (‘‘Many homeowners have sought            See 12 CFR 226.2(a)(12) (definition of ‘‘consumer       regulations should be addressed in a separate
                                              help from MARS [providers] before entering                 credit’’).                                              effort.’’).
                                              default, though sometimes the MARS then                       115 There have been cases in which consumers            123 See supra note 98. For example, some laws

                                              encourages a default. * * * The mortgage servicing         were at risk of foreclosure on non-primary              mandate that before executing a title transfer, the
                                              industry and others have urged homeowners to seek          residences. One comment observed that those at          foreclosure rescue operator must verify that the
                                              help before they go into default.’’); NCRC (ANPR)          risk of losing a property to foreclosure include        consumer can reasonably afford to repurchase the
                                              at 2 (noting that there are ‘‘[c]ompanies claiming to      senior citizens who live in nursing homes or            home. See, e.g., Minn. Stat. § 325N.17(a)(1). In
                                              offer assistance with loan modifications, to               assisted living facilities and military service         addition, the foreclosure rescue operator may be
                                              consumers who may or may not be in default’’);             members who rent their homes while deployed.            required to obtain written consent from the
                                              NAAG (ANPR) at 11 (‘‘The [state] requirement that          NCLC at 4 (supporting covering services purported       homeowner, conduct a face-to-face closing, abide by
                                              consumers be in default before statutory protections       to assist consumers save second homes or rental         federal and state laws governing sales of residential
                                              begin made sense when mortgage consultants                 properties from foreclosure).                           properties, allow consumers a period of time to
                                              solicited business based on foreclosure filings, as           116 The Final Rule also contains a definition of     cancel the transaction before title conveyance can
                                              those consumers would necessarily be in default.                                                                   be recorded, and either return title to the consumer
                                                                                                         ‘‘dwelling loan,’’ unmodified from the proposal, as
                                              Mortgage consultants are now able to mine public                                                                   or provide compensation that represents the
                                                                                                         ‘‘any loan secured by a dwelling, and any associated
                                              information to target consumers who are not yet in                                                                 property’s fair market value. See, e.g., id.
                                                                                                         deed of trust or mortgage.’’ Section 322.2(f).
                                              default. Consultants may rely on an Internet                  117 As noted in § II, in a sale-leaseback or title
                                                                                                                                                                 § 325N.17(a)(2)–(4), (b).
                                              presence to draw in consumers who may also not                                                                        124 See supra note 43; see also, e.g., CJI, Att. 1,
                                              be in default. As consumers have grown more                reconveyance transaction, the MARS provider
                                                                                                                                                                 2 (private plaintiffs in Maryland challenging
                                              concerned about the state of the economy, these            typically instructs the consumer to transfer title to
                                                                                                                                                                 foreclosure rescue and equity stripping scam);
                                              solicitations are proving increasingly attractive.         his or her home to the provider and then to rent
                                                                                                                                                                 NAAG (ANPR) at 5–6; CJI, Att. 1 at 2; NCLC at 16
                                              Based on these reasons, a rule should provide as           the home from the provider. The provider then           (‘‘Sale-leaseback and other title-transfer transactions
                                              much coverage for consumers as possible.’’).               promises to reconvey title to the home at some later    can be the most harmful of foreclosure rescue scams
                                                 112 Section 322.2(e). The definition for ‘‘dwelling’’   date. In some cases, the provider also may charge       because they not only deprive a homeowner of
                                              is similar to the definition of that term in               upfront fees in connection with the transaction. See    scarce money but outright steal the homeowner’s
                                              Regulation Z, 12 CFR. 226, which implements the            supra note 43.                                          deed.’’).
                                                                                                            118 MARS NPRM, 75 FR at 10728.
                                              Truth in Lending Act, 15 U.S.C. 1601 et seq.; 12                                                                      125 Other transactions proposed to consumers
                                                                                                            119 Id.
                                              CFR 226.2(a)(19).                                                                                                  similarly would be covered by the Rule if marketed
                                                 113 Some commenters recommended including                  120 See NAAG at 5 (‘‘We believe that the proposed
                                                                                                                                                                 as a means to stop or avoid foreclosure. See, e.g.,.
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                                              manufactured homes, a term defined by the                  rule will not interfere with state laws, but instead    NV DML at 2–3 (describing two transactions being
                                              National Manufactured Housing Construction and             will complement existing state laws that address        marketed to some consumers as a means to secure
                                              Safety Standards Act, 42 U.S.C. 5402(6), to refer to       sale-leaseback transactions’’); CSBS at 2 (‘‘[S]tate    concessions on their mortgage loans). The
                                              non-site built homes. See, e.g., NCLC at 3 (the term       regulators believe that it is important for the FTC     definition of MARS encompasses any service that
                                              ‘‘mobile home’’ often refers to a home built prior to      to address abuses with respect to sale-leaseback        purports to help consumers stop, prevent, or
                                              1974, while the term ‘‘manufactured home’’ means           transactions.’’); NCLC at 16 (‘‘We support the FTC’s    postpone any foreclosure sale, or otherwise save the
                                              a post-1974 home that complies with HUD                    plan to regulate only the marketing of these scams      property, regardless of the form that relief may take.
                                              standards); see also OPLC at 2; NCLC at 4.                 while leaving further regulation to the states.’’).     Section 322(i)(2).

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                                              75102            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              leaseback and title reconveyance                         providing MARS to consumers,129 and                     c. Mortgage Assistance Relief ‘‘Product’’
                                              transactions marketed as a way to save                   the record shows that some former
                                                                                                                                                                  One commenter recommended that
                                              a consumer’s home from foreclosure or                    brokers who now provide MARS have
                                                                                                                                                               the Commission add the word ‘‘product’’
                                              repossession.126                                         engaged in the same types of unfair and
                                                                                                                                                               to the proposed definition ‘‘mortgage
                                                                                                       deceptive practices as other MARS
                                              b. Mortgage Refinancing Services                                                                                 assistance relief service.’’ The
                                                 The proposed rule covered mortgage                      In the NPRM, the Commission                           commenter recommended this addition
                                              brokers who offer loan origination or                    specifically requested comment on how                   to ensure that providers cannot evade
                                              refinancing services, but only if those                  the Rule should treat mortgage brokers                  the Rule by claiming to sell a product
                                              services are represented, expressly or                   who offer refinancing services. A                       (e.g., software, books, CDs, or other
                                              impliedly, to help consumers avoid                       number of commenters, noting the                        tangible materials to help consumers
                                              delinquency or foreclosure. The Final                    incidence of unfair and deceptive                       avoid foreclosure) rather than a
                                              Rule is unchanged on this point. Thus,                   practices by mortgage brokers selling                   service.135 Another comment from a
                                              the Final Rule does not cover mortgage                   MARS,131 recommended that the Final                     group of state bank regulators disagreed,
                                              brokers who offer services that are                      Rule cover mortgage brokers.132 In                      stating, without elaboration, that the
                                              advertised or marketed for other                         addition, one comment from a consumer                   regulators saw no reason to include the
                                              purposes. To obtain a new loan or                        group argued that the Rule should                       word ‘‘product’’ in the definition of
                                              refinance an existing loan, consumers                    expressly cover refinancing as a form of                MARS.136
                                              can work either with the lender directly                 MARS.133 A consortium of state bank                        The Commission declines to include
                                              or with a mortgage broker. 127                           regulating agencies, on the other hand,                 products in the definition of MARS in
                                                 As discussed in the NPRM, in some                     recommended that the Rule exclude                       the Final Rule. The record demonstrates
                                              cases consumers at risk of foreclosure                   mortgage brokers entirely or, at a                      that providers of services to help
                                              could benefit from assistance in                         minimum, exclude their loan                             consumers modify their mortgages and
                                              refinancing; thus, the Commission does                   origination activities.134                              avoid foreclosure often engage in unfair
                                              not wish the Rule to reduce the                            The Commission concludes that                         and deceptive practices; in contrast,
                                              availability of legitimate services of this              mortgage brokers generally are not                      neither the Commission’s law
                                              kind.128 At the same time, the                           covered by the Rule. However, if a                      enforcement experience nor the
                                              Commission is concerned that services                    mortgage broker offers loan refinancing                 rulemaking record show that those who
                                              purported to help consumers avoid                        or originations as a means for                          sell products for mortgage assistance
                                              foreclosure through refinancing could                    consumers to save their homes from                      relief are engaged in the same types of
                                              be marketed unfairly or deceptively.                     foreclosure—that is, the broker is                      conduct. The Commission will continue
                                              Indeed, with the deterioration of the                    providing MARS—then the Rule covers                     to monitor to ensure that MARS
                                              housing market, many mortgage brokers                    this conduct. Thus, the Final Rule                      providers do not gravitate to the sale of
                                              have focused on marketing and                            protects consumers from unfair and                      products to evade the Rule.137 Should
                                                                                                       deceptive practices by mortgage brokers                 MARS providers selling products
                                                  126 As a general matter, the Final Rule is not
                                                                                                       operating as MARS providers without                     engage in unfair or deceptive practices,
                                              intended to apply to the marketing of services to        unduly restricting legitimate mortgage
                                              assist consumers in selling their properties to third
                                                                                                                                                               the Commission has the authority to
                                              parties. The Final Rule, however, does specifically      brokerage activities.                                   take law enforcement action under
                                              cover the marketing of services involving the sale                                                               Section 5 of the FTC Act. Moreover,
                                              of properties to third parties if those services are        129 One commenter provided examples of
                                                                                                                                                               should unfair or deceptive practices in
                                              designed or intended to assist consumers in              advertisements showing MARS providers
                                              averting foreclosure, e.g., through a short sale or      aggressively recruiting mortgage brokers to sell
                                                                                                                                                               the sale of mortgage assistance relief
                                              deed-in-lieu of foreclosure. One commenter urged         MARS. See NCLC (ANPR) at 10.                            products become widespread, the
                                              the Commission to exempt licensed real estate               130 See, e.g. supra note 52; Peter S. Goodman,       Commission may consider amending
                                              professionals from the Final Rule. NAR at 1–2. The       Subprime Brokers Back as Dubious Loan Fixers,           the Rule to include such practices.138
                                              commenter argued the Rule would restrict real            N.Y. Times, July 19, 2009, at A1 (accounting of how
                                              estate agents in helping consumers with the process      many mortgage brokers in southern California began      2. Section 322.2(a): ‘‘Clear and
                                              of selling their homes through short sales. Id. The      selling MARS when loan origination work
                                              Commission concludes that an exemption for real                                                                  Prominent’’
                                              estate agents is not necessary. Real estate agents          131 See NYC DCA at 8; NAAG (ANPR) at 11–12.
                                              customarily assist consumers in selling or buying
                                                                                                                                                                 The proposed rule required that
                                                                                                          132 CSBS at 2 (‘‘The proposed FTC rules should
                                              homes and perform functions such as listing homes                                                                mandated disclosures be made ‘‘clearly
                                                                                                       apply to mortgage brokers to the extent that
                                              for sale, showing homes, and finding desirable           mortgage brokers engage in non-loan origination         and prominently,’’ specifying how this
                                              homes for consumers. The Commission is aware             MARS activities, e.g. negotiating loan                  requirement applied in different
                                              that real estate agents may perform these functions      modifications, short sales, etc.’’); NYC DCA at 8
                                              when properties are bought or sold through a short
                                                                                                                                                               mediums. The two commenters that
                                                                                                       (‘‘Mortgage brokers offering for-profit mortgage
                                              sale transaction, but does not consider these            assistance services are likely to be engaged in the
                                                                                                                                                               addressed how disclosures must be
                                              services to be MARS.                                     same problematic practices as other MARS                made supported the proposed criteria
                                                  127 Mortgage brokers can offer a wide choice of
                                                                                                       providers and must be subject to the rule.’’); LLAF     for making clear and prominent
                                              loan products from different lenders, without            at 2. Comments to the ANPR made similar
                                              consumers having to deal with each lender                arguments. See, e.g., NAAG (ANPR) at 11–12 (‘‘We
                                                                                                                                                                  135 See CUUS at 2 (adding the word ‘‘product’’ to
                                              separately. Thus, mortgage brokers commonly act as       have already seen complaints in which mortgage
                                              intermediaries between consumers and lenders in          brokers charge consumers for mortgage consulting        the definition of MARS ‘‘would prevent MARS
                                              bona fide loan origination or refinancing                services and then failed to provide services or         providers from claiming they are not covered by the
                                              transactions. Mortgage brokers typically are paid by     provided fewer services than originally promised.       rule because they offer a product, not a service.’’).
                                                                                                                                                                  136 See CSBS at 2 (‘‘The state regulators do not
                                              the lender, or in some cases by the borrower, from       The trend of mortgage brokers providing services is
                                              the closing costs of the loan transaction. See, e.g.,    likely to continue, especially if the market for        believe that there is any reason to broaden the
                                              Nat’l Ass’n of Mortg. Brokers FAQs, available at         mortgage loan origination remains soft.’’); NCLC        definition of MARS to include the word ‘product’
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                                                                    (ANPR) at 13–14.                                        as inquired by the Commission.’’).
                                              FAQs1.asp?SnID=498395277; see also NAAG at 12               133 See CUUS at 2–3 (recommending that Rule             137 Providers should be aware that merely

                                              (noting that brokers ‘‘are traditionally paid * * * at   specify that ‘‘a refinance of the existing mortgage’’   including a product, such as a book, in conjunction
                                              the closing of a consumer’s loan, after all services     is an example of an included service).                  with the sale of services will not remove the
                                              have been provided’’); NCLC (ANPR) at 29                    134 See CSBS at 2 (‘‘The proposed FTC rules do       transaction from coverage by the Rule.
                                              (‘‘[B]rokers * * * are normally paid only when a         not need to address loan origination activities, even      138 As discussed above, see supra note 15, the
                                              sale or mortgage transaction is completed.’’).           if the loan is being originated to avoid                Commission’s authority to amend the MARS Rule
                                                  128 MARS NPRM, 75 FR at 10713.                       foreclosure.’’).                                        will transfer to the BCFP on July 21, 2011.

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                     75103

                                              disclosures.139 No commenters opposed                     The disclosures must be made in each                    high degree of contrast from the
                                              these requirements. The Final Rule                        language that is ‘‘substantially used’’ in              immediate background on which it
                                              substantially adopts the proposed rule’s                  the advertising.143 In addition, as                     appears;145 distinct from other text,
                                              definition of ‘‘clear and prominent’’ with                described below, the Rule includes                      such as inside a border; and in a distinct
                                              only the few changes discussed below.                     clarity and prominence requirements                     type style, such as bold.146 Unchanged,
                                              The Rule sets forth general requirements                  specific to the particular media in                     however, are the requirements that the
                                              to ensure that required disclosures in                    which disclosures appear. The extensive                 disclosure must be communicated in the
                                              commercial communications 140 are                         record of unfairness and deception in                   same languages that are substantially
                                              sufficiently clear and prominent for                      the MARS industry makes it appropriate                  used in the commercial
                                              consumers to notice and comprehend                        for the Commission to articulate with                   communication;147 and appear parallel
                                              them.141 In all cases, the syntax and                     specificity how MARS providers must                     to the base of the communication148 and
                                              wording of disclosures must be easy for                   make required disclosures to prevent                    that, unless otherwise specified, each
                                              consumers to understand and must not                      consumer harm.                                          letter of the disclosure text shall be, at
                                              be accompanied by statements that                                                                                 a minimum, the larger of 12-point type
                                              contradict or obscure their meaning.142                   a. Written Disclosures                                  or one-half the size of the largest
                                                                                                           The proposed rule set forth various                  character used in the name of the
                                                 139 See CSBS at 2 (endorsing requirements as           requirements for disclosures that must                  advertised website or telephone number
                                              ‘‘generally well-rounded and adequate’’); NCLC at         appear in consumer communications                       to which consumers are referred for
                                              16 (‘‘The Commission has done an admirable job
                                              writing disclosure rules that will reduce the ability
                                                                                                        disseminated in print or written form,                  information on any MARS.149
                                              of MARS providers to obscure or overshadow                including on a computer screen. The
                                                                                                                                                                b. Audio Disclosures
                                              mandatory disclosure statements.’’).                      proposed rule provided that such
                                                 140 As defined in the Final Rule, ‘‘commercial
                                                                                                        disclosures:                                               Section 322.2(a)(2) addresses the use
                                              communication’’ is intended to include any written                                                                of disclosures in audio communications
                                              or oral statement, illustration, or other depiction         shall be in a font easily read by a
                                              used to induce the purchase of a service, plan, or        reasonable consumer, of a color or shade that           such as broadcast radio or streaming
                                              program. See § 322.2(c) (adopting the proposed            readily contrasts with the background of the            radio. The proposed rule required these
                                              definition without substantive modification). As          commercial communication, in the same                   disclosures to be ‘‘delivered in a slow
                                              detailed in Section III.D. of this SBP, the Final Rule    language as each that is substantially used in          and deliberate manner and in a volume
                                              also adds to the proposed provision two
                                              subprovisions defining ‘‘general commercial
                                                                                                        the commercial communication, parallel to               and cadence sufficient for an ordinary
                                              communication’’ and ‘‘consumer-specific
                                                                                                        the base of the commercial communication,               consumer to hear and comprehend
                                              commercial communication.’’ See §§ 322.2(c)(1) &          and, except as otherwise provided in this               them.’’ As with the requirements for
                                              322.2(c)(2). Section 322.2(c)(1) defines a ‘‘general      rule, each letter of the disclosure shall be, at        written disclosures, the Commission has
                                              commercial communication’’ to be ‘‘a commercial           a minimum, the larger of 12-point type or               decided to modify these requirements
                                              communication that occurs prior to the consumer           one-half the size of the largest letter or
                                              agreeing to permit the provider to seek offers of         numeral used in the name of the advertised
                                                                                                                                                                slightly to improve the clarity of the
                                              mortgage assistance relief on behalf of the               website or telephone number to which
                                              consumer, or otherwise agreeing to use the                consumers are referred to receive information
                                                                                                                                                                   145 Free Credit Report Rule,16 CFR 610.4(a)(3)(iii);

                                              mortgage assistance relief service, and that is not                                                               see also, In re Tender Corp., Docket No. C–4261
                                              directed at a specific consumer.’’ Section 322.2(c)(2)
                                                                                                        relating to any mortgage assistance relief
                                                                                                                                                                (FTC July 17, 2009), available at
                                              defines a ‘‘consumer-specific commercial                  service.                                                os/caselist/0823188/090717tenderdo.pdf (stating
                                              communication’’ as ‘‘a commercial communication             Section 322.2(a)(1) of the Final Rule                 that disclosures must appear ‘‘in print that contrasts
                                              that occurs prior to the consumer agreeing to permit                                                              with the background against which it appears’’); In
                                              the provider to seek offers of mortgage assistance        largely retains these requirements but                  re Budget Rent-A-Car-System, Inc., Docket No. C–
                                              relief on behalf of the consumer, or otherwise            modifies them slightly to improve the                   4212 (FTC Jan. 4, 2008), available at http://
                                              agreeing to use the mortgage assistance relief            clarity and effectiveness of the              
                                              service, and that is directed at a specific consumer.’’   disclosures and to conform the relevant                 (same); see also FTC, Dot Com Disclosures:
                                              These definitions were added to clarify the                                                                       Information about Online Advertising 12 (2000),
                                              disclosure requirements in § 322.4 of the Final Rule.     provisions of the Final Rule to the Free                available at
                                                 141 Where possible, in formulating the                 Credit Report Rule the Commission                       business/ecommerce/bus41.pdf (Dot Com
                                              requirements of the Rule, the Commission has              recently issued.144 The Final Rule                      Disclosures) (‘‘A disclosure in a color that contrasts
                                              drawn from comparable FTC rules requiring clear           therefore now specifies that a written                  with the background emphasizes the text of the
                                              and prominent disclosures. See Free Annual File                                                                   disclosure and makes it more noticeable.
                                              Disclosures, 16 CFR 610.4 (2010) (Free Credit
                                                                                                        disclosure must be easily readable; in a                Information in a color that blends in with the
                                              Report Rule); Disclosure Requirements and                                                                         background of the advertisement is likely to be
                                              Prohibitions Concerning Franchising, 16 CFR 436.6         436.9(a); Business Opportunity Rule, 16 CFR             missed.’’).
                                                                                                        437.1(a)(21).                                              146 Sections 322.4(a) and (b) of the Rule set forth
                                              (2007) (Franchise Rule); Disclosure Requirements
                                              and Prohibitions Concerning Business                         143 See Free Credit Report Rule, 16 CFR              additional requirements for the heading that must
                                              Opportunities, 16 CFR 437.1 (Business Opportunity         610.4(3)(ii) (same language as that principally used    precede written disclosures. This heading must be
                                              Rule); Regulations Under Section 4 of the Fair            in the advertisement); see also NYC DCA at 7–8          in bold face font that is at least two-point type larger
                                              Packaging and Labeling Act, 16 CFR 500.4 (Fair            (‘‘The FTC should require MARS providers to offer       than the font size of the text of the required
                                              Packaging and Labeling Act Regulations); Trade            all mandated disclosures * * * in the languages         disclosures.
                                                                                                                                                                   147 See also, e.g., Free Credit Report Rule, 16 CFR
                                              Regulation Pursuant to the Telephone Disclosure           used in their advertising.’’); LFSV at 2 (‘‘The FTC
                                              and Dispute Resolution Act of 1992, 16 CFR 308.2          should require that companies that negotiate a          610.4(a)(3)(ii); 900 Number Rule, 16 CFR
                                              (900 Number Rule); Rule Concerning Cooling-Off            contract primarily in a language other than English     308.3(a)(1). If the advertisement has substantial
                                              Period for Sales Made at Home or at Certain Other         provide a contract in the language in which the         material in more than one language, the MARS Rule
                                              Locations, 16 CFR 429.1 (Door-to-Door Sales Rule).        contract was primarily negotiated.’’).                  requires that the disclosure be delivered in each
                                              The disclosure requirements also are consistent              144 See Free Credit Report Rule, 16 CFR 610.4        such language. Section 322.2(a)(1).
                                              with those in many FTC orders. See, e.g., Sears           (2010). The Commission did not promulgate the              148 See, e.g., Swisher Int’l, Inc., Docket No. C–

                                              Holding Mgmt. Co., Docket No. C–4264, File No.            Free Credit Report Rule until after it issued the       3964 (FTC Aug. 25, 2000), available at http://
                                              082–3099 (FTC Sept. 9, 2009), available at http://        MARS NPRM. In that proceeding, unlike this one, (requiring
                                                              the Commission received numerous comments on            warnings for cigars to appear ‘‘parallel * * * to the
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                                              090604searsdo.pdf.                                        how the rule should address the prominence of the       base of the * * * advertisement’’); Fair Packaging
                                                 142 See Free Credit Report Rule, 16 CFR                required disclosures, including formatting and          and Labeling Act Regulations, 16 CFR 500.4(b)
                                              610.4(3)(vi) (prohibiting any representation that         placement. Free Annual File Disclosures; Final Rule     (requiring that identification for packaged goods
                                              contradicts, is inconsistent with, or undermines the      75 FR 9733 (2010). Several commenters, for              appear ‘‘in lines generally parallel to the base on
                                              required disclosures, and any techniques that             example, offered suggestions on how to make visual      which the packaging or commodity rests as it is
                                              significantly detract from the message                    disclosures prominent, including placing them           designed to be displayed’’).
                                              communicated by the disclosures); 900 Number              within a border in a box, and in a contrasting color.      149 See Free Credit Report Rule, 16 CFR

                                              Rule, 16 CFR 308.3(a)(5); Franchise Rule, 16 CFR          Id. at 9734.                                            610.4(b)(3); see also 900 Number Rule, 16 CFR 308.

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                                              75104            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              requirements for audio disclosures and                       video disclosures set forth in other parts              the Rule. The proposed rule generally
                                              to be consistent with the Free Credit                        of the ‘‘clear and prominent’’ definition.              exempted from its provisions loan
                                              Report Rule.150 Thus, the Final Rule                         In addition, the disclosures must be                    holders and servicers, and agents of
                                              requires MARS providers to deliver the                       provided in a way that the consumer                     such entities unless the agents ‘‘claim,
                                              required disclosures ‘‘in a slow and                         cannot avoid the information, i.e., it                  demand, charge, collect, or receive any
                                              deliberate manner and in a reasonably                        must be visible without the need to                     money or other valuable consideration
                                              understandable volume and pitch.’’151                        scroll down a Web page. The Final Rule                  from the consumer for the agent’s
                                                                                                           makes two minor modifications to the                    benefit.’’ 158
                                              c. Video Disclosures                                                                                                    In the NPRM, the Commission
                                                                                                           proposed rule. First, it modifies the
                                                Section 322.2(a)(3) of the Final Rule                      requirement that the disclosure be made                 specifically sought comment on the
                                              adopts the proposed rule’s video                             on a separate landing page from the                     proposed exemption for loan holders
                                              disclosure requirements without                              page on which the consumer takes any                    and servicers.159 Lenders and servicers
                                              modification. Video communications                           action to incur a financial obligation.                 (who actually have the authority to
                                              include those that appear on television                      The disclosure instead must be made on                  change loan terms) may offer MARS that
                                              or are streamed over the Internet. As a                      or immediately prior to the page on                     the Rule would cover in the absence of
                                              threshold matter, these disclosures must                     which the consumer takes any action to                  an exemption.160 For example, a lender
                                              be delivered in accordance with the                          incur a financial obligation.154 Second,                or servicer may notify a consumer of her
                                              requirements for written and audio                           the Final Rule mandates that the                        eligibility for a loan modification under
                                              disclosures in §§ 322.2(a)(1) and (2). In                    disclosure appear in text at least the                  the MHA program and assist her in
                                              addition, the disclosures must be made                       same size as the largest character of the               submitting the necessary paperwork.161
                                              simultaneously in both audio and                             advertisement, replacing the proposed                   In addition, lenders and servicers may
                                              video,152 the latter of which must be                        rule’s requirement that it be twice the                 outsource these functions to other
                                              displayed for at least the duration of the                   size of any hyperlink to the company’s                  parties who operate on their behalf.
                                              audio disclosure and comprise at least                       website or display of the URL. Both of                  Such outsourcing is a common method
                                              four percent of the vertical picture                         these modifications are intended to                     of providing these services given the
                                              height of the screen.153                                     ensure that consumers see mandated                      large number of consumers currently
                                                                                                           disclosures before they decide whether                  requesting assistance.162
                                              d. Interactive Media                                                                                                    Several comments from the financial
                                                                                                           to purchase a mortgage assistance relief
                                                Section 322.2(a)(4) of the Final Rule                      service.155                                             services industry and consumer groups
                                              addresses how disclosures must be                                                                                    expressly supported the proposed
                                              made in interactive media formats, such                      e. Program-Length Media                                 exemption for lenders and servicers,163
                                              as software, the Internet, or mobile                            Section 322.2(a)(6) of the Final Rule,
                                                                                                                                                                      158 See § 322.2(i) (proposed rule). This limiting
                                              media. As in proposed § 322.2(a)(4), the                     which adopts the proposed rule without
                                                                                                                                                                   language was intended to ensure that MARS
                                              disclosures must conform with the                            modification, requires that disclosures                 providers could not evade the Rule by styling
                                              requirements for written, audio, and                         in program-length television, radio, and                themselves as ‘‘agents’’ of the lender or servicer.
                                                                                                           Internet-based advertisements for MARS                     159 See MARS NPRM, 75 FR at 10728.
                                                150 See  supra notes 141–49.                               be presented at the beginning, near the                    160 See, e.g., CMC (ANPR) at 5 (‘‘Servicers are
                                                151 See  Free Credit Report Rule, 16 CFR                   middle, and at the end of the                           increasingly turning to third-party service-providers
                                              610.4(a)(1)(3)(iv); see also In re Sears Holding,                                                                    to assist them in processing loan modifications and
                                              Docket No. C–4264 (stating that audio disclosures
                                                                                                           advertisement.156 Requiring that                        in other loss-mitigation activities.’’); Am. Bankers
                                              must be made ‘‘in a volume and cadence sufficient            disclosures be delivered at different                   Ass’n (ANPR) at 4–6; AFSA (ANPR) at 3, 5; MBA
                                              for an ordinary consumer to hear and comprehend              stages of the broadcast makes it more                   (ANPR) at 4.
                                              them’’); In re Darden Rests., Inc., Docket No. C–4189        likely that consumers who join the                         161 See, e.g., AFSA at 3 (stating that mortgage

                                              (FTC May 11, 2009), available at http://                                                                             servicers engage in the same forms of
                                                                                                           broadcast in progress will receive them.                communication that would be covered under the
                                              070510do0623112c4189.pdf (same); In re Kmart                 3. Section 322.2(j): ‘‘Mortgage Assistance              Rule ‘‘to make the consumer aware of the
                                              Corp., Docket No. C–4197 (FTC Aug. 15, 2007),                                                                        availability of possible loss mitigation options and
                                              available at         Relief Service Provider’’                               to encourage the consumer to contact the mortgage
                                              0623088do.pdf (same); In re Palm, Inc., Docket No.           a. Exemption for Loan Holders and                       servicer directly, which is a critical component of
                                              C–4044 (FTC Apr. 19, 2002), available at http://                                                                     any loss mitigation policy by a mortgage servicer to
                                                                                                           Servicers                                               assist consumers’’); MBA (ANPR) at 4 (stating that
                                              (same); Dot Com Disclosures, supra note 145, at 14              Under § 322.2(j) of the Final Rule,                  mortgage servicers collect payments, conduct
                                              (same).                                                                                                              borrower contact and outreach, and execute loan
                                                 152 Disclosures generally are more effective if they
                                                                                                           ‘‘any person that provides, offers to                   modification or other loss mitigation agreements).
                                              are made in both the visual and audio part of a              provide, or arranges for others to                         162 See, e.g., David Lawder, Few US Mortgage

                                              consumer communication. See generally Maria                  provide, any mortgage assistance relief                 Modifications Made Permanent, Reuters Dec. 10,
                                              Grubbs Hoy & J. Craig Andrews, Adherence of                  service’’ is a ‘‘mortgage assistance relief             2009, available at
                                              Prime-Time Televised Advertising Disclosures to              service provider,’’ 157 and thus subject to             idUSN1021463420091210 (referring to a company
                                              the ‘‘Clear and Conspicuous’’ Standard: 1990 Versus                                                                  that ‘‘has been hired by some of the largest U.S.
                                              2002, 23 J. Mktg. Pub. Pol. 170 (2004) (stating that                                                                 banks to assist in modification efforts’’).
                                                                                                              154 The Commission declines to require in the
                                              ‘‘dual modality’’ disclosures—oral and visual                                                                           163 See AFSA at 2–3 (The Rule is ‘‘not intended
                                              together—are more effective at communicating                 Final Rule that information be disclosed on a           to regulate mortgage holders and servicers, but to
                                              information to consumers); see also In re Kraft, Inc.,       separate landing page, because this requirement         stop for-profit MARS providers from harming
                                              114 F.T.C. 40 (1991) (finding that a visual                  may not be feasible or effective in some contexts,      consumers. The FTC is currently drafting proposed
                                              disclosure alone was unlikely to be effective as a           cf. Free Credit Report Rule; Final Rule, 75 FR 9726,    rules for mortgage acts and practices. That rule,
                                              corrective measure in light of ‘‘the distracting visual      9737 (Mar. 6, 2010), and there is no evidence in the    rather than this MARS rule, is the appropriate place
                                              and audio elements and the brief appearance of a             record addressing its effectiveness in this context.    to consider additional regulations for mortgage
                                                                                                              155 See Dot Com Disclosures, supra note 145, at
                                              complex superscript in the middle of the                                                                             holders and servicers.’’); CUUS at 3 (‘‘Consumers
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                                              commercial’’), aff’d, 970 F.2d 311 (7th Cir. 1992).          11 (explaining that disclosures are more likely to be   Union agrees that lenders and servicers should be
                                                 153 See Federal Election Commission Rules:                effective if they are provided when the consumer        exempted from the definition of ‘mortgage
                                              Contributions and Expenditure Limitations and                is considering the purchase).                           assistance relief services.’’’ Consumers Union is not
                                                                                                              156 See Free Credit Report Rule, 16 CFR
                                              Prohibitions, 11 CFR 110.11(c)(3)(iii)(B)–(C)                                                                        aware of any lenders or servicers actively marketing
                                              (statement concerning funding source for political           610.4(a)(3)(v). Section 308.3(a)(6) of the 900 Rule     MARS services for a fee to their customers.’’); CUNA
                                              ads ‘‘must appear in letters equal to or greater than        also imposes a nearly-identical requirement. 16 CFR     at 2 (‘‘We strongly urge the FTC to retain this
                                              four (4) percent of the vertical picture height’’ and        308.3(a)(6).                                            exemption in the Final Rule. Credit unions have not
                                              ‘‘be visible for a period of at least (4) four seconds’’).      157 Section 322.2(j).                                been the source of any problems for home loan

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                      75105

                                              but some recommended modifications                       §§ 322.2(l) and 322.2(g), respectively, to                 commission basis.172 The Rule is not
                                              to its scope.164 Three commenters said                   limit the exemption to loan holders and                    intended to restrict how lenders and
                                              that the Rule should cover lenders and                   servicers of loans ‘‘that [are] the subject                servicers choose to compensate third
                                              servicers.165                                            of the offer to provide mortgage                           parties that perform MARS functions on
                                                 The Commission has determined that                    assistance relief services.’’ 168 This                     their behalf. Further, the Commission
                                              the record supports an exemption for                     modification clarifies that there is no                    concludes that such a restriction on the
                                              lenders and servicers. These lenders and                 blanket exemption for lenders and                          exemption is not necessary to prevent
                                              servicers might provide useful MARS to                   servicers based solely on their status,169                 third parties from improperly claiming
                                              consumers, and nothing in the record                     but rather that the Final Rule exempts                     an exemption in order to collect
                                              shows that such entities have engaged                    such entities only if they offer MARS in                   advance fees for MARS from consumers.
                                              in the core conduct addressed by the                     connection with loans they actually                        The exemption applies only to those
                                              Final Rule, i.e., deceiving consumers                                                                               activities conducted within the scope of
                                                                                                       hold or service.
                                              into paying large advance fees for                                                                                  their agency or contractor relationship
                                              services and not delivering promised                        The second change to the exemption                      with exempted lenders and servicers.
                                              results.166                                              clarifies that it encompasses both agents                  Thus, if they collect fees for MARS not
                                                 Thus, the Commission adopts the                       and contractors of lenders and servicers.                  performed on behalf of the lender or
                                              exemption in the proposed rule for                       Specifically, §§ 322.2(j)(1) and (2) have                  servicer, they would be subject to the
                                              lenders and servicers, but with three                    been changed to include not only loan                      Rule’s requirements.
                                              modifications.167 First, the Commission                  holders and servicers as well as their
                                              has modified the definitions of                          agents, but also ‘‘contractor[s] of such                   b. Treatment of Nonprofit Providers of
                                              ‘‘servicer’’ and ‘‘dwelling loan holder’’ in             individual[s] or entit[ies].’’ 170 Adding                  Mortgage Relief Services
                                                                                                       the term ‘‘contractor’’ makes clear that                      Section 322.2(k) of the Final Rule
                                              borrowers and do not need additional rules to            the exemption would apply to third                         retains without substantive modification
                                              ensure they act in their members’ best interests.’’);                                                               the exemption for nonprofit entities that
                                              CSBS at 2–3 (‘‘We support the Commission’s
                                                                                                       parties with whom lenders and servicers
                                              inclination to generally exempt loan holders and         technically do not have an agency                          was included in the proposed rule.173
                                              servicers, as well as their agents, and nonprofit        relationship as a matter of law, but who                   Nonprofits are excluded from the FTC’s
                                              entities excluded from the FTC’s jurisdiction from       nevertheless perform MARS on their                         jurisdiction under the FTC Act and,
                                              the definition of mortgage assistance relief service                                                                therefore, they are exempt from rules
                                              provider.’’); MBA at 3–4 (‘‘We are pleased that the      behalf.171
                                              proposed rule specifically excludes mortgage
                                                                                                                                                                  issued pursuant to the Omnibus
                                                                                                          Third, the Commission has                               Appropriations Act.174 This exemption
                                                 164 CUUS at 3 (‘‘The Rule should specify that the     determined to remove the language in                       includes bona fide nonprofit
                                              only lender or servicer qualifying for this              the proposed rule that would exclude                       organizations with housing counselors
                                              exemption is the one currently holding the               from the exemption third parties who                       offering MARS and nonprofit legal
                                              mortgage loan of the homeowner retaining the             ‘‘claim, demand, charge, collect, or
                                              services of a MARS entity.’’). But see MBA at 4 (the                                                                organizations representing financially
                                              rule should exempt contractors of lenders and            receive any money or other valuable                        stressed consumers.175 The FTC,
                                              servicers); AFSA at 3–4 (servicers’ agents and           consideration from the consumer for the                    however, does have jurisdiction over
                                              contractors that request or collect fees for their own   agent’s benefit.’’ Such language would                     purported nonprofits that in fact operate
                                              benefit should not be excluded from the
                                              exemption). One commenter also requested that the
                                                                                                       have resulted in the Rule covering                         for the profit of their members,176 and
                                              Rule specify that ‘‘certain up-front fees are            agents and contractors that lenders and                    § 322.2(k) does not exempt these
                                              permissible by a licensed mortgage company,              servicers may pay on a contingency or                      entities.177
                                              servicer or depository institution when necessary to
                                              execute a refinance, modification, or other loss                                                                       172 See AFSA at 3–4 (describing use of employee
                                                                                                          168 ‘‘Dwelling loan holder’’ is defined in § 322.2(g)
                                              mitigation agreement.’’ MBA at 4. As discussed, the
                                              rule does not apply to loan holders or servicers, and    as ‘‘any individual or entity who holds the dwelling       incentive programs and attorneys who work on a
                                              thus does not govern these activities.                   loan that is the subject of the offer to provide           contingency).
                                                                                                       mortgage assistance relief services.’’ Section 322.2(l)       173 To improve the organization and clarity of the
                                                 165 One of the three commenters argued that

                                              lenders and servicers do not properly inform             defines ‘‘servicer’’ as ‘‘the individual or entity         Rule text, however, the Commission has deleted
                                              consumers of their foreclosure risks, lose paperwork     responsible for (1) receiving any scheduled periodic       proposed § 322.2(j)(3), and altered the definition of
                                              associated with loan modification requests, fail to      payments from a consumer pursuant to the terms             ‘‘person’’ in § 322.2(k) of the Final Rule—the
                                              process these requests correctly, and mislead            of the dwelling loan that is the subject of the offer      foundational term of ‘‘mortgage assistance relief
                                              consumers about their eligibility for permanent loan     to provide mortgage assistance relief services,            service provider’’— to exclude ‘‘any person [that] is
                                              modifications. See OPLC at 2. Another said it was        including amounts for escrow accounts under                specifically excluded from the Federal Trade
                                              aware of servicers who instructed homeowners to          section 10 of the Real Estate Settlement Procedures        Commission’s jurisdiction pursuant to 15 U.S.C. 44
                                              stop making payments and, in some cases, required        Act (12 U.S.C. 2609), and (2) making the payments          and 45(a)(2).’’
                                              homeowners to pay a fee to be considered for a loan      of principal and interest and such other payments             174 Section 5(a)(2) of the FTC Act states: ‘‘The

                                              modification. LOLLAF at 2–3. In opposing the             with respect to the amounts received from the              Commission is hereby empowered and directed to
                                              exemption, a third commenter, a MARS provider,           consumer as may be required pursuant to the terms          prevent persons, partnerships, or corporations
                                              claimed that some lenders are ‘‘staffing up to create    of the mortgage servicing loan documents or                * * * from using unfair or deceptive acts or
                                              their own MARS entities’’ but did not elaborate          servicing contract.’’ This definition draws upon the       practices in or affecting commerce.’’ 15 U.S.C.
                                              further. See 1st ALC, Att. at 7. However, these          definition of servicer in the Real Estate Settlement       45(a)(2). Section 4 of the Act defines ‘‘corporation’’
                                              practices fall outside of the scope of this              Procedures Act. See 12 U.S.C. 2605(i). As noted            to include: ‘‘any company, trust, so-called
                                              rulemaking, which is focused on the conduct of           above, the Final Rule adds the phrase ‘‘that is the        Massachusetts trust, or association, incorporated or
                                              intermediaries who consumers retain to work with         subject of an offer to provide mortgage assistance         unincorporated, which is organized to carry on
                                              their lenders.                                           relief services’’ to the proposed definitions of           business for its own profit or that of its members.’’
                                                 166 CUUS at 3 (‘‘Consumers Union is not aware of      ‘‘dwelling loan holder’’ and ‘‘servicer.’’                 15 U.S.C. 44 (emphasis added).
                                                                                                          169 See CUUS at 3 (‘‘[C]onsumers Union is                  175 These nonprofit services are described in more
                                              any lenders or servicers actively marketing MARS
                                              services for a fee to their customers.’’); NAAG          concerned that the lender or servicer exemptions           detail in Section II.C. of the ANPR. MARS ANPR,
                                              (ANPR) at 13 (‘‘We are unaware of any banks, thrifts     may be used by MARS entities who otherwise                 74 FR at 26135.
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                                              or federal credit unions engaged in for-profit loan      provide or service loans and are technically lenders          176 See, e.g., AMA v. FTC, 638 F.2d 443 (2d Cir.

                                              modification or foreclosure rescue services, aside       or servicers, but are not the lenders or servicers for     1980); FTC v. Ameridebt, Inc., 343 F. Supp. 2d 451
                                              from negotiating loan modifications for consumers        the mortgage loan that is the subject of MARS              (D. Md. 2004).
                                              whose loans they are servicing.’’); Am. Bankers          services.’’)                                                  177 An entity that is registered as a tax exempt
                                              Ass’n (ABA) (ANPR) at 6; AFSA (ANPR) at 3; HPC              170 Section 322.2(j).
                                                                                                                                                                  nonprofit under the Internal Revenue Code is not
                                              (ANPR) at 2; OH AG (ANPR)                                   171 See MBA at 4 (contractors under the                 necessarily considered a nonprofit for the purposes
                                              at 5.                                                    supervision and control of the servicer do not ‘‘pose      of the exemption in the FTC Act. See, e.g., FTC v.
                                                 167 Section 322.2(j)(1)–(2).                          the risk of a foreclosure scam or phantom help’’).                                                     Continued

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                                              75106            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              C. Section 322.3: Prohibited                               services.180 Consumers who stop                           scope of the prohibition in the
                                              Representations                                            communicating with their lenders or                       NPRM,185 and with the comments
                                                                                                         servicers after purchasing MARS may                       indicating that consumers who follow
                                                Section 322.3 of the Final Rule                          not learn that the MARS provider is not                   this instruction are likely to be harmed
                                              prohibits MARS providers from making                       taking the actions necessary to deliver                   even after purchasing MARS.
                                              certain representations or                                 the results it promised.181 Finally, in
                                              misrepresentations in connection with                                                                                c. Legal Basis
                                                                                                         some cases, both before and after
                                              mortgage assistance relief services.                       purchasing MARS, consumers who do                         (1) Unfairness
                                              1. Section 322.3(a): Prohibited                            not communicate with their lenders or                       The Commission concludes that it is
                                              Statement                                                  servicers may not know that foreclosure                   an unfair practice for MARS providers
                                                                                                         and loss of their home is imminent.182                    to instruct consumers not to
                                                 Section 322.3(a) of the Final Rule                         A few commenters objected to this                      communicate with their lenders or
                                              bans MARS providers from instructing                       prohibition as it applied to attorneys,                   servicers, because that instruction:
                                              consumers not to communicate with                          voicing concern that it would prevent                       (1) Causes or is likely to cause
                                              their lender or servicer. The                              attorneys from properly advising their                    substantial injury to consumers,186 (2)
                                              Commission has concluded that giving                       clients as to their mortgages.183 As                      that is not outweighed by countervailing
                                              such instruction is an unfair practice. In                 described in § III.G. of this SBP, the                    benefits to consumers or competition,
                                              addition, the Commission has                               Final Rule exempts from § 322.3(a)                        and (3) is not reasonably avoidable by
                                              concluded that barring such instruction                    attorneys who provide MARS when                           consumers.187
                                              is reasonably related to the prevention                    they meet certain conditions.                               First, consumers who follow this
                                              of deception. The provision in the Final                                                                             instruction suffer or are likely to suffer
                                              Rule is slightly modified from the                         b. Final Section 322.3(a)
                                                                                                                                                                   substantial injury. As the commenters
                                              proposed rule, as detailed below.                             Section 322.3(a) of the Final Rule                     noted, consumers who stop
                                                                                                         adopts the proposed rule’s prohibition                    communicating with their lender or
                                              a. Public Comments on the Proposed                         on the instruction,184 with one
                                              Provision                                                                                                            servicer are deprived of critical
                                                                                                         clarification. The proposed rule                          information about (1) possible work-out
                                                Several commenters supported the                         prohibited MARS providers from giving                     options, (2) the veracity of the
                                              ban on instructing consumers not to                        consumers such instruction ‘‘in                           provider’s claims, (3) whether the
                                              speak with their lender or servicer,                       connection with the advertising,                          provider is actually performing, and (4)
                                              including two consumer groups, a                           marketing, promotion, offering for sale,                  in some cases, that foreclosure and the
                                              consortium of state banking regulators,                    or sale’’ of mortgage assistance relief                   loss of their homes is imminent.
                                              and two trade groups for the financial                     services. The Final Rule clarifies that                   Consumers who lack this information
                                              services industry.178 The comments                         MARS providers also are prohibited                        may end up paying hundreds or
                                              generally warned that financially-                         from giving consumers such instruction                    thousands of dollars for MARS services
                                              distressed consumers who receive this                      in connection with performing services                    that do not provide the promised relief,
                                              advice from purported MARS experts                         under their contracts. This change is                     and may even lose their homes.188
                                              and follow it are prevented from                           consistent with the discussion of the
                                              receiving valuable information from                                                                                    185 MARS    NPRM, 75 FR at 10715–16.
                                                                                                           180 CUUS    at 3 (‘‘[T]he foreclosure clock continues
                                              their lender or servicer. More                             to run, and rather than seeking help from a
                                                                                                                                                                     186 To  establish that an act or practice is unfair,
                                              specifically, consumers who cease such                                                                               the Commission must demonstrate actual or likely
                                                                                                         legitimate non-profit housing counseling agency,          consumer injury. 15 U.S.C. 45(n).
                                              communications prior to purchasing                         the homeowner is diverted away from legitimate               187 15 U.S.C. 45(n) (codifying the Commission’s
                                              MARS do not learn about workout or                         sources of help by the MARS provider’s assurances         unfairness analysis); see also In re Int’l Harvester
                                                                                                         that they will deliver results.’’); see also CRC
                                              modification offers available from their                   (ANPR) at 7 (‘‘People who do not have a chance of
                                                                                                                                                                   Co., 104 F.T.C. 949, 1079, 1074 n.3 (1984),
                                              lender or servicer,179 as well as other                                                                              reprinting Letter from the FTC to Hon. Wendell
                                                                                                         keeping the home are being steered away from              Ford and Hon. John Danforth, Comm. on
                                              information that may be material in                        legitimate, free homeowner counseling services or         Commerce, Sci. and Transp., United States Senate,
                                              evaluating the veracity of the claims                      are failing to take any action before it is too late      Commission Statement of Policy on the Scope of
                                                                                                         because they have been assured everything is being
                                              made by the MARS provider about its                        taken care of for them already. All too often, it is
                                                                                                                                                                   Consumer Unfairness Jurisdiction (Dec. 17, 1980)
                                                                                                                                                                   (‘‘Unfairness Policy Statement’’).
                                                                                                         not.’’).                                                     188 The FTC has observed these losses repeatedly
                                                                                                           181 LOLLAF at 3 (‘‘[C]ommunication with a
                                              Ameridebt, Inc., 343 F. Supp. 2d 451, 460–61 (D.                                                                     in its law enforcement work. See, e.g., FTC v. Loss
                                              Md. 2004).                                                 servicer may allow a homeowner to determine               Mitigation Servs., Inc., No. SACV09–800 DOC
                                                  178 See, e.g., CUUS at 3 (‘‘strongly support[ ] the    whether or not the MARS provider is providing any         (ANX), Mem. Supp. Ex Parte TRO at 18–19 (C.D.
                                              Rule’s prohibition on any representation that would        service on his or her behalf, as that provider            Cal. filed July 13, 2009) (‘‘In numerous instances,
                                              encourage consumers not to speak with their                promised.’’); CUUS at 3 (‘‘Consumers report often         Defendants have warned consumers that any
                                              servicer or lender’’); LOLLAF at 3 (‘‘endorse[ ] the       being instructed by MARS providers to cease all           contact with their lenders will hinder Defendants’
                                              proposed rule’s ban on MARS providers advising             communication with their lenders and/or loan              modification negotiations, and have threatened to
                                              consumers not to contact their mortgage lenders            servicers, even though the provider subsequently          drop consumers and deny them refunds if they
                                              and servicers’’); CSBS at 3 (supports prohibiting          does nothing of value on the homeowner’s behalf.’’).      independently talk to their lenders. Relying on this
                                                                                                           182 AFSA at 4 (‘‘[L]enders and servicers would be
                                              MARS providers from instructing consumers not to                                                                     advice, many consumers avoid their lenders during
                                              contact their lenders or servicers but agrees with         unable to warn a borrower of a potential                  critical periods, including after receiving notices of
                                              limited exemption for attorneys); AFSA at 4                foreclosure.’’); LOLLAF at 3 (‘‘[U]rging a homeowner      default or foreclosure, or other important
                                              (‘‘strongly support[ ] proposed § 322.3(a). MARS           not to communicate with his/her servicers only            communications. * * * At that point the
                                              providers should be banned from advising                   increases the likelihood that a homeowner will end        cumulative effects of Defendant’s
                                              consumers not to contact or communicate with               up in foreclosure, as well as burdened with               misrepresentations are devastating * * * [including
                                              their lenders or servicers * * * [T]elling a borrower      additional late charges and other fees.’’).               that] many consumers have lost their homes.’’)
                                              not to contact a lender or servicer is the worst             183 See, e.g., ABA at 5; Bronson at 5.
                                                                                                                                                                   (citations omitted); FTC v. Kirkland Young, LLC,
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                                              advice someone can give a borrower at risk or in             184 The Final Rule does not prohibit MARS               No. 09–23507, Mem. Supp. P.I. at 19 (S.D. Fla. filed
                                              default.’’).                                               providers from discussing with consumers the              Nov. 24, 2009) (‘‘[By] attempting to sever
                                                  179 AFSA at 4 (‘‘If lenders and servicers are unable   advantages and disadvantages of communicating             communications between consumers and their
                                              to contact borrowers, they are unable to offer             with their lenders and servicers, so long as              lenders, Defendants harm consumers. * * * The
                                              workouts or loan modifications.’’); LOLLAF at 3            providers do not make any deceptive claims in             cost to consumers is both in time and money, which
                                              (‘‘[O]ngoing communication with mortgage servicers         doing so. Rather, the Final Rule bars MARS                are obviously important to consumers who are
                                              is key to any homeowner negotiating a workout to           providers from instructing consumers not to engage        behind on their mortgages and facing the threat of
                                              save their home from foreclosure.’’).                      in these communications.                                  foreclosure on their family’s home.’’); FTC v. US

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                75107

                                                 Second, the injury is not outweighed                    The Commission therefore concludes                  d. Recommendations by Commenters
                                              by any countervailing benefits to                        that MARS providers instructing                       Not Adopted
                                              consumers or competition. There is                       consumers not to communicate with                       Several commenters, including a
                                              nothing in the record suggesting that                    their lenders or servicers is an unfair act           consortium of state attorneys general
                                              there are any circumstances in which a                   or practice. The Final Rule’s prohibition             and a consumer group, recommended
                                              non-attorney MARS provider’s                             on this instruction is intended to                    that the Commission adopt an
                                              instruction not to communicate with a                    preserve and foster consumer access to                additional prohibition, not included in
                                              consumer’s lender or servicer would                      information from lenders and servicers                proposed § 322.3(a), that would ban
                                              benefit the consumer.189 Similarly,                      that may shed light on issues critical to             providers from instructing consumers to
                                              nothing in the record, including the                     consumers’ decision making and their                  stop making their mortgage
                                              comments of MARS providers,                              well-being.                                           payments.193 The commenters asserted
                                              identifies any benefits to competition                                                                         that MARS providers commonly
                                                                                                       (2) Prevention of Deception
                                              from such an instruction. A ‘‘benefit’’                                                                        mislead consumers concerning the
                                              this practice might bring is to increase                   The Final Rule’s prohibition on                     consequences of not paying on their
                                              MARS providers’ revenues by                              instructing consumers not to                          mortgages, for example, by telling them
                                              increasing the number of consumers                       communicate with their lenders and                    that lenders will not work with them
                                              who decide to contract with them. Such                   servicers will remove a barrier to                    unless they stop paying.194
                                              ‘‘benefits’’ are not cognizable in an                    consumers obtaining information that                    The Commission declines to adopt
                                              unfairness analysis.190 Consequently,                    will enable them to evaluate the truth                this prohibition. The benefits and costs
                                              the Commission concludes that there                      and accuracy of the provider’s claims                 to consumers of failing to pay their
                                              are no benefits to consumers or                          and to gauge the provider’s performance               mortgage depend on their individual
                                              competition from this act or practice,                   against those claims. This provision                  circumstances. In most instances, it is
                                              and, even if there were, they clearly are                thus will help consumers avoid being                  not in the best interest of a consumer to
                                              outweighed by the substantial injury to                  deceived. Accordingly, the Commission                 stop paying,195 yet there are some, albeit
                                              consumers discussed above.                               has concluded that this prohibition is                limited, circumstances in which it
                                                 Finally, consumers cannot reasonably                  reasonably related to the goal of                     might be beneficial for some consumers
                                              avoid the injury this act or practice                    preventing deception.192                              to do so.196 The Commission declines to
                                              causes. Many consumers are unaware of
                                                                                                          192 The Commission concludes that prohibiting
                                              the negative consequences of failing to                                                                        have information that would be valuable to
                                                                                                       MARS providers from instructing consumers to stop     consumers, the inconsistent and contradictory
                                              communicate with their lender or                         communicating with their lender or servicer does      nature of these statements would not prevent
                                              servicer. Moreover, the claims many                      not violate the First Amendment. The Rule restricts   deception and would, at best, confuse consumers.
                                              MARS providers make that they have                       speech that is ‘‘commercial’’ in nature because it    See, e.g., Deception Policy Statement, infra note
                                              specialized expertise 191 make it less                   arises in the context of a commercial transaction     200, at 180; Thompson Med. Co., 104 F.T.C. at 842–
                                                                                                       and is ‘‘expression related solely to the economic    43; In re Figgie Int’l, Inc., 107 F.T.C. 313, 401
                                              likely that consumers will disregard or                  interests of the speaker and its audience.’’ Cent.    (1986), aff’d sub nom, Figgie Int’l Inc. v. FTC, 817
                                              discount their advice. As a result,                      Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n,        F.2d 102 (4th Cir. 1987) (unpublished table
                                              consumers cannot reasonably avoid the                    447 U.S. 557, 561 (1980). The intermediate scrutiny   decision).
                                              harm from such instructions.                             standard applies to restrictions on nonmisleading         193 CUUS at 3 (‘‘MARS providers should be
                                                                                                       commercial speech. Milavetz, Gallop & Milavetz,       prohibited from advising current or prospective
                                                                                                       P.A. v. United States, 130 S. Ct 1324, 1339           clients who are not yet in default to stop making
                                              Foreclosure Relief Corp., No. SACV09–768 JVS                (2010), slip op. at 19; Conn. State Bar Ass’n v.   payments on their mortgage loans.’’); NAAG at 4
                                              (MGX), Mem. Supp. TRO at 12 (C.D. Cal. filed July        United States, 620 F.3d 81, 95 (2d Cir. 2010).        (‘‘[W]e would suggest making clear that consultants
                                              7, 2009) (‘‘At the company’s behest, consumers also         To pass constitutional muster, commercial speech   may not advise consumers not to pay their
                                              stopped answering inquiries from their lenders, and      restrictions subject to intermediate scrutiny must    mortgages.’’).
                                              therefore did not realize that their modifications       satisfy the test the Court set forth in Central           194 See, e.g., NAAG at 4 (‘‘We are aware of a
                                              were not in process and that their homes might be        Hudson. Cent. Hudson Gas & Elec. Corp., 447 U.S.      number of rescue consultants who incorrectly claim
                                              at risk. * * * Defendants’ inaction caused some          at 566. The Final Rule’s prohibition on instructing   that consumers’ lenders will not work with them
                                              lenders to begin foreclosure proceedings against         consumers not to communicate with their lenders       until they are behind on their mortgage payments.
                                              consumers. Other consumers lost their homes.’’);         and servicers satisfies this test. First, the         We also are aware of consultants who advise
                                              FTC v. Truman Foreclosure Assistance, LLC, No.           prohibition serves a substantial governmental         consumers not to make mortgage payments so that
                                              09–23543, Mem. Supp. P.I. at 20 (S.D. Fla. filed         interest in ensuring that financially distressed      they will be able to afford mortgage loan
                                              Nov. 23, 2009) (‘‘When consumers speak with their        consumers who face foreclosure have access to         modification fees.’’); CUUS at 3 (‘‘Consumers often
                                              lenders directly, they often discover that               information that may prevent injury and may be        report being instructed by for-profit MARS entities
                                              Defendants had not yet contacted the lender or only      critical to their ability to make decisions free of   to stop making mortgage payments in order to
                                              had left messages or had non-substantive contacts        deception and confusion. See, e.g., Friedman v.       qualify for loan modification services or other forms
                                              with the lender.’’).                                     Rogers, 440 U.S. 1, 16 (1979) (upholding ban on use   of foreclosure relief.’’).
                                                 189 Cf Section III.G.3. (discussing the possible                                                                195 CUUS at 3 (Consumers are ‘‘often unaware that
                                                                                                       of trade names by optometrists because ‘‘[r]ather
                                              benefits to consumers when attorneys who                 than stifling commercial speech, [the ban] ensures    [following MARS providers’ advice to stop paying
                                              represent them in legal matters give an instruction      that information regarding optometrical services      their mortgage] may ruin their credit scores and
                                              to stop communicating with adverse parties such as       will be communicated more fully and accurately to     lead to fewer options to avoid foreclosure.’’); CUNA
                                              their lenders or servicers).                             consumers’’). Second, prohibiting the instruction     at 2 (following this instruction ‘‘only serves to
                                                 190 Increased revenues or profits to a seller                                                               increase the overall mortgage debt in addition to the
                                                                                                       directly advances this goal by removing
                                              engaged in an act or practice are not necessarily a      impediments to the availability of this information   fees and other penalties that result when payments
                                              benefit to competition for purposes of unfairness        to consumers. Third, there is a reasonable fit        to the servicer or lender are not made in a timely
                                              analysis because ‘‘[t]he benefit [from the conduct]      between the problem—MARS providers impeding           manner’’).
                                              must be to * * * competition—not simply to the           consumers’ access to critical information—and the         196 For example, the record suggests that some
                                              actor.’’ J. Howard Beales, III, The FTC’s Use of         solution, which would remove the impediment.          lenders, in the current financial crisis, may be more
                                              Unfairness Authority: Its Rise, Fall, and                Moreover, alternatives that are less restrictive of   responsive to borrowers who are delinquent,
                                              Resurrection, 2003 WL 21501809, at *14 n.51              speech, such as a disclosure remedy, would not be     especially if the borrower would not qualify for a
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                                              (2003); see In re Orkin Exterminating Co., 108           effective means of achieving the goal. See, e.g.,     loan modification under various government
                                              F.T.C. 263, 364–65 (1986) (discussing benefits to        Pearson v. Shalala, 164 F.3d 650, 659 (DC Cir.        programs. See, e.g., Suzanne Capner, Lenders Await
                                              process of competition), aff’d 849 F.2d 1354 (11th       1999) (noting that the banning of a claim may be      Call Back After Mobile Giveaway, Fin. Times, Jun.
                                              Cir. 1988); FTC v. J.K. Publications, Inc., 99           permissible where a disclosure would not eliminate    28, 2010 (some lenders are sending mobile phones
                                              F.Supp.2d 1176 (C.D. Cal. 2000); FTC v. Windward         the harm the claim causes). For example, if MARS      programmed to call their loss mitigation
                                              Mktg, No. 1:96–CV–615–FMH, 1997 U.S. Dist.               providers were permitted to instruct consumers not    departments to delinquent borrowers and offering
                                              LEXIS 17114, *29–30 (N.D. Ga. Sept. 30, 1997).           to communicate with their lender or servicer, but     them lower monthly payments when borrowers
                                                 191 See supra notes 51–53.                            were required to disclose that these entities may                                                Continued

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                                              75108            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              adopt the recommended prohibition                        commenters recommended adding                        additional deceptive practices identified
                                              because it could prevent MARS                            additional examples, as detailed below.              in the comments.
                                              providers from disseminating truthful,                                                                           Sections 322.3(b)(1) and (2) prohibit
                                                                                                       b. Final Section 322.3(b)                            MARS providers from misrepresenting
                                              non-misleading information that could
                                              be useful to some consumers.                                Section 322.3(b) of the Final Rule, like ‘‘[t]he likelihood of negotiating,
                                                Nevertheless, the Commission                           the proposed rule, prohibits                         obtaining, or arranging any represented
                                              recognizes that most consumers would                     misrepresenting any material aspect of               service or result’’ and ‘‘the amount of
                                              be harmed if they complied with a                        any MARS, to prevent deception. The                  time it will take’’ to do so. As discussed
                                              MARS provider’s instruction to stop                      Final Rule also adopts proposed                      in § II of this SBP, MARS providers
                                              paying on their mortgages. Therefore, as                 §§ 322.3(b)(1)–(7) without substantive               commonly persuade consumers to
                                              discussed more fully in § III.D. of this                 modification, but adds five examples of              purchase their services with false or
                                              SBP, the Final Rule requires that if                     prohibited misrepresentations: (a)                   misleading promises that they can
                                              providers instruct consumers not to pay                  Misrepresentations about whether                     achieve specific successful results in a
                                              on their mortgages, they must disclose                   consumers will receive legal services;               short time frame.203 This type of
                                              clearly and prominently that not paying                  (b) misrepresentations of the benefits               information is central to consumers’
                                              may cause consumers to lose their home                   and costs of using alternatives to for-              decisions to purchase MARS.
                                              and damage their credit rating.197                       profit MARS to obtain relief, such as                   Section 322.3(b)(3) prohibits
                                                                                                       working with the consumer’s lender or                misrepresentations that any MARS is
                                              2. Section 322.3(b): Prohibited                          servicer directly or consulting with a               ‘‘affiliated with, endorsed or approved
                                              Misrepresentations                                       nonprofit housing counselor; (c)                     by, or otherwise associated with’’ the
                                              a. Proposed Provision                                    misrepresentations regarding the                     government, nonprofit housing
                                                                                                       amount or percentage of debts that                   programs, or consumers’ lenders or
                                                Section 322.3(b) of the proposed rule                  consumers may save by purchasing                     servicers. To confer greater legitimacy
                                              prohibited express or implied                            MARS; (d) misrepresentations regarding on their services, MARS providers
                                              misrepresentations of any material                       the total costs consumers must pay to                frequently falsely claim that their
                                              aspect of any mortgage assistance relief                 purchase MARS; and (e)                               services are associated with such trusted
                                              service. To provide clarity and guidance                 misrepresentations regarding the terms,              third-party entities or programs.204
                                              to the industry, proposed §§ 322.3(b)(1)–                conditions, or limitations of any offer of When these claims are made expressly,
                                              (7) set forth a non-exhaustive list of                   MARS the provider obtains from the                   as they frequently are, they are
                                              specific misrepresentations that would                   consumer’s lender or servicer, including presumed to be material to consumers’
                                              violate the Rule, including                              the amount of time the consumer has to purchasing decisions.205 Even when
                                              misrepresentations about the following:                  accept or reject the offer.199                       affiliation, endorsement, or approval are
                                                (1) The likelihood of negotiating,                        A claim is ‘‘deceptive’’ under Section            implied, such claims are clearly
                                              obtaining, or arranging a specific form of               5 of the FTC Act if there is ‘‘a                     material because some consumers are
                                              mortgage relief;                                         representation or omission of fact that is more likely to purchase MARS they
                                                (2) The amount of time needed to                       likely to mislead consumers acting                   believe are endorsed or approved by the
                                              obtain the promised mortgage relief;                     reasonably under the circumstances,                  government, non-profit programs, or
                                                (3) The affiliation of the provider with               and that representation or omission is               their lender or servicer.
                                              the government, public programs, or                      material.’’ 200 A representation is                     Sections 322.3(b)(4) and (5) bar
                                              consumers’ lenders or servicers;                         material if it is likely to influence                misrepresentations concerning
                                                (4) Consumers’ payment obligations                     consumers’ decisions or conduct.201 The consumers’ payment and other
                                              under their mortgage loans;                              types of misrepresentations specified in obligations under their mortgage loans
                                                (5) The terms or conditions of                         §§ 322.3(b)(1)–(12) of the Final Rule are            and the amount owed on them. MARS
                                              consumers’ mortgage loans;                               presumed to be material to consumers                 providers, for example, often falsely
                                                (6) The provider’s refund and                          because they pertain to the cost, central            state or imply that once consumers
                                              cancellation policies; and                               characteristics, efficacy, or other                  retain a MARS provider, their
                                                (7) That the provider has performed                    important attributes of MARS.202                     obligations to pay their mortgages are
                                              the promised services or has the right to                   The exemplar misrepresentations                   suspended and their lenders will not
                                              demand payment.                                          specified in the Final Rule track the                foreclose.206 In fact, consumers who
                                                The Commission received only a few                     types of false or misleading claims that             stop making payments may incur
                                              comments specifically addressing this                    the Commission and the states have                   additional fees and charges and lose
                                              proposed provision. The comments                         challenged in law enforcement actions                their homes, regardless of whether they
                                              were generally supportive and did not                    against MARS providers, as described in have retained a MARS provider. The
                                              recommended substantive modification                     § II.C. of this SBP, and also address                purported benefit of immunity from
                                              to the proposed exemplar                                                                                      foreclosure is material to consumers’
                                              misrepresentations 198—although some                     misrepresentations that give rise to a violation     decisions to purchase MARS and
                                                                                                       under the proposed rule.’’); CSBS at 3 (‘‘We endorse whether to continue making payments
                                              call), available at           the Commission’s effort to prohibit
                                              d6df8bec-82fe-11df-8b15-00144feabdc0.html; David         misrepresentations of any material aspect of any     on their mortgages. Section 322.3(b)(4)
                                              Streitfeld & Louise Story, Bank of America to            MARS.’’); LOLLAF at 3 (‘‘The prohibited
                                              Reduce Mortgage Balances, N.Y. Times, Mar. 24,           misrepresentations enumerated in the proposed            203 See supra notes 70 & 75.
                                              2010, available at          rule accurately target the deceptive conduct that it     204 See supra notes 72–74.
                                              03/25/business/25housing.html (Bank of America           is intended to prevent and may help dispel the           205 See Deception Policy Statement, supra note
                                              offers mortgage balance reductions up to 30% to          misconceptions that consumers hold regarding           200, at 182.
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                                              borrowers at least 60 days delinquent on their           MARS providers.’’); MBA at 2.                            206 See, e.g., FTC v. Fed. Loan Modification Law
                                                                                                          199 Sections 322.3(b)(8)–(12).
                                              loans). How effective a consumer may be in                                                                      Ctr., LLP, No. SACV09–401 CJC (MLGx), Mem.
                                              leveraging delinquency is highly dependent on the           200 Federal Trade Commission Policy Statement
                                                                                                                                                              Supp. TRO at 15 (C.D. Cal., Amd. Compl. filed June
                                              particular lender, the type of loan, and the             on Deception, appended to In re Cliffdale Assocs.,     24, 2009) (defendant allegedly instructing
                                              consumer’s financial situation.                          Inc., 103 F.T.C. 110, 174–83 (1984) (‘‘Deception       consumers to stop making mortgage payments
                                                197 See § 322.4(c).                                    Policy Statement’’).                                   because such payments were unnecessary or would
                                                198 CUUS at 4 (‘‘Consumers Union supports the             201 Id. at 182–83.
                                                                                                                                                              adversely affect consumer’s ability to obtain a loan
                                              non-exclusive enumeration of other                          202 Id. at 182–83.                                  modification).

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                     75109

                                              will prohibit any such                                   demand money from the consumer. This                      believe that attorneys are adept at
                                              misrepresentations regarding the                         provision will protect consumers from                     negotiating with lenders or services and,
                                              obligation of consumers to make                          MARS providers who make false claims                      thus, that having their assistance will
                                              payments on their current mortgages                      as to whether they are entitled to receive                increase the likelihood of obtaining
                                              and the consequences of failing to pay.                  fees. As detailed in § III.E. of this SBP,                mortgage relief.
                                              Additionally, § 322.3(b)(5) prohibits                    the Final Rule prohibits providers from                      Section 322.3(b)(9) prohibits
                                              providers from misrepresenting the                       collecting any fees until the consumer                    misrepresentations concerning ‘‘[t]he
                                              terms or conditions of consumers’                        has accepted the results delivered by the                 availability, performance, cost, or
                                              current loans—for example, by falsely                    provider. Section 322.3(b)(7) will help                   characteristics of any alternative to for-
                                              representing that the terms are                          to prevent MARS providers from                            profit mortgage assistance relief services
                                              unfavorable in some regard in order to                   circumventing the advance fee ban in                      through which the consumer can obtain
                                              persuade consumers to purchase MARS                      the Final Rule by misrepresenting that                    mortgage assistance relief, including
                                              that purportedly will result in                          consumers owe fees before they have                       negotiating directly with the dwelling
                                              consumers obtaining more favorable                       accepted the results delivered by the                     loan holder or servicer, or using any
                                              terms. Information regarding the terms                   provider. Additionally, the claim as to                   nonprofit housing counselor agency or
                                              and conditions of consumers’ loans is                    results obtained is material to                           program.’’ As discussed in § II.A. of this
                                              material to them because it is likely to                 consumers’ decisions whether or not to                    SBP, consumers sometimes can obtain
                                              influence their decision whether to                      pay the providers.210                                     mortgage relief at no cost from nonprofit
                                              purchase MARS.                                              Section 322.3(b)(8) prohibits                          housing counselor programs or by
                                                 Section 322.3(b)(6) prohibits                         providers from misrepresenting that                       working directly with their lenders or
                                              misrepresentations of MARS providers’                    consumers will ‘‘receive legal                            servicers. For-profit MARS providers,
                                              refund, exchange, or cancellation                        representation.’’ The record                              therefore, have an incentive to make
                                              policies, including the ‘‘likelihood of                  demonstrates that MARS providers                          false or misleading claims about the
                                              obtaining a full or partial refund.’’                    commonly mislead consumers into                           effectiveness and value of these forms of
                                              MARS providers commonly tout their                       believing that they offer legal services                  competing assistance. The FTC has
                                              liberal refund and cancellation policies,                and that they employ attorneys who will                   charged in its law enforcement actions
                                              often to give consumers a sense of                       represent consumers in legal                              that some MARS providers, in fact,
                                              security that the upfront fee they are                   proceedings.211 Further, MARS                             make such claims.213 Information about
                                              asked to pay will be refunded if the                     providers often falsely claim to be law                   potential alternatives to for-profit MARS
                                              provider is unsuccessful. In fact, many                  firms or affiliated with attorneys.212                    is likely to influence consumers’
                                              providers do not provide refunds or                      Whether licensed legal professionals                      decisions regarding whether to purchase
                                              have restrictive cancellation policies.207               will be working on consumers’ behalf is                   MARS from a for-profit provider, and if
                                              Refund and cancellation policies are                     material because some consumers may                       so, at what price.214
                                              important considerations for consumers                                                                                Section 322.3(b)(10) prohibits MARS
                                              in deciding whether to purchase                             210 Section 322.3(b)(7) of the Final Rule makes        providers from misrepresenting the
                                              MARS.208 As detailed in § III.E. of this                 one non-substantive modification to the proposed          ‘‘amount of money or the percentage of
                                                                                                       provision. Proposed § 322.3(b)(7) prohibited
                                              SBP, the Final Rule effectively allows                   misrepresenting ‘‘[t]hat the mortgage assistance
                                                                                                                                                                 the debt amount that a consumer may
                                              consumers to withdraw from MARS at                       relief service provider has completed the                 save by using the mortgage assistance
                                              any time, and prohibits MARS providers                   represented services, as specified in § 322.5, or         relief service.’’ Commonly MARS
                                              from collecting advance fees. Section                    otherwise has a right to claim, demand, charge,           providers have claimed that they can
                                                                                                       collect or receive payment or other consideration.’’
                                              322.3(b)(6) will help ensure that MARS                   For clarity, the Final Rule removes the phrase, ‘‘as
                                                                                                                                                                 obtain specific interest rate reductions
                                              providers do not misrepresent to                         specified in § 322.5,’’ and the word ‘‘otherwise.’’       and other concessions from lenders,
                                              consumers that they are, in fact,                           211 See supra notes 85–86; OPLC at 2–3 (‘‘Often        when, in reality, the results are true
                                              obligated to continue to use the                         mortgage assistance relief services (MARS)                only for few, if any, consumers.215 This
                                                                                                       providers will imply that they will represent the         provision will prohibit providers from
                                              provider’s services. This provision will                 homeowners in legal proceedings, or otherwise
                                              also help ensure that providers do not                   suggest or state that they have attorneys on staff that   promising more savings than they can
                                              misrepresent whether they will refund                    will resolve the homeowners’ legal proceedings.
                                              fees they collect—in compliance with                     The list of prohibited representations should                213 See, e.g., FTC v. Loss Mitigation Servs., Inc.,

                                                                                                       include a prohibition on such implications or             No. SACV09–800 DOC (ANX) (C.D. Cal. filed July
                                              § 322.5 of the Final Rule—after the                      statements. * * *’’); Francis at 1 (noting concern        13, 2009) (alleging that defendants represented on
                                              consumer has accepted the mortgage                       that some MARS providers use an attorney’s name           their Web site that ‘‘Representing Yourself Can Be
                                              relief delivered.209                                     in their marketing and mislead consumers ‘‘as to          Hazardous!’’ and that ‘‘you will be offered less of a
                                                 Section 322.3(b)(7) prohibits                         whether or not an attorney-client relationship will       modification or short sale than you could really
                                              misrepresentations that a MARS                           exist’’). One comment recommended that the Rule           get’’); FTC v. Truman Foreclosure Assistance, LLC,
                                                                                                       require MARS providers who advertise legal                No. 09–23543, Mem. Supp. P.I. at 20 (S.D. Fla. filed
                                              provider has achieved a represented                      services to disclose whether an attorney will             Nov. 23, 2009) (alleging that defendants’ Web sites
                                              result or has a right to claim, charge, or               represent consumers in foreclosure proceedings and        stated ‘‘Don’t go through this alone. You need
                                                                                                       to provide the name of such attorney, and require         professional help at a time like this.’’).
                                                207 See  supra note 77.                                that any MARS provider that uses the name of a law           214 It is a deceptive practice for advertisers to

                                                208 The   TSR Rule similarly prohibits                 firm or attorney disclose whether it employs              make false or misleading comparisons between
                                              misrepresentations about telemarketers’ refund and       attorneys licensed to practice law in the consumer’s      their product and that of competing products. See,
                                              cancellation policies. See 6 CFR 310.3(a)(2)(iv). In     state and whether they would represent the                e.g., Novartis Corp. v. FTC, 223 F.3d 783 (DC Cir.
                                              numerous individual cases, the Commission has            consumer in foreclosure proceedings. Francis at 1.        2000) (advertising by drug company was deceptive
                                              challenged as deceptive misrepresentations               The Commission believes that requiring these              because it falsely claimed that its pain pills were
                                              concerning the refund and cancellation polices of        disclosures is unnecessary in light of the                superior to other analgesics for treating back pain);
                                              MARS providers. See FTC Case List, supra note 28.        prohibition on express or implied                         Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992)
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                                                 209 Thus, for example, if a MARS provider             misrepresentations that a consumer will receive           (advertising was deceptive because it falsely
                                              represents that the fee it collects once the consumer    legal representation. The Commission believes that        implied Kraft’s cheese slices had more calcium than
                                              has accepted the result the provider has delivered       a general statement that a MARS provider offers           imitation cheese slices).
                                              may later be refundable under certain conditions         legal services, in the absence of a qualifying               215 See, e.g., FTC v. Data Med. Capital, Inc., No.

                                              (e.g., the consumer decides his or her monthly           disclosure, is likely to convey an implied claim that     SA–CV–99–1266 AHS (Eex), Mem. Supp. Contempt
                                              payments are unaffordable), then any failure by the      the attorney is properly licensed and will represent      at 12 (C.D. Cal. filed May 27, 2009) (alleging that
                                              provider to observe this policy would constitute a       consumers in a foreclosure action.                        defendant claimed it could reduce consumers’
                                              violation of § 322.3(b)(6).                                 212 See supra notes 84–88 and accompanying text.       interest rates to 2 to 5 percent).

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                                              deliver, including any promised                           representation is made, the provider                     obtain the advertised results, i.e., that
                                              reduction in the interest rate on a                       possesses and relies upon competent and                  the typical consumer who purchases
                                              mortgage loan—a consideration of                          reliable evidence that substantiates that the            MARS from that provider will achieve
                                                                                                        representation is true. For the purposes of
                                              central importance to consumers.                          this paragraph, ‘‘competent and reliable
                                                                                                                                                                 that result.220
                                                  Section 322.3(b)(11) prohibits MARS                   evidence’’ means tests, analyses, research,
                                                                                                                                                                   Providers cannot circumvent the
                                              providers from misrepresenting the                        studies, or other evidence based on the                  substantiation requirements by making
                                              ‘‘total cost to purchase the mortgage                     expertise of professionals in the relevant               general, non-specific claims. Thus, for
                                              assistance relief service.’’ This provision               area, that have been conducted and evaluated             example, if a MARS provider makes
                                              is designed to prevent providers from                     in an objective manner by individuals                    only a general savings claim (e.g., ‘‘we
                                              making deceptive claims about the                         qualified to do so, using procedures generally           will help you reduce your mortgage
                                              amount of their fees—a pivotal fact for                   accepted in the profession to yield accurate             payments’’), without specifying a
                                                                                                        and reliable results.                                    percentage or amount of savings, these
                                              consumers considering whether to
                                              purchase MARS.                                               Section 322.3(c) also clarifies the                   claims are likely to convey that
                                                  Finally, § 322.3(b)(12) prohibits                     types of evidence that MARS providers                    consumers can expect to achieve a
                                              MARS providers from misrepresenting                       must possess and rely upon to comply                     result that will be beneficial to them and
                                              ‘‘[t]he terms, conditions, or limitations                 with § 322.3(c) when representing the                    that the benefits will be substantial.221
                                              of any offer of mortgage assistance relief                ‘‘benefits, performance, or efficacy’’ of
                                              the provider obtains from the                             any MARS. This provision encompasses                        220 It is deceptive to make unqualified

                                                                                                        a wide variety of claims, including but                  performance claims that are only true for some
                                              consumer’s dwelling loan holder or                                                                                 consumers, because reasonable consumers are
                                              servicer, including the time period in                    not limited to: the provider’s ability to                likely to interpret such claims to apply to the
                                              which the consumer must decide to                         save consumers a specific amount of                      typical consumer. See FTC v. Five-Star Auto Club,
                                              accept the offer.’’ As discussed in § III.E.              money (e.g., a reduction in interest rate                Inc., 97 F. Supp. 2d 502, 528–29 (S.D.N.Y. 2000)
                                                                                                        or monthly payments), the likelihood                     (holding that in the face of express earnings claims
                                              of this SBP, the Final Rule allows                                                                                 for multi-level marketing scheme, it was reasonable
                                              consumers to reject the results obtained                  that the provider will secure a loan                     for consumers to have assumed the promised
                                              by MARS providers, in which case they                     modification or other results for                        rewards were achieved by the typical participant);
                                              do not have to pay the provider’s fee.                    consumers, and the amount of time it                     Chrysler Corp. v. FTC, 561 F.2d 357, 363 (DC Cir.
                                                                                                        will take for the provider to secure a                   1977); In re Ford Motor Co., 87 F.T.C. 756, 778, aff’d
                                              When a MARS provider obtains an offer                                                                              in part and remanded in part, 87 F.T.C. 792 (1976);
                                              for a loan modification or other                          loan modification or other result.                       In re J. B. Williams Co., 68 F.T.C. 481, 539 (1965),
                                              mortgage relief and presents it to the                       Advertisers and marketers that make                   aff’d as modified, 381 F.2d 884 (6th Cir. 1967); FTC
                                              consumer, the terms, conditions, and                      objective claims about their products                    v. Feil, 285 F.2d 879, 885–87 & n.19 (9th Cir. 1960);
                                              limitations of the offer are material to                  must have a ‘‘reasonable basis’’ to                      cf. Guides Concerning the Use of Endorsements and
                                                                                                        substantiate them.218 In the particular                  Testimonials in Advertising, 16 CFR 255.2 (‘‘An
                                              the consumer’s decision whether to                                                                                 advertisement containing an endorsement relating
                                              accept it and pay the provider’s fee.                     context of MARS, when making claims                      the experience of one or more consumers on a
                                              Additionally, it is material for                          regarding the performance, benefits, or                  central or key attribute of the product or service
                                              consumers to know how much time                           efficacy of these services, providers                    also will likely be interpreted as representing that
                                                                                                        must possess a reasonable basis in the                   the endorser’s experience is representative of what
                                              they have to accept or reject the offer for                                                                        consumers will generally achieve with the
                                              mortgage relief, so that they make a                      form of ‘‘competent and reliable                         advertised product or service. * * *’’); In re
                                              timely decision. This provision will                      evidence’’ to support the claim.219 Thus,                Cliffdale Assocs., 103 F.T.C. 110, 171–73 (1984);
                                              ensure that providers do not deceive                      when a MARS provider represents that                     Porter & Dietsch, Inc. v. FTC, 605 F.2d 294, 302–
                                                                                                        it will save consumers money or reduce                   03 (7th Cir. 1979).
                                              consumers regarding the results they                                                                                  Although providers may use samples of their
                                              have obtained and do not make                             their debt amount or interest rate, this                 historical data to substantiate savings claims, these
                                              misrepresentations that pressure them                     claim must be supported by competent                     samples must be representative of the entire
                                              into accepting unfavorable terms.216 It is                and reliable, methodologically sound                     relevant population of past customers. Providers
                                                                                                        evidence showing that consumers who                      using samples must, among other things, employ
                                              thus reasonably related to preventing                                                                              appropriate sampling techniques, proper statistical
                                                                                                        purchase the service generally will
                                              providers from undermining the ability                                                                             analysis, and safeguards for reducing bias and
                                              of consumers to accept or reject the                                                                               random error. Providers may not cherry-pick
                                                                                                          218 It is an unfair and deceptive practice, in
                                                                                                                                                                 specific categories of consumers or exclude others
                                              offer.                                                    violation of Section 5 of the FTC Act, to make an        in order to inflate the savings. See, e.g., In re Kroger
                                                                                                        express or implied objective claim without a             Co., 98 F.T.C. 639, 741–46 (1979) (initial decision),
                                              c. Section 322.3(c): Substantiation                       reasonable basis supporting it. See, e.g., FTC v.        aff’d, 98 F.T.C. at 721 (1981) (claims based on
                                                 Commission law enforcement actions                     Pantron I Corp., 33 F.2d 1088, 1096 (9th Cir. 1994);     sampling were deceptive because certain categories
                                                                                                        Removatron Int’l Corp., 111 F.T.C. 206, 296–99           were systematically excluded and because the
                                              reveal that MARS providers often make                     (1988), aff’d, 884 F.2d 1489 (1st Cir. 1989); In re      advertiser failed to ensure that individuals who
                                              representations about the benefits,                       Thompson Med. Co., 104 F.T.C. 648, 813 (1984),           selected the sample were unbiased); FTC v. Litton
                                              performance, or efficacy of their                         aff’d, 791 F.2d 189 (DC Cir. 1986); see also generally   Indus., Inc., 97 F.T.C. 1, 70–72 (1981) (claims
                                              services.217 MARS providers must have                     1984 Policy Statement Regarding Advertising              touting superiority of microwave oven were
                                                                                                        Substantiation, appended to Thompson Med. Co.,           deceptive because the advertiser based them on a
                                              substantiation for such claims at the                     104 F.T.C. at 813 (Advertising Substantiation Policy     biased survey of ‘‘Litton-authorized’’ service
                                              time they are made. The Final Rule                        Statement); Amended Franchise Rule, 16 CFR               agencies), enforced as modified, 676 F.2d 364 (9th
                                              therefore specifies that it is a violation                436.5(s), 436.9(c); Amended Franchise Rule               Cir. 1982); Bristol Myers v. FTC, 185 F.2d 58 (1950)
                                              of the Rule to:                                           Statement of Basis and Purpose, 72 FR 15444,             (holding advertisements to be deceptive where they
                                                                                                        15449 (Mar. 30, 2007).                                   claimed that dentists used one brand of toothpaste
                                                Mak[e] a representation, expressly or by                  219 As discussed in the SBP addressing                 ‘‘2 to 1 over any other [brand]’’ when, in fact, the
                                              implication, about the benefits, performance,             amendments to the TSR regarding debt relief              vast majority of dentists surveyed offered no
                                              or efficacy of any mortgage assistance relief             services, claims concerning the benefits,                response). Additionally, the relationship between
                                              service unless, at the time such                          performance, or efficacy of debt relief services must    past experience and anticipated future results must
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                                                                                                        be supported by competent and reliable evidence.         be an ‘‘apples-to-apples’’ comparison. If there have
                                                 216 Additionally, to the extent that providers         See TSR; Final Rule, 75 FR 48458, 48500 n.574 and        been material changes to the MARS that could
                                                                                                        accompanying text (Aug. 10, 2010).                       affect the applicability of historical experience to
                                              obtain trial loan modifications for consumers,
                                                                                                          In addition, in order to comply with § 322.3(b),       future results, any claims made must account for
                                              § 322.3(b)(12) prohibits providers from
                                                                                                        the prohibition against misrepresentations, a            the likely effect of those changes. See Amended
                                              misrepresenting that these loan modifications are
                                                                                                        provider must not make false or misleading               Franchise Rule, 16 CFR 437.5(s)(3)(ii).
                                                                                                        statements regarding the level of support it has for        221 An unqualified efficacy claim conveys to
                                                217 See   FTC Case List, supra note 28.                 a claim.                                                 consumers that the result or benefit will be

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                                              Under the Final Rule, the provider must                  radio advertisements; (2) disclosures                    2. Disclosures Required by the Final
                                              have competent and reliable evidence                     that providers must make in all                          Rule
                                              showing that consumers obtain such                       ‘‘consumer-specific commercial                              The Commission has determined to
                                              results.                                                 communications’’ (a term now defined                     adopt the proposed rule with four basic
                                                                                                       in § 322.2(c)(2)), such as telemarketing                 changes. First, the Final Rule adds
                                              D. Section 322.4: Disclosures Required
                                                                                                       calls; and (3) disclosures that the                      headings to § 322.4(a)–(c), which clarify
                                              in Commercial Communications
                                                                                                       provider must make in all                                that the disclosures fall into three
                                                 Proposed § 322.4 would require that                   communications.223 The Final Rule
                                              MARS providers disclose certain                                                                                   categories: ‘‘Disclosures in All General
                                                                                                       broadens the conditions under which                      Commercial Communications’’;
                                              material information to prevent                          the disclosures must be provided, such
                                              deception and thereby assist consumers                                                                            ‘‘Disclosures in All Consumer-Specific
                                                                                                       that all required disclosures (except for                Commercial Communications’’; and
                                              in making informed decisions about                       one) must be provided in all general
                                              purchasing MARS.222 The Final Rule                                                                                ‘‘Disclosures in All General Commercial
                                                                                                       commercial communications and in all                     Communications, Consumer-Specific
                                              adopts all of these proposed disclosures.                consumer-specific commercial
                                              In addition, it requires one new                                                                                  Commercial Communications, and
                                                                                                       communications. The disclosures
                                              disclosure: To inform consumers of the                                                                            Other Communications.’’ Second, the
                                                                                                       regarding total cost and the consumer’s
                                              potential adverse consequences of not                                                                             Final Rule has added a new triggered
                                                                                                       right to withdraw from the service and
                                              making mortgage payments. Further, the                                                                            disclosure in § 322.4(c): ‘‘If you stop
                                                                                                       reject mortgage relief offers need only be
                                              Final Rule expands the proposed                                                                                   paying your mortgage, you could lose
                                                                                                       made in consumer-specific commercial
                                              disclosure regarding the total cost of the                                                                        your home and damage your credit
                                              service to include: (1) Consumers’ rights                                                                         rating.’’ MARS providers must make this
                                              to withdraw from the service and to                      1. Proposed Disclosures                                  disclosure if they advise consumers,
                                              accept or reject any offer of mortgage                      The proposed rule 224 required MARS                   expressly or by implication, to
                                              relief the provider obtains from the                     providers to disclose, in every                          discontinue making their mortgage
                                              lender or servicer; (2) the fact that                    commercial communication and every                       payments. Third, § 322.4(b)(1) of the
                                              consumers do not have to pay the                         communication directed at a specific                     Final Rule expands the proposed total
                                              provider if they reject the offer; and (3)               consumer prior to the consumer                           cost disclosure to include the following
                                              the cost of the services if they accept the              entering an agreement to purchase                        information:
                                              offer. The Final Rule also modifies the                  MARS, that the provider ‘‘is a for-profit                  ‘‘You may stop doing business with us at
                                              structure of the proposal to clarify that                business not associated with the                         any time. You may accept or reject the offer
                                              the disclosures in this provision almost                 government. This offer has not been                      of mortgage assistance we obtain from your
                                              all fall into three main categories: (1)                 approved by the government or your                       lender [or servicer]. If you reject the offer,
                                              Disclosures that providers must make in                  lender.’’ 225 The proposed rule also                     you do not have to pay us. If you accept the
                                                                                                                                                                offer, you will have to pay us (insert amount
                                              all ‘‘general commercial                                 included two disclosures that were                       or method for calculating the amount) for our
                                              communications’’ (a term now defined                     required only in communications                          services.’’ For the purposes of this paragraph,
                                              in § 322.2(c)(1)), such as television or                 directed at a specific consumer prior to                 the amount ‘‘you will have to pay’’ shall
                                                                                                       the consumer entering into an                            consist of the total amount the consumer
                                              meaningful and not de minimis. See P. Lorillard Co.      agreement to purchase MARS: (1) The                      must pay to purchase, receive, and use all of
                                              v. FTC, 186 F.2d 52, 57 (4th Cir. 1950) (challenging     full amount the consumer must pay for                    the mortgage assistance relief services that
                                              advertising that claimed that a brand of cigarettes                                                               are the subject of the sales offer, including,
                                              was lowest in nicotine, tar, and resins in part          the service; and (2) that ‘‘[e]ven if you
                                                                                                                                                                but not limited to, all fees and charges.
                                              because the difference from other brands was             buy our service, your lender may not
                                              insignificant); In re Sun Co., 115 F.T.C. 560 (1992)     agree to change your loan.’’ 226                           Fourth, as suggested by the
                                              (consent order) (alleging that advertising for high                                                               comments, the Final Rule provides that,
                                              octane gasoline represented that it would provide
                                                                                                       Commenters who addressed these
                                              superior power ‘‘that would be significant to            disclosures generally supported them,                    with one exception—the disclosure of
                                              consumers’’); Guides for the Use of Environmental        but some urged that all of the                           total cost and the right to cancel the
                                              Marketing Claims, 16 CFR 260.6(c) (1998)                 disclosures be required in every                         service at any time—all of the required
                                              (‘‘Marketers should avoid implications of significant
                                              environmental benefits if the benefit is in fact         communication or advocated for                           disclosures must be made in every
                                              negligible.’’); FTC Enforcement Policy Statement on      requiring additional disclosures.227                     communication with consumers prior to
                                              Food Advertising, 59 FR 28388, 28395 & n.96 (June                                                                 the consumers entering into an
                                              1, 1994), available at             223 See   supra note 140.                              agreement to purchase MARS.228 As
                                              policystmt/ad-food.shtm (‘‘The Commission shares           224 In  the NPRM, the Commission sought
                                              FDA’s view that health claims should not be
                                                                                                       comment and empirical data bearing on the costs          disclosures); NAAG at 4 (stating that ‘‘we do
                                              asserted for foods that do not significantly
                                                                                                       and benefits of the disclosure requirements set forth    generally support enhanced disclosure
                                              contribute to the claimed benefit. A claim about the
                                                                                                       in the proposed rule. No comments provided such          requirements,’’ but proposing additional
                                              benefit of a product carries with it the implication
                                                                                                       data.                                                    disclosures); NYC DCA at 5–8 (suggesting expanded
                                              that the benefit is significant.’’).                        225 Proposed §§ 322.4(a), 322.3(b)(2).
                                                 222 The Commission concludes that the                                                                          distribution and additional disclosures); see also
                                                                                                          226 The latter disclosure would not be required       NCLC at 3; OPLC at 3. One commenter suggested
                                              disclosures adopted in the Final Rule are consistent
                                              with the First Amendment. It is well established         when a MARS provider offers only to stop, prevent,       that MARS providers be required to provide
                                              that the government may ‘‘require that a commercial      or postpone a foreclosure sale or repossession, as       consumer disclosures in the form of an FTC-drafted
                                              message appear in such a form, or to include such        described in § 322.2(i)(1).                              ‘‘bill of rights,’’ which would include information on
                                              additional information, warnings, and disclaimers,          227 See CUUS at 4 (stating that ‘‘Consumers Union     consumers’ legal rights, the risks associated with
                                              as are necessary to prevent deception.’’ Va. Bd of       supports the Rule’s disclosure requirements listed       purchasing MARS, and information on free
                                              Pharmacy v. Va. Citizens Consumer Council, 425           in Sec. 322.4,’’ but proposing expanded distribution     services. NYC DCA at 7. The Commission
                                              U.S. 748, 771–72 n.24 (1976); see also Milavetz v.       and additional disclosures); CSBS at 3 (stating that     recognizes the value of consumer education about
                                              United States, 130 S. Ct. 1324, 1340–41 (2010)           ‘‘state regulators believe that the disclosures          MARS but declines to adopt this recommendation.
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                                              (upholding the constitutionality of a Bankruptcy         required under § 322.4 are generally appropriate,’’      The Final Rule requires disclosure of the key
                                              Code provision that required debt relief agencies to     but proposing expanded distribution and additional       information in a manner that the Commission
                                              make certain disclosures in their advertisement);        disclosures); MA AG at 3 (stating that ‘‘I support the   believes will assist consumers in avoiding
                                              Zauderer v. Office of Disciplinary Counsel, 471 U.S.     types of disclosures required in the proposed rule,’’    deception and will help ensure that consumers will
                                              626, 651 (1985) (‘‘[W]arning[s] or disclaimer[s]         but proposing expanded distribution); LOLLAF at 3        notice and comprehend it.
                                              might be appropriately required * * * in order to        (stating that ‘‘[t]he required disclosures enumerated       228 As discussed in Section II.B, MARS providers

                                              dissipate the possibility of consumer confusion or       in the proposal will assist consumers who consider       often disseminate advertisements that instruct
                                              deception.’’).                                           using a MARS provider,’’ but proposing additional                                                    Continued

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                                              explained below, the Commission                          nonprofit entities assist financially                     disclosure must be provided clearly and
                                              believes the disclosures in the Final                    distressed consumers with their                           prominently in all communications in
                                              Rule are appropriate, because each of                    mortgages and in light of the frequency                   which the triggering statement is made.
                                              them either is necessary to prevent                      of deceptive affiliation claims, the                      Moreover, unlike the other disclosures
                                              deception or is reasonably related to                    Commission concludes that requiring                       in § 322.4, this disclosure is not limited
                                              preventing deception.229                                 MARS providers to disclose their                          to commercial communications
                                                                                                       nonaffiliation with government or other                   occurring prior to the consumer
                                              a. Disclosures Required Both in General
                                                                                                       programs is reasonably related to the                     agreeing to enroll in the service. Thus,
                                              Commercial Communications and
                                                                                                       goal of preventing deception.232                          even if the consumer has already agreed
                                              Consumer-Specific Commercial                                Sections 322.4(a)(2) and 322.4(b)(3) of                to use MARS, the provider must make
                                              Communications                                           the Final Rule, which adopt the                           this disclosure if, and when, it advises
                                                 Sections 322.4(a)(1) and 322.4(b)(2) of               proposal without substantive                              consumers to stop making timely
                                              the Final Rule adopt, without                            modification,233 require MARS                             payments. Additionally, this disclosure
                                              substantive modification, the approach                   providers to disclose clearly and                         must also be made in close proximity to
                                              in the proposed rule and require MARS                    prominently in all their general and                      the specific triggering claim, to ensure
                                              providers to disclose clearly and                        consumer-specific commercial                              that the net impression consumers take
                                              prominently, in each general                             communications that ‘‘[e]ven if you                       away reflects both the information in
                                              commercial communication and                             accept this offer and use our service,                    the triggering claim and the information
                                              consumer-specific commercial                             your lender may not agree to change                       in the triggered disclosure. The record
                                              communication, that the MARS                             your loan.’’ 234 In light of the widespread               demonstrates that MARS providers
                                              provider ‘‘is not associated with the                    deceptive success and ‘‘guarantee’’                       frequently encourage consumers, often
                                              government, and * * * [the] service is                   claims in this industry,235 this                          through deception, to stop paying their
                                              not approved by the government or your                   disclosure will ensure that consumers                     mortgages and instead pay providers.238
                                              lender.’’ As described above, there are                  do not use MARS under the                                 Consumers who rely on these deceptive
                                              many government, nonprofit, lender and                   misimpression that they will, or are very                 statements frequently suffer grave
                                              servicer programs providing a wide                       likely to, receive a successful result.                   financial harm.239 The Commission
                                              array of services that MARS providers                    Thus, requiring such a disclosure is                      determines, therefore, that requiring
                                              have mimicked. The Commission and                        reasonably related to the goal of                         MARS providers who encourage
                                              state law enforcement officials have                     preventing deception.236                                  consumers not to pay their mortgages to
                                              brought numerous law enforcement                            Section 322.4(c) of the Final Rule,                    disclose the risks of following this
                                              actions against for-profit MARS                          which was not included in the proposed                    advice is necessary to prevent
                                              providers who have misrepresented                        rule, also requires that if MARS                          deception.240
                                              their affiliation with a government                      providers advise consumers, expressly
                                              agency, lender, or servicer.230 These                                                                              b. Disclosure Required Only in
                                                                                                       or by implication, to stop making                         Consumer-Specific Commercial
                                              providers have used a variety of                         mortgage payments, they must warn
                                              misleading techniques, including                                                                                   Communications
                                                                                                       consumers: ‘‘If you stop paying your
                                              adopting trade names, URLs, or symbols                   mortgage, you could lose your home and                       Section 322.4(b)(1) retains, but also
                                              that resemble those associated with                      damage your credit rating.’’ 237 This                     expands, the requirement in the
                                              government programs.231 Given that the                                                                             proposed rule that MARS providers
                                              government, for-profit entities, and                       232 Supra    note 105.                                  disclose, clearly and prominently, in all
                                                                                                         233 In   order to clarify the application of this       communications directed at specific
                                              consumers to call a telephone number or contact an       provision, however, the Final Rule includes two           consumers, the total amount the
                                              email address, and once consumers do so, the             non-substantive modifications. First, the Final Rule      consumer will have to pay to purchase,
                                              providers begin to interact with them on an              clarifies that this disclosure applies to any MARS
                                                                                                       provider who represents, ‘‘expressly or by
                                                                                                                                                                 receive, and use the service.
                                              individual level. During these individual
                                              interactions, MARS providers commonly contradict         implication, that consumers will receive’’ MARS.          Specifically, in addition to this cost
                                              or obfuscate disclaimers made in general                 This replaces the language of the proposed rule that      information, the Final Rule requires that
                                              advertising. See, e.g., FTC v. Fed. Loan Modification    stated that this disclosure applied to any MARS           providers inform consumers that they
                                              Law Ctr., LLP, No. SACV09–401 CJC (MLGx) (C.D.           provider that ‘‘advertises any represented [mortgage
                                                                                                       relief].’’ Second, the Final Rule replaces the word
                                                                                                                                                                 (a) may withdraw from the service at
                                              Cal. filed Apr. 3, 2009) (alleging that false success
                                              rate claims and other deceptive claims often were        ‘‘buy’’ in the proposal with the phrase ‘‘accept this     any time, and (b) have the right to reject
                                              made during telemarketing calls with consumers);         offer and use.’’                                          any offer of mortgage relief that the
                                              FTC v. Loss Mitigation Servs., Inc., No. SACV09–             234 This disclosure is required in all cases except   provider obtains from the servicer or
                                              800 DOC (ANX) (C.D. Cal. filed July 13, 2009)            when the only MARS offered is the service or result       lender and, (c) if they do so, they owe
                                              (same). As discussed below, the Commission               described in § 322.2(i)(1)—i.e., to stop, prevent or
                                              therefore concludes that it is not sufficient to make    postpone any mortgage or deed of trust foreclosure
                                                                                                                                                                 nothing to the provider. As detailed in
                                              the disclosures only in general advertisements.          sale, any repossession of the consumer’s property,        § III.E. of this SBP, the Final Rule
                                                 229 The Final Rule also includes a small number       or otherwise save the consumer’s dwelling from
                                              of minor, non-substantive modifications to ensure        foreclosure or repossession.                                238 See supra note 82; CUNA at 2 (Consumers ‘‘are

                                              that these requirements are clear and easy to                235 Supra note 75.                                    often instructed to stop making mortgage
                                              understand.                                                  236 Supra note 105. In the absence of a               payments.’’).
                                                 230 See supra notes 72–74.                            qualification, an efficacy claim may convey a               239 Id.
                                                 231 See, e.g., FTC v. Fed. Housing Modification       greater likelihood of success than often is the case.       240 It can be an unfair or deceptive practice to

                                              Dep’t, Inc., No. 09–CV–01753 (D.D.C. filed Sept. 16,         237 Commenters supported this requirement. See        advise consumers to take a certain action without
                                              2009) (alleging use of direct mail material with seal    NAAG at 4 (Rule should prohibit MARS providers            disclosing the attendant material adverse risks or
                                              depicting U.S. Capitol with words ‘‘NATIONS              ‘‘from representing that a consumer ‘should stop          consequences. See, e.g., In re North Am. Philips
                                              HOUSING MODIFICATION CENTER’’                            making mortgage payments’.’’); CUUS at 5 (‘‘[I]t          Corp., 111 F.T.C. 139, 175–84 (1988); In re Int’l
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                                              superimposed); FTC v. Ryan, No. 1:09–00535 (HHK)         would also be beneficial for MARS providers to            Harvester Co., 104 F.T.C. 949, 1066–67 (unfair
                                              (D.D.C., Amend. Compl. filed Mar. 25, 2009)              disclose to consumers the consequences of not             practice to conceal ‘‘fuel-geysering’’ hazard when
                                              (alleging use of government-like seal that read          paying their mortgages (such as loss of their home        using tractors). In Int’l Harvester, the Commission
                                              ‘‘United States—Department of Housing’’ on               and damage to their credit rating).’’); CSBS at 3         noted that it ‘‘frequently has decided that the
                                              defendant’s Web sites with URLs ‘‘http://                (‘‘[D]isclosures should include the fact that             omission of product safety information is an unfair
                                    ’’ and ‘‘’’    consumers are not exempt from making their home           and deceptive practice.’’ Id. at 1045 (quoting
                                              and that featured prominent button linking to            payments simply because they have decided to              Firestone Tire & Rubber Co., 81 F.T.C. 398, 456
                                              official U.S. government Web site).                      pursue MARS.’’).                                          (1972)).

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                                              prohibits providers from collecting fees                 through its law enforcement actions and                  concludes that, to prevent providers
                                              until the consumer has accepted the                      through public comments. Adding more                     from deceiving consumers regarding
                                              result obtained by the provider. The                     disclosure requirements, even to the                     their performance, it is enough that: (1)
                                              Commission determines that, to                           extent they might provide some help to                   § 322.3(b)(1) of the Final Rule prohibits
                                              effectuate the advance fee ban, it also is               some consumers, risks overshadowing                      MARS providers from misrepresenting
                                              necessary for the provider to inform                     more important information or                            the likelihood that purchasing MARS
                                              consumers that they may withdraw from                    overloading consumers with too much                      will result in a successful outcome, and
                                              the service, and may accept or reject the                information.244                                          (2) §§ 322.4(a)(2) and 322.4(b)(3) require
                                              result delivered by the provider. Thus,                    Two commenters suggested that                          providers to disclose that lenders may
                                              this disclosure is reasonably related to                 requiring MARS providers to disclose                     not agree to modify loans even if
                                              preventing unfair and deceptive acts                     their historical performance could help                  consumers purchase MARS.247
                                              and practices by MARS providers.                         consumers understand the risks in                           Four commenters suggested that
                                                 As in the proposed rule, § 322.4(b)(1)                purchasing MARS from them.245                            MARS providers be required to disclose
                                              of the Final Rule also requires providers                Performance data, if it could be                         that MARS are available for free or at
                                              to disclose the total cost of their                      calculated in a useful, non-misleading                   lower cost from nonprofit housing
                                              services.241 To the extent that a provider               way, likely would be valuable                            counseling agencies, such as those
                                              bases its fee on a fixed percentage of the               information to consumers in deciding                     certified by HUD, and disclose the
                                              amount of money the consumer saves as                    whether to purchase MARS. The                            contact information for these
                                              a result of the service (instead of                      Commission has concluded, however,                       agencies.248 Although some consumers
                                              charging a flat fee), it must disclose this              that requiring MARS providers to                         would benefit from this information, it
                                              percentage.242 This disclosure is limited                disclose their performance data is                       is already available from other sources,
                                              to communications directed at a specific                 impracticable. Given the broad variety                   including the agencies themselves. In
                                              consumer because MARS providers                          of results MARS providers might be able                  addition, the Commission is mindful of
                                              often charge consumers different                         to obtain, they would have to                            the need to limit the number of
                                              amounts based on their individual                        incorporate many potential variables to                  disclosures to maximize their
                                              circumstances. In such cases, it would                   calculate success rates for consumers.                   effectiveness. As noted above, the
                                              be very difficult or impossible to                       For example, one consumer may                            greater the number of disclosures, the
                                              provide accurate information about total                 consider a short sale a success, while                   higher the risk of overloading
                                              cost in commercial communications                        another may consider only a loan                         consumers such that they do not read or
                                              directed at general audiences.                           modification to be a success. It is,                     comprehend any of the information. For
                                              Nevertheless, the record shows that                      therefore, impracticable to develop                      these reasons, the Commission
                                              many MARS providers do not inform                        accurate and comparable performance                      determines that the Final Rule’s
                                              individual consumers about their fees                    data that providers could disclose to                    prohibition on misrepresenting the
                                              prior to the time of contracting.243 The                 consumers. Moreover, requiring                           availability, performance, cost, or
                                              total cost of a MARS is perhaps the most                 disclosure of historical performance                     characteristics of any alternative means
                                              material information for consumers in                    data would not be feasible for the large                 for consumers to obtain MARS, which
                                              making decisions whether to enter into                   number of MARS providers who are                         includes misrepresentations regarding
                                              a transaction with the provider.                         new market entrants, because they lack                   any nonprofit housing counseling
                                              Requiring this disclosure will help                      past data on which to base a valid                       agency or program, is sufficient.249
                                              protect consumers from being misled by                   historical performance claim. Further,                      Finally, one commenter suggested
                                              providers who give incomplete,                           shifting market conditions and changes                   that MARS providers be required to
                                              inaccurate, or confusing cost                            in government and other assistance                       provide their physical address and
                                              information. This disclosure, therefore,                 programs could have substantial effects                  landline telephone number.250 Many
                                              is reasonably related to the prevention                  on the reliability of historical                         MARS providers, like other businesses,
                                              of deception.                                            performance data as a predictor of                       routinely make contact information
                                                                                                       future success.246 The Commission                        available to prospective customers and
                                              3. Disclosures Not Adopted                                                                                        do not need to be compelled to do so.
                                                 The Commission declines to adopt                         244 Consumer research shows that the ability of
                                                                                                                                                                In addition, after the consumer agrees to
                                                                                                       consumers to process information and make                use a provider’s services, the
                                              some modifications to the disclosure                     rational choices may be impaired if the quantity of
                                              requirements that some commenters                        the information they receive is too great. See           prohibition on advance fees in the Final
                                              suggested. The reasons are set forth                     generally, Yu-Chen Chen et al., The Effects of           Rule means that the provider will have
                                              below. As a general matter, the                          Information Overload on Consumers’ Subjective            to communicate with the consumer to
                                                                                                       State Towards Buying Decision in the Internet
                                              disclosures required in the Final Rule                   Shopping Environment, 8(1) Electronic Comm. Res.
                                                                                                                                                                proffer the results and obtain payment.
                                              are focused on responding to the core                    & Applications 48 (2009); Byung-Kwan Lee & Wei-          There is no information in the record to
                                              unfair and deceptive acts and practices                  Na Lee, The Effect of Information Overload on            support the conclusion that MARS
                                              that the Commission has identified                       Consumer Choice Quality in an On-Line                    providers generally are not already
                                                                                                       Environment, 21(3) Psychol. & Marketing 159, 177
                                                                                                                                                                making their contact information
                                                241 Providers may not evade this disclosure               245 LOLLAF at 4; CUUS at 5–6 (adding that             available, or that they generally would
                                              requirement, in whole or in part, by labeling their      historical performance data would only be                not make such information available to
                                              fees or charges as ‘‘penalties’’ or other terms. This    meaningful if a MARS provider had been in
                                              provision requires that providers disclose all of the
                                                                                                                                                                get paid. In the absence of information
                                                                                                       business long enough to have amassed a sufficient
                                              costs the consumer will have to pay the provider         record). In contrast, a consortium of state regulators
                                                                                                                                                                  247 See supra §§ III.C.2.b. and III.D.2.
                                              in connection with the mortgage assistance relief        urged the Commission to prohibit MARS providers
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                                              service.                                                 from disclosing such information because                   248 LOLLAF   at 3–4 (require disclosure that MARS
                                                242 Further, regardless of whether the provider        performance figures can be easily manipulated and        services are available for free from HUD-certified
                                              discloses its fee as a flat amount or percentage of      could mislead consumers. CSBS at 3.                      counseling agencies); CSBS at 3 (require disclosure
                                              savings, it may not later charge the consumer a             246 For similar reasons, the Commission declined      that MARS services can be obtained from non-profit
                                              larger amount or percentage than initially disclosed.    to require providers to disclose their drop out rates    and government organizations for little or no cost);
                                              Doing so would clearly violate § 322.3(b)(11) of the     in amending the TSR to address debt relief services.     LFSV at 3; NAAG at 4–5.
                                              Final Rule.                                              See TSR; Final Rule, 75 FR 48458, 48497 & nn. 531–         249 See § 322.3(b)(9).
                                                243 See NCRC Report, supra note 76, at 21.             32 (Aug. 10, 2010).                                        250 NYC DCA at 6.

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                                              75114            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              in the record SE showing that contact                    that represented that they would obtain                proposed advance fee ban.254 In
                                              information is or will be lacking, the                   a loan modification from requesting or                 addition, a coalition of state regulators
                                              Commission declines to include in the                    receiving payment until they had                       of financial institutions supported the
                                              Final Rule a requirement that MARS                       achieved a modification meeting certain                proposed ban, arguing that it would
                                              providers must disclose this                             specifications, namely: The contractual                curb abuses in the MARS industry.255
                                              information.                                             change to one or more terms of an                      NAAG, individual state attorneys
                                                                                                       existing dwelling loan between the                     general, and the financial institution
                                              E. Section 322.5: Prohibition on
                                                                                                       consumer and the owner of such debt                    regulators specifically recommended
                                              Collection of Advance Fees and Related
                                                                                                       that substantially reduces the                         that a final rule eliminate the possibility
                                                                                                       consumer’s scheduled periodic
                                                 The proposed rule banned MARS                                                                                of MARS providers evading the ban by
                                                                                                       payments, where the change is (1)
                                              providers from requiring that consumers                                                                         charging fees on a piecemeal basis
                                                                                                       Permanent for a period of five years or
                                              pay in advance for their services, i.e.,                 more; or (2) Will become permanent for                 before they have delivered all of the
                                              prior to providers delivering the                        a period of five years or more once the                results they represented.256 NAAG and
                                              promised results. The Commission has                     consumer successfully completes a trial                the individual state attorneys general
                                              determined to adopt an advance fee ban                   period of three months or less.                        noted that many MARS providers split
                                              in the Final Rule, but with two                             The proposed rule also required                     their service into discrete steps and then
                                              significant revisions to the ban in the                  MARS providers, prior to collecting                    demand most of their fees after
                                              proposed rule. First, the Final Rule                     payment, to furnish to consumers                       completing relatively insignificant
                                              prohibits a provider of any mortgage                     documentation showing that they have                   initial steps, such as answering a phone
                                              assistance relief service—including loan                 secured an offer of mortgage relief from               call or sending the consumer
                                              modifications or other forms of MARS—                    the consumer’s lender or servicer.                     preliminary forms.257
                                              from collecting any fees until the
                                                                                                       a. Comments Supporting the Advance                        A wide array of consumer advocates,
                                              provider negotiates, and the consumer
                                                                                                       Fee Ban                                                community organizations, and legal
                                              executes, a written agreement for
                                                                                                          A large number of commenters                        service providers also submitted
                                              mortgage relief with the lender or
                                              servicer. Second, to effectuate this                     supported the proposed advance fee                     comments generally supporting the
                                              provision, the Final Rule also requires                  ban.251 NAAG’s comment, representing                   proposed advance fee ban.258 These
                                              MARS providers, at the time of                           40 attorneys general, urged the                        comments argued that a ban is necessary
                                              forwarding the offer of mortgage relief,                 Commission to adopt proposed § 322.5,                  to ensure that providers deliver the
                                              to disclose that consumers have the                      arguing that it was ‘‘critical’’ and ‘‘the             results they promise and to curb
                                              right to accept or reject the offer, and to              linchpin of effective deterrence of                    deception and abuse.259 Like those of
                                              provide consumers with a notice from                     fraudulent practices’’ by MARS                         the state law enforcement agencies and
                                              their lender or servicer disclosing the                  providers.252 According to NAAG, ‘‘[t]he               financial regulators, some of these
                                              material differences between the terms,                  collection of advance fees virtually                   comments also urged the Commission to
                                              conditions, and limitations of                           ensures that consumers will have no
                                              consumers’ current loans and those                       recourse when consultants fail to                         254 See, e.g., MN AG at 2–3; MA AG at 1; OH AG

                                              associated with the offer for mortgage                   perform services, as is generally the                  at 1; see also, e.g., NYC DCA at 3–5 (New York City
                                                                                                       case.’’ 253 Three state attorneys general              Department of Consumer Affairs stating support for
                                              relief. These provisions supplant the                                                                           advance fee ban).
                                              proposed rule’s allowance of fees once                   who joined the NAAG comment also                          255 See CSBS at 3.
                                              (1) the provider delivers an offer from                  submitted individual comments offering                    256 See NAAG at 3; MN AG at 3; CSBS at 4; MA

                                              the servicer or lender for a mortgage                    similar reasons for supporting the                     AG at 2. Some commenters also noted that they
                                              loan modification meeting certain                                                                               have observed MARS providers that charge fees
                                              minimum requirements; or (2) in the                          251 As detailed in the NPRM, many of these         piecemeal in order to circumvent state statutory
                                                                                                       commenters recommended at the ANPR stage that          advance fee bans. See NAAG at 3; MN AG at 3; MA
                                              case of providers offering MARS other                                                                           AG at 2.
                                                                                                       the Commission include an advance fee ban. See
                                              than loan modifications, the provider                    MARS NPRM, 74 FR at 10808 & nn.19–21. In                  257 NAAG at 3; MN AG at 3; MA AG at 2 (‘‘[U]nder

                                              delivers the result that it represented it               addition, some commenters who did not comment          an exemption for piecemeal fees, providers would
                                              would deliver. The reasons for these                     on the NPRM had advocated an advance fee ban at        continue the widespread current practice of front
                                                                                                       the ANPR stage. See CRC (ANPR) at 4 (‘‘Banning         loading piecemeal fees, so that the provider quickly
                                              alterations to the proposed rule are                     advance fees is a crucial component to any effort      obtains a substantial payment that is
                                              discussed below.                                         to reduce * * * unfair and deceptive practices in      disproportionate to the amount of services
                                                                                                       the loan modification industry and will likely push    provided.’’).
                                              1. Proposed Rule and Public Comments                     many scam artists out of our communities. The FTC         258 See CRL; LFSV at 2–3; LCCR at 4; WMC at 1;
                                              Received                                                 should ban the collection of advance fees outright     NCLC at 3; LOLLAF at 4; CUUS at 6–8.
                                                                                                       * * *.’’); Shriver at 2 (recommending prohibition         259 See, e.g., CUUS at 7 (‘‘The prohibitions on
                                                 The advance fee ban in the proposed                   on up-front fees); NCLR at 1 (recommending that        advance fee payments is the most effective tool in
                                              rule included two separate provisions,                   up-front fees be banned); CMC at 8 (‘‘The CMC          this proposed rule to drive bad actors from the
                                              one addressing the marketing of MARS                     would support a ban or limitation on the collection    marketplace, making room for the legitimate
                                              generally and the other addressing the                   of advance fees by MARS providers.’’); Chase at 3      companies to fill in the void and provide quality,
                                                                                                       (‘‘[T]he payment of advance fees should be banned      honest services and products to consumers.’’); NCLC
                                              marketing of MARS specifically to                        because there is no guarantee the MARS provider        at 3 (‘‘The single most important provision is
                                              obtain loan modifications. The first                     will be successful * * *.’’); HPC at 2 (arguing that   section 322.5 * * *. Wrongdoers are attracted to
                                              provision in the proposed rule,                          consumers should not be required to pay up-front       mortgage assistance relief services by the potential
                                              § 322.5(a), prohibited MARS providers                    fees).                                                 for extracting large payments from homeowners
                                                                                                           252 NAAG at 2–3; see also NAAG (ANPR) at 9 (‘‘A
                                              from requesting or receiving payment                                                                            without performing any work or providing anything
                                                                                                       ban on advance fees * * * is necessary for any         of value. Requiring mortgage assistance relief
                                              until they achieved all of the results
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                                                                                                       meaningful mortgage consultant regulation * * *.       services (MARS) providers to earn their fee before
                                              that: (1) The provider had represented                   A key provision of any rule regulating mortgage        being paid will rid the market of those who
                                              that the service would achieve; and (2)                  consultants is that no fee may be charged or           specialize in nothing more than ‘take the money
                                              would be consistent with consumers’                      collected until after the mortgage consultant has      and run.’’’); LCCR at 4 (‘‘The ban will also protect
                                                                                                       fully performed each and every service the             struggling homeowners by incentivizing MARS
                                              reasonable expectations about the                        mortgage consultant contracted to perform or           providers to represent their capabilities in a way
                                              service. The second provision, proposed                  represented that he or she would perform.’’).          that reflects services they can realistically provide
                                              § 322.5(b), prohibited MARS providers                        253 NAAG at 2.                                     in a timely manner.’’).

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                      75115

                                              prohibit MARS providers from                             Several consumer group comments                            comments claiming that they have
                                              collecting fees piecemeal.260                            similarly recommended that the                             secured loan modifications for a large
                                                 Comments from the financial services                  Commission not adopt either of these                       number of their customers,276 although
                                              industry, including a trade association                  alternatives. For example, three                           they offered no data or other
                                              representing mortgage brokers and                        commenters specifically opposed                            substantiation for these claims.
                                              another representing financial                           allowing providers to collect a fixed,                        Second, MARS providers asserted
                                              institutions, also supported the advance                 limited advance fee; 265 two of the three                  that, without the ability to collect fees
                                              fee ban.261 In addition, several                         argued that providers would collect any                    in advance, legitimate MARS providers
                                              California attorneys who provide MARS                    upfront fee amount permitted and never                     would be unable to stay in business and
                                              supported an advance fee ban for non-                    provide any benefits to consumers.266                      would stop providing services, leaving
                                              attorney MARS providers, asserting that                  Other commenters urged the                                 consumers either without assistance or
                                              it would curb their abuses.262                           Commission not to permit providers to                      vulnerable to illegitimate providers.277
                                                 In the NPRM, the Commission                           force consumers to set aside fees in                       These commenters argued that MARS
                                              requested comment on possible                            dedicated accounts.267 Among other                         providers need advance fees to cover
                                              alternatives to the proposed advance fee                 reasons, these commenters asserted that                    their ongoing operating costs—e.g., for
                                              ban, e.g., permitting a limited advance                  allowing MARS providers to require                         payroll, office space, and equipment—as
                                              fee or allowing providers to require                     such accounts would place the onus on                      well as the direct costs of seeking
                                              consumers to set fees aside in a                         consumers to recover the deposited                         modifications, all of which they incur
                                              dedicated account.263 In response to this                funds if providers failed to perform.268                   prior to obtaining the modifications.278
                                              request, state attorneys general and                                                                                The commenters claimed that, as a
                                              regulators argued that the alternatives                  b. Comments Opposing the Proposed                          result of delays and other problems
                                              on which the Commission requested                        Advance Fee Ban                                            lenders and servicers cause, it can take
                                              comment would be inadequate to                              A number of MARS providers, many                        from several months to a year to obtain
                                              prevent deception and unfairness.264                     of them attorneys,269 submitted                            a modification, a long time to go
                                                                                                       comments opposing the proposed                             without being paid.279 The commenters
                                                 260 See LFSV at 2; LCCR at 8; LOLLAF at 5
                                                                                                       advance fee ban.270 These commenters                       also argued that they need consumers’
                                              (‘‘Allowing any fees to be collected prior to            offered several reasons for their                          payments upfront because most
                                              providing a permanent loan modification presents
                                              MARS providers with a back door opportunity to           opposition. First, MARS providers                          consumers who purchase MARS are in
                                              extract significant sums of money without any            argued that their services frequently                      financial distress and may be unwilling
                                              benefit provided to the consumer.’’).                    confer substantial benefits on                             or unable to pay the amount owed to the
                                                 261 See, e.g., MBA at 2–3; AFSA at 5. AFSA
                                                                                                       consumers, including collecting,                           provider even when the provider has
                                              argued that banning advance fees is the best way
                                              to ensure that providers deliver a beneficial service    reviewing, and explaining to consumers                     completely fulfilled its promises.280
                                              to consumers.                                            the paperwork sent by lenders and
                                                                                                                                                                  2. Legal Basis
                                                 262 See Greenfield at 2 (‘‘We applaud the basic       servicers; 271 making repeated phone
                                              restrictions that are proposed on the ability of         calls on behalf of consumers to lenders                    a. Unfairness
                                              MARS providers * * * to request and accept
                                              advance fees. These restrictions are warranted
                                                                                                       and servicers to ensure that they have                        Based on the record in this
                                              because there is ample evidence from the state           received necessary information and                         proceeding, the Commission concludes
                                              Attorneys General and other sources in California        documents; 272 advising consumers on                       that it is an unfair act or practice for
                                              and nationwide that persons who are looking to           whether they would be eligible for a
                                              take advantage of distressed consumers are
                                                                                                                                                                  MARS providers to charge advance fees,
                                              gravitating toward this relatively new field.’’).        loan modification or other                                 because: (1) It causes or is likely to
                                                 263 75 FR at 10730–31. For purposes of discussion     alternative; 273 recommending that
                                              in this Section of the SBP, the Commission uses the      consumers consider bankruptcy; 274 and                        276 See Rogers at 2 (stating that his firm has

                                              phrase ‘‘dedicated account’’ to include any account      offering emotional support.275 At least                    obtained trial modifications for over 90% of its
                                              into which a MARS provider might request or                                                                         customers and has never failed to convert a trial
                                              require consumers to set aside fees to ensure that
                                                                                                       two MARS providers submitted                               modification into a permanent modification);
                                              the provider can later collect them. The term                                                                       Hawthorne at 1 (‘‘I have over 600 success stories,
                                                                                                            265 CUUS  at 6; LCCR at 4; LOLLAF at 5.
                                              encompasses an ‘‘escrow account,’’ a phrase                                                                         and i [sic] get 80 loan modifications in a month for
                                              frequently used in the real estate context to describe        266 LOLLAF   at 5; CUUS at 6.                         our clients.’’).
                                              an account controlled by a third-party administrator          267 LFSV at 3; CUUS at 7; WMC at 2; LOLLAF at            277 See, e.g., Sygit at 1; Rate Modifications at 1;

                                              into which a consumer places a deposit for the           5.                                                         Rogers at 9–10; Wallace at 1; Holler at 1; Giles at
                                              purchase of a home. It also encompasses a ‘‘trust             268 LFSV at 3; LOLLAF at 5.                           3; Dargon at 1, 3; Carr at 5; Goldberg at 1–2; Deal
                                              account,’’ a phrase most commonly used to describe            269 See,
                                                                                                                   e.g., Mobley; Deal; Rogers; Dargon; Holler;    at 4. One comment submitted by a group of
                                              funds paid by clients to attorneys, which attorneys      Giles; 1st ALC. Many of the objections that MARS           attorneys who provide MARS suggested that many
                                              set aside and from which they later collect or           providers who are attorneys raised to the proposed         attorneys in California have already stopped
                                              withdraw their fees. The public comments and             advance fee ban applied equally to non-attorney            offering these services to consumers as a result of
                                              other materials in the record sometimes use these        MARS providers. Other objections were attorney-            that state’s advance fee ban, which recently became
                                              phrases interchangeably, and the Commission              specific.                                                  applicable to attorneys. See Greenfield at 4.
                                              intends for ‘‘dedicated accounts’’ to include all of        270 See, e.g., MFP (non-attorney provider);
                                                                                                                                                                     278 See, e.g., Rogers at 9; Dix at 1; GLS at 1;

                                              these mechanisms, and any other variations, for                                                                     Hunter at 1 (‘‘How are the lights, phones,
                                                                                                       Metropolis (same); Rate Modifications (same);
                                              setting aside consumer funds.                                                                                       computers, marketing, and payroll to be met if we
                                                                                                       Fortress (same).
                                                 264 See NAAG at 2–3; MA AG at 2; CSBS at 4; see
                                                                                                          271 See, e.g., Giles at 3–4; Dargon at 2.
                                                                                                                                                                  only receive compensation down the road?’’).
                                              also NYC DCA at 5. Specifically, NAAG raised                272 See, e.g., Dargon at 2; Goldberg at 2; Greenfield
                                                                                                                                                                     279 See, e.g., Rogers at 9; Peters at 1; GLS at 1;

                                              concerns that the use of dedicated accounts would                                                                   Dargon at 3; Giles at 3 (noting that ‘‘a successful
                                              not protect consumers because (as demonstrated in        at 4.                                                      loan modification takes a year, and is never
                                                                                                          273 See, e.g., 1st ALC at 8.
                                              one law enforcement action described in its                                                                         accomplished in less than six (6) months’’);
                                                                                                          274 See, e.g., Giles at 3.
                                              comment) providers might inappropriately access                                                                     Greenfield at 4 (‘‘Mortgage loan modifications often
                                              the funds set aside or refuse to return those funds         275 See, e.g., Giles at 3 (‘‘I do the ‘hand holding’    take from six months to a year to reach a
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                                              to consumers. NAAG at 2–3. In response to similar        throughout the process and I am the one that               resolution.’’).
                                              concerns about permitting dedicated accounts in          assures them they are not going to lose their                 280 USHS at 1; Rogers at 9; ARS/Peters at 1; GLS

                                              the provision of debt relief services, for purposes of   homes.’’). One commenter also noted that, even             at 1; ARS/Peters at 1 (stating that, under California
                                              its recent amendments to the TSR, the Commission         when unsuccessful at obtaining a loan modification,        law barring upfront fees, ‘‘I am having to spend
                                              imposed several conditions for using such accounts       he often can force a delay in his customers’               hours chasing down payments from clients and
                                              to ensure that providers do not improperly obtain        foreclosure proceedings so that they can remain in         getting the run around’’); Deal at 5 (‘‘I am not
                                              or control the funds. See TSR; Final Rule, 75 FR at      their homes for an additional period of time. See          interested in chasing clients who fail to pay. It is
                                              49490–91.                                                Carr at 3.                                                 usually a waste of time and money.’’).

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                                              75116            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              cause substantial injury to consumers;                       The FTC and state law enforcement                      Attorney General likewise submitted a
                                              (2) the injury is not outweighed by                       agencies have collectively filed over two                 comment stating that in the majority of
                                              countervailing benefits to consumers or                   hundred cases against MARS                                its lawsuits against MARS providers,
                                              competition; and (3) the injury is not                    providers.285 These cases typically have                  virtually none of the defendants’
                                              reasonably avoidable by consumers                         alleged that the defendants employed                      customers appear to have receive
                                              themselves.281 To prevent this injury,                    deceptive success claims to entice                        promised services or results.289
                                              the Final Rule bans MARS providers                        consumers to purchase their services,
                                                                                                                                                                     Consumers are especially unlikely to
                                              from collecting advance fees for their                    and then did not produce the results
                                              services.                                                 they promised.286 In one recent FTC                       obtain the claimed results if the MARS
                                                                                                        action, for example, the court found that                 provider has promised a loan
                                              (1) Consumer Injury from Advance Fees                                                                               modification.290 Many consumers who
                                                                                                        defendants successfully obtained loan
                                                 The record shows that charging fees                    modifications for fewer than 5% of their                  purchase services from MARS providers
                                              for MARS prior to delivering results—                     customers, despite their frequent claims                  are not even eligible for the government
                                              the most common business model in                         of a 90% or 100% success rate.287                         programs that offer incentives for
                                              this industry 282—causes or is likely to                  Similarly, the court in another FTC                       lenders and servicers to make loan
                                              cause substantial injury to consumers.                    lawsuit concluded that the defendants                     modifications.291 Apart from these
                                              Consumers in financial distress suffer                    had a success rate of ‘‘no more than                      programs, lenders and servicers often
                                              monetary harm—in the hundreds or                          between 1% and 10%.’’ 288 The Illinois                    are unwilling to modify the terms of
                                              thousands of dollars—when, following                                                                                loans or forgive fees and penalties as an
                                              sales pitches frequently characterized by                     285 Financial Services and Products: The Role of
                                                                                                                                                                  alternative to foreclosure.292 Even if
                                              high pressure and deception, they use                     the Federal Trade Commission in Protecting                lenders and servicers might be amenable
                                                                                                        Consumers, Hearing Before the S. Comm. on
                                              their scarce funds to pay in advance for                  Commerce, Sci. & Transp., 111th Cong. 6 (2010)            to modification, many MARS providers
                                              promised results that rarely                              (testimony of FTC).                                       often do little or no work for their
                                              materialize.283 When MARS providers                           286 See, e.g., FTC Case List, supra note 28; NAAG
                                                                                                                                                                  customers—for example, neglecting to
                                              fail to perform, consumers may lose                       (ANPR) at 6 (‘‘In our experience, we have found that
                                                                                                                                                                  contact lenders or servicers or failing to
                                              funds they need to make monthly                           services provided by foreclosure rescue services
                                                                                                        companies result only in costs to consumers. There        respond to their requests for basic
                                              mortgage payments and thus may lose                       are no benefits. The companies collect an upfront         information—thereby increasing the
                                              their homes as well.                                      fee that consumers can ill-afford to pay. Consumers
                                                 (a) Consumers Are Injured Because                      then submit financial information to the companies
                                                                                                        and the companies promise to forward the                  modification acceptable’’); FTC v. US Foreclosure
                                              They Pay for Services That Are Never                                                                                Relief Corp., No. SACV09–768 JVS (MGX), Second
                                                                                                        information to the consumers’ loan servicers and
                                              Provided                                                  obtain a loan modification offer. In the majority of      Int. Rep. Temp. Receiver at 4 (C.D. Cal. filed Sept.
                                                 The record shows that MARS                             cases, the companies do nothing with the                  17, 2009) (estimating that 21% of defendants’
                                              providers do not achieve successful                       consumers’ information. The consumers then end            customers were approved for loan modifications);
                                                                                                        up turning to a non-profit for help, calling their        FTC v. LucasLawCenter ‘‘Inc.’’, No. SACV–09–770
                                              results for the vast majority of their                                                                              DOC (ANX), Mem. Supp. TRO at 19 (C.D. Cal. filed
                                                                                                        servicers themselves, or falling further behind on
                                              customers. Consumers who pay advance                      their mortgage payments as they wait for the              July 7, 2009) (alleging that ‘‘[n]early every consumer
                                              fees but do not receive promised                          promised loan modification offer that never               who is promised a loan modification never received
                                              benefits lose the often considerable                      materializes.’’); see also, e.g., Press Release, Cal.     any offer to modify their home loans’’); FTC v.
                                                                                                        Att’y Gen., Four Arrested, Five Wanted for Fleecing       Freedom Foreclosure Prevention Specialists, LLC,
                                              sums they have paid for MARS services                                                                               No. 2:09–cv–01167–FJM (D. Ariz. June 1, 2009)
                                                                                                        Hundreds of Homeowners Seeking Foreclosure
                                              (typically hundreds or thousands of                       Relief (May 20, 2010) (criminal matter alleging that,     (alleging that defendants only completed loan
                                              dollars), funds financially-distressed                    ‘‘[i]n almost every case, no loan modifications were      modifications for about 6% of customers).
                                                                                                                                                                     289 See IL AG (June 30, 2010) at 2–4; see also GAO
                                              consumers often need to make mortgage                     completed [by defendants], as promised,’’ although
                                                                                                        they promoted 90% to 100% success rates),                 Report, supra note 45, Executive Summary (finding
                                              payments or meet other basic needs.284                                                                              that ‘‘the most active [MARS] scheme is one in
                                                                                                        available at
                                                                                                        release.php?id=1923; NAAG (ANPR) at 3 (‘‘As of            which individuals or companies charge a fee for
                                                281 15  U.S.C. 45(n).                                                                                             services not rendered’’).
                                                                                                        July 1, 2009, the Office of the Illinois Attorney
                                                282 See  supra notes 47–49 and accompanying text.       General had identified roughly 170 companies                 290 See, e.g., FTC Case List, supra note 28.

                                              In the Commission’s law enforcement actions,              operating in Illinois that appeared to have offered          291 See, e.g., Manuel Adelino et al., Why Don’t
                                              MARS providers uniformly have charged advance             or were presently offering foreclosure rescue             Lenders Renegotiate More Home Mortgages?
                                              fees to consumers. See FTC Case List, supra note          services that violated Illinois state laws. The           Redefaults, Self-Cures, and Securitization 3
                                              28. But see USHS at 1 (MARS provider stating that         majority of these companies take impermissible up-        (Federal Reserve Bank of Atlanta, Working Paper
                                              he only collects fees after obtaining a trial             front fees and then fail to deliver promised              No. 2009–17a, 2009), available at http://
                                              modification for his customers).                          services.’’); MN AG (ANPR) at 2 (‘‘As a general rule,
                                                 283 See TSR; Final Rule, 75 FR at 48482.               these companies provide no service, or at most,           ppdp0904.pdf (finding that lender provided
                                              Moreover, this practice creates incentives for MARS       simply submit paperwork to the homeowner’s                monthly payment-lowering modifications to only
                                              providers that are fundamentally at odds with the         mortgage company.’’); Chase (ANPR) at 1 (‘‘Chase’s        3% of seriously delinquent loans in 2007 and 2008);
                                              interests of consumers—to expend their resources          experience has been that MARS entities disrupt the        NCLC at 6 (pointing to ‘‘[o]ne analysis of statistics
                                              on soliciting customers and collecting fees, rather       loan modification process and provide little value        for modifications made in May 2009 [which]
                                              than providing services. See also id. at 48484.           in exchange for the high fees they charge.’’).            showed that only 12% reduced the interest rate or
                                                 284 See, e.g., NCRC (ANPR) at 3 (‘‘The high costs          287 FTC v. Data Med. Capital, Inc., No. SA–CV–        wrote-off fees or principal’’).
                                              of loan modification and foreclosure rescue services      99–1266 AHS (Eex), Contempt Or. at 55 (C.D. Cal.             292 See supra note 291; see also, e.g., Alan M.

                                              may also prevent financially stressed consumers           filed Jan. 15, 2010).                                     White, Deleveraging the American Homeowner: The
                                              from being able to pay their regular mortgage                 288 FTC v. Truman Foreclosure Assistance, LLC,        Failure of 2008 Voluntary Mortgage Contract
                                              payment, if they buy into companies’ promises. If         No. 09–23543, Order Granting Prelim. Injunct. at 11       Modifications, 41 Conn. L. Rev. 1107, 1111 (2009)
                                              the company does not deliver, they may be unable          (S.D. Fla. entered Jan. 11, 2010); see also, e.g., FTC    (arguing, inter alia, that ‘‘[n]o single servicer or
                                              to correct the delinquency for lack of these funds.’’);   v. Federal Loan Modification Ctr., LLP, No. SACV          group of servicer * * * has any incentive to
                                              NAAG (ANPR) at 10 (‘‘Paying the fee upfront likely        09–401 CJC (MLGx), Mem. Sup. Pls. Mot. Supp.              organize a pause in foreclosures or organized
                                              means that some of the consumer’s other bills will        Summ. J. at 13 (C.D. Cal. filed Oct. 6, 2010) (alleging   deleveraging program to benefit the group’’). But see
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                                              not be paid or that the consumer will have to use         that company obtained results for consumers at a          Press Release, HOPE NOW, HOPE NOW Reports
                                              credit cards or funds from friends or family.’’); MN      rate ranging from 8.9% to 17.76%); FTC v. Loss            More Than 476,000 Loan Modifications in First
                                              AG (ANPR) at 2 (‘‘These advance fees often make           Mitigation Servs., Inc., No. SACV09–800 DOC               Quarter of 2010 (May 10, 2010) (coalition including
                                              it even more difficult for the homeowner—and the          (ANX), Rep. Mem. Supp. Prelim. Injunct. at 2 (C.D.        mortgage servicers announcing that its members
                                              loan modification or foreclosure rescue                   Cal. filed Aug. 13, 2009) (alleging that, even            have offered 2.88 million loan modifications to
                                              consultant—to effectively resolve the homeowner’s         according to statistics self reported by defendant,       consumers), available at
                                              financial dilemma.’’); see also TSR; Final Rule, 75       ‘‘only 27% of [defendant’s] clients were ‘approved’       press_release/files/
                                              FR at 48484.                                              for a loan modification, and only 16% found the           1Q%20Data%20Release_05_10_10.pdf.

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                   75117

                                              odds even further that their customers                   decades of experience in its law                         exercise of consumer decision making, a
                                              will not receive the promised results.293                enforcement work in drawing inferences                   traditional hallmark of an unfair
                                                 In addition to past law enforcement                   from the number and types of consumer                    practice.300
                                              actions, the significant and growing                     complaints. In this matter, the frequency                   Third, the transactions in which
                                              number of consumer complaints about                      and consistency of the conduct                           consumers agree to purchase MARS and
                                              MARS providers strongly suggests that                    described in consumer complaints                         make advance payments often take
                                              they are continuing to fail to deliver the               raises, at a minimum, a strong inference                 place in the context of extensive
                                              results they promise. For example, one                   that this conduct is widespread in the                   deception.301 To induce consumers to
                                              coalition of government and private                      MARS industry. The complaint data                        purchase their services and pay advance
                                              groups that collects consumer                            corroborates the other evidence in the                   fees, MARS providers make aggressive
                                              complaints regarding MARS received                       record discussed above that MARS                         performance claims. As discussed
                                              3,461 consumer complaints against                        providers, after collecting substantial                  above, in their ads and in follow-up
                                              MARS providers between April and                         advance fees, fail to deliver promised                   telemarketing and email interactions
                                              August of 2010.294 Similarly, state and                  results for most consumers.                              with consumers, MARS providers
                                              local consumer protection agencies                                                                                commonly claim that there is a high
                                              reported that fraudulent offers of help to               (b) The Context in Which MARS Are                        probability, or even a guarantee, that
                                              save homes from foreclosure was the                      Offered Has Contributed to the                           they will obtain dramatic reductions in
                                              fastest growing complaint category in                    Substantial Injury                                       payments or other mortgage relief.302 To
                                              2009.295                                                   The Commission concludes that                          increase the credibility of these claims,
                                                 The Commission’s extensive                            several aspects of the marketing of                      many MARS providers misrepresent
                                              experience with consumer complaints                      MARS have contributed to the                             that they have special expertise in
                                              teaches that such complaints—while not                   substantial injury caused by charging                    mortgage relief assistance and a close
                                              a representative sample of MARS                          advance fees. First, MARS providers                      affiliation with the government, a non-
                                              consumers—are the ‘‘tip of the iceberg’’                 direct their claims to financially                       profit program, or the consumer’s lender
                                              in terms of the actual levels of consumer                distressed consumers who often are                       or servicer.303 Morever, providers seek
                                              dissatisfaction.296 The Commission has                   desperate for any solution to their                      to allay concerns consumers might have
                                                                                                       mortgage problems and thus are                           about paying in advance by falsely
                                                293 See  supra note 79.                                vulnerable to the providers’ purported                   claiming that they will provide refunds
                                                294 See  Loan Modification Scam Prevention             solutions.297 The Commission has long                    if they do not obtain the promised
                                              Network (LMSPN), National Loan Modification              held that the risk of injury is
                                              Scam Database Report—August 2010, available at
                                          exacerbated in situations in which                          Finally, charging advance fees for
                                              August-LMSPN-Report-Final.pdf; LMSPN, National           sellers exercise undue influence over                    MARS requires consumers to bear the
                                              Loan Modification Scam Database Report—July              susceptible classes of purchasers.298                    full risk of the possible failure of the
                                              2010, available at http://                                 Second, MARS providers frequently                      provider to perform, even though the
                                              LMSPN-Report-Final.pdf; LMSPN, National Loan             use high pressure sales tactics in selling               provider is in a better position to
                                              Modification Scam Database Report—June 2010,             their services.299 Thus, the manner in                   assume risk. When selling MARS to
                                              available at            which MARS are sold impedes the free                     consumers, only the MARS provider
                                              LMSPN, National Loan Modification Scam
                                                                                                                                                                knows how frequently, and under what
                                              Database Report—May 2010, available at http://
                                                                                                          297 See Unfairness Policy Statement, supra note
                                                                                                                                                                circumstances, it has been successful in
                                             187, at 1074 (noting that the Commission may             the past. Consumers, in contrast, are not
                                              LMSPN-Report-Final.pdf; LMSPN, National Loan             consider the ‘‘exercise [of] undue influence over
                                                                                                       highly susceptible classes of purchasers’’ as part of    likely to know whether a successful
                                              Modification Scam Database Report—April 2010,
                                              available at            the unfairness analysis).                                outcome is likely for them. Consumers
                                                                                                          298 Id. at 1074 n.3.                                  are injured by a business model that
                                                 295 Consumer Fed’n of Am., 2009 Consumer                 299 See, e.g., FTC v. Loss Mitigation Servs., Inc.,   forces them to bear the full risk of
                                              Complaint Survey Report 25 (July 27, 2010)               No. SACV09–800 DOC (ANX), Mem. Supp. TRO at              nonperformance and the resulting harm,
                                              (surveying state and local government agencies           17 (C.D. Cal. filed July 13, 2009) (‘‘Defendants
                                                                                                       [allegedly] create[d] an atmosphere of pressure and
                                                                                                                                                                particularly, as in this context, where
                                              regarding their consumer complaints), available at
                                                         urgency to encourage consumers to pay the up-front       the seller is in a better position to know
                                                                    fee. In numerous instances, Defendants’                  and account for the risks.305
                                              Consumer_Complaint_Survey_Report072009.pdf.              representatives have sent consumers emails
                                              Moreover, the Financial Crimes Enforcement               transmitting [defendants’] loan modification                300 See TSR; Final Rule, 75 FR at 48485 & n.379
                                              Network reported that financial institutions             application that includes arbitrary deadlines and        (citing Unfairness Policy Statement, supra note 187,
                                              submitted about 3,000 suspicious activity reports        other warnings to pressure consumers to return the       at 1074); In re Amrep, 102 F.T.C. 1362 (1983), aff’d,
                                              related to loan modification and foreclosure rescue      information fast * * * [including statements that]       768 F. 2d 1171 (10th Cir. 1985); In re Horizon Corp.,
                                              scams in 2009. FinCEN, Loan Modification and             ‘[i]f the Application Process and Mitigation Process     97 F.T.C. 464 (1981); In re Sw. Sunsites, 105 F.T.C.
                                              Foreclosure Rescue Scams—Evolving Trends and             are not handled with precision and a sense of            7, 340 (1985), aff’d, 785 F. 2d 1431 (9th Cir. 1986).
                                              Patterns in Bank Secrecy Act Reporting at 10 (May        urgency you could very likely lose your home’ and           301 As the Commission recently concluded in
                                              2010), available at               ‘[i]t is extremely important that this application be
                                                                                                                                                                promulgating the debt relief amendments to the
                                              news_room/rp/files/MLFLoanMODForeclosure.pdf             faxed back by the (3) day deadline to avoid
                                                                                                                                                                TSR, transactions characterized by deception
                                              (FinCEN, Foreclosure Rescue Fraud Report May             cancellation of the file.’’’); FTC v. Truman
                                                                                                                                                                exacerbate the potential for consumer injury. See
                                              2010).                                                   Foreclosure Assistance, LLC, No. 09–23543, Mem.
                                                                                                                                                                TSR; Final Rule, 75 FR at 48485.
                                                 296 See, e.g., Dennis E. Garrett, The Frequency and   Supp. P.I. at 14–15 (S.D. Fla. filed Nov. 23, 2009)         302 Supra note 75.
                                              Distribution of Better Business Bureau Complaints:       (alleging that defendants’ Web sites stated, ‘‘[t]he
                                                                                                                                                                   303 Supra notes 72–74.
                                              An Analysis Based on Exchange Transactions, 17           single-most important factor in stopping your
                                                                                                                                                                   304 See supra note 77.
                                              J. Consumer Satisfaction, Dissatisfaction, &             foreclosure is SPEED! Time is not your friend’’ and
                                              Complaining Behav. 88, 90 (2004) (noting that only       that defendants’ solicitations stated ‘‘[y]ou must act      305 See TSR; Final Rule, 75 FR at 48485 (citing

                                              a small percentage of dissatisfied consumers             immediately,’’ and ‘‘URGENT NOTICE: Please Call          Cooling Off Period For Door-to-Door Sales; Trade
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                                              complain to third-party entities or agencies); Jeanne    Immediately!’’); FTC v. Data Med. Capital Inc., No.      Regulations Rule and Statement of Basis and
                                              Hogarth et al., Problems with Credit Cards: An           SA–CV–99–1266 AHS (Eex), Mem. Supp. App.                 Purpose, 37 FR 22934, 22947 (Oct. 26, 1972)
                                              Exploration of Consumer Complaining Behaviors,           Contempt at 8 (C.D. Cal. filed May 27, 2009) (‘‘The      (codified at 16 CFR 429)); Preservation of
                                              14 J. Consumer Satisfaction, Dissatisfaction, &          fuel for [defendant’s alleged] scheme was the            Consumers’ Claims and Defenses, Statement of
                                              Complaining Behav. 88, 98 (2001) (finding that only      desperate plight of consumers facing a recessionary      Basis and Purpose, 40 FR 53506, 53523 (Nov. 18,
                                              7% of consumers having problems with their credit        economy and a free falling real estate market. * * *     1975) (codified at 16 CFR 433) (same); In re Orkin
                                              card company complain to third-party entities or         [T]elemarketers were trained to * * * ‘capitalize on     Exterminating, 108 F.T.C. 263, 364 (‘‘By raising the
                                              agencies).                                               fear’ and ‘create urgency.’ ’’).                                                                     Continued

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                                              75118            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                                Thus, the Commission concludes that                     from MARS providers included                               predict with precision the impact of an
                                              the practice of charging an advance fee                   anecdotes and unsupported assertions                       advance fee ban, but recognizes it may
                                              for MARS causes or is likely to cause                     of success,310 the bulk of the                             force some MARS providers to
                                              substantial consumer injury.306                           comments 311 and the Commission’s law                      capitalize adequately to fund their
                                                                                                        enforcement experience provide strong                      initial operations, until they begin
                                              (2) Benefits to Consumers or
                                                                                                        evidence that MARS providers rarely                        receiving fees generated by their
                                              Competition From Advanced Fees
                                                                                                        deliver the results they promise.                          delivery of services.316 Companies in
                                                The second factor in the unfairness                        Second, MARS providers have                             many other lines of business capitalize
                                              analysis under Section 5(n) of the FTC                    asserted that an advance fee ban would                     for this purpose. Thus, although the
                                              Act is a consideration of whether an act                  impose undue burdens on them,                              advance fee ban in the Final Rule may
                                              or practice has benefits to consumers                     because: (1) They would not have the                       result in new business models,317 there
                                              and competition and, if so, whether they                  cash flow necessary to fund their day-                     is no evidence in the record to
                                              outweigh the actual or likely harm to                     to-day operations; 312 and (2) they might                  substantiate the claim that MARS
                                              consumers. MARS provider commenters                       not get paid for the services they                         providers will not be able to operate if
                                              posited two main arguments to support                     rendered given the precarious financial                    they are paid after they deliver results
                                              their contention that charging advance                    situation of their customers.313 As a                      to their customers.318
                                              fees is beneficial to consumers.                          result, according to these commenters,                        A ban on advance fees would shift
                                                First, the providers argued that, in                    many MARS providers could not afford                       some of the risk of nonperformance
                                              exchange for their upfront fees, they                     to stay in business, and would therefore                   under the contract from consumers to
                                              provide significant benefits to                           no longer be able to provide consumers                     MARS providers. At present, consumers
                                              consumers in the form of completed                        the benefits of their services.314                         bear the full risk—typically, they must
                                              services and successful results.307                          There is scant evidence in the                          pay thousands of dollars up front with
                                              However, the rulemaking record                            rulemaking record to support this                          no assurance that they will ever receive
                                              demonstrates that the vast majority of                    argument, and no industry members                          any benefit in return. The poor
                                              consumers fail to receive successful                      submitted cost data to back up this                        performance of this industry makes it
                                              loan modifications or other forms of                      claim.315 The Commission cannot                            likely that consumers will be harmed if
                                              mortgage assistance promised.308 In the                                                                              they continue to bear the full risk of
                                              ANPR and NPRM, the Commission                                310 Only one MARS commenter offered a self-
                                                                                                                                                                   nonperformance.319 Prohibiting the
                                              specifically requested empirical                          reported success rate, stating that he places over
                                                                                                                                                                   charging of advance fees reallocates
                                              evidence on the success rates of MARS                     90% of his clients into trial or permanent loan
                                                                                                        modifications. See Rogers at 1. However, this              some of this risk to MARS providers and
                                              providers in delivering promised                          commenter did not submit any additional                    gives them a powerful incentive to
                                              results.309 No such evidence was                          information or data supporting this claim. Another         actually deliver results.
                                              submitted. Although a few comments                        commenter reported anecdotal accounts of a small
                                                                                                                                                                      In short, the Commission concludes
                                                                                                        number of consumers for whom he purportedly
                                                                                                        obtained loan modifications. See Parkey (audio             that charging advance fees for MARS
                                              fees, Orkin unilaterally shifted the risk of inflation
                                              that it had assumed under the pre-1975 contracts          files). Another MARS provider reported that it has
                                              to its pre-1975 customers.’’), aff’d 849 F.2d 1354        over ‘‘600 success stories’’ and secures over 80 loan      telephone sales people] was $450 for a fully paid
                                              (11th Cir. 1988); In re Thompson Med. Co., 104            modifications per month. See, e.g., Metropolis at 1.       sale—i.e., $2,500—with an extra $25 if the
                                              F.T.C. 648 (1984) (noting that marketers must             This commenter also failed to submit information           consumer paid by debit card or wire transfer.’’).
                                              provide a high level of substantiation to support         or data supporting this claim, defining ‘‘success             316 See, e.g., LCCR at 4 (‘‘The for-profit business

                                              ‘‘claim[s] whose truth or falsity would be difficult      story,’’ or indicating the percentage of its customers     should be able to capitalize its business in a manner
                                              or impossible for consumers to evaluate by                who received modifications out of the total who            so that it can carry forward these nominal fees as
                                              themselves’’).                                            purchased the services.                                    operating costs and then incorporate that operating
                                                                                                           311 See supra § III.E.1.
                                                 306 For similar reasons, the TSR prohibits advance                                                                cost into the fee obtained from the consumer after
                                                                                                           312 See supra § III.E.1.b.; see also, e.g., Gutner      the services are rendered.’’). See generally TSR;
                                              fees for three types of services that often are
                                              promoted deceptively to consumers in financial            (ANPR) at 1 (‘‘[L]oan modification is not as simple        Final Rule, 75 FR 48458 (Aug. 10, 2010).
                                              crisis: debt relief services, credit repair services,     as filling out a few forms and then it is done. Loan          317 In connection with the FTC’s recent

                                              and certain loan offers. See 16 CFR 310.4(a); TSR;        modification is a long and involved process. * * *         amendments to the TSR to curb deception and
                                              Final Rule, 75 FR at 48484–85. The Credit Repair          Loan modification companies have expenses just             abuse in debt relief services, industry
                                              Organizations Act also bans the collection of             like any other company—payroll, lease, insurance,          representatives similarly argued that they would be
                                              advance fees for credit repair services. 15 U.S.C.        equipment etc.’’); TNLMA (ANPR) at 5 (‘‘[MARS              unable to pay their operating costs without
                                              1679b(b).                                                 providers] incur significant costs before the              collecting advance fees. See TSR; Final Rule, 75 FR
                                                 307 See supra § III.E.1.b.                             consumer’s mortgage is ready to be modified.’’).           at 48486. In fact, after the Commission issued the
                                                 308 As noted earlier, MARS providers suggest that,        313 See supra § III.E.1.b.; see also, e.g., TNLMA       TSR amendments, a major debt relief trade
                                              even in instances where they do not secure the            (ANPR) at 5 (‘‘Nearly all professions, from attorneys      association stated that the rule, while providing a
                                              promised result, they offer consumers other services      to accountants to personal trainers, charge advance        ‘‘significant capital challenge’’ to the industry,
                                              that are beneficial to them, such as day-to-day           fees. * * * The reason these other professions             would ‘‘allow good companies that are getting
                                              assistance in communicating with servicers or             charge fees ‘up-front’ is to avoid the risk of being       results for consumers’’ to survive. Press Release,
                                              lenders, delays in foreclosure proceedings, and           ‘stiffed’ at the end of a laboriously costly effort.’’).   The Ass’n of Settlement Cos., TASC Announces
                                              emotional support. See supra § III.E.1.b. There is no        314 See supra § III.E.1.b. One commenter argued,        Support for FTC Debt Settlement Rules (Aug. 17,
                                              evidence in the record establishing the frequency         alternatively, that the advance fee ban would              2010), available at
                                              with which providers deliver these ‘‘benefits.’’ In       compel legitimate MARS providers to charge                 press-release/TASC-Announces-Support-for-FTC-
                                              any event, providers generally do not advertise such      consumers higher fees to account for the risk of           Debt-Settlement-Rules-1305731.htm.
                                              services or ancillary ‘‘benefits,’’ but instead solicit   nonpayment. Rogers at 18. There is no evidence in             318 See TSR; Final Rule, 75 FR at 48486; Truth in

                                              customers by touting the end result, such as a            the record substantiating this theory. Assuming that       Lending—Final Rule; Fed Res. Brd. Official Staff
                                              modified loan. Presumably, this is because                MARS providers compete with one another, it is not         Commentary, 75 FR 58509, 58518 (Sept. 24, 2010)
                                              consumers are much more interested in receiving,          clear that they would be able to raise prices with         (compensation restrictions for mortgage brokers
                                              and much more willing to pay for, the promised            impunity, thereby passing this cost on to                  may result in new business models, but ‘‘the Board
                                              result. See TSR; Final Rule, 75 FR at 48479               consumers.                                                 does not believe mortgage brokerage firms will no
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                                              (dismissing arguments that debt relief service               315 Notably, FTC law enforcement actions suggest        longer be able to compete in the marketplace unless
                                              providers offer ancillary services such as education      that a predominant portion of providers’ costs are         they can continue to engage in compensation
                                              and financial advice because industry members did         dedicated to marketing and sales, instead of the           practices the Board has found to be unfair.’’).
                                              not provide evidence to establish how many                process of assisting consumers obtain mortgage                319 Increased revenue or profit for a seller, alone,
                                              providers offer the services, how extensive they are,     relief. See, e.g., FTC v. US Foreclosure Relief Corp.,     is not a benefit to consumers or competition for
                                              or how much they cost to provide).                        No. SACV09–768 JVS (MGX), Prelim. Rep. Temp.               purposes of unfairness analysis. See In re Orkin
                                                 309 MARS ANPR, 74 FR at 26137; MARS NPRM,              Receiver at 9 (C.D. Cal. filed July 15, 2009) (‘‘[T]he     Exterminating Comp., Inc., 108 F.T.C. 263, 365–66
                                              75 FR at 10727, 10729.                                    typical commission [for a MARS provider’s                  (1986), aff’d, 849 F.2d 1354, 1363 (11th Cir. 1988).

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                                              does not provide benefits to consumers                   provide refunds for nonperformance.325                   or practice under Section 5(n) of the
                                              or competition, and, even if such                        In addition, although consumers may                      FTC Act.331
                                              benefits were to exist, they would not                   have the right under state law to bring                  b. The Advance Fee Ban Is Reasonably
                                              outweigh the substantial injury this                     breach of contract actions to recover                    Related to the Goal of Preventing
                                              practice demonstrably causes or is likely                advance fees from MARS providers who
                                              to cause to consumers.                                                                                            Deception
                                                                                                       do not perform, many consumers are
                                                                                                       unaware of their legal rights or are                       As explained above, the Omnibus
                                              (3) Reasonably Avoidable Harm
                                                                                                       unable to afford the costs and risks of                  Appropriations Act, as clarified by the
                                                 The third prong of the unfairness                                                                              Credit Card Act, authorized the FTC not
                                                                                                       litigation.326 Thus, the Commission
                                              analysis under Section 5(n) of the FTC                                                                            only to prohibit conduct that is itself
                                                                                                       finds that consumers cannot reasonably
                                              Act requires the Commission to                                                                                    unfair or deceptive, but also to adopt
                                              consider whether consumers could                         avoid the injuries they face in
                                                                                                       connection with MARS providers                           rules that are reasonably related to
                                              reasonably avoid the harm caused by an                                                                            preventing unfair or deceptive conduct
                                              act or practice. The Commission finds                    charging advance fees.
                                                                                                                                                                in connection with MARS.332 For the
                                              an act or practice unfair ‘‘not to second-               (4) Public Policy Concerning Advance                     reasons detailed here, the Commission
                                              guess the wisdom of particular                           Fees                                                     concludes that an advance fee ban for
                                              consumer decisions, but rather to halt                                                                            MARS is reasonably related to the goal
                                              some form of seller behavior that                           Section 5(n) of the FTC Act permits                   of protecting consumers from the
                                              unreasonably creates or takes advantage                  the Commission to consider established                   deception that is widespread in the
                                              of an obstacle to the free exercise of                   public policies in determining whether                   offering of these services.
                                              consumer decision making.’’ 320 The                      an act or practice is unfair, although                     As detailed in Section II of this SBP,
                                              extent to which a consumer can                           those policies cannot be the primary                     MARS providers commonly make
                                              reasonably avoid injury is determined in                 basis for that determination.327 At least                deceptive claims as to the results they
                                              part by whether the consumer can make                    20 states currently prohibit charging                    will obtain. These claims induce
                                              an informed choice.321 In this regard,                   advance fees for MARS because of its                     consumers to pay advance fees of
                                              the Unfairness Policy Statement                          adverse impact on consumers.328                          hundreds or thousands of dollars for
                                              explains that certain types of sales                     Consistent with these state statutes and                 results the providers typically do not
                                              techniques may effectively prevent                       their law enforcement experience, over                   deliver. Because the likelihood of
                                              consumers from making informed                           40 attorneys general filed comments                      consumers pursuing judicial remedies
                                              decisions and that corrective action may                 strongly advocating an FTC rule                          against nonperformance is small,333
                                              therefore be necessary.322                               prohibiting advance fees for MARS.329                    MARS providers have little incentive to
                                                 For harm to be reasonably avoidable,                                                                           perform, and in fact many do not.334
                                                                                                       Thus, public policies embodied in state
                                              consumers must have ‘‘reason to
                                                                                                       laws and law enforcement further                         The advance fee ban proposed in § 322.5
                                              anticipate the impending harm and the
                                                                                                       support the Commission’s finding that                    realigns the incentives of MARS
                                              means to avoid it.’’ 323 As discussed
                                                                                                       this practice is unfair.330                              providers to deliver on their promises,
                                              above, the deceptive success and other
                                                                                                                                                                because they will not be paid until they
                                              claims MARS providers disseminate                           For the reasons set forth above, the
                                                                                                                                                                deliver results that the consumer finds
                                              prevent or substantially hinder the                      Commission concludes that charging an
                                                                                                                                                                acceptable.335 As a result, the ban is
                                              ability of consumers to recognize the                    advance fee for MARS is an unfair act
                                              risks they face in paying advance fees to                                                                            331 As noted earlier, the Commission reached the
                                              MARS providers. This is especially so                      325 Even   if MARS providers granted refunds, it       same conclusion, for similar reasons, with respect
                                              because consumers often are under dire                   would not be sufficient to eliminate the harm to         to the charging of an advance fee for four other
                                              pressure to make decisions quickly.                      consumers from paying the advance fee because            products or services covered by the TSR that have
                                                                                                       financially distressed consumers are deprived of the     been routinely misrepresented: debt relief services,
                                              Moreover, consumers have little                          use of the money from the time of payment to the         credit repair services, money recovery services, and
                                              experience with purchasing services to                   time of refund and because the process of obtaining      guaranteed loans or other extensions of credit. See
                                              stave off foreclosure, which is not a                    a refund from a MARS provider imposes costs on           Telemarketing Sales Rule Statement of Basis and
                                              routine consumer transaction, whereas                    them. See FTC v. Think Achievement Corp., 312 F.         Purpose, 68 FR 4580, 4614 (Jan. 29, 2003) (codified
                                                                                                       3d 259, 261 (7th Cir. 2002) (‘‘This might be a tenable   at 6 CFR 310.4(a)). Although the TSR declares the
                                              the provider has presumably handled                      argument if obtaining a refunds were costless, but       charging of advance fees in these contexts to be
                                              the transaction many times.                              of course it is not. No one would buy something          ‘‘abusive’’—the term used in the Telemarketing
                                                 Once they have paid in advance and                    knowing that it was worthless and that therefore he      Act—the Commission used the unfairness test set
                                              learned that a MARS provider has not                     would have to get a refund of the purchase price.’’).    forth in Section 5(n) of the FTC Act in finding that
                                                                                                          326 See Unfairness Policy Statement, supra note       the practice was abusive. See 75 FR at 48482–87;
                                              obtained a result they are willing to
                                                                                                       187, at 1074 n.19 (‘‘In some senses any injury can       TSR: Notice of Proposed Rulemaking, 67 FR 4492–
                                              accept, consumers cannot reasonably                      be avoided—for example, * * * by private legal           4511 (Jan. 30, 2002).
                                              eliminate or mitigate the harm.324 As                    actions for damages—but these courses may be too            332 See supra note 105.
                                              discussed above, MARS providers rarely                   expensive to be practicable for individual                  333 See supra note 326.
                                                                                                       consumers to pursue.’’); see also In re Orkin               334 See supra § III.E.3. In addition, purchases of
                                                 320 Unfairness Policy Statement, supra note 187,      Exterminating, 108 F.T.C. at 379–80 (Oliver, Chmn.,      MARS typically are a one-time event, and thus
                                              at 1074.                                                 concurring) (suing for breach of contract is not a       reputational costs are unlikely to be a major
                                                 321 Id.                                               reasonable means for consumers to avoid injury).         deterrent for providers.
                                                                                                          327 15 U.S.C. 45(n).
                                                 322 Id.                                                                                                           335 See, e.g., LOLLAF at 4; CRL at 5 (‘‘[W]e are
                                                                                                          328 See supra note 98.
                                                 323 Orkin Exterminating Co., 108 F.T.C. 263, 366                                                               supportive of the comprehensive ban on advance
                                                                                                          329 See NAAG at 2–3; NAAG (ANPR) at 9; MN AG
                                              (1986), aff’d, 849 F.2d 1354, 1368 (11th Cir. 1988);                                                              fees proposed by the FTC, which would align the
                                              see Int’l Harvester Co., 104 F.T.C. 949, 1061 (1984)     (ANPR) at 4; MA AG (ANPR) at 2; OH AG (ANPR)             incentives of MARS providers and consumers.’’);
                                              (‘‘whether some consequence is ‘reasonably               at 3.                                                    NAAG at 5 (‘‘Requiring these companies to obtain
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                                              avoidable’ depends not just on whether they know            330 Unfairness Policy Statement, supra note 187,      the promised loan modification as a condition of
                                              the physical steps to take in order to prevent it, but   at 1075 (‘‘Conversely, statutes or other sources of      being paid will substantially reduce their incentive
                                              also whether they understand the necessity of            public policy may affirmatively allow for a practice     for making false or inflated promises of foreclosure
                                              actually taking those steps.’’).                         that the Commission tentatively views as unfair.         assistance.’’); LCCR at 4 (‘‘The ban will * * *
                                                 324 See Int’l Harvester Co., 104 F.T.C. at 366        The existence of such policies will then give the        incentiviz[e] MARS providers to represent their
                                              (Consumers ‘‘seek to mitigate the damage afterward       agency reason to reconsider its assessment of            capabilities in a way that reflects services they can
                                              if they are aware of potential avenues toward that       whether the practice is actually injurious in its net    realistically provide in a timely manner. After all,
                                              end.’’).                                                 effects.’’).                                                                                         Continued

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                                              75120            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              likely to discourage providers from                      conditions, and limitations associated                concession or other result from the
                                              making deceptive claims and is thus                      with the consumer’s current mortgage                  lender or servicer and the consumer has
                                              reasonably related to the goal of                        loan and the terms, conditions, and                   accepted that result.
                                              preventing deception.336 Although the                    limitations associated with the                          The proposed rule did not require
                                              Final Rule prohibits deceptive                           consumer’s mortgage loan if he or she                 such acceptance, but instead allowed a
                                              representations and mandates certain                     accepts the dwelling loan holder’s or                 provider to collect a fee once it had (1)
                                              disclosures, there is no assurance that                  servicer’s offer, including but not                   in the case of providers promoting
                                              these measures will be effective in every                limited to differences in the loan’s:                 mortgage loan modifications,
                                              case or that all providers will abide by                    (i) Principal balance;                             ‘‘[o]btained a mortgage loan
                                              them. The advance fee ban will provide                      (ii) Contract interest rate, including             modification [as defined in the
                                              additional protection against continued                  the maximum rate and any adjustable                   proposed rule] for the consumer’’ and
                                              deception in this industry,                              rates, if applicable;                                 delivered a written offer from the lender
                                                                                                          (iii) Amount and number of the                     or servicer for a loan modification to the
                                              3. The Ban on Advance Payments                           consumer’s scheduled periodic                         consumer; or (2) in the case of providers
                                                 Section 322.5 of the Final Rule                       payments on the loan;                                 offering MARS other than loan
                                              provides that:                                              (iv) Monthly amounts owed for                      modifications, ‘‘[a]chieved all of the
                                                 It is a violation of this rule for any                principal, interest, taxes, and any                   results that * * * [t]he provider
                                              mortgage assistance relief service                       mortgage insurance on the loan;                       represented, expressly or by
                                              provider to:                                                (v) Amount of any delinquent                       implication, to the consumer that the
                                                 (a) Request or receive payment of any                 payments owing or outstanding;                        service would achieve, and * * * [that
                                              fee or other consideration until the                        (vi) Assessed fees or penalties; and               are] consistent with consumers’
                                              consumer has executed a written                             (vii) Term                                         reasonable expectations about the
                                              agreement between the consumer and                       The notice must be made in a clear and                service’’ and delivered documentation of
                                              the consumer’s dwelling loan holder or                   prominent manner, on a separate                       these results to consumers. Under the
                                              servicer incorporating the offer of                      written page, and preceded by the                     proposed rule, payment was contingent
                                              mortgage assistance relief the provider                  heading: ‘‘IMPORTANT INFORMATION                      upon either delivering a specific result
                                              obtained from the consumer’s dwelling                    FROM YOUR [name of lender or                          defined in the rule (e.g., a ‘‘mortgage
                                              loan holder or servicer;                                 servicer] ABOUT THIS OFFER.’’ The                     loan modification’’) or obtaining the
                                                 (b) Fail to disclose, at the time the                 heading must be in bold face font that                results the MARS provider promised at
                                              mortgage assistance relief service                       is two-point-type larger than the font                the time the consumer agreed to use the
                                              provider furnishes the consumer with                     size of the required disclosure.                      service. The Final Rule, however,
                                              the written agreement specified in                          (d) Fail to disclose in the notice                 requires that payment be contingent
                                              paragraph (a) of this section, the                       specified in paragraph (c) of this                    upon consumer acceptance of results
                                              following information: ‘‘This is an offer                section, in cases where the offer of                  the provider presents.337 Regardless of
                                              of mortgage assistance we obtained from                  mortgage assistance relief the provider               how the result the provider delivers
                                              your lender [or servicer]. You may                       obtained from the consumer’s dwelling                 compares to what it promoted or
                                              accept or reject the offer. If you reject                loan holder or servicer is a trial                    promised at the time the consumer
                                              the offer, you do not have to pay us. If                 mortgage loan modification, the terms,                agreed to use its service, the provider
                                              you accept the offer, you will have to                   conditions, and limitations of this offer,            still must secure a written agreement
                                              pay us [same amount as disclosed                         including but not limited to, (i) the fact            between the consumer and his or her
                                              pursuant to § 322.4(b)(1)] for our                       that the consumer may not qualify for a               lender or servicer accepting the results
                                              services.’’ The disclosure required by                   permanent mortgage loan modification,                 delivered before collecting any fees. The
                                              this paragraph must be made in a clear                   and (ii) the likely amount of the                     Commission has adopted an approach
                                              and prominent manner, on a separate                      scheduled periodic payments and any                   different from that in the proposed rule
                                              written page, and preceded by the                        arrears, payments, or fees that the                   because it concludes that the new
                                              heading: ‘‘IMPORTANT NOTICE: Before                      consumer would owe in failing to                      approach strikes a better balance
                                              buying this service, consider the                        qualify.                                              between protecting consumers and
                                              following information.’’ The heading                        This provision is intended to prevent              ensuring that MARS providers can
                                              must be in bold face font that is two                    MARS providers from requesting or                     collect fees for beneficial results they
                                              point-type larger than the font size of                  receiving any fees or any other form of               achieve.
                                              the required disclosure; or                              compensation, including an equity stake                  At the same time, the Final Rule
                                                 (c) Fail to provide, at the time the                  in consumers’ property, until they have               permits providers to collect fees if they
                                              mortgage assistance relief service                       delivered a loan modification or another
                                              provider furnishes the consumer with                     result the consumer accepts.                             337 The Commission cautions that providers not

                                              the written agreement specified in                                                                             attempt to evade the requirements of § 322.5(a) by
                                              paragraph (a) of this section, a notice                  a. The Consumer Acceptance                            entering a contract with consumers signed at the
                                                                                                       Requirement                                           outset specifying the consumer’s preapproval, for
                                              from the consumer’s dwelling loan                                                                              example, that any offer that involves a certain type
                                              holder or servicer that describes all                       Section 322.5(a) of the Final Rule                 of concession from the lender or servicer will be
                                              material differences between the terms,                  prohibits a MARS provider from                        deemed acceptable. Moreover, the provider may not
                                                                                                                                                             rely on authority obtained through a power of
                                                                                                       collecting a fee until ‘‘the consumer has             attorney at the time or before the time of contracting
                                              the sooner the providers are able to make good on        executed a written agreement between                  to execute an agreement incorporating the offer of
                                              the representations to the consumer, the sooner          the consumer and the consumer’s                       mortgage relief from the lender or servicer on the
                                              they will be able to charge their fees.’’); CUUS at                                                            consumer’s behalf, because the Commission would
                                                                                                       dwelling loan holder or servicer
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                                              6 (‘‘[W]e believe that imposing this requirement will                                                          not regard the consumer as having accepted the
                                              force for-profit MARS providers to sell their            incorporating the offer of mortgage                   offer—as required under § 322.5(a). The
                                              services only to those they can reasonably expect        assistance relief the provider obtained               Commission further cautions that providers not use
                                              to help rather than anyone they can sign up to           from the consumer’s dwelling loan                     deceptive or unfair practices to convince consumers
                                              generate advance fees even when there is no hope                                                               to accept concessions to which they would not
                                              of offering them the help they seek.’’); MARS NPRM,      holder or servicer.’’ This provision will             otherwise agree, as doing so may constitute a
                                              75 FR at 10719 n.148.                                    ensure that MARS providers only                       violation of § 322.5(a) and other provisions of the
                                                 336 See supra note 105.                               collect fees after they have delivered a              Rule, including § 322.3(b)(12).

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                                              deliver results that, although different                   consumer would understand that he or                they pay on their loans.340 The
                                              from what they promised to consumers,                      she may not receive a reduction in the              Commission has determined that, in
                                              are ultimately acceptable to consumers.                    amount of interest, principal balance, or           light of the changes in the Final Rule,
                                              It avoids disputes over what the                           monthly payments.                                   including the advance fee ban and
                                              provider actually promised, and allows                        Further, as described above, § 322.5(b)          related disclosures, such a prohibition is
                                              consumers to make the decision about                       of the Final Rule requires providers to             unnecessary. As noted above, § 322.5
                                              whether the offered mortgage relief is                     inform consumers: (a) that they do not              will ensure that consumers are told that
                                              satisfactory to them. It also ensures that                 have to pay any fees to the MARS                    they are being offered a trial
                                              the consumer receives a result that he or                  provider unless and until they accept               modification and ensure that they have
                                              she determines to be beneficial—for                        the result that the provider has                    the opportunity to reject the offer.
                                              example, a loan modification with a                        delivered, and (b) the total amount in                 Given that, under the advance fee ban
                                              particular reduction in monthly                            fees consumers will have to pay the                 provision, providers must deliver a
                                              payments 338 or lasting a specific                         provider if they accept that result.                written agreement from the servicer or
                                              duration. This approach is similar to the                  Additionally, Section 322.5(c) of the               lender to the consumer, and obtain the
                                              one taken in the TSR’s advance fee ban                     Final Rule requires providers to furnish            consumer’s written acceptance of that
                                              for debt relief services.339                               the consumer with a written notice from             agreement, the Final Rule requires that
                                                 The Commission warns that securing                      the consumer’s lender or servicer                   the disclosures in §§ 322.5(b)–(d) also be
                                              consumer acceptance to an offer will not                   describing all ‘‘material differences’’             made in writing, each on a separate page
                                              immunize a provider from other                             between the terms, conditions, and                  from the agreement. These disclosures
                                              violations of the Rule. Providers cannot                   limitations of the consumer’s current               must also be made ‘‘at the time that the
                                              misrepresent the results consumers will                    mortgage loan and those associated with             * * * provider furnishes the consumer
                                              receive if they use MARS. For example,                     the offer for mortgage relief, including            with a written agreement to be
                                              if a provider represents to a consumer                     but not limited to differences in the               executed’’ by the consumer. Sections
                                              that it will obtain a reduction in the                     principal balance; contract interest rate,          322.5(b)–(d) will ensure that consumers
                                              amount of interest, principal balance, or                  including the maximum rate and any                  receive this critical information when
                                              monthly payments, but only obtains a                       adjustable rates, if applicable; amount             they are in a position either to accept or
                                              forbearance agreement, then, regardless                    and number of the consumer’s                        reject the result secured by the
                                              of whether the consumer accepts the                        scheduled periodic payments on the                  provider.341 These disclosures are
                                              forbearance agreement, that provider                       loan; monthly amounts owed for                      necessary to effectuate the advance fee
                                              has made a misrepresentation in                            principal, interest, taxes, and any                 ban and, accordingly, are reasonably
                                              violation of § 322.3(b) of the Final Rule.                 mortgage insurance on the loan; amount              related to the prevention of deceptive or
                                              In order to comply with § 322.3(b), the                    of any delinquent payments owing or                 unfair practices.
                                              provider should qualify its claims                         outstanding; assessed fees or penalties;
                                              sufficiently so that a reasonable                          or term of the loan. Based on its law               b. Prohibition on Advance Fees for
                                                                                                         enforcement experience and the                      Piecemeal Services
                                                 338 In response to the proposed rule, which sets        rulemaking record, the Commission                     As detailed above, NAAG and several
                                              forth specific requirements as to the result that          concludes that these factors are essential
                                              entities promoting loan modifications must deliver                                                             other commenters strongly supported
                                              before collecting fees, some commenters
                                                                                                         to consumers’ ability to compare the                the proposed rule’s prohibition on the
                                              recommended that the Final Rule add requirements           mortgage relief offered with their                  practice of collecting advance fees for
                                              that MARS providers obtain a ‘‘sustainable’’ or            current mortgage loan and, thus,                    piecemeal services.342 The Commission
                                              ‘‘affordable’’ loan modification for the consumer.         whether they should accept it.
                                              See, e.g., LOLLAF at 4, 6; LFSV at 3; CSBS at 4;                                                               agrees that without such a prohibition,
                                              NCLC at 18; LCCR at 4–5 (‘‘We believe that MARS            Requiring that the lender or servicer               many MARS providers would attempt to
                                              providers who negotiate mortgage loan                      prepare the written disclosure also                 collect fees for discrete tasks that fall
                                              modifications for homeowners in exchange for               better ensures that the information                 short of, and often may never lead to,
                                              compensation must confer a real benefit in the form        provided is consistent with the terms of
                                              of a modified mortgage that is affordable and                                                                  the result promised. These individual
                                              sustainable.’’). Some of these commenters noted that       the offer, and mitigates against the risk           tasks might include: conducting an
                                              many consumers who have obtained loan                      that MARS providers would mislead                   initial consultation with the consumer;
                                              modifications have subsequently re-defaulted, or           consumers about the offer.
                                              are at risk of doing so, and therefore that the               Section 322.5(d) also specifies that in             340 See, e.g., NYC DCA at 4; NCLC at 17–18 (also
                                              Commission should adopt specific benchmarks for
                                              determining if a loan modification will benefit the
                                                                                                         cases where the mortgage relief offer               arguing that consumers who enter trial
                                              consumer (for example, by reducing their monthly           obtained from the lender or servicer is             modifications frequently suffer a number of
                                              payments by at least 20% for five years or by              a trial loan modification, the notice from          negative consequences, including harm to their
                                              employing HAMP guidelines for interest rates).             the lender or servicer that the provider            creditworthiness and, if they do not qualify for a
                                                 Because the Final Rule requires that the                                                                    permanent modification, significant arrearages that
                                                                                                         must furnish to the consumer with the               can result in foreclosure).
                                              consumer consent to the result delivered by the
                                              provider, it will help ensure that consumers only          offer of mortgage assistance must                      341 This disclosure also complements

                                              pay fees for loan modifications that they believe to       include: (1) that the consumer may not              § 322.3(b)(7), which prohibits providers from
                                              be affordable and sustainable. Consumers’ ability to       qualify for a permanent modification,               misrepresenting that they have the right to claim or
                                              make monthly payments vary depending on their                                                                  charge a fee. Under § 322.3(b)(7), providers may not
                                                                                                         and (2) if the consumer does not qualify,           circumvent this written disclosure by
                                              circumstances and over time. The requirements of
                                              government programs like the MHA and servicer              the likely amount of the scheduled                  misrepresenting expressly or by implication—orally
                                              policies also may change. By making payment of             periodic payments that he will have to              or otherwise—that the consumer must pay
                                              fees contingent upon consumer acceptance, the              pay and any arrearages or fees that may             providers’ fees.
                                              Final Rule gives each consumer the ability to              accumulate. Some commenters                            342 See, e.g., NAAG (ANPR) at 5 (‘‘We are now
                                              determine, based on her individual circumstances,                                                              seeing consultants offering these services
                                                                                                         recommended that the proposed rule be
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                                              the type of loan modification that would best assist                                                           piecemeal. For example, some companies represent
                                              her. Therefore, the Commission believes it is              changed to prohibit providers from                  they will help consumers gather their financial
                                              unnecessary to adopt an affordability requirement          collecting fees for obtaining a trial               documents and prepare the information to submit
                                              for loan modifications.                                    modification, because most consumers                to their mortgage servicer for a fee. Then, for
                                                 339 See 16 CFR 310.4(a)(5)(i)(A) (prohibiting debt                                                          another fee, the companies represent that they will
                                              relief providers from collecting fees until, inter alia,
                                                                                                         who receive trial modifications do not              facilitate communication between the consumers
                                              the customer has executed the debt relief                  receive permanent modifications that                and their mortgage servicer.’’); see also CSBS at 4;
                                              agreement).                                                would substantially reduce the amount               LCCR at 8; MA AG at 2; NAAG at 3.

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                                              reviewing or auditing the consumer’s                      set limits (or caps) on them.345 Other                  Commission’s role is to remove
                                              mortgage loan documents; 343 gathering                    commenters argued that the FTC should                   obstacles to consumers making the
                                              financial or other information from the                   not adopt caps as a substitute for an                   informed choices that are necessary to a
                                              borrower; sending an application or                       advance fee ban.346 Two of the latter                   properly functioning market.
                                              other request to the lender or servicer;                  group of commenters asserted that
                                                                                                                                                                b. Use of Dedicated Accounts
                                              facilitating communications between                       providers would abuse such a provision
                                              the borrower and the lender or servicer;                  by simply signing up as many                               In the NPRM, the Commission
                                              or responding on behalf of the consumer                   consumers as possible and collecting                    requested comment on whether, in the
                                              to requests from the lender or servicer.                  any fees permitted upfront without                      event the Rule bans advance fees, MARS
                                              The record demonstrates that many                         providing any benefits to consumers.347                 providers should be allowed to request
                                              MARS providers currently charge                           A third group of commenters, although                   or require that consumers place any
                                              discrete fees for these types of tasks, in                supportive of an advance fee ban,                       such fees in a dedicated bank
                                              some instances to evade state advance                     argued that the Commission should also                  account.352 The Final Rule does not
                                              fee bans.344                                              limit MARS providers to charging back-                  permit MARS providers, other than
                                                 Section 322.5 of the Final Rule,                       end fees that are ‘‘reasonable’’ or ‘‘not               attorneys, to request or require
                                              although modified, still prohibits MARS                   excessive.’’ 348                                        consumers to pay fees into any type of
                                                                                                          As in the recent adoption of debt                     account prior to completing their
                                              providers from collecting fees for
                                                                                                        relief amendments to the TSR, and for                   services.353 The overwhelming weight
                                              piecemeal services. Section 322.5(a)
                                                                                                        the same reasons,349 the Commission                     of comments opposed allowing the use
                                              requires the provider to secure the
                                                                                                        declines to set caps on the fees MARS                   of such accounts,354 because, among
                                              consumer’s written agreement to
                                                                                                        providers can receive. While the FTC                    other things, some unscrupulous MARS
                                              accepting the mortgage relief it has
                                                                                                        concludes that the collection of advance                providers might misuse funds held in
                                              obtained; thus, providers will be unable
                                                                                                        fees by MARS providers is an unfair act                 dedicated accounts,355 and permitting
                                              to charge a fee for intermediate services
                                                                                                        or practice, it has made no such                        dedicated accounts would place undue
                                              unless and until the consumer accepts
                                                                                                        determination about the amount of fees                  burdens on consumers to recover money
                                              the result the MARS provider obtains
                                                                                                        charged.350 In general, the competitive                 they paid into the accounts if providers
                                              from the consumer’s lender or servicer.                                                                           do not deliver the results consumers
                                                                                                        market should establish the prices
                                              c. Documentation Requirement                              MARS providers charge,351 and the                       finds acceptable.356 There is nothing in
                                                 Under § 322.5 of the Final Rule,                          345 Baughman at 1; Hunter at 1; Casey at 1. Some     Industrial Market Structure and Economic
                                              MARS providers must provide                               state statutes include fee caps for MARS providers.     Performance 190–93, 204 (1st ed. 1980). Further, fee
                                              consumers with documentary proof of                       For example, Maine limits providers to a $75 up-        caps can quickly become obsolete, as changes in
                                              the results they achieved before                          front fee. See Me. Rev. Stat. Ann. tit. 32, § 6174–     market conditions and technologies render the fixed
                                                                                                        A.                                                      maximum fee too low (e.g., if the costs of providing
                                              requesting or receiving payment.                             346 See, e.g., MBA at 3; CSBS at 4; MA AG at 1;      the service rise) or too high (e.g., if new technology
                                              Section 322.5(a) of the Final Rule                        CUUS at 6; CRL at 2.                                    lowers the cost of providing the service or if market
                                              requires providers to give consumers a                       347 LOLLAF at 5 (‘‘Allowing any fees to be           participants would compete on price absent
                                                                                                                                                                regulation). United States. v. Trenton Potteries Co.,
                                              written offer—for the consumer to                         collected prior to providing a permanent loan
                                                                                                                                                                273 U.S. 392, 397 (1927) (‘‘The reasonable price
                                              accept or reject—from the lender or                       modification presents MARS providers with a back
                                                                                                                                                                fixed today may through economic and business
                                                                                                        door opportunity to extract significant sums of
                                              servicer setting forth the mortgage relief                money without any benefit provided to the
                                                                                                                                                                changes become the unreasonable price of
                                              they have obtained for the consumer,                                                                              tomorrow.’’).
                                                                                                        consumer.’’); CUUS at 6 (‘‘It may seem innocent             352 See 75 FR at 10721, 10729–30.
                                              such as a forbearance agreement, short                    enough to allow a small initial fee of $25.00 or            353 As discussed in § III.G., the Final Rule
                                              sale, or deed-in-lieu of foreclosure                      $50.00. At first glance, this fee may not seem
                                                                                                        particularly burdensome to consumers. However,          exempts attorneys from the advance fee ban if they
                                              transaction; waiver of an acceleration                    this may incentivize certain for-profit MARS            meet certain conditions, including depositing such
                                              clause; opportunity to cure default or                    providers to simply sign up as many people as           fees into their client trust accounts.
                                                                                                                                                                    354 See, e.g., CUUS at 7; CSBS at 4. Only a single
                                              reinstate a loan; or repayment plan. The                  possible only for the initial fee, and nothing else.
                                                                                                                                                                commenter recommended that the Rule allow
                                              documentation required is a                               The small fees could potentially add up to sizeable
                                                                                                        profits for MARS companies, depending on the            providers (other than attorneys) to use such
                                              comprehensive written instrument that                     aggressive nature of the MARS provider’s marketing      accounts, and that commenter provided no analysis
                                              memorializes a lender’s or servicer’s                     campaign.’’).                                           of the costs and benefits of his proposal. See
                                                                                                                                                                Goldberg at 4 (‘‘Even escrowing funds through
                                              agreement to offer the concession.                           348 LFSV at 2–3; LOLLAF at 5; NCLC (ANPR) at
                                                                                                                                                                dedicated trust accounts is a better alternative and
                                                                                                        13; see also MA AG at 2 (recommending that the
                                                                                                                                                                less of a financial burden on the consumer.’’). An
                                              4. Additional Provisions Not Adopted in                   Commission consider a ‘‘sliding scale’’ fee cap as a
                                                                                                                                                                additional comment noted that MARS providers
                                              the Final Rule                                            complement to the advance fee ban); LCCR at 7–8
                                                                                                                                                                may use dedicated accounts under Nevada’s
                                                                                                                                                                relevant statute. See Hirsch at 1; see also Nev. Rev.
                                                 In the NPRM, the Commission                               349 See TSR; Final Rule, 75 FR at 48488 (finding
                                                                                                                                                                Stat. § 645F.300, et seq.
                                              requested comment on whether the                          that fee setting is best done by a competitive              355 OPLC at 1; NYC DCA at 5 (‘‘Given the high
                                                                                                        market, that the Commission’s role is to remove
                                              Final Rule should: (1) Limit or cap                       obstacles to consumers making informed choices in
                                                                                                                                                                cost and potential for improper access to funds by
                                              providers’ advance fees; (2) allow                                                                                MARS providers, the FTC should apply the
                                                                                                        the market, and that the amended TSR is designed        prohibition on collection of fees in advance of
                                              providers to use independent third-                       to ensure that the debt relief market functions         permanent loan modifications to payments held in
                                              party escrow accounts to hold fees until                  properly).                                              escrow accounts.’’); NAAG at 2 (‘‘Likewise, third-
                                                                                                           350 The purpose of the FTC’s unfairness doctrine
                                              they achieve results; and (3) include a                                                                           party escrow accounts will not protect consumers’
                                                                                                        is not to allow the Commission to obtain better         interests in the same manner as an advance fee
                                              right to cancel. Based on the record, the                 bargains for consumers than they can obtain in the      prohibition. Indeed, there is evidence that third-
                                              Commission declines to adopt any of                       marketplace. See, e.g., Am. Fin. Servs. Ass’n v. FTC,   party escrow accounts are subject to manipulation
                                              these approaches.                                         767 F.2d 957, 964 (DC Cir. 1985). Instead, it is to     that renders their purported protections
                                                                                                        prohibit acts and practices that may unreasonably       ineffective.’’).
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                                              a. Fee Caps                                               create or take advantage of an obstacle to                  356 LFSV at 3; NCLC at 15; LOLLAF at 5
                                                                                                        consumers’ ability to make informed choices. See        (‘‘[E]scrowing funds and not allowing MARS
                                                Some commenters recommended that                        id. at 976.                                             providers to access them without providing a
                                                                                                           351 A federally established maximum advance fee
                                              the Commission allow advance fees, but                                                                            benefit, does not provide a significant safeguard to
                                                                                                        might well become the de facto actual fee for           protect consumers from abusive MARS providers.
                                                                                                        MARS. F.M. Scherer, Focal Point Pricing and             Consumers who seek to recover fees may have to
                                                343 See   supra note 56 and accompanying text.          Conscious Parallelism, in Competition Pol’y,            bring a lawsuit to either recover them from escrow
                                                344 See   supra note 342.                               Domestic & Int’l 89–97 (2000); F. M. Scherer,           or to claw back the fees paid to a MARS provider.’’).

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                  75123

                                              the record indicating that non-attorney                  in aggressive sales tactics that may                    For example, a consumer group
                                              MARS providers currently use                             overcome any hesitancy on the part of                   explained that such a provision would
                                              dedicated accounts with any frequency                    consumers.360 According to these                        be valuable because entities that assist
                                              to deposit advance fees or that an                       commenters, a right to cancel would                     and facilitate fraudulent MARS
                                              infrastructure to support such accounts                  provide consumers with an opportunity                   providers often receive a substantial
                                              exists. Without more information as to                   to discuss purchasing MARS with                         portion of the funds obtained from
                                              how MARS providers would use                             trusted confidants,361 reconsider their                 consumers for mortgage assistance relief
                                              dedicated accounts and whether                           decision free of aggressive sales                       services.367 As discussed below, a
                                              consumers would be adequately                            tactics,362 and assess whether the                      number of commenters supported a
                                              protected, and in light of widespread                    service is beneficial for them.                         substantial assistance or support
                                              deceptive and unfair acts and practices                     The Commission declines to include                   provision, but recommended including
                                              by MARS providers, the Commission                        a right to cancel provision in the Final                a different knowledge standard in a final
                                              declines to permit providers to request                  Rule. Under § 322.5 of the Final Rule,                  rule than in the proposed rule.368
                                              or require that consumers place advance                  even if a consumer enters into an
                                                                                                       agreement to use a MARS provider in                     1. Substantial Assistance
                                              fees for MARS in such accounts.357
                                                                                                       circumstances undermining his or her                       Many MARS providers rely on, or
                                              c. Right To Cancel                                       ability to make a well-informed                         work in conjunction with, other entities
                                                 The proposed rule did not include a                   decision, the consumer has no                           to advertise their services and operate
                                              right to cancel. However, the NPRM                       obligation to pay any money to the                      their businesses. The Final Rule
                                              solicited comments on whether the                        MARS provider until he or she accepts                   provision applies to substantial—i.e.,
                                              Final Rule should give consumers the                     an offered result. The consumer is free                 more than casual or incidental—
                                              right to cancel their contracts with                     to reject offers that he or she believes are            assistance or support that such entities
                                              MARS providers without obligation for                    unsatisfactory. If the consumer never                   provide to MARS providers.369
                                              a certain period of time often referred to               accepts an offer, he or she is never                    Substantial assistance could include
                                              as a ‘‘cooling off period.’’                             obligated to pay the provider. Thus, a                  such critical support functions as lead
                                                 Several commenters recommended                        right to cancel would provide little                    generation, telemarketing and other
                                              including a right to cancel in the Final                 additional benefit to consumers.363                     marketing support,370 payment
                                              Rule as a complement to the advance fee                                                                          processing,371 back-end handling of
                                                                                                       F. Section 322.6: Substantial Assistance                consumer files,372 and customer
                                              ban.358 Many of these commenters                         or Support
                                              observed that consumers considering                                                                              referrals.
                                              whether to purchase MARS often are                          The proposed rule prohibited any                        A common example of those who
                                              facing an immediate crisis and may not                   person within the FTC’s jurisdiction                    provide substantial assistance to MARS
                                                                                                       under the FTC Act 364 from providing                    providers are so-called ‘‘lead
                                              take the time they need to make well-
                                                                                                       ‘‘substantial assistance or support’’ to                generators.’’ Lead generators obtain the
                                              informed decisions.359 They further
                                                                                                       any MARS provider if the person                         contact information of consumers, i.e.
                                              noted that MARS providers often engage
                                                                                                       ‘‘knows or consciously avoids knowing                   leads, who have indicated interest in
                                                 357 The amended TSR allows debt relief providers      that the provider is engaged in any act                 MARS by visiting the lead generator’s
                                              to establish dedicated accounts for consumer             or practice that violates this rule.’’ The
                                              payments pending completion of the services,             Final Rule adopts the proposed                            367 CUUS    at 8.
                                              subject to several conditions to ensure that             provision with a single, minor                            368 See  CUUS at 8; NYC DCA at 9.
                                              consumers are protected. 16 CFR 310.4(a)(5)(ii).                                                                    369 See TSR Statement of Basis and Purpose, 60
                                              There are fundamental differences between debt
                                                                                                                                                               FR 43842, 43852 (1995) (‘‘The Commission further
                                              settlement services and MARS, however, that make            Public comments generally supported                  believes that the ordinary understanding of the
                                              this distinction an appropriate one. Consumers           a prohibition on providing substantial                  qualifying word ‘substantial’ encompasses the
                                              typically pay for debt settlement services by making     assistance or support to another who is                 notion that the requisite assistance must consist of
                                              monthly payments, which include a portion of the         violating the Rule.365 Several                          more than mere casual or incidental dealing with
                                              provider’s fees as well as savings towards                                                                       a seller or telemarketer that is unrelated to a
                                              settlements. It is only after consumers save enough      commenters asserted that such a                         violation of the Rule.’’).
                                              money to fund a likely settlement—a process that         measure would prevent MARS                                 370 See, e.g., FTC v. Kirkland Young, LLC, No. 09–
                                              can take many months or years—that the provider          providers from using ‘‘lead generators’’                23507, Mem. Supp. TRO at 9 (S.D. Fla. filed Nov.
                                              begins negotiating with the creditor to reduce the       or mortgage brokers to supply contact                   24, 2009) (alleging that Defendant employed
                                              debt. MARS services, on the other hand, generally                                                                another entity to make some of its telemarketing
                                              do not include this ‘‘forced savings’’ function;         information for potential customers,366
                                                                                                                                                               calls to consumers).
                                              rather, consumers simply pay the provider’s fees in      thus making it more difficult for                          371 Frequently, MARS providers rely on the
                                              a single or small number of payments. Any relief,        deceptive MARS providers to operate.                    services of payment processors to handle credit
                                              such as a loan modification, that the MARS                                                                       card payments. See, e.g., FTC v. Loss Mitigation
                                              provider obtains typically would not involve a             360 Id.                                               Servs., Inc., No. SACV09–800 DOC (ANx) (C.D. Cal.
                                              lump sum payment for which the consumer would              361 See                                               filed July 13, 2009); FTC v. LucasLawCenter ‘‘Inc.’’,
                                              have to save. Moreover, the record in the TSR                       NCLC at 14; LFSV at 2.
                                                                                                         362 See
                                                                                                                                                               No. SACV09–770 DOC(ANx) (C.D. Cal. filed July 7,
                                              proceeding showed that it is the usual practice in                  LOLLAF at 6; NCLC at 14.                     2010) (third-party papers filed by payment
                                                                                                          363 The Commission also declined to include a
                                              the debt settlement industry to use dedicated                                                                    processor); Pls. Opp. Mot. Decl. Relief (C.D. Cal.
                                              accounts and that a structure is already in place to     right to cancel in the debt relief amendments to the    filed Nov. 20, 2009). In other industries, the FTC
                                              administer these accounts, consisting of                 TSR. See TSR; Final Rule, 75 FR at 48488.               has sued payment processors that billed consumers
                                              established, independent firms that manage                  364 The Final Rule explicitly exempts from the
                                                                                                                                                               for products or services despite indications that
                                              accounts that the consumers own and control. TSR;        definition of ‘‘person’’ any individuals or entities    those products or services were illusory on an
                                              Final Rule, 75 FR at 48490–91 & n.451. One such          outside the FTC’s jurisdiction. See § 322.2(k).         assistance and facilitating theory. See, e.g., FTC v.
                                              firm manages approximately 250,000 accounts for             365 See CSBS at 4 (‘‘The state regulators support    InterBill, Ltd., No. 06–cv–01644–JCM–PAL (D. Nev.
                                              consumers enrolled with various debt settlement          the Commission’s proposal to prohibit any person        Dec. 26, 2006); FTC v. Your Money Access, LLC, No.
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                                              companies. Global Client Solutions, (Oct. 9, 2009)       from providing substantial assistance or support to     07–5174 (E.D. Pa. filed Dec. 6, 2007).
                                              at 2, available at       a MARS provider if that person knows or                    372 See, e.g., FTC v. Fed. Loan Modification Law
                                              tsrdebtrelief/543670-00138.pdf. No such                  consciously avoids knowing that the provider is         Ctr., LLP, No. SACV09–401 CJC (MLGx), Reply to
                                              infrastructure exists in the MARS industry.              violating any provision of the proposed rule.’’); see   Resp. Order To Show Cause at 9 (C.D. Cal. filed
                                                 358 See LOLLAF at 6; NCLC at 13; CUUS at 7;           also CUUS at 8 (supporting prohibition but              April 22, 2009) (alleging that defendants contracted
                                              LFSV at 1–2.                                             suggesting alternate standard); NYC DCA at 9            with another entity to process backlog of consumer
                                                 359 See, e.g., CSBS at 4; CUUS at 7; LFSV at 2;       (same); NAR at 2 (same).                                files and negotiate with lenders on behalf of those
                                              NYC DCA at 10; NCLC at 14; LOLLAF at 6.                     366 See, e.g., CUUS at 8; NY DCA at 9.               consumers).

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                                              website in response to advertisements                    commenter argued that the ‘‘knows or                    preventing deceptive conduct by MARS
                                              disseminated either by the lead                          consciously avoids knowing’’ standard                   providers. As noted above, MARS
                                              generators themselves,373 or through a                   in the proposed rule was too strong,                    providers frequently rely upon the
                                              network of Internet advertisers.374 Lead                 expressing concern that those who                       assistance and support of other persons
                                              generators then sell the consumer                        provide substantial assistance would be                 for essential tasks such as identifying
                                              information to MARS providers.375 In                     presumed to know of the rule violations                 potential customers, marketing, back-
                                              some instances, lead generators route                    of the MARS providers they are                          room operations, and payment
                                              consumers who run Internet searches                      assisting.378                                           processing. This support makes it
                                              for government foreclosure assistance                      The Commission retains the ‘‘knows                    possible for MARS providers engaged in
                                              programs directly to MARS providers’                     or consciously avoids knowing’’                         deception to efficiently operate on a
                                              websites.376                                             standard in the Final Rule. As the                      wide scale. Prohibiting such persons
                                                                                                       Commission stated in including the                      from providing substantial and knowing
                                              2. The Knowledge Standard
                                                                                                       same standard in the assisting and                      assistance or support to MARS
                                                 Under the proposed rule, those who                    facilitating provision of the TSR:                      providers is likely to make it more
                                              provided substantial assistance to                                                                               difficult for providers to engage in
                                                                                                         [t]he ‘conscious avoidance’ standard is
                                              MARS providers would be liable if they                   intended to capture the situation where                 deceptive conduct.
                                              knew or consciously avoided knowing                      actual knowledge cannot be proven, but there
                                              that the providers were violating the                                                                            b. Unfairness
                                                                                                       are facts and evidence that support an
                                              rule. Some commenters suggested                          inference of deliberate ignorance on the part              Applying the three-prong test under
                                              modifications to this knowledge                          of a person that [the wrongdoer] is engaged             Section 5(n) of the FTC Act, the
                                              standard. Specifically, two commenters                   in an act or practice that violates [the                Commission concludes that it is an
                                              advocated changing the ‘‘knows or                        Rule].’’ 379                                            unfair practice to knowingly, or with
                                              consciously avoids knowing’’ standard                      The standard thus neither permits                     conscious avoidance of knowledge,
                                              to a ‘‘knew or should have known’’                       third parties providing substantial                     provide substantial assistance to a
                                              standard, claiming that the former                       assistance and support to turn a ‘‘blind                MARS provider engaged in violations of
                                              standard would allow those who                           eye’’ to the Rule violations of MARS                    the Rule.381 First, this practice causes or
                                              provide substantial assistance to escape                 providers, nor presumes that such third                 is likely to cause substantial consumer
                                              liability by failing to monitor the                      parties have the requisite knowledge                    injury by enhancing and expanding the
                                              conduct of the MARS providers they are                   simply because they provided the                        provider’s ability to engage in the
                                              assisting.377 Conversely, another                        assistance or support. If those who                     harmful conduct. For example, using
                                                                                                       provide substantial assistance or                       lead generators often allows MARS
                                                 373 Lead generators themselves often may also
                                                                                                       support to MARS providers receive or                    providers to promote their services more
                                              qualify as ‘‘mortgage assistance relief service                                                                  widely and effectively, leading to
                                              providers’’ and thus be liable for primary violations
                                                                                                       become aware of information that
                                              of the Rule, because many of these entities              reasonably calls into question the                      substantial injury to consumers if those
                                              ‘‘arrang[e] for others to provide’’ MARS. See            legality of the MARS provider’s                         providers engage in violations of the
                                              § 322.2(j). For example, if a lead generator             practices, they will be liable if they                  Rule.382 Second, no commenters
                                              disseminates advertisements containing                                                                           submitted information suggesting that
                                              misrepresentations to entice consumers to provide        continue to assist and support that
                                              their contact information, and then passes that          provider.380 In general, the                            there were any benefits to consumers or
                                              information on to another entity that will provide       determination of whether a person had                   competition from knowingly giving
                                              MARS, the lead generator would likely be in              the requisite knowledge will depend on                  substantial assistance to MARS
                                              violation of § 322.3 of the Final Rule. The                                                                      providers who are violating the Rule,383
                                              Commission also has brought actions under Section        a variety of factors such as the person’s
                                              5 of the FTC Act against lead generators for the         relationship to the MARS provider, the
                                                                                                                                                                  381 Federal courts have held that providing
                                              deceptive claims they disseminated. See e.g. FTC v.      nature and extent of the person’s degree
                                              Dominant Leads, LLC, No. 1:10–cv–0997 (D.D.C.                                                                    knowing substantial assistance to others who
                                              filed Jun. 15, 2010); see also United States v. Ryan,
                                                                                                       of involvement in the operations of the                 engaged in unlawful conduct is an unfair practice.
                                              No. 09–00173–CJC (C.D. Cal. filed July 14, 2009)         MARS provider, and the nature of the                    See, e.g., FTC v. Neovi, Inc., 598 F. Supp. 2d 1104
                                              (criminal complaint against lead generator named         provider’s violations.                                  (S.D. Cal. 2008), aff’d, 604 F.3d 1150 (9th Cir. 2010)
                                              as defendant in FTC action); FTC v. Ryan, No. 1:09–                                                              (holding that defendants engaged in unfair acts by
                                              00535 (HHK) (D.D.C. filed Mar. 25, 2009); FTC v.         3. Legal Basis                                          creating checks they knew were often requested by
                                              Cantkier, No. 1:09–cv–00894 (D.D.C. Am.                                                                          unauthorized parties); FTC v. Accusearch, Inc., No.
                                              Complaint filed July 10, 2009).                          a. Preventing Deception                                 06–CV–105–D, 2007 WL 4356786 (D. Wyo. Sept. 28,
                                                 374 Additionally, advertising affiliate network
                                                                                                          The Commission concludes that                        2007) (holding that defendants engaged in unfair
                                              companies may serve as intermediaries between                                                                    practices by selling phone records obtained by other
                                                                                                       § 322.6 is reasonably related to                        parties through deception); FTC v. Windward Mktg.,
                                              advertisers and lead generator Web sites. Such
                                              companies also could be held liable if they                                                                      No. Civ.A. 1:96–CV–615F, 1997 WL 33642380 (N.D.
                                                                                                          378 See NAR at 2 (provision would implicate real     Ga. Sept. 30, 1997) (holding that defendants
                                              knowingly provide substantial assistance to MARS
                                              providers who violate the Rule.                          estate professionals who help consumers conduct         engaged in unfair acts by depositing unauthorized
                                                 375 See, e.g., FTC v. Kirkland Young, LLC, No. 09–    short sales, when the consumers are referred to         bank drafts obtained by a deceptive telemarketing
                                              23507, Mem. Supp. TRO at 9 (S.D. Fla. filed Nov.         them by MARS providers).                                operation).
                                                                                                          379 TSR Statement of Basis and Purpose, 60 FR           382 Lead generators may possess the contact
                                              24, 2009) (alleging that defendant employed lead
                                              generators to leave messages with consumers via          43842, 43852 (Aug. 23, 1995).                           information of thousands of consumers that
                                              outbound telemarketing calls); FTC v. Truman                380 United States. v. Dish Network, L.L.C., 667 F.   otherwise might be unavailable to a small MARS
                                              Foreclosure Assistance, LLC, No. 09–23543 (S.D.          Supp. 2d 952, 961 (C.D. Ill. 2009) (finding United      provider. The MARS provider can use that
                                              Fla. filed Nov. 23, 2009); FTC v. Hope Now               States properly pled knowledge or conscious             information to target more consumers with
                                              Modifications, LLC, No. 1:09–cv–01204–JBS–JS             avoidance of knowledge when it alleged that             deceptive advertisements, contact consumers less
                                              (D.N.J. filed Mar. 17, 2009).                            defendant received complaints that its dealers were     expensively, or both, than it could in the absence
                                                 376 See, e.g., FTC v. One or More Unknown Parties     violating the TSR but continued paying the dealers      of such information. See, e.g., CUUS at 8, NY DCA
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                                              Misrepresenting their Affiliation with the Making        to telemarket); FTC v. Global Mkting Group, Inc.,       at 9.
                                              Home Affordable Program, No. 09–894 (D.D.C. filed        594 F. Supp. 2d 1281, 1288 (M.D. Fla. 2008)                383 To the extent the substantial assistance and

                                              May 14, 2009).                                           (finding that defendant at a minimum consciously        facilitation provision makes it more difficult or
                                                 377 See CUUS (Mar. 26, 2010) at 8 (‘‘Failure to       avoided knowing of TSR violations where it              expensive for MARS providers to hire third-party
                                              verify a company’s integrity in the face of clear and    processed consumer payments to telemarketers;           service providers, the Commission concludes that
                                              reasonable evidence to the contrary should expose        reviewed, edited, and approved telemarketers’ sales     any such costs are outweighed by the benefits of
                                              an entity or individual to liability.’’); NYC DCA        scripts; and handled complaints and law                 more effectively preventing deceptive or unfair
                                              (Mar. 29, 2010) at 9.                                    enforcement inquiries).                                 conduct by MARS providers.

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                    75125

                                              and the Commission is not aware of any                   prohibition on advance fees),386 or a                     significant (and increasing) attorney
                                              such benefits. To the extent any such                    complete exemption for attorneys.387                      involvement in MARS, both in
                                              benefits exist, they clearly are                            Based on the record, the Commission                    affiliation with non-attorney providers
                                              outweighed by the substantial injury                     has determined to include a broader                       or as providers themselves.389
                                              this conduct causes consumers. Finally,                  exemption for attorneys in the Final                      According to these commenters,
                                              the consumer injury caused by Rule                       Rule. Generally speaking, attorneys who                   attorneys frequently have engaged in the
                                              violations that are substantially                        provide MARS are exempt from the                          same deceptive or unfair conduct as that
                                              facilitated by third parties is not                      Rule if they: (1) Provide MARS as part                    of other MARS providers.390 For
                                              reasonably avoidable by consumers,                       of the practice of law; (2) are licensed                  example, the Illinois Attorney General
                                              who have no way of knowing that the                      to practice law in the state where their                  asserted that, since approximately
                                              MARS providers with whom they                            clients or their clients’ dwellings are                   December 2009, attorneys played some
                                              contract are engaged in violations of the                located; and (3) comply with all state                    role (including participating in or
                                              Rule.                                                    laws and licensing regulations covering                   assisting others in the conduct at issue)
                                                                                                       the same subjects as the Final Rule.                      in 40% of the MARS companies
                                              G. Section 322.7: Exemptions                             Attorneys who meet these standards are                    reviewed by that agency in response to
                                                                                                       exempt from all of the provisions of the                  complaints.391
                                                 The proposed rule exempted
                                                                                                       Final Rule except its advance fee ban.                       In addition, NAAG asserted that
                                              attorneys licensed to practice law in the
                                                                                                       Such attorneys will be exempt from the                    attorneys, and MARS providers who
                                              state where the consumer resides from:
                                                                                                       advance fee ban in § 322.5, but only if                   affiliate with them, have been successful
                                              (1) The prohibition on instructing
                                                                                                       they deposit advance fees received from                   in circumventing state MARS laws by
                                              consumers not to contact or
                                                                                                       their clients into a ‘‘client trust account’’             invoking attorney exemptions in these
                                              communicate with their lenders; and (2)                  (as defined in a new provision,
                                              the advance fee ban, but only if the                                                                               laws.392 NAAG’s comment also
                                                                                                       § 322.2(b)) and comply with all state                     discussed the propensity of attorneys to
                                              attorney was providing legal counsel in                  laws and licensing regulations
                                              connection with preparing or filing legal                                                                          act as fronts for MARS companies and
                                                                                                       governing these accounts.388                              the recent trend of national MARS
                                              documents in a bankruptcy or other
                                              legal proceeding. As the Commission                      1. Comments in Support of a Limited                       providers to retain ‘‘local counsel’’ to
                                              explained in the NPRM, this proposed                     Exemption                                                 attempt to take advantage of attorney
                                              exemption was intended to allow                             In support of a limited attorney                       exemptions in state MARS laws.393
                                              attorneys who provide MARS as part of                    exemption, several commenters cited                       Other commenters, echoing the
                                              the practice of law to perform without                                                                             concerns of state law enforcers,
                                              undue burden useful legal services for                       386 NCLC at 7 (‘‘[L]egitimate attorneys play a        contended that unscrupulous MARS
                                              consumers, while still covering                          critical role in providing bona fide and valuable         providers would evade the Rule if its
                                              attorneys who might harm consumers in                    assistance to consumers seeking loan modifications
                                                                                                       and other forms of mortgage-related assistance.’’);
                                              offering or providing MARS.384                           LSFV at 4 (‘‘Those seeking advice, who are likely
                                                                                                                                                                    389 See, e.g., Lawyers’ Committee at 9 (attorneys

                                                                                                                                                                 team up with MARS providers, or act
                                                 The Commission received numerous                      in or facing mortgage default, may need specific
                                                                                                                                                                 independently to scam consumers); NAAG at 3
                                                                                                       advice regarding the contractual and tax
                                              comments on this proposed exemption                      implications of a loan modification, which HUD-
                                                                                                                                                                 (attorneys’ participation ranged from working as
                                              from attorneys and attorney                              approved counselors may not be qualified to               employees of MARS companies to operating their
                                                                                                                                                                 own companies); MBA at 4 (‘‘[W]e are aware of
                                              organizations, consumer groups, and                      provide.’’); Lawyers’ Committee at 9 (‘‘[I]n many
                                                                                                                                                                 attorneys who have ‘rented’ their licenses to
                                              others. Indeed, the proposed rule’s                      situations short of legal action, there is a legitimate
                                                                                                       need for attorneys to provide legal advice or             mortgage assistance relief providers.’’); see also IL
                                              treatment of attorneys was the issue                     transactional services to their clients.’’); CSBS at 4    AG (ANPR) (reporting that ‘‘33 percent of the
                                              most addressed in the comments.                          (‘‘[W]e believe that limiting the exemption to            [MARS] companies we have dealt with are owned
                                                                                                                                                                 by attorneys, while 38 percent have some link to
                                              Several commenters, including NAAG,                      preparing and filing for bankruptcy petitions or
                                                                                                                                                                 the legal profession’’).
                                              an association of mortgage bankers,                      other documents in a bankruptcy or other court or
                                                                                                                                                                    390 See, e.g., CSBS at 4 (‘‘[A]n increasing number
                                                                                                       administrative proceeding, is unduly narrow and
                                              consumer groups, and others supported                    might interfere with the ability of attorneys to offer    of attorneys have engaged in deception and
                                              a limited exemption like that in the                     legitimate counsel and advice to their clients.’’).       unfairness in connection with mortgage assistance
                                              proposed rule.385 Other commenters,                          387 ABA at 1 (‘‘[T]he ABA urges the FTC to modify     relief services.’’); NAAG at 3 (by way of example
                                                                                                       the rule to expand its existing attorney exemption        reporting that attorneys participated in half of the
                                              including several consumer groups, a                                                                               mortgage foreclosure rescue companies for which
                                                                                                       to exclude lawyers engaged in the practice of law
                                              public interest law firm, and a                          from the entire proposed rule, not just certain           the Illinois Attorney General received complaints
                                              consortium of state banking regulators,                  narrow provisions of the rule.’’); Rogers at 15           on March 18 and 19, 2010); CUUS at 8 (commenter
                                              supported a broader exemption                            (‘‘Prohibit loan modification companies from taking       has ‘‘received many complaints about attorneys’
                                                                                                       up-front fees unless they are licensed attorneys          involvement in fraudulent MARS schemes’’);
                                              (especially with regard to the                                                                                     Lawyers’ Committee at 9 (‘‘The intersection between
                                                                                                       regularly conducting business out of publicly
                                                                                                       accessible office space in the state in which they        legal services and mortgage assistance relief
                                                384 MARS   NPRM, 75 FR at 10724–25.                    provide loan modification services.’’); IL RELA at 1.     services is well documented in the increasing
                                                385 NAAG    at 3–4; MBA at 4 (The definition in the        388 As discussed in Section I.A, the Dodd-Frank       number of reports of attorneys teaming up with
                                              rule should retain the integrity of the licensed         Act will transfer rulemaking authority with respect       MARS providers to scam consumers.’’); NCLC at 4
                                              attorney within state laws and rules regulating the      to this Rule to a new Bureau of Consumer Financial        (acknowledging that ‘‘attorneys have been among
                                              practice of law to remain effective and those outside    Protection, effective as of the transfer date, Dodd-      those perpetrating abusive MARS activities’’); see
                                              that standard should be prosecuted.’’); NYC DCA at       Frank Act, Public Law 111–203, 124 Stat. 1376,            also NAAG (ANPR) at 13 (‘‘[W]e have received
                                              4 (recommending that the Commission prohibit             which is currently designated as July 21, 2011.           many complaints regarding attorneys who are
                                              collection of advance fees by attorneys ‘‘not directly   BCFP; Designated Transfer Date, 75 FR 57252. The          offering loan modification business. These attorneys
                                              involved with legal services in connection with          new Bureau will not have authority with respect to        generally provide no legal services for consumers
                                              either the preparation and filing of a bankruptcy        activities engaged in as part of the practice of law,     and present the same problems as mortgage
                                              petition or court proceedings to avoid a                 but will retain authority over attorneys to the extent    consultants in general.’’).
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                                                                                                                                                                    391 IL AG at 2.
                                              foreclosure’’); IL AG (ANPR) at 2; MA AG (ANPR)          they offer consumer financial products or services
                                                                                                                                                                    392 NAAG at 3 (‘‘The exemption for attorneys has
                                              at 9 (recommending that the Commission adopt a           outside the scope of an attorney-client relationship
                                              provision similar to Massachusetts state law). One       and to the extent they are subject to certain             been particularly abused.’’); MN AG (ANPR) at 5
                                              commenter argued that attorneys should not be            enumerated consumer laws or authorities                   (‘‘This Office is aware of several loan modification
                                              exempted from the advance fee ban restrictions,          transferred to the agency, including the Final Rule       and foreclosure rescue companies that have
                                              even when performing legal services in connection        in this proceeding. Dodd-Frank Act § 1027(e)(3).          affiliated with licensed attorneys in other states in
                                              with a bankruptcy petition or some other legal           The Commission will continue to have authority to         an effort to circumvent state law.’’).
                                              proceeding. CUUS at 8–9.                                 enforce the Rule, including against attorneys.               393 NAAG at 3.

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                                              attorney exemption were not                                transactions,397 resolving violations of                    regulators asked the Commission to
                                              sufficiently limited.394                                   fair lending laws, disputing charges that                   consider creating an exemption based
                                                                                                         servicers had assessed improperly, and                      on state law attorney exemptions, noting
                                              2. Comments in Support of a Broader
                                                                                                         counseling on the tax implications of                       that the Michigan Credit Services Act
                                                                                                         short sales.398 The commenters asserted                     exempts attorneys who do not provide
                                                 Despite their recognition that some                     that a significant portion of the MARS                      covered credit services on a regular and
                                              attorneys have engaged in unfair or                        work attorneys perform does not involve                     continuing basis.404
                                              deceptive practices in connection with                     litigation and thus would not be eligible                       Many commenters, nearly all of
                                              MARS, several commenters argued that                       for the proposed rule’s exemption from                      whom are attorneys who provide
                                              broadening the attorney exemption was                      the advance fee ban.399 Absent a broader                    MARS 405 or organizations that
                                              necessary to preserve consumers’ access                    exemption from the advance fee ban,                         represent them,406 including the
                                              to valuable legal services.395 These                       according to these commenters, many                         American Bar Association (ABA) 407 and
                                              commenters contended that many                             attorneys would stop performing legal                       some state bars,408 recommended that
                                              consumers who are having difficulty                        services for consumers seeking to avoid                     the Commission completely exempt
                                              paying their mortgages may benefit from                    foreclosure.400                                             attorneys engaged in the practice of
                                              legal services, but that such assistance                      The comments favoring a broader                          law.409 In particular, the ABA proposed
                                              may be considered MARS and thus                            attorney exemption suggested a number                       that the Commission exempt any
                                              subject to the Rule.396 The commenters                     of changes to the proposed rule. A few                      ‘‘licensed attorney engaged in the
                                              claimed the proposed rule would cover                      commenters asserted that the exemption                      practice of law and those individuals
                                              legal services such as advising                            from the advance fee ban should apply                       acting under the direction of the
                                              consumers on bankruptcy laws,                              to all legal services, not just legal                       attorney.’’ 410
                                              unwinding sale-leaseback                                   services related to litigation 401 or those
                                                                                                                                                                        404 CSBS at 5; see also NCLC at 13 (suggesting
                                                                                                         provided by attorneys in the same state
                                                                                                                                                                     that the Commission should consider allowing the
                                                394 NCLC   at 2–3; Lawyers’ Committee at 9; LSFV         where the consumer resides.402 Several                      states to adopt alternative methods of regulating
                                              at 4.                                                      commenters recommended that, in lieu                        attorney conduct). But see NAAG at 3 (‘‘It is
                                                 395 NCLC at 7 (‘‘[L]egitimate attorneys play a
                                                                                                         of an advance fee ban, attorneys be                         important that exemptions to the rule’s coverage be
                                              critical role in providing bona fide and valuable                                                                      limited and narrow. As detailed in our earlier
                                              assistance to consumers seeking loan modifications
                                                                                                         permitted to place fees in a client trust
                                                                                                                                                                     submission, companies are now exploiting
                                              and other forms of mortgage-related assistance.’’);        account and draw on them as legal work                      exemptions in state mortgage rescue statutes in
                                              LSFV at 4 (‘‘Those seeking advice, who are likely          is completed.403 State banking                              order to evade compliance with state laws. The
                                              in or facing mortgage default, may need specific                                                                       exemption for attorneys has been particularly
                                              advice regarding the contractual and tax                     397 See   supra note 43.                                  abused.’’).
                                              implications of a loan modification, which HUD-              398 See
                                                                                                                                                                        405 See, e.g., Deal; Greenfield; Rogers; Carr,
                                                                                                                     supra notes 396–97; see also NCLC
                                              approved counselors may not be qualified to                                                                            Davidson, Dix, Holler, Shaw, Peters, Dargon; Giles.
                                                                                                         (ANPR) at 14 (noting that ‘‘an attorney’s more
                                              provide.’’); Lawyers’ Committee at 9 (‘‘[I]n many                                                                         406 See, e.g., IL RELA.
                                                                                                         beneficial and traditional role of analyzing a client’s
                                              situations short of legal action, there is a legitimate                                                                   407 ABA at 11.
                                                                                                         paperwork and advising the client of potential
                                              need for attorneys to provide legal advice or                                                                             408 IL St. Bar Assoc.; ME St. Bar Assoc., MO Bar,
                                                                                                         claims and options may also fit within the
                                              transactional services to their clients.’’).                                                                           WI St. Bar, MI St. Bar., GA St. Bar, OR St. Bar.
                                                 396 See supra note 395. Attorney commenters also
                                                                                                         definition of mortgage assistance relief’’).
                                                                                                            399 In its survey of NACA and NABCA members,                409 See, e.g., ABA at 1 (‘‘[T]he ABA urges the FTC
                                              asserted that they provide useful legal services to                                                                    to modify the rule to expand its existing attorney
                                                                                                         see supra note 44, NCLC reported that 38% of the
                                              consumers facing the possible loss of their homes.                                                                     exemption to exclude lawyers engaged in the
                                                                                                         298 attorneys who responded claimed that they
                                              See, e.g., ABA at 1 (‘‘[T]he rule would make it                                                                        practice of law from the entire proposed rule, not
                                                                                                         perform MARS ‘‘not in connection with a court or
                                              difficult or impossible for many consumer debtors                                                                      just certain narrow provisions of the rule.’’); Rogers
                                                                                                         administrative proceeding or bankruptcy petition.’’
                                              to obtain the legal services that they desperately                                                                     at 15 (‘‘Prohibit loan modification companies from
                                                                                                         NCLC at 6.
                                              need to help negotiate changes to their residential           400 LFSV at 4 (‘‘Licensed attorneys and public           taking up-front fees unless they are licensed
                                              mortgages with their lenders and keep their                                                                            attorneys regularly conducting business out of
                                              homes’’); Mobley at 1 (‘‘It is essential to have           accountants in our community are prepared and
                                                                                                                                                                     publicly accessible office space in the state in
                                              competent legal representation when negotiating a          capable of providing this important and potentially
                                                                                                                                                                     which they provide loan modification services.’’); IL
                                              loan modification. While the government and                useful advice, but may choose to avoid contracting
                                                                                                                                                                     RELA at 1.
                                              servicers continually advise homeowners that loan          with consumers to address these questions for fear             410 ABA at 11. The issue of the jurisdiction in
                                              modifications can be done without a third party’s          that they may run afoul of the Commission’s
                                                                                                         proposed Rule.’’); NCLC at 6 (‘‘Attorneys are likely        which an attorney must be licensed to qualify for
                                              help and that free help is available, statistics show                                                                  the exemption is discussed infra § III.G.3.c.(2).
                                              that this advice has done nothing to help                  to cease representing homeowners because of the
                                                                                                         risk that clients with unreasonable expectations               The ABA also urged the Commission to reconcile
                                              homeowners.’’); Carr at 2 (‘‘[M]any lawyers also offer                                                                 the exemption in the Final Rule with the attorney
                                              their client a defense against foreclosure, mitigation     would not pay.’’); see also CSBS at 4.
                                                                                                            401 See, e.g., CSBS at 4 (‘‘[W]e believe that limiting   exemption in HUD’s proposed rule under the SAFE
                                              or diversionary representation (where available)                                                                       Act. See supra notes 99–103 and accompanying
                                              and ultimately (if necessary) a bankruptcy petition        the exemption to preparing and filing for
                                                                                                                                                                     text. As discussed in Section II.C., HUD’s proposed
                                              filing to protect their homes if the negotiation           bankruptcy petitions or other documents in a
                                                                                                                                                                     rule imposes standards for the licensing and
                                              attempt should fail. Further, lawyers are uniquely         bankruptcy or other court or administrative
                                                                                                                                                                     registration of loan originators, which HUD intends
                                              qualified to assist the homeowner to understand the        proceeding, is unduly narrow and might interfere
                                                                                                                                                                     to encompass third-party loan modification
                                              legal implications of and determine which of the           with the ability of attorneys to offer legitimate
                                                                                                                                                                     specialists. The HUD proposed rule would exempt
                                              bewildering panoply of alternatives facing them            counsel and advice to their clients.’’).
                                                                                                            402 See, e.g., NCLC at 8 (‘‘The [proposed rule]
                                                                                                                                                                     licensed attorneys who provide covered services ‘‘as
                                              will be the most effective in their unique                                                                             an ancillary matter to the attorney’s representation
                                              circumstances.’’); E. Davidson at 1 (‘‘Involvement of      overlooks circumstances in which a homeowner                of the client,’’ unless the attorney is compensated
                                              an attorneys at the earliest possible time, is an          would need to retain an attorney in another state.          by a mortgage loan originator. Safe Mortgage
                                              important vehicle for borrowers in either litigating       This is most likely to occur with second homes and          Licensing Act, 24 CFR 3400.103(e)(6). The
                                              or settling with the servicer or holder of the loan.’’);   rental properties. When a mortgage holder or                Commission declines to adopt the exemption
                                              Legalprise at 1 (adversarial system works best if          servicer initiates a foreclosure action, the                proposed by HUD. As a matter of law, the
                                              both lender and consumer have legal counsel);              foreclosure process will take place where the               Commission in this proceeding would not be bound
                                              Greenfield at 3 (distressed homeowners have a              dwelling is located and the homeowner will need             by a decision on the part of HUD to adopt a certain
                                              ‘‘significant need for legal services’’); Dargon at 3      an attorney licensed in that jurisdiction, even if it       exemption for licensed attorneys based on a
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                                              (‘‘But don’t strangle legitimate attorneys in your         is not where the homeowner resides.’’).                     rulemaking record in a different proceeding to
                                              efforts to regulate hucksters and scam artists.               403 See, e.g., NCLC at 15; see also Mobley at 2;
                                                                                                                                                                     implement a different statute. In any event,
                                              Putting us out of business would harm our clients          Rogers at 20–21; Carr at 10; Bronson at 9. A                reconciliation of two rules is premature given that
                                              greatly, and will only make the foreclosure crisis         coalition of consumer groups cautioned that                 the HUD Rule is only at the proposal stage. As
                                              worse and punish the very people who most need             attorneys should be allowed to collect fees in client       discussed below, the FTC has concluded that the
                                              the services.’’); Giles at 1–2 (discussing                 trust accounts only if they offer MARS as part of           record in this proceeding warrants a different
                                              representation of clients in foreclosure mediation         the authorized practice of law and do not split fees        treatment of attorneys than the exemption in the
                                              with lenders).                                             with non-attorneys. NCLC at 15.                             proposed HUD Rule.

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                         75127

                                              a. General Objections to Covering                         regulations impose extensive                                instances, according to these
                                              Attorneys                                                 restrictions and duties on attorneys.414                    commenters, the requirements would
                                                 Comments advocating for a broader or                   For example, according to commenters,                       undermine attorneys’ ethical obligations
                                              complete attorney exemption made the                      these laws and regulations obligate                         to their clients. In other instances, the
                                              following main points: (1) It is                          attorneys to work diligently and                            requirements would be cumbersome or
                                              unnecessary to cover attorneys because                    competently on behalf of their clients                      excessive in light of comprehensive
                                              strict state laws and licensing                           and to charge only reasonable fees.415                      state laws governing how attorneys
                                              regulations governing attorney behavior                   Several commenters also argued that                         promote and charge for their services. In
                                              already provide adequate protection for                   state laws and regulations offer unique                     particular, they raised concerns about
                                              consumers; 411 (2) the proposed rule’s                    protections when attorneys collect fees                     subjecting attorneys to the advance fee
                                              requirements conflict with the manner                     and expenses in advance of providing                        ban, the prohibition on instructing
                                              in which attorneys traditionally have                     services.416 According to the ABA,                          consumers not to communicate with
                                              offered and charged for their legal                       nearly every state court system has                         their lenders or servicers, the required
                                              services; 412 and (3) the proposed rule                   adopted laws and regulations requiring                      disclosures, and recordkeeping and
                                                                                                        attorneys to deposit advance payments                       compliance requirements.
                                              would cause attorneys to stop providing
                                                                                                        of fees and expenses into a client trust                      First, several commenters urged the
                                              legal services to financially distressed
                                                                                                        account that must comply with certain                       FTC to exempt attorneys entirely from
                                                 Attorney commenters contended that                     requirements.417 Violations of state laws                   the advance fee ban. According to the
                                              federal regulation of attorneys who                       and regulations governing attorney                          ABA, the advance fee ban in the
                                              provide MARS is unnecessary, because                      conduct can result in sanctions and                         proposed rule, which conditioned the
                                              existing state laws and licensing                         other disciplinary action, including                        receipt of payment on achieving the
                                                                                                        disbarment.418 Accordingly, these                           promised result, conflicted with well-
                                                 411 See ABA at 8 (‘‘The primary reason to regulate
                                                                                                        commenters urged the Commission to                          established state laws and regulations
                                              those providing mortgage assistance relief services       exempt attorneys entirely from the Final                    permitting attorneys and clients to agree
                                              to consumers is to keep them honest and ensure            Rule and defer entirely to state                            to a variety of fee arrangements,
                                              proper government oversight over them. But                enforcement against attorneys who                           including flat fees, contingency fees, or
                                              because lawyers already have substantial fiduciary        violate applicable state laws or licensing
                                              duties to their clients that are strictly enforced by                                                                 hourly fees.421 According to the ABA,
                                              the state supreme courts and state bars that license      regulations.419                                             the advance fee ban effectively would
                                              and oversee the lawyers, this rationale for
                                                                                                        b. Objections to Specific Provisions                        restrict attorneys to charging
                                              regulating MARS providers simply does not apply                                                                       contingency fees for MARS.422
                                              to lawyers who are already licensed by their state        Covering Attorneys
                                              courts and bars.’’); Lawson at 1 (‘‘Attorneys are
                                                                                                                                                                      Attorney commenters contended that
                                                                                                           In addition to their general objections                  an advance fee ban would render them
                                              regulated by the bar associations, they do not need
                                              to be regulated on another level.’’); Mobley at 2 (‘‘In   to the proposed rule applying to                            unable to pay their operating costs 423
                                              deciding to provide broader attorney exemptions in        attorneys, the commenters objected to                       and expose them to a high risk of non-
                                              the rule, the FTC should consider that attorneys          applying some of its provisions to                          payment,424 thereby causing many
                                              already are regulated by the states, are subject to       attorneys. These comments, submitted
                                              strict ethical standards, and misconduct leads to
                                              severe sanctions. In fact, the Rules of Professional      by attorneys and organizations                                 421 See, e.g., ABA at 6–7; see also Bronson at 2

                                              Conduct implemented in most states already                representing them, contended that a                         (‘‘Historically, attorneys have billed either on an
                                              provide for the investigation and discipline of the       number of the proposed rule’s                               hourly basis, a flat rate basis or on a contingency
                                              majority of the dishonest and unfair acts this rule       provisions were inconsistent with the                       basis. All of these methods are legal and within the
                                              is written to prevent.’’); Carr at 5 (‘‘In addition                                                                   boundaries of the rules of ethics governing
                                              lawyers are licensed professionals bound to follow
                                                                                                        practice of law and the state laws and                      attorneys as long as they are clearly described in a
                                              a code of ethics promulgated by the bar associations      regulations that govern it.420 In some                      written retainer agreement provided to the client.’’);
                                              in the states in which they practice and hence the                                                                    Dargon at 2 (charges clients a flat fee of $2500;
                                              activities described in the rule are already in effect       414 See, e.g., Deal at 1 (‘‘[The FTC] proposes to        clients value a ‘‘predictable, definitive fee that
                                              ‘policed’ at the state level, when in my opinion all      regulate the relationship between the attorney and          includes representation throughout the process
                                              regulation of this type more properly resides.’’).        client, which up until now has been the jurisdiction        regardless of the complexity or duration’’).
                                                 412 See ABA at 3–5; Deal at 8 (‘‘Attorneys are well                                                                   422 ABA at 7; see also Bronson at 2 (‘‘Without the
                                                                                                        of state bar associations and state supreme courts.’’).
                                              regulated by their bar associations.’’); Carr at 5.       The ABA also emphasized that the agents and                 ability to take a retainer and charge for their time
                                                 413 See ABA at 8 (‘‘As a result of these               employees of attorneys must comply with the same            and effort regardless of whether they are successful,
                                              burdensome mandates, many lawyers who                     ethical rules. ABA at 8.                                    most attorneys will not be able to offer expert loan
                                              currently help consumers renegotiate their                   415 See, e.g., ABA at 8.                                 modification advice and services.’’); Greenfield at 5
                                              mortgages or avoid foreclosure as a part of their            416 See, e.g., ABA at 6–9; Mobley at 2; Rogers at        (‘‘An attorney who attempts to negotiate but is
                                              practice might stop handling these types of cases         16; Bronson at 5.                                           unable to achieve a mortgage loan modification for
                                              altogether rather than comply with these new                 417 ABA at 9; see also NCLC at 11 (‘‘Attorneys in        her client is still entitled to be paid for legal
                                              regulations.’’); Greenfield at 3–4 (reporting that        many states have long been required to escrow               services actually rendered.’’); Dargon at 2 (‘‘If the
                                              many attorneys, including herself, discontinued           unearned fees, and client trust accounts are                FTC removes the up-front fee, it will effectively
                                              providing MARS after California passed a law that         recognized as an appropriate method of protecting           create a contingency area of law akin to personal
                                              prohibited attorneys from collecting advance fees);       money that remains the property of the client until         injury—only without an insurance company or
                                              Mobley at 2 (‘‘Reputable attorneys experienced in         earned by the attorney.’’).                                 solvent defendant at the end of the case to absorb
                                              loan modifications and other mortgage law issues             418 ABA at 9; Mobley at 2; Rogers at 16, 20–21           the attorneys’ fees.’’).
                                                                                                                                                                       423 See, e.g., Mobley at 2 (‘‘Attorneys simply
                                              would not be able to continue to practice. * * *’’);      (‘‘Violation of the rules of an IOLTA account, which
                                              Carr at 5 (‘‘I and many others in the profession          is often audited, can easily result in the disbarment       cannot operate a firm without collecting upfront
                                              predict that lawyers will henceforth shun this field      of an attorney. Therefore, it is unlikely attorneys         fees.’’); Greenfield at 5 (‘‘Requiring an attorney to
                                              if the rule is adopted in its present form. * * *’’);     would often violate the escrow requirements.’’); Carr       wait to be paid until a permanent modification is
                                              Deal at 4 (‘‘The practical effect of [the Rule] is that   at 10; see also NCLC (‘‘A client who is injured by          approved by the servicer is unreasonable when the
                                              attorneys will not be willing to work for clients         an attorney removing funds from a trust account             actual time that elapses could be six months to one
                                              needing these services, and people who need legal         will have recourse to the jurisdiction’s attorney           year.’’); Rogers at 9–10; Giles at 3; Dargon at 1, 3;
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                                              services will not be able to obtain them.’’); Giles at    discipline system, many of which include client             Carr at 5; Deal at 4.
                                              4 (‘‘If you pass this rule, it will drive lawyers like    recovery funds to provide redress in exactly this              424 See, e.g., ABA at 8 (‘‘[L]awyers who try to help

                                              myself out of the market, and the number of               situation.’’); Deal at 1 (‘‘If I fail to behave ethically   their consumer clients to renegotiate their
                                              permanent HAMPs that are executed will drop               and fairly towards my clients I can be disciplined          mortgages or avoid foreclosure * * * would be
                                              precipitously.’’); Rogers at 1 (‘‘The proposed FTC        and ordered to refund fees.’’).                             prohibited from charging an advance fee, thereby
                                                                                                           419 See, e.g., ABA at 9; Mobley at 2.
                                              rules, as they stand, will result in the wholesale                                                                    greatly increasing the risk that the lawyer would not
                                              elimination of reputable and capable attorneys who           420 See, e.g., ABA at 3–7; IL RELA at 1–2; IL St.        receive payment for the legal services provided.’’);
                                              help desperate homeowners.’’).                            Bar Assoc. at 1; Carr at 4–5; Bronson at 9.                                                              Continued

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                                              75128            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              attorneys to discontinue providing these                      possibly jeopardize the attorney-client                    inspection during an investigation or
                                              types of services.425 According to the                        privilege.429 Some commenters also                         law enforcement action would
                                              commenters, the proposed rule’s                               recommended that the exemption from                        undermine attorney-client
                                              limitation of the exemption to attorneys                      this prohibition apply to attorneys who                    confidentiality and the attorney-client
                                              engaged in bankruptcy or other legal                          are lawfully licensed in any state,430                     relationship.435
                                              proceedings would exclude many forms                          noting that the exemption in the
                                              of legal work for which attorneys                             proposed rule would prevent attorneys                      3. The Attorney Exemption in the Final
                                              regularly collect fees in advance.426                         from giving such an instruction to their                   Rule
                                              Therefore, these commenters                                   out-of-state clients.431                                      In the Final Rule, the Commission has
                                              recommended that a final rule should                             Third, some commenters argued that                      broadened the attorney exemption. An
                                              allow them to place advance fees in a                         attorneys should not be subject to the                     attorney is exempt from the Rule, except
                                              client trust account and withdraw them                        proposed rule’s disclosure                                 the advance fee ban, if he or she:
                                              as they perform services.427                                  requirements.432 The ABA criticized                        (1) Provides MARS as part of the
                                                 Second, some attorney commenters                           two disclosures in particular: (1) The                     practice of law; (2) is licensed to
                                              recommended exempting attorneys from                          disclosure that providers are for-profit
                                                                                                                                                                       practice law in the state where the client
                                              the prohibition on instructing                                businesses not affiliated with the
                                                                                                                                                                       or the client’s dwelling is located; and
                                              consumers not to contact their lenders                        government or the consumer’s lender or
                                                                                                                                                                       (3) complies with applicable state laws
                                              or servicers. According to the ABA,                           servicer, because in the attorney context
                                                                                                                                                                       and regulations relating to the same
                                              clients typically expect attorneys they                       this non-affiliation disclosure is
                                                                                                                                                                       general types of conduct the Rule
                                              retain to act as their representative in                      unnecessary and potentially confusing
                                                                                                                                                                       addresses, namely, the competent and
                                              dealing with other parties, such as                           to consumers;433 and (2) the total cost
                                                                                                                                                                       diligent provision of legal services,
                                              lenders and servicers.428 In general, the                     disclosure, because it would mandate
                                                                                                                                                                       communication with clients, charging
                                              commenters argued that imposing this                          that attorneys charge a flat fee for their
                                                                                                                                                                       and receipt of fees, promotion of
                                              prohibition would undermine attorneys’                        services even though they commonly
                                              effectiveness as legal counsel and                            charge fees on an hourly or other                          services, and not engaging in fraudulent
                                                                                                            basis.434                                                  or deceitful conduct. In addition, an
                                              Mobley at 2 (‘‘It is unreasonable for anyone to                  Finally, several commenters argued                      attorney that meets these criteria is
                                              believe that clients are just as likely to pay their          that attorneys should be exempt from                       exempt from the advance fee ban if the
                                              attorney bill after their legal matter is resolved as
                                                                                                            the proposed rule’s record keeping and                     attorney deposits any advance fees in a
                                              before.’’); Greenfield at 5 (‘‘The Commission’s                                                                          client trust account and complies with
                                              position that attorneys who represent that they will          compliance requirements. The ABA and
                                              ‘negotiate’ a mortgage loan modification cannot be            other attorney organizations claimed                       all state laws and licensing regulations
                                              compensated until a permanent modification is                 that requiring attorneys to comply with                    relating to the use of those accounts.
                                              offered to the borrower is unreasonable and
                                                                                                            the requirements to maintain records of                    The attorney exemption in the Final
                                              unrealistic.’’); Rogers at 8, 10 (‘‘[The proposal] will                                                                  Rule strikes a balance between allowing
                                              virtually eradicate the practical ability of ethical,         their interactions and transactions with
                                              law abiding loan modification attorneys to ever get           clients and to produce them for FTC                        consumers to continue to have access to
                                              paid.’’); Carr at 4 (‘‘[T]he attorneys is relegated to                                                                   bona fide legal assistance,436 while at
                                              filing a multitude of small claims cases against                 429 See, e.g., ABA at 4–5 (‘‘Section 322.3 of the       the same time preventing or deterring
                                              clients who are largely ‘judgment proof.’’’); GLS at                                                                     unfair or deceptive practices by
                                                                                                            Proposed Rule would seriously undermine the
                                              1 (‘‘You are telling attorneys, many of them younger
                                                                                                            confidential attorney-client relationship by               attorneys.437
                                              (like myself), newly out of law school (like myself),
                                                                                                            prohibiting lawyers from giving certain proper legal
                                              and with little to no ability to carry the overhead
                                              costs of providing assistance absent receipt of some
                                                                                                            advice to their consumer clients who live in another       a. The Commission’s Determination Not
                                                                                                            state, including advice to ‘not contact or                 To Exempt All Attorneys
                                              fees, that they can’t collect a fee from clients who
                                                                                                            communicate with his or her lender or servicer’.’’);
                                              are the very definition of a credit risk until the very
                                                                                                            IL St. Bar at 1 (arguing that proposed rule ‘‘prohibits
                                              close of the matter. These matters typically take
                                                                                                            lawyers from giving their clients who live in
                                                                                                                                                                         As discussed above, some
                                              over 6 months to as long as a year. Statistically                                                                        commenters advocated exempting from
                                              something like only 10% of these are ‘successful’.            another state appropriate legal advice by
                                              * * * As a result, your attorneys are under                   prohibiting them from advising these clients not to        the Rule all attorneys, regardless of their
                                              mountains of debt from student loans and                      communicate directly with the lenders’’); IL RELA          activities. The Commission declines
                                                                                                            at 2 (same); CCRL at 10 (arguing that it is unclear
                                              struggling to stay out of foreclosure themselves have
                                                                                                            why rule should cover attorneys engaged in the
                                                                                                                                                                       such a blanket exemption to attorneys.
                                              only a 10% chance of getting paid after 6 months                                                                         The record shows that a substantial
                                              to a year of work.’’).                                        ‘‘ethical practice of law’’); Bronson at 9 (arguing that
                                                 425 See, e.g., Greenfield at 4; Giles at 3 (‘‘If the FTC   it is ‘‘dangerous to pass a rule that supercedes the       number of attorneys have engaged in the
                                              says I can’t collect a fee in advance, I will have to         judgment of attorneys as to whether their clients          types of deceptive and unfair conduct
                                                                                                            should talk to the lender or servicer’’); MI St. Bar
                                              exit this field of practice.’’); Lawson at 2 (‘‘Without
                                                                                                            at 1; Rogers at 10–12.
                                                                                                                                                                       the Rule prohibits. For example,
                                              the ability to take a retainer and charge for their                                                                      approximately 22% of the complaints
                                                                                                               430 See ABA at 5; Bronson at 5.
                                              time and effort regardless of whether they are
                                              successful, most attorneys will not be able to offer             431 See supra note 430. A consortium of consumer        that a coalition of government agencies,
                                              expert loan modification advice and services.’’);             groups also argued that the proposed exemption             nonprofits, and service providers has
                                              Dargon at 3 (‘‘Attorneys will be loathe to take               would not permit attorneys to represent consumers          received from consumers about loan
                                              modification cases if they have no assurance of               who own property in a state other than where they
                                                                                                            reside, for example, members of the military who
                                                                                                                                                                       modification fraud involve some form of
                                              being paid for their time and effort’’); IL RELA at
                                              1; WI St. Bar at 1.                                           commonly rent property in one state but reside in
                                                 426 See, e.g., Greenfield at 5; ABA at 6–7.                another. See NCLC at 8.                                       435 See, e.g., ABA at 4; IL St. Bar Assoc. at 1; OR

                                              Alternatively, some commenters argued that the                   432 See ABA at 4, 8 ; MO Bar at 1; OR St. Bar at        St. Bar at 1; FL Bar at 1; NCLC at 9; Rogers at 22.
                                              proposed rule would create incentives for attorneys           1; IL St. Bar Assoc. at 1; IL RELA at 2; MI St. Bar           436 As discussed above, both attorney
                                              to file a lawsuit or a petition for bankruptcy on             at 1; FL Bar at 1; ME St. Bar Assoc. at 1; GA St.          practitioners, see, e.g., ABA at 7, and consumer
                                              behalf of their client instead of finding another             Bar at 1; WI St. Bar at 1.                                 advocates, see, e.g., NCLC at 7; LFSV at 4, have
                                              potentially appropriate solution. See, e.g., Mobley              433 ABA at 3. A consumer group also opposed             argued that the Final Rule should not curtail
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                                              at 2; FL Bar at 1; OR St. Bar at 1; IL RELA at 2.             requiring attorneys to make this disclosure,               consumer access to legal help.
                                                 427 See, e.g., Greenfield at 4–6 (arguing that             contending that there is little evidence that the             437 As discussed above, consumer groups, law
                                              ‘‘attorneys should be permitted to request a client           misimpression that the disclosure is designed to           enforcers, and regulators have argued that the Final
                                              retainer to be held in a regulated account, and to            cure—that the provider is affiliated with the              Rule should protect consumers from harm by
                                              bill a client for legal work performed on an interim          government or the consumer’s lender or servicer—           attorneys. See NCLC at 8; CSBS at 4; LSFV at 4;
                                              basis’’); Rogers at 20–21; Mobley at 2; Carr at 10;           actually exists with respect to attorneys. NCLC at         Lawyers’ Committee at 9; see also NAAG at 3–4;
                                              Bronson at 9.                                                 9.                                                         MBA at 4; NYC DCA at 4; IL AG (ANPR) at 2; MA
                                                 428 ABA at 4.                                                 434 ABA at 7.                                           AG (ANPR) at 9; CUUS at 8–9.

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                      75129

                                              attorney participation.438 Similarly, of                 which attorneys were found or alleged                     NAAG comment, for example,
                                              the 342 MARS companies investigated                      to have engaged in unfair or deceptive                    explained that the attorney exemptions
                                              by the Illinois Attorney General’s Office,               practices in offering or providing MARS                   in many state MARS laws have created
                                              over 38% appeared to have had some                       to consumers.                                             loopholes that MARS providers have
                                              attorney involvement, and attorneys                        Additionally, the record, including                     exploited to harm consumers.444 As
                                              owned—at least in part—over 17% of                       FTC and state law enforcement                             discussed above, these state MARS laws
                                              those companies.439 This data is                         actions,442 demonstrates that MARS                        often exempt attorneys if they have
                                              consistent with the many FTC 440 and                     providers have used state law                             attorney-client relationships with the
                                              state 441 law enforcement actions in                     exemptions for attorneys to circumvent                    consumers for whom they are providing
                                                                                                       the law and harm consumers.443 The                        services.445 An attorney-client
                                                 438 Of the 6,473 total complaints in the LMSPN
                                                                                                                                                                 relationship by itself, however, provides
                                              database as of August 25, 2010, see supra note 75,       Sues 21 Companies and 14 Individuals Who Ripped
                                              the Network determined that 1,510 involved legal                                                                   no guarantee that the attorney will act
                                                                                                       Off Consumers Desperate For Mortgage Relief (July
                                              representation. This level of reported attorney          15, 2009), available at
                                                                                                                                                                 in a fair and honest fashion. Not only
                                              involvement has remained consistent over the past        release.php?id=1767 (among the defendants that the        have MARS attorneys engaged in unfair
                                              several months. See Loan Modification Scam               California Attorney General sued were 4 attorneys         and deceptive acts and practices and
                                              Prevention Network June 2010 National Loan               and three law firms); Cincinnati Bar Ass’n. v.
                                              Modification Scam Database Report, at 1 (‘‘(LMSPN,                                                                 used such exemptions to circumvent
                                                                                                       Mullaney, 119 Ohio St. 3d 412 (2008). Federal and
                                              June 2010 Report),’’), available at http://              state criminal authorities also have prosecuted           state law requirements, but many non-
                                            attorneys who have engaged in foreclosure rescue          attorney MARS providers have
                                              LMSPN–Report-Final.pdf. (noting that 33% percent
                                              of persons aged 51 and older reported attorney
                                                                                                       fraud. See, e.g., Amanda Bronstad, Crackdown on           employed or affiliated with attorneys for
                                                                                                       California Attorneys For Mortgage Fraud a State-          that same purpose.446 MARS providers
                                              involvement in the loan modification scam); Loan
                                                                                                       Federal Joint Effort, Nat’l L.J., Oct. 12, 2010 (Orange
                                              Modification Scam Prevention Network May 2010
                                                                                                       County district attorney’s office brought criminal
                                              National Loan Modification Scam Database Report,
                                                                                                       charges against an attorney in connection with his        (holding that unfair and deceptive trade practice
                                              at 1 (‘‘LMSPN, May 2010 Report), available at
                                                                                                       defrauding more than 400 homeowners with                  claims against attorney are barred by a statutory
                                                                                                       promises to modify mortgage loans in exchange for         exemption for ‘‘member[s] of learned profession’’);
                                              May-LMSPN–Report-Final.pdf. (‘‘At the end of May,
                                                                                                       advance fees); Ameet Sachdev, Lawyer Convicted of         Ohio Rev. Code Ann. § 1345.01(A) (consumer
                                              almost one-third of our reports indicated that legal
                                                                                                       Mortgage-Rescue Fraud, Chi. Trib., July 13, 2010          transactions under the Ohio Consumer Sales
                                              representation was a part of the reported scam.’’);
                                                                                                       (Attorney radio personality found guilty of federal       Practices Act do not include ‘‘transactions between
                                              Loan Modification Scam Prevention Network April
                                                                                                       criminal charges in connection with bilking               attorneys, physicians, or dentists and their clients
                                              2010 National Loan Modification Scam Database
                                              Report, at 2 (‘‘LMSPN, April 2010 Report), available     homeowners in fraudulent foreclosure rescue               or patients’’).
                                              at         scheme), available at http://                                444 NAAG at 4 (‘‘We expect the trend of using

                                              files/April-LMSPN–Report-Final.pdf. (noting that              attorneys as fronts for mortgage rescue companies
                                              20% of complaints involve attorney representation).      chicago-law-20100713,0,3981512.column; Press              to continue. We have noticed that national
                                              A May 2010 LMSPN Report also found that the              Release, Dist, Att’y Queens Cnty., Seventeen              companies are recruiting for attorney ‘partners’ or
                                              names of more than 20 law firms or attorneys had         Individuals—Including Two Attorneys—Charged in            ‘local counsel’ in all of the states they work in to
                                              appeared in multiple complaints. See LMSPN, May          Massive Multi-Million Dollar Real Estate Fraud:           evade states’ mortgage rescue fraud statutes * * *
                                              2010 Report at 1.                                        Ringleaders Allegedly Targeted Distressed                 Based on the continued—and increasing—number
                                                 439 See IL AG (June 30, 2010) at 2. More              Homeowners in Mortgage Rescue Scams (May 13,              of complaints we are receiving against companies
                                                                                                       2010), available at              exploiting the attorney exemption, we support only
                                              specifically, this comment stated that 17.5% of
                                              these companies were owned, at least in part, by         newpressreleases/2010/may/                                a narrowly-crafted exemption for attorney
                                              attorneys; 15% had affiliations with attorneys; and      huggins_sookraj_et%20al_05_13_2010_cmp.pdf.               services.’’); IL AG (ANPR) at 2 (‘‘Attorneys are using
                                                                                                          442 See supra notes 55–61 and accompanying text;       the exemption to market and sell the same mortgage
                                              6% showed evidence of attorneys on their staffs.
                                                 440 See, e.g., FTC v. Washington Data Res., Inc.,     see also FTC v. Truman Foreclosure Assistance,            consulting services provided by non-attorneys.’’).
                                              No. 8:09-cv-02309–SDM–TBM (M.D. Fla. filed Nov.          LLC, No. 09–23543 (S.D. Fla. filed Nov. 23, 2009)            445 See supra notes 58–60, 98; see also, e.g., Colo.

                                              12, 2009); FTC v. LucasLawCenter ‘‘Inc.’’, No.           (alleging that defendants told consumers that they        Rev. Stat. § 6–1–1103(4)(b)(I) (exempts Colorado
                                              SACV09–770 DOC (ANX) (C.D. Cal. filed July 7,            were affiliated with law firm or attorneys); FTC v.       attorneys ‘‘while performing any activity related to
                                              2009); FTC v. US Foreclosure Relief Corp., No.           Fed. Housing Modification Dep’t, No. 09–CV–01753          the person’s attorney-client relationship with a
                                              SACV09–768 JVS (MGX) (C.D. Cal., Amd. Compl.             (D.D.C. filed Sept. 16, 2009) (alleging that              homeowner’’); 765 Il. Comp. Stat. Ann. 940/5
                                              filed Mar. 8, 2010); FTC v. Fed. Loan Modification       defendants falsely claim to have attorneys or             (exempts Illinois attorneys engaged in the practice
                                              Law Ctr., LLP, Case No. SACV09–401 CJC (MLGx)            forensic accountants on staff); FTC v. Loan               of law); Mo. Rev. Stat. § 407.935(2)(b)a9 (exempts
                                              (C.D. Cal., Am. Compl. filed Oct. 1, 2010).              Modification Shop, Inc., No. 3:09-cv-00798 (JAP),         Missouri attorneys rendering service in the course
                                                 441 See, e.g., Florida v. Kirkland Young, No. 09–     Mem. Supp. TRO at 14 (D.N.J. filed Aug. 4, 2009)          of practice); see also NAAG (ANPR) at 13
                                              90945–CA–03 (Fla. Cir. Ct. Dade-County Dec. 17,          (alleging that defendants misrepresent ‘‘that it is an    (‘‘Currently, most states exempt attorneys from their
                                              2009); North Carolina v. Campbell Law Firm, P.A.,        attorney-based company’’).                                mortgage rescue consultant laws.’’); CMC (ANPR) at
                                                                                                          443 See, e.g., NAAG at 3 (‘‘As detailed in our         9–10. In California, the state legislature eliminated
                                              No. 09cv023738 (N.C. Super. Ct.—Wake filed Nov.
                                              11, 2009); Assurance of Voluntary Compliance &           earlier submission, companies are now exploiting          the attorney exemption from its law regulating
                                              Discontinuance In re Airan2 (Nov. 9, 2009),              exemptions in state mortgage rescue statutes in           foreclosure consultants because of concerns about
                                              available at http://                                     order to evade compliance with state laws. The            evasion. See supra note 61.
                                               exemption for attorneys has been particularly                446 See, e.g., CSBS (ANPR) at 2 (noting ‘‘attorneys

                                              files/uploads/Airan2.pdf; Press Release, Conn. Att’y     abused.’’); IL AG (ANPR) at 2 (‘‘Attorneys are using      who lend their name to a loan modification
                                              Gen., Attorney General Warns Consumers About             the [state] exemption to market and sell the same         company, but play, little, if any direct role, in
                                              Foreclosure Rescue Company Masquerading As Law           mortgage consulting services provided by non-             helping consumers obtain actual loan
                                              Firm (Aug. 10, 2009), available at http://               attorneys.’’); see also NAAG at 3–4 (arguing that it      modifications’’); MN AG (ANPR) at 5 (‘‘The Office
                                    ;              is a ‘‘difficult and fact-intensive inquiry’’ to prove    is aware of several loan modification and
                                              California v. United First, Inc., No. BC 417194 (Cal     attorneys are not engaged in the practice of law, and     foreclosure rescue companies that have affiliated
                                              Super. Ct. Los Angeles filed July 6, 2009) (alleging     thus they are not exempted from state laws                with licensed attorneys in other states in an effort
                                              attorney Mitchell Roth and his law firm MW Roth,         exempting those activities).                              to circumvent state law.’’); CRC (ANPR) at 2 (‘‘An
                                              PLC falsely promised to eliminate mortgages on              In addition, some state consumer fraud statutes        increasing number of attorneys are involving
                                              consumers’ homes and improve their credit);              explicitly exempt attorneys, further impeding state       themselves in these unethical practices without
                                              Assurance of Voluntary Compliance &                      enforcers from prosecuting attorney MARS                  providing any legal (or other) services, sometimes
                                              Discontinuance In re Law Office of Eugene S.             providers for unfair or deceptive practices. See D.C.     engaging in fee-splitting or even simply acting as
                                              Alkana (Jun. 12, 2009), available at http://             Code Ann. § 28–3903(c)(2)(C) (prohibiting the             fronts for loan modification companies who are
jlentini on DSKJ8SOYB1PROD with RULES6

                                               Department of Consumer Protection from applying           seeking to avoid state laws that prohibit some of the
                                              files/uploads/Legal%20Home%20Solutions.pdf;              the statute to the ‘‘professional services of             practices described above but exempt attorneys.’’);
                                              Assurance of Voluntary Compliance &                      clergymen, lawyers [and others]’’); Md. Code Ann.,        Cal. State Bar Ethics Alert at 2 (‘‘There is evidence
                                              Discontinuance In re Traut Law Group (Jun. 11,           Com. Law § 13–104(1) (the statute ‘‘does not apply        that some foreclosure consultants may be
                                              2009), available at http://                              to * * * [t]he professional services of a * * *           attempting to avoid the statutory prohibition on
                                               lawyer’’); N.C. Gen. Stat. § 75–1.1 (2005) (exempting     collecting a fee before any services have been
                                              files/uploads/Traut%20Law%20Group.pdf; see also          ‘‘member[s] of a learned profession’’); see also Sharp    rendered by having a lawyer work with them in
                                              Press Release, Office of the Cal. Att’y Gen., Brown      v. Gailor, 510 S.E.2d 702, 704 (N.C. App. 1999)           foreclosure consultations.’’).

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                                              75130            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              increasingly have induced consumers to                   communicating with the lender or                         such consumers with non-litigation
                                              purchase their services by making                        servicer.450                                             legal services, such as advising them on
                                              claims that their services include                          Given the prevalence of attorneys                     bankruptcy laws, unwinding sale-
                                              specialized legal assistance from                        engaged in unfair and deceptive                          leaseback transactions, resolving
                                              attorneys,447 with some attorneys                        practices in providing MARS and the                      violations of fair lending laws, disputing
                                              lending their names and credentials to                   experience of the states with categorical                charges that servicers had assessed
                                              these operations.448 In these                            exemptions for all attorneys, the                        improperly, and counseling on the tax
                                              arrangements, however, the attorneys                     Commission has decided not to exempt                     implications of short sales.453 The
                                                                                                       attorneys across-the-board from the                      Commission concludes that some
                                              often do little or no work on behalf of
                                                                                                       Final Rule. The record demonstrates                      attorneys might cease providing such
                                              consumers,449 with non-attorneys
                                                                                                       that such a categorical exemption would                  beneficial services if they were required
                                              handling most functions, including                       open a large loophole to the Rule that                   to comply with the provisions of the
                                                                                                       MARS providers would exploit to the                      Rule.
                                                 447 The FTC’s review of the information produced
                                                                                                       detriment of consumers.                                     At the other end of the spectrum,
                                              by a media monitoring company, see supra note 66,
                                              showed that 25 of the 140 companies advertising                                                                   individuals with law licenses frequently
                                                                                                       b. The Rationale for the Attorney
                                              MARS made reference to being attorneys or                                                                         engage in deceptive or unfair MARS
                                                                                                       Exemption in the Final Rule
                                              providing some form of legal assistance.                                                                          practices or assist others who do. As
                                                 448 See, e.g., FTC v. Loss Mitigation Servs., Inc.,      As discussed above, attorneys’                        with other services sold routinely
                                              No. SACV09–800 DOC (ANX), Mem. Supp. Pls. Ex             activities related to mortgage assistance                through deceptive or unfair means, a
                                              Parte App. at 3 (C.D. Cal. filed Aug. 3, 2009)           relief run the gamut. At one end of the
                                              (alleging that ‘‘Walker Law Group’’ was ‘‘a sham
                                                                                                                                                                broad attorney exemption can become
                                              legal operation designed to evade state law
                                                                                                       spectrum, attorneys may provide a host                   an easy way for fraud artists to ply their
                                              restrictions on the collection of up-front fees for      of valuable services for consumers                       trade without fear of law enforcement.
                                              loan modification and foreclosure relief’’); FTC v.      unable to pay their mortgages.451 For                    Thus, the Commission concludes that
                                              US Foreclosure Relief Corp., No. SACV09–768 JVS          instance, some attorneys represent in                    merely possessing a law degree or a
                                              (MGX), Prelim. Rep. Temp. Receiver at 2–3 (C.D.          legal proceedings consumers who are in
                                              Cal. filed July 7, 2009) (stating that defendants’
                                                                                                                                                                license to practice law is not an
                                              ‘‘relationship with two different lawyers was
                                                                                                       or at risk of foreclosure,452 or provide                 adequate basis for an exemption from
                                              nominal at best and served primarily as a cover to                                                                the Rule.
                                              dignify the business and invoke the attorney                 450 See, e.g., FTC v. US Foreclosure Relief Corp.,
                                                                                                                                                                   The Commission’s goal is to craft an
                                              exception to advance fee prohibitions’’); FTC v.         No. SACV09–768 JVS (MGX) (C.D. Cal., Amd.                exemption that enables attorneys to
                                              LucasLawCenter ‘‘Inc.’’, No. SACV–09–770 DOC             Compl. filed Mar. 8, 2010) (alleging defendants
                                              (ANX), Mem. Supp. TRO at 19 (C.D. Cal. filed July        falsely claimed a lawyer would negotiate the terms       engage in the bona fide practice of law,
                                              7, 2009) (alleging that ‘‘[d]espite promises to the      of consumers’ home loans); FTC v. FTC v. Fed. Loan       but does not create a loophole for
                                              contrary, consumers have no contact with the             Modification Law Ctr., LLP, No. SACV09–401 CJC           unscrupulous attorneys who themselves
                                              purported attorneys who are supposed to be               (MLGx), Mem. Supp. Ex Parte TRO at 6 & n.2 (C.D.         engage in unfair or deceptive acts and
                                              negotiating with their lenders’’); FTC v. Fed. Loan      Cal. filed Apr. 6, 2009) (alleging ‘‘despite promises
                                                                                                       to the contrary, consumers have no contact with          practices in selling MARS or lend their
                                              Modification Law Ctr., LLP, No. SACV09–401 CJC
                                              (MLGx), Mem. Supp. Ex Parte TRO at 6 & n.2; (C.D.        purported attorneys who are supposed to be               credentials to others who do so. The
                                              Cal. filed Apr. 6, 2009) (alleging non-attorney          negotiating with their lenders’’); see also Chase        attorney exemption described below is
                                                                                                       (ANPR) at 5 (‘‘Many MARS providers claim to be
                                              defendants partnered with a California-licensed
                                                                                                       affiliated with attorneys, but typically the people
                                                                                                                                                                designed to achieve that goal.
                                              attorney to exploit attorney exemption in state law);
                                                                                                       performing the services are not attorneys, and the       c. Requirements for the Exemption
                                              see also Drexel Testimony at 6 (‘‘In exchange for the
                                                                                                       connection with the attorney is very tenuous. Calls
                                              use of the attorney’s name and his or her ability to
                                              charge and receive advance fees, the foreclosure
                                                                                                       to the MARS provider do not go to the attorney’s         (1) Practice of Law
                                                                                                       office and addresses used by the providers are not
                                              consultant typically offers to perform most or all of    the same as the attorney’s.’’); OH AG (ANPR) at 5           As described above, the services that
                                              the loan modification services. * * *’’); Press          (‘‘[A]t most the lawyer [advertised to consumers by      attorneys may deliver to consumers
                                              Release, State Bar of Cal., State Bar Takes Action       foreclosure rescue companies] will file a brief
                                              to Aid Homeowners in Foreclosure Crisis (Nov. 25,                                                                 with mortgage problems can be legal or
                                                                                                       template response on behalf of the consumers.’’).
                                              2009) (‘‘[T]he attorneys work with untrained non-            451 In today’s financial crisis, many consumers
                                                                                                                                                                non-legal in nature. Limiting the
                                              attorney staff engaging in the unlawful practice of      have turned to attorneys for help with their             exemption to attorneys engaged in the
                                              law by offering legal advice to prospective clients.     mortgages. See, e.g., LFSV at 1 (‘‘During the recent     ‘‘practice of law’’ is intended to draw the
                                              [The Office of Trial Counsel] also is investigating
                                              the non-attorney staff for possible referral to law
                                                                                                       mortgage crisis, we have been dealing with a flood       distinction between legal and non-legal
                                                                                                       of borrowers whose mortgages are distressed and          services, even though performed or
                                              enforcement.’’), available at http://                    who have been subject to abuses by companies and
                                                              individuals promising assistance with obtaining          supervised by an attorney. The ‘‘practice
                                              calbar_generic.jsp?cid=10144&n=96395; CMC                modification of those loans.’’); Central California      of law’’ generally encompasses
                                              (ANPR) at 10 (‘‘[The attorneys’] communications          Legal Services: State Bar’s First Foreclosure Forum      providing advice or counsel that
                                              [with the consumer] are generally ‘boilerplate’ that     in Fresno, available at http://
                                              does not appear to reflect any considered review by                                                               requires knowledge of the law and
                                              an attorney.’’); OH AG (ANPR) at 5 (‘‘[O]ur office       ccls/index.php (call for volunteer assistance to         preparing documents, including court
                                              sees foreclosure rescue companies advertise that         handle the sheer number of clients who need
                                              they will provide a lawyer or legal help to that         assistance to avoid foreclosure). Many consumers at      represent clients in these mediation proceedings
                                              consumer. The lawyer’s client, however, is actually      risk of losing their homes must rely on for-profit       and may in some states file a petition for review on
                                              the company, not the consumer, and at most the           attorneys to receive legal assistance because their      behalf of consumers if the mediation fails because
                                              lawyer will file a brief template response on behalf     income levels disqualify them for non-profit legal       lenders have acted in bad faith. See, e.g., Giles at
                                              of the consumers.’’); IL AG (ANPR) at 2. Similarly,      aid. See Income Levels for Individuals Eligible for      1–2; see also Nev. Rev. Stat. Ann. § 107.086(5)
                                              financial service companies report receiving letters     Assistance, 45 CFR part 1611 (2010) (publishing          (requiring loan holder to participate in mediation in
                                              from attorneys who do no work but lend their             2010 maximum income levels for individuals who           good faith and to bring all necessary documents).
                                              names to out-of-state attorneys. AFSA at 5.              are permitted to receive free or low cost legal help        453 See, e.g., NCLC (ANPR) at 14 (noting that ‘‘an
                                                 449 IL AG (ANPR) at 2 (‘‘While attorney mortgage      from programs funded by the Legal Services               attorney’s more beneficial and traditional role of
                                              consultants charge a premium for their services and      Corporation).                                            analyzing a client’s paperwork and advising the
jlentini on DSKJ8SOYB1PROD with RULES6

                                              aggressively market their status as legal                    452 As one example, in several states borrowers      client of potential claims and options may also fit
                                              professionals, they generally exclude—either             have the right to participate in supervised              within the definition of mortgage assistance relief’’);
                                              expressly or in practice—actual legal representation     mediation with lenders before the home goes into         LSFV at 4 (‘‘Those seeking advice, who are likely
                                              or legal work from the scope of provided services.’’).   judicial foreclosure. See, e.g., Conn. Gen. Stat. Ann.   in or facing mortgage default, may need specific
                                              Some MARS providers advertise the provision of           § 8–265ee (2009) (providing for court-sponsored          advice regarding the contractual and tax
                                              legal services to consumers but then later disclaim,     mediation prior to foreclosure); Nev. Rev. Stat. Ann.    implications of a loan modification, which HUD-
                                              in fine print contracts, that they will actually         § 107.086 (2009) (providing for court-supervised         approved counselors may not be qualified to
                                              provide such services. See id. at 2–4, 7.                mediation prior to foreclosure). Attorneys often         provide.’’).

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                   75131

                                              pleadings and contracts, to secure                        attorneys who represent clients who live              of clients; (2) disclosure of material
                                              clients’ legal rights.454 The activities                  in one state, but whose dwelling that is              information regarding their services to
                                              that constitute the ‘‘practice of law,’’                  the subject of the MARS is located in                 clients; (3) the accuracy of
                                              however, may vary based on state laws                     another state.456 The Commission                      representations of material aspects of
                                              and licensing regulations, as interpreted                 recognizes that some consumers who                    their legal services; (4) the request,
                                              by state courts and state bars. The Final                 are in or at risk of foreclosure may need             receipt, handling, and distribution of
                                              Rule only allows an exemption for                         legal assistance concerning dwellings                 fees from clients; and (5) prohibitions
                                              attorneys who are engaged in the                          located in a state other than the one                 on fee-splitting with non-attorneys or
                                              ‘‘practice of law,’’ as interpreted by the                where they reside. As an example, older               aiding others in the unauthorized
                                              jurisdiction where the consumer or the                    persons who live in assisted living                   practice of law.
                                              consumer’s dwelling is located.                           facilities located close to family may                   The record in this proceeding
                                                                                                        continue to own homes in other                        demonstrates that many attorneys
                                              (2) Licensing Jurisdiction                                                                                      involved in the provision of MARS have
                                                                                                        states.457 Therefore, the Final Rule
                                                 To qualify for the exemption in the                    expands the attorney exemption to                     engaged in practices that violate one or
                                              Final Rule, attorneys must be licensed                    encompass attorneys who are licensed                  more aspects of the applicable state laws
                                              to practice law in the state where their                  in the state where the consumer resides               or licensing regulations.460 To protect
                                              clients reside or where their clients’                    or where the dwelling is located.                     consumers and avoid duplicative or
                                              dwellings that are the subject of the                        The Commission declines to expand                  inconsistent standards, the Commission
                                              MARS are located. State attorney                          the exemption to attorneys licensed in                has determined that it is appropriate to
                                              licensing regulations can provide an                      any state, as recommended by some
                                              important check on the conduct of                         commenters.458 The record, including                     460 See, e.g., Press Release State Bar of Cal., State

                                              attorneys. The record shows, however,                     state and FTC law enforcement,                        Bar Takes Action to Aid Homeowners in
                                              that in many cases attorneys have                                                                               Foreclosure Crisis (Sept. 18, 2009) (alleging that
                                                                                                        consumer complaints, and comments,                    attorneys took ‘‘fees for promised services and then
                                              provided MARS in jurisdictions in                         demonstrates that many attorneys who                  failed to perform those services, communicate with
                                              which they are not licensed.455 To                        have engaged in deceptive and unfair                  their clients or return the unearned fees’’), available
                                              ensure that exempt attorneys would be                     conduct that harms consumers operated
                                              subject to the oversight and regulation                                                                         200934.aspx; see also Helen Hierschbiel, Working
                                                                                                        on an interstate basis, including in                  with Loan Modification Agencies, Or. St. Bar Bull.
                                              of state officials, the proposed rule                     states where they were not licensed.459               (Aug./Sept. 2009) (warning Oregon attorneys of
                                              limited the exemption to those attorneys                  Requiring that attorneys be licensed                  potential ethical violations associated with working
                                              who were licensed to practice in the                                                                            with loan modification companies), available at
                                                                                                        where the consumer or the property is       
                                              state where the consumer resides.                         located makes it more likely that state               09augsep/barcounsel.html; Bob Lipson & David
                                                 Some commenters, including several                                                                           Huey, Lawyers and Buyers Beware, Was. St. Bar J.
                                                                                                        bar officials will be a ‘‘cop on the beat,’’
                                              consumer groups, argued that the                                                                                (Aug. 2009) (warning attorneys of the ‘‘potential
                                                                                                        deterring and preventing unlawful
                                              exemption in the proposed rule was too                                                                          ethical pitfalls’’ of ‘‘working with a loan
                                                                                                        conduct by attorneys.                                 modification company in conjunction with your
                                              narrow because it did not include
                                                                                                                                                              practice’’), available at
                                                                                                        (3) Compliance With State Laws and                    publications/barnews/aug09-lawyersbeware.htm; N.
                                                454 See,  e.g., Baron v. Los Angeles, 469 P.2d 353,     Licensing Regulations                                 J. Sup. Ct. Adv. Comm. On Prof. Ethics, Op. 716,
                                              357 (Cal. 1970) (adopting the definition articulated                                                            Lawyers Performing Loan or Mortgage Modification
                                              in In re Eley v. Miller, 34 N. E. 836, 837–38 (Ind.          In addition to being licensed,                     Services for Homeowners, 197 N.J.L.J. 59 (Jun. 26,
                                              App. 1893), that the practice of law ‘‘includes legal     attorneys must comply with all relevant               2009) (citing two ethics opinions in holding that
                                              advice and counsel, and the preparation of legal          state laws and licensing regulations                  attorneys cannot pay fees to loan modification
                                              instruments and contracts by which legal rights are                                                             companies for referring clients, act as in-house
                                              secured although such matter may or may not be
                                                                                                        governing their conduct for the state in
                                                                                                                                                              counsel to a for-profit loan modification company,
                                              pending in a court.’’); State Bar Ass’n of Conn. v.       which the client or the client’s dwelling             or engage in prohibited fee sharing with loan
                                              Conn. Bank & Trust Co., 140 A.2d 863, 870 (Conn.          is located to qualify for the exemption.              modification companies), available at http://
                                              1958) (The practice of law ‘‘embraces the giving of       Specifically, these attorneys must abide    
                                              legal advice on a large variety of subjects and the                                                             45_loanmod.pdf; Diane Karpman, Beware the
                                              preparation of legal instruments covering an              by all such laws and regulations relating             Meltdown’s Temptations, Cal. Bar J. (Dec. 2008)
                                              extensive field.’’); Ga. Code Ann. § 5–19–50              to the following subject matters: (1)                 (warning the legal community about the potential
                                              (defining practice of law as ‘‘(1) Representing           Competent and diligent representation                 ethical violations that could occur if attorneys were
                                              litigants in court and preparing pleadings and other                                                            to go into business with non-attorneys in the loan
                                              papers incident to any action or special proceedings        456 See,                                            modification market) available at http://
                                              in any court or other judicial body; (2)                              e.g., Greenfield at 5; NCLC at 10.
                                                                                                          457 See
                                              Conveyancing; (3) The preparation of legal                           NCLC at 4.                                 cbj.jsp?sCategoryPath=/Home/
                                                                                                           458 See ABA at 5; Bronson at 5.
                                              instruments of all kinds whereby a legal right is                                                               Attorney%20Resources/
                                              secured; (4) The rendering of opinions as to the             459 See, e.g., FTC Case List, supra note 28;
                                              validity or invalidity of titles to real or personal      Assurance of Voluntary Compliance &                   December2008&MONTH=
                                              property; (5) The giving of any legal advice; and (6)     Discontinuance In re Airan2 (Nov. 9, 2009),           December&YEAR=2008&sCat
                                              Any action taken for others in any matter connected       available at http://                                  HtmlTitle=Discipline&sJournalCategory=YES&sCat
                                              with the law.’’).                                       HtmlPath=cbj/2008-12_Discipline_Ethics-
                                                 455 See, e.g., FTC v. Fed. Loan Modification Law       files/uploads/Airan2.pdf (alleging out-of-state       Byte.html&sSubCatHtmlTitle=Ethics%20Byte;
                                              Ctr., LLP, No. SACV09–401 CJC (MLGx) (law firm            attorney sold MARS without proper licenses to         Florida Bar, Ethics Alert: Providing Legal Services
                                              advertised MARS nationally while attorneys who            Colorado residents); Assurance of Voluntary           to Distressed Homeowners (cautioning attorneys
                                              purportedly worked for company were only                  Compliance & Discontinuance In re Law Office of       against entering into arrangements with non-
                                              licensed to practice law in California); Assurance of     Eugene S. Alkana (Jun. 12, 2009) (same), available    lawyers to provide services associated with loan
                                              Voluntary Compliance & Discontinuance In re:              at      modifications, short sales, and other forms of
                                              Airan2, (Nov. 9, 2009) (out-of-state attorney             default/files/uploads/                                foreclosure-related rescue), available at http://
                                              provided MARS to Colorado consumers), available           Legal%20Home%20Solutions.pdf; Assurance of  
                                              at http://www.coloradoattorneygeneral.                    Voluntary Compliance & Discontinuance In re           Attachments/
jlentini on DSKJ8SOYB1PROD with RULES6

                                              gov/sites/default/files/uploads/Airan2.pdf; see also      Traut Law Group (Jun. 11, 2009) (same), available     872C2A9D7B71F05785257569005795DE/$FILE/
                                              CMC at 9–10 (‘‘These attorneys are often not              at      loanModification20092.pdf. Additionally, the Ohio
                                              licensed to practice in either the borrower’s or          default/files/uploads/Traut%20Law%20Group.pdf;        Supreme Court has sanctioned attorneys hired by a
                                              servicer’s state * * *.’’); CSBS at 2 (‘‘This [increase   cf. Model Rules of Prof’l. Conduct R. 5.5             foreclosure rescue company for, inter alia, failing to
                                              of involvement by attorneys] includes out-of-state        (prescribing that an attorney may practice law in a   engage in adequate preparation and failing to
                                              attorneys, many of whom are not licensed to               jurisdiction other than the one in which she is       properly pursue clients’ individual objectives. See
                                              practice law in the state where the homeowner lives       admitted only under limited circumstances, and        Cincinnati Bar Ass’n v. Mullaney, 894 N.E. 2d 1210
                                              * * *.’’).                                                even then only on a temporary basis).                 (Ohio 2008).

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                                              75132            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              generally exempt from the Final Rule                      providers in engaging in the                                involved in providing MARS.473 State
                                              attorneys who comply with the                             unauthorized practice of law, i.e.,                         bars also typically respond only to
                                              applicable state laws and regulations.                    providing legal services without a                          client and competitor complaints rather
                                              Attorneys not in compliance with those                    license to do so.469 If attorneys do not                    than actively monitoring and
                                              laws and regulations, however, remain                     comply with all of these state                              investigating possible violations on their
                                              subject to the Rule. Examples of                          requirements, they must comply with                         own initiative.474 As a result, as the
                                              activities that may be in violation of                    all of the requirements in the Final Rule.                  record demonstrates, numerous
                                              state laws and regulations, and thus                         Some state bars have initiated an                        attorneys have engaged and continue to
                                              would render attorneys ineligible for the                 increasing number of investigations of                      engage in unfair or deceptive practices
                                              exemption, include: (1) Failing to work                   attorneys who provide MARS and, in                          in the provision of MARS without states
                                              diligently and competently on behalf of                   many instances, have brought                                taking action against them. The
                                              clients, i.e., not taking reasonable efforts              misconduct cases against them.470 For                       Commission encourages all state courts
                                              to obtain mortgage assistance relief; 461                 example, the Florida Bar submitted a                        and bars to follow the example of states
                                              (2) neglecting to keep clients reasonably                 comment stating that it is investigating                    like Florida and California and
                                              informed as to the status of their                        155 pending complaints against 42                           aggressively enforce their laws and
                                              matters, including the potential for                      lawyers engaged in providing MARS.471                       regulations covering attorneys who
                                              adverse outcomes; 462 (3)                                 The California Bar is currently                             provide MARS as part of the practice of
                                              misrepresenting any material aspect of                    conducting roughly 2,000 investigations                     law. The record demonstrates, however,
                                              the legal services,463 including the                      related to MARS providers.472 Vigorous                      that the threat of bar sanctions has not
                                              likelihood they will achieve a favorable                  state monitoring and enforcement play a                     been a sufficient deterrent to attorney
                                              result,464 an affiliation with a                          vital role in reducing the incidence of                     misconduct in the sale or provision of
                                              government agency,465 or the cost of                      unfair or deceptive conduct by attorneys                    MARS, and thus it is necessary to cover
                                              their services; 466 (4) sharing legal fees                involved in the provision of MARS.                          certain conduct of attorneys under the
                                              for MARS-related services with non-                          Nevertheless, many state bars have                       Final Rule.
                                              attorneys; 467 (5) forming partnerships                   limited resources for investigating and
                                                                                                        taking action against unethical attorneys                   d. Exemption From the Advance Fee
                                              with non-attorneys in connection with
                                              offering MARS; 468 and (6) aiding MARS
                                                                                                        2009) (warning attorneys of the ‘‘potential ethical            The practices of attorneys who meet
                                                461 See,   e.g., Model Rules of Prof’l Conduct R. 1.1   pitfalls’’ of ‘‘working with a loan modification            the conditions listed in 322.7(a) are
                                                                                                        company in conjunction with your practice’’),
                                              & 1.3 (requiring attorneys to provide competent and
                                                                                                        available at
                                                                                                                                                                    entitled to a general exemption from the
                                              diligent legal services).                                                                                             Final Rule. The one exception relates to
                                                 462 See, e.g., Model Rules of Prof’l Conduct R. 1.4
                                                                                                        publications/barnews/aug09-lawyersbeware.htm; N.
                                              (governing attorney communications with clients
                                                                                                        J. S. Ct. Adv. Comm. Prof. in Ethics & Comm. on             the prohibition on advance fees. Under
                                                                                                        Unauthorized Practice of Law, Lawyers Performing            § 322.7(b) of the Final Rule, attorneys
                                              about their cases); see also Model Rules of Prof’l        Loan or Mortgage Modification Services for
                                              Conduct R. 2.1 (calling for attorneys to exercise         Homeowners, (Jun. 26, 2009) (citing two ethics              are exempt from the advance fee ban
                                              independent professional judgment and render              opinions in holding that attorneys cannot pay fees          only if they: (1) Meet all of the
                                              candid advice).
                                                 463 See, e.g., Model Rules of Prof’l Conduct R. 7.1
                                                                                                        to loan modification companies for referring clients,       conditions required for the general
                                                                                                        act as in-house counsel to a for-profit loan                exemption; (2) deposit any advance fees
                                              (general prohibition on making ‘‘false or misleading      modification company, or engage in prohibited fee-
                                              communications about the lawyer or the lawyer’s           sharing with loan modification companies),                  they receive into a client trust account;
                                              services’’). Attorneys also cannot engage in conduct      available at         and (3) comply with all state laws and
                                              that is dishonest, fraudulent, or deceitful. See          ACPE_716_UPL_45_loanmod.pdf.                                licensing regulations governing the use
                                              Model Rules of Prof’l Conduct R. 8.4.                        469 See Model Rules of Prof’l Conduct R. 5.5
                                                 464 Id. In some cases, state laws and regulations                                                                  of such accounts.
                                                                                                        (lawyer is not permitted to practice law in violation
                                              would prohibit attorneys from promising that they         of the laws that regulate the legal profession in that
                                              will obtain any particular mortgage relief for their                                                                     473 See, e.g., Deborah L. Rhode, Institutionalizing
                                                                                                        state, nor assist another to do so). In addition,
                                              clients. See, e.g., FL. Rules of Prof’l Conduct R. 4–     attorneys who operate what have come to be known            Ethics, 44 Case W. Res. L. Rev. 665, 694 (1994)
                                              7.2(c)(F) & (G) (2010) (prohibits any communication       as ‘‘loan modification mills’’ may violate state law        (discussing funding constraints of bar disciplinary
                                              that ‘‘contains any reference to past successes or        if they provide MARS as part of their legal services,       system).
                                              results obtained’’ or ‘‘promises results’’).              but delegate most of the work to non-attorneys                 474 See ABA, Ctr. For Prof’l Responsibility.
                                                 465 Id.; see also Model Rules of Prof’l Conduct R.                                                                 Lawyer Regulation for A new Century: Report of the
                                                                                                        without properly supervising the delegated work or
                                              7.5 (generally prohibits use of firm name,                retaining control over it. See Model Rules of Prof’l        Commission on the Evaluation of Disciplinary
                                              letterhead, or other professional designation that is     Conduct R. 5.3.                                             Enforcement vi–vii, 9–11, 75 (1992); see also Fred
                                              misleading, and specifies that attorneys in private          470 See, e.g., Press Release, State Bar of Cal., State   C. Zacharias, The Future Structure and Regulation
                                              practice cannot use a trade name that implies a           Bar Continues Pursuit of Attorney Modification              of Law Practice: Confronting Lies, Fictions, and
                                              connection with a government agency).                     Fraud (Aug. 12, 2009), available at http://                 False Paradigms in Legal Ethics Regulation, 44 Ariz.
                                                 466 See Model Rules of Prof’l Conduct R. 7.1, 7.2,
                                                                                                            L. Rev. 829, 871 (2002) (‘‘[State bars] have tended
                                              & 8.4; see also Model Rules of Prof’l Conduct R. 1.5      jsp?cid=10144&n=96096; Fl. Bar, Ethics Alert:               to focus exclusively on cases that come to their
                                              (must communicate to clients the scope of                 Providing Legal Services to Distressed Homeowners,          attention easily, through complaints by allegedly
                                              representation and the basis and rate for fees,           available at                 aggrieved persons.’’); Julie Rose O’Sullivan,
                                              preferably in writing, before or within a reasonable      TFBResources.nsf/Attachments/                               Professional Discipline For Law Firms? A Response
                                              time after commencing the representation).                872C2A9D7B71F05785257569005795DE/$FILE/                     to Professor Scheneyer’s Proposal, 16 Geo. J. Legal
                                                 467 See Model Rules of Prof’l Conduct R. 5.4 (only     loanModification20092.pdf?; see also Cincinnati             Ethics 1, 51–52 (2002) (‘‘[O]verwhelming majority of
                                              under certain circumstances can lawyers or law            Bar Assoc. v. Mullaney, 119 Ohio St. 3d 412 (2008)          [bar disciplinary] proceedings continue to be
                                              firms share legal fees with non-lawyers).                 (disciplining attorneys involved in mortgage                founded upon complaints rather than proactive
                                                 468 Id. (lawyers cannot form business partnerships     assistance relief services).                                investigations’’).
                                              with non-lawyers if any of the activities involve the        471 FL Bar (July 1, 2010) at 1. In the past year,           The Commission, in contrast, frequently initiates
                                              practice of law). State bars have warned attorneys        Florida has brought 32 cases alleging neglect by            investigations based on its own monitoring of
                                              about the ethical problems of partnering with non-        attorneys in providing loan modification services,          industry practices or information from third party
                                              attorneys to perform MARS. See, e.g., Helen               which resulted in disciplinary action against four          sources, even in the absence of a consumer or
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                                              Hierschbiel, Working with Loan Modification               attorneys. During that time, the Florida Bar                competitor complaint. The Commission also has a
                                              Agencies, Or. St. Bar Bull. (Aug./Sept. 2009)             disciplined another four attorneys in connection            number of important remedial powers that bar
                                              (warning Oregon attorneys of potential ethical            with their advertising of MARS. Id.                         associations may lack, including the ability to file
                                              violations associated with working with loan                 472 Press Release, State Bar of Cal., Two More           an immediate action in Federal court for a
                                              modification companies), available at http://             Loan Foreclosure Lawyers Placed on Involuntary              temporary restraining order to halt ongoing
                                                 Inactive Enrollment (June 2, 2010), available at            violations and freeze the defendant’s assets for
                                              barcounsel.html; Bob Lipson & David Huey,                             ultimate return to injured consumers. See 15 U.S.C
                                              Lawyers and Buyers Beware, Wash. St. Bar J. (Aug.         201012.aspx.                                                53(b).

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                        75133

                                                 Given the frequency with which                        are earned or expenses are incurred,479                        To qualify for the exemption from the
                                              attorneys, and those affiliated with                     maintain complete records as to                             requirements of the advance fee ban, the
                                              attorneys, have engaged in unfair and                    transactions,480 notify clients of any                      Commission concludes that attorneys
                                              deceptive practices in connection with                   withdrawals,481 and keep the client’s                       not only must deposit advance fees in
                                              MARS, the Commission believes that a                     funds separate from other clients’ funds                    a client trust account, but also must
                                              blanket exemption from the advance fee                   if a dispute as to ownership of the funds                   comply with all state laws and licensing
                                              ban for attorneys is unwarranted and                     is pending.482 In some cases, attorneys                     regulations governing their use of client
                                              would not adequately protect                             also are prohibited from ‘‘front-loading’’                  trust accounts for these funds.485 The
                                              consumers. At the same time, the                         fees to expedite their withdrawal of                        Rule does not restrict attorneys as to the
                                              Commission is mindful of the possible                    funds from client trust accounts.483 In                     type of fees they charge clients,
                                              adverse consequences from imposing                       addition, as discussed above, in the                        including flat fees, contingency fees, or
                                              unnecessary fee restrictions on attorneys                event attorneys misappropriate funds,                       hourly fees, but requires that they
                                              that would reduce the availability of                    state court systems and bars can take,                      withdraw their fees from the client trust
                                              beneficial legal services. On balance, the               and have taken, disciplinary action,                        accounts consistent with state laws and
                                              Commission has concluded that a                          including license revocation. Finally,                      licensing regulations. These conditions
                                              modified, broader attorney exemption                     state bars typically maintain client-                       are appropriate for ensuring that such
                                              with regard to the advance fee ban is                    security funds, which are capitalized by                    attorneys do not collect and handle fees
                                              appropriate. The Final Rule therefore                    licensing fees that attorneys pay, for the                  in a manner harmful to consumers.
                                              permits attorneys who provide MARS as                    purpose of compensating injured                             Attorneys who do not comply with all
                                              part of their provision of legal services                clients.484                                                 of these state requirements must comply
                                              to collect advance fees if, in compliance                                                                            with the advance fee ban in the Final
                                              with applicable state laws and licensing                 own property and in a separate account where the            Rule.486
                                                                                                       lawyer’s office is situated, or elsewhere with the
                                              regulations, the attorney deposits such                  consent of the client or third person’’).                   H. Section 322.8: Waiver Not Permitted
                                              payments into a client trust account 475                    479 See Model Rules of Prof’l Conduct R. 1.15(c)

                                              and draws on them as work is                             (‘‘A lawyer shall deposit into a client trust account
                                                                                                                                                                     Section 322.8 of the Final Rule, which
                                              performed.                                               legal fees and expenses that have been paid in              includes only non-substantive
                                                                                                       advance, to be withdrawn by the lawyer only as fees
                                                 Unlike other MARS providers,                          are earned or expenses incurred.’’); see also, e.g.,        index.html (‘‘client protection program’’ hyperlink)
                                              attorneys commonly deposit advance                       Cal. Rules of Prof’l Conduct R. 3–700 (when client          (fund provided to reimburse losses resulting from
                                              fees in client trust accounts and, in                    representation terminates, attorneys must promptly          dishonest conduct by attorneys); State Bar of
                                              some jurisdictions, are legally required                 return any part of a fee paid in advance that has           Nevada: Clients’ Security Fund, available at http://
                                                                                                       not been earned); Fla. Rules of Prof’l Conduct R.  (fund
                                              to do so.476 State laws and licensing                    4–1.16 (same); Ill. Rules of Prof’l Conduct R. 116          reimburses losses to clients when attorney ‘‘betrays
                                              regulations strictly limit attorneys’ use                (same); Nev. Rules of Prof’l Conduct R. 166 (same).         client’s trust or misappropriates the client’s funds’’).
                                              of funds in these accounts.477 For                          480 Attorneys must retain complete records as to         There is no guarantee that consumer losses will be
                                              example, state laws and licensing                        transactional activity on the accounts. See Model           reimbursed from these funds. In some cases, the
                                                                                                       Rules of Prof’l Conduct R. 1.15(a) (‘‘Complete              amount in dues collected from attorneys may be
                                              regulations mandate that attorneys keep                  records of such account funds and other property            insufficient to cover reported losses from attorney
                                              fees deposited in the client trust                       shall be kept by the lawyer and shall be preserved          misconduct. See, e.g., Valerie Miller, New President
                                              accounts separate from their own                         for a period of [five years] after termination of the       Points State Bar Toward Future, Las Vegas Business
                                              funds,478 only withdraw funds as fees                    representation.’’); see also Cal. Rules of Prof’l           Press, July 12, 2010 available at http://
                                                                                                       Conduct R. 4–100; Fla. Rules of Prof’l Conduct R. 
                                                                                                       4–1.15; Ill. Rules of Prof’l Conduct R. 1.15; Nev.          news/iq_36736725.txt (reporting that in 2009,
                                                 475 The Final Rule defines ‘‘client trust account’’
                                                                                                       Rules of Prof’l Conduct R. 169.                             claims against the State Bar of Nevada’s client-
                                              to mean a ‘‘separate account created by a licensed          481 See, e.g. Mance, 980 A. 2d at 1204 (attorney         security account exceeded the amount in dues
                                              attorney for the purpose of holding client funds,        should notify client of any withdrawal so that she          collected from attorneys). In addition, state bars
                                              which is: (1) [m]aintained in compliance with all        has an opportunity to review the amount                     often impose strict limitations on what types of
                                              applicable state laws and regulations, including         withdrawn and, if warranted, contest it).                   losses qualify for reimbursement. For example, the
                                              licensing regulations; and (2) [l]ocated in the state       482 Model Rules of Prof’l Conduct R. at 1.15(e)          Illinois client security fund limits reimbursement to
                                              where the attorney’s office is located, or elsewhere                                                                 losses that result from ‘‘intentional dishonesty’’ by
                                                                                                       (‘‘When in the course of representation a lawyer is
                                              in the United States with the consent of the                                                                         the attorney. See Attorney Registration and
                                                                                                       in possession of property in which two or more
                                              consumer on whose behalf the funds are held.’’           persons (one of whom may be the lawyer) claims              Disciplinary Commission of the Supreme Court of
                                              § 322.2(b). This definition is consistent with the       interests, the property shall be kept separate by the       Illinois: Client Protection Program, available at
                                              requirements of the Model Rules of Professional          lawyer until the dispute is resolved. The lawyer   (‘‘client
                                              Conduct. See Model Rules of Prof’l Conduct R. 1.15.      shall promptly distribute all portions of the               protection program’’ hyperlink).
                                                 476 Indeed, some state laws and licensing                                                                            485 As noted in § III.E.5. of this SBP, the advance
                                                                                                       property as to which the interests are not in
                                              regulations mandate that attorneys deposit flat fees,    dispute.’’).                                                fee ban does not take effect until 60 days after
                                              also known as fixed fees, collected in advance of           483 State courts have advised that attorneys             issuance of the Final Rule. However, given that
                                              performing legal services into client trust accounts,    should avoid excessive ‘‘front-loading’’ of fees. See,      some states’ attorney regulations require the use of
                                              unless the client provides informed consent to a         e.g., Mance, 980 A. 2d at 1204–05. Fees are                 client trust accounts, many lawyers who have
                                              contrary fee arrangement. See, e.g., In re Mance, 980    withdrawn from client trust accounts pursuant to a          accepted advance fees from consumers for MARS
                                              A.2d 1196 (DC 2009); DC Bar, Formal Op. 355              mutual agreement between the attorney and client,           should have already placed them in trust accounts
                                              (2010) (providing guidance to attorneys on Mance         which allows for withdrawals once attorneys                 to comply with these regulations.
                                              opinion); Minn. Lawyers Prof’l. Responsibility Bd.,      achieve certain milestones. See, e.g., id. at 1202; see        486 A public interest law firm recommended that
                                              Formal Op. 15 (1991) (advising that attorneys must       also Model Rules of Prof’l Conduct R. 1.15(a).              the Commission also allow state-licensed
                                              deposit advance payments into lawyer trust                  484 See, e.g. State Bar of California: Client Security   accountants to collect fees for preliminary mortgage
                                              accounts); see also Colo. Rules of Prof’l Conduct R.     Funds, available at               default counseling to consumers. LFSV at 4. The
                                              1.15.                                                    Attorneys/LawyerRegulation.aspx (‘‘client security          comment did not elaborate on this
                                                 477 See, e.g., Model Rules of Prof’l Conduct R.
                                                                                                       fund’’ hyperlink) (fund set up to reimburse losses          recommendation. The Commission declines to
                                              1.15 (restrictions on the safekeeping of client          resulting from attorney dishonesty); Florida State          exempt accountants from the advance fee ban.
                                              property that is ‘‘in a lawyer’s possession in           Bar: Clients’ Security Fund, available at http://           Apart from this one comment, nothing submitted on
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                                              connection with a representation’’); see also Cal. (follow ‘‘pubic         the record indicates that accountants regularly
                                              Rules of Prof’l Conduct R. 4–100 (Preserving             information’’ hyperlink, then follow ‘‘clients’             perform MARS. No accountant or organization
                                              Identity of Funds and Property of a Client); Fla.        security fund’’ hyperlink) (fund created to help            representing that profession submitted comments in
                                              Rules of Prof’l Conduct R. 4–1.15 (Safekeeping of        compensate losses of money or property due to               this proceeding. Moreover, accountants typically do
                                              Property); Ill. Rules of Prof’l Conduct R. 1.15          attorney misappropriation or embezzlement);                 not receive payment prior to completing their
                                              (same); Nev. Rules of Prof’l Conduct R. 169 (same).      Attorney Registration and Disciplinary Commission           services, nor do laws or licensing regulations
                                                 478 Model Rules of Prof’l Conduct R. 1.15(a)          of the Supreme Court of Illinois: Client Protection         governing the accounting profession address this
                                              (funds shall be held ‘‘separate from the lawyers’        Program, available at                issue. See, e.g., Va. Code Ann. § 54.1–4400, et seq.

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                                              75134            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              modifications to the proposal, provides                  services purchased, to the extent MARS                provided to them; 493 (2) maintain
                                              that ‘‘[i]t is a violation of this rule for              providers obtain such information in the              records in a form in which searches can
                                              any person to obtain, or attempt to                      ordinary course of business;                          be conducted electronically based on
                                              obtain, a waiver from any consumer of                       (5) Copies of all materially different             the name, address, and zip code of the
                                              any protection provided by or any right                  sales scripts, training materials,                    consumer; 494 (3) keep comprehensive
                                              of the consumer under this rule.’’ 487 No                commercial communications, or other                   records of all consumers contacted, as
                                              comments were received addressing this                   marketing materials, including websites               well as the employees, independent
                                              provision. Several states include similar                and weblogs; and                                      contractors, and subcontractors of the
                                              provisions in their statutes restricting                    (6) Copies of the documentation                    provider; 495 (4) make available to the
                                              MARS.488 The Commission concludes                        provided to the consumer in order to                  FTC all data, records, and other
                                              that this provision is necessary to                      comply with the advance fee ban in                    information collected in processing a
                                              prevent MARS providers from                              § 322.5.                                              consumer’s case; 496 and (5) respond to
                                              attempting to circumvent the Rule, and,                     In addition, §§ 322.9(b)(1)–(4) of the             consumer complaints within 14 days of
                                              therefore, adopts this prohibition.                      proposed rule contained four                          receipt, resolve complaints within 30
                                                                                                       compliance requirements. To monitor                   days, and submit records of complaints
                                              I. Section 322.9: Recordkeeping and
                                                                                                       whether their employees and                           and their resolution to the FTC.497 Two
                                              Compliance Requirements
                                                                                                       contractors are complying with the                    commenters also recommended that the
                                                 Section 322.9 of the proposed rule set                Rule, § 322.9(b)(1) required providers to:            Rule require a longer recordkeeping
                                              forth specific categories of records                        • Conduct random, blind recording                  retention period.498
                                              MARS providers were required to                          and testing of the oral representations                  A number of commenters—in
                                              retain. It also contained four compliance                made by persons in sales or other                     particular, members of the legal
                                              requirements. The Final Rule is very                     customer service functions;                           profession—objected to the
                                              similar to the proposed rule, except that                   • Establish a procedure for receiving              recordkeeping and compliance
                                              MARS providers no longer are required                    and responding to consumer                            requirements.499 Those commenters
                                              to record telephone communications                       complaints; and                                       generally argued that the recordkeeping
                                              with consumers unless they telemarket                       • Ascertain the number and nature of               and compliance requirements in the
                                              their services.489                                       consumer complaints regarding                         proposed rule were ill-suited to
                                              1. Proposed Recordkeeping and                            transactions handled by individual                    attorneys and would interfere with their
                                              Compliance Requirements                                  employees or independent contractors.                 client relationships. These comments
                                                                                                       Proposed §§ 322.9(b)(2) and (3) required              and the Commission’s response to them
                                                 Section 322.9(a) of the proposed rule                                                                       are discussed above in § III.G. of this
                                                                                                       that MARS providers investigate
                                              set forth specific categories of records                                                                       SBP.
                                                                                                       promptly and fully any consumer
                                              MARS providers would be required to
                                                                                                       complaints they receive and take                      3. Final Recordkeeping and Compliance
                                              keep and contained a time period for
                                                                                                       corrective action with respect to any                 Provisions
                                              retention. Specifically, for a period of 24
                                                                                                       employee or contractor whom the
                                              months from the date records are                                                                                 With one exception, the Commission
                                                                                                       provider determines is not complying
                                              produced, the proposed rule required                                                                           adopts in the Final Rule recordkeeping
                                                                                                       with the Rule. Finally, proposed
                                              MARS providers to keep:                                                                                        and compliance requirements that are
                                                 (1) All contracts or other agreements                 § 322.9(b)(4) required MARS providers
                                                                                                       to create and retain documentation of                 very similar to those set forth in the
                                              between the provider and any consumer                                                                          proposed rule. As discussed throughout
                                              for any mortgage assistance relief                       their compliance with proposed
                                                                                                       § 322.9(b)(1)–(3).                                    this SBP, the rulemaking record,
                                              service;                                                                                                       including the Commission’s law
                                                 (2) Copies of all written                             2. Comments Regarding Proposed                        enforcement experience, indicates that
                                              communications between the provider                      Recordkeeping and Compliance                          MARS providers frequently engage in
                                              and any consumer occurring prior to the                  Requirements                                          unfair and deceptive acts and practices.
                                              date on which the consumer enters into                                                                         The recordkeeping and compliance
                                                                                                         State attorneys general and other state
                                              a contract or other agreement with the                                                                         requirements in the Final Rule will
                                                                                                       regulators, legal aid groups, and
                                              provider for any mortgage assistance                                                                           assist the Commission in investigating
                                                                                                       consumer advocates, while not
                                              relief service;                                                                                                and prosecuting law violations,
                                                 (3) Copies of all documents or                        addressing these recordkeeping and
                                                                                                       compliance requirements specifically,                 including identifying injured consumers
                                              telephone recordings created in
                                                                                                       endorsed the proposed rule generally.490              for purposes of paying consumer
                                              connection with § 322.9 (b), which sets
                                                                                                       One commenter expressly stated that it                redress. Both the recordkeeping 500 and
                                              forth compliance requirements;
                                                 (4) All consumer files containing the                 supported the recordkeeping and
                                                                                                                                                               493 OPLC at 3–4 (provide documents in a timely
                                              names, phone numbers, dollar amounts                     compliance provisions.491 Several
                                                                                                                                                             manner upon written request); LFSV at 4 (provide
                                              paid, quantity of items or services                      comments proposed additional or                       documents within 10 days of a consumer’s
                                              purchased, and descriptions of items or                  modified compliance or recordkeeping                  requests).
                                                                                                       requirements,492 including mandating                    494 NYC DCA at 9.

                                                  487 The Commission merely modified this              that MARS providers: (1) Upon request,                  495 Id. at 9–10.

                                              provision to make it clearer and easier to               provide consumers with copies of any                    496 CUUS at 9.
                                                                                                                                                               497 Id.
                                              understand. The proposed provision stated that           contracts or other documents in the
                                              ‘‘[a]ny attempt by any person to obtain a waiver         providers’ files related to the services
                                                                                                                                                               498 See LFSV at 4; CUUS at 9 (recommending a

                                              from any consumer of any protection provided by                                                                retention period of five years, the statute of
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                                              or any right of the consumer under this rule                                                                   limitations for FTC civil penalty actions).
                                              constitutes a violation of the rule.’’ MARS NPRM,           490 See, e.g., NAAG at 2,5; OH AG at 1; MA AG        499 See ABA at 4, 8 ; MO Bar at 1; OR Bar at 1;
                                              75 FR at 10737.                                          at 1; MN AG at 1, 3; NY DCA at 2; CSBS at 1; CUUS     IL BA at 1; IRELA at 2; MI Bar at 1; FL Bar at 1;
                                                  488 See supra note 98.                               at 9; LOLLAF at 1; Lawyer’s Committee at 11; LFSV     ME BA at 1; GA Bar at 1; WI Bar at 1; Shaw at 1;
                                                  489 The Commission also made minor, non-             at 1.                                                 GLS at 1.
                                                                                                          491 CUUS at 9.
                                              substantive changes to the language of § 322.9 in the                                                            500 The recordkeeping requirements in the Final

                                              proposed rule, to make the Final Rule provisions            492 OPLC at 3–4; NYC DCA at 9–10; CUUS at 9;       Rule are similar to those imposed in the TSR, 16
                                              clearer and easier to understand.                        LFSV at 4.                                            CFR part 310; The Franchise Rule, 16 CFR part 436;

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                  75135

                                              compliance 501 requirements are similar                   definition of this term used in the                      suggested recordkeeping and
                                              to those imposed in other FTC                             TSR.504                                                  compliance requirements.509
                                              consumer protection rules. In addition,                      The Commission declines to make the                   J. Section 322.10: Actions by States
                                              MARS providers would likely retain                        other changes in the recordkeeping and
                                              these records in the ordinary course of                   compliance requirements advocated in                        The Omnibus Appropriations Act, as
                                              business even in the absence of the                       the comments. With respect to                            clarified by the Credit CARD Act,
                                              Rule. The Commission adopts these                         suggestions that the Rule require the                    permits states to enforce the Rules
                                              recordkeeping and compliance                              retention of additional records, the FTC                 issued in connection with the MARS
                                              requirements to promote effective and                     concludes that the records specified in                  rulemaking.510 States may enforce the
                                              efficient enforcement of the Rule,                        § 322.9(a) are sufficient for the                        Rules, subject to the notice requirements
                                              thereby deterring and preventing                          Commission to make an initial                            of the Omnibus Appropriations Act, by
                                              deception and unfairness.                                 determination about whether a                            bringing civil actions in federal district
                                                 The Commission has decided to make                     provider’s practices merit further                       court or another court of competent
                                              one substantive modification to the                       investigation. If its practices do, the                  jurisdiction. Section 322.10 tracks the
                                              compliance requirements in the                            Commission has substantial authority                     statute, stating that states have the
                                                                                                        under the FTC Act 505 to compel MARS                     authority to file actions against those
                                              proposed rule. The proposed rule
                                                                                                        providers and others to produce                          who violate the Rule.511
                                              required all MARS providers to conduct
                                              random blind recording of their sales                     additional information and records.                      K. Section 322.11: Severability
                                              and customer service calls. Some MARS                     With regard to comments suggesting                         Section 322.11 states that the
                                              providers who do not telemarket their                     that the recordkeeping retention period                  provisions of the Rule are separate and
                                              services, including many attorneys,                       be extended, the Commission                              severable from one another. This
                                              argued that it would be unduly costly                     concludes,506 based on its law                           provision, which is modeled after a
                                              for them to record such calls.                            enforcement experience, that a two-year                  similar provision in the TSR,512 also
                                                 To foster compliance with the Rule                     retention period is sufficient to                        states that if a court stays or invalidates
                                              without imposing undue burdens, the                       investigate violations of the Rule.                      any provisions in the proposed rule, the
                                              Commission has decided to modify the                      Extending the retention period beyond                    Commission intends the remaining
                                              telephone call recording requirement so                   two years also might impose additional                   provisions to continue in effect. This
                                              that it applies to MARS providers only                    costs on MARS providers.                                 provision was included in the proposed
                                              if they telemarket their services.502                        Finally, comments suggested that the                  rule and no comments were received
                                              Specifically, § 332.9(b)(1)(i) of the Final               Final Rule should include provisions                     addressing it. The Commission has
                                              Rule states:                                              intended to make it easier for consumers                 determined to adopt the proposed
                                                                                                        to obtain information about the conduct                  provision as the Final Rule.
                                                If the mortgage assistance relief service
                                              provider is engaged in the telemarketing of
                                                                                                        of the MARS providers with whom they
                                                                                                        contract. In particular, comments                        L. Effective Dates
                                              mortgage assistance relief services, [it must
                                              perform] random, blind recording and testing              recommended that the Commission                             The Final Rule, with the exception of
                                              of the oral representations made by                       require that MARS providers create and                   the advance fee ban in § 322.5, becomes
                                              individuals engaged in sales or other                     maintain electronically searchable                       effective on December 29, 2010. Given
                                              customer service functions                                records 507 and give consumers copies of                 the widespread deceptive and unfair
                                                                                                        any documents related to the services                    conduct of MARS providers, and the
                                              Further, in order to effectuate this
                                                                                                        they provided or promised to                             urgency of protecting consumers of
                                              provision, the Final Rule defines
                                                                                                        provide.508 Although having such                         these services, the Commission
                                              ‘‘telemarketing’’ as ‘‘a plan, program, or
                                              campaign which is conducted to induce                     information or having access to it may                   concludes that this effective date is
                                              the purchase of any service, by use of                    make the conduct of MARS providers                       appropriate.
                                                                                                        more transparent to their customers, it                     The advance fee ban provision,
                                              one or more telephones and which
                                                                                                        is not clear to what extent these                        § 322.5 of the Final Rule, takes effect on
                                              involves more than one interstate
                                                                                                        requirements prevent unfairness or                       January 31, 2011.513 The Commission is
                                              telephone call.’’ 503 This is similar to the
                                                                                                        deception, or are reasonably related to                  providing MARS providers an
                                                                                                        the prevention of such conduct. In                       additional month after the effective date
                                              and the Funeral Industry Practices Rule, 16 CFR                                                                    of the other provisions of the Rule
                                              part 453.                                                 addition, there is no information in the
                                                501 The compliance requirements in the Final            rulemaking record assessing possible                     because compliance with the advance
                                              Rule are similar to those imposed in the Standards        benefits to consumers that might result
                                              for Safeguarding Customer Information, 16 CFR part                                                                    509 Another comment suggested that the
                                                                                                        from such requirements, nor is there
                                              314; the TSR, 16 CFR part 310; and the Trade                                                                       Commission mandate that MARS providers respond
                                              Regulation Pursuant to the Telephone Disclosure
                                                                                                        anything addressing the costs to MARS                    to consumer complaints within 14 days of receipt
                                              and Dispute Resolution Act of 1992 (900 Number            providers of creating, maintaining, and                  and resolve complaints within 30 days of receipt.
                                              Rule), 16 CFR part 308.                                   providing access to information in their                 LFSV at 4. Prompt resolution of consumer
                                                502 The Commission notes, however, that MARS
                                                                                                        files and databases. The Commission                      complaints certainly is good business practice, but
                                              providers who do not telemarket their services                                                                     in the absence of information as to the costs and
                                                                                                        therefore declines to impose these                       the benefits of such requirements, as well as
                                              remain subject to the other recordkeeping and
                                              compliance requirements in the Final Rule.                                                                         information as to whether they prevent unfairness
                                                                                                           504 Unlike the TSR, the definition of                 or deception or are reasonably related to the
                                                503 Section 322.2(m). This definition was not

                                              included in the proposed rule.                            telemarketing in the MARS Rule does not cover the        prevention of such conduct, the Commission
                                                                                                        purchase of goods or a charitable contribution.          declines to specify such requirements in the Final
                                                The Final Rule also clarifies, in § 322.9(b)(4), that      505 See 15 U.S.C. 46, 49, 57b–1; 19 CFR 2.7.          Rule.
                                              providers must ‘‘maintain any information and
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                                                                                                           506 See LFSV at 4; CUUS at 9 (recommending a             510 Credit CARD Act § 511(b).
                                              material necessary to demonstrate [their]
                                              compliance’’—as opposed, merely, to ‘‘maintain[ing]       retention period of five years because it is similar        511 NAAG stated that the Rule ‘‘would work

                                              documentation’’ of compliance—as the proposal             to the FTC statute of limitation for civil penalties).   harmoniously with existing state laws.’’ NAAG at 5.
                                                                                                           507 NYC DCA at 9.                                        512 See 16 CFR 310.9.
                                              required. This modification makes it clear that the
                                              information providers must maintain to                       508 OPLC at 3–4 (provide documents in a timely           513 The Final Rule does not apply retroactively;

                                              demonstrate compliance is not limited to paper            manner upon written request); LFSV at 4 (provide         thus, the advance fee ban does not apply to
                                              documents, but instead includes other media such          documents within 10 days of a consumer’s                 contracts with consumers executed prior to the
                                              as audio or computer files.                               requests).                                               effective date.

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                                              75136            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              fee ban may entail substantial                           notice from the consumer’s loan holder                 seeking payment from a consumer; (2)
                                              adjustments to many providers’                           or servicer that describes material                    monitoring of sales presentations by
                                              operations.                                              differences between the terms,                         recording and testing of oral
                                                                                                       conditions, and limitations associated                 representations if they engage in the
                                              IV. Paperwork Reduction Act
                                                                                                       with the consumer’s current mortgage                   telemarketing of their services; (3)
                                                 The Commission is submitting this                     and the terms, conditions, and                         establishing a procedure for receiving
                                              Final Rule and a Supplemental                            limitations associated with the                        and responding to consumer
                                              Supporting Statement to the Office of                    consumer’s mortgage if he or she                       complaints; (4) ascertaining, in some
                                              Management and Budget for review                         accepts the loan holder’s or servicer’s                instances, the number and nature of
                                              under the Paperwork Reduction Act                        offer.                                                 consumer complaints; and (5) taking
                                              (PRA), 44 U.S.C. 3501–21. The                               The Final Rule also expands the                     corrective action if sales persons fail to
                                              disclosure and recordkeeping                             proposed disclosure of total cost in                   comply with the Rule, including
                                              requirements of the Rule constitute                      § 322.4(b)(1), such that the provider                  training and disciplining sales persons.
                                              ‘‘collection[s] of information’’ for                     must now disclose: ‘‘You may stop                      To lessen the burden of providers who
                                              purposes of the PRA.514 The associated                   doing business with us at any time. You                do not telemarket their services, the
                                              PRA burden analysis follows.                             may accept or reject the offer of                      Commission streamlined the
                                              A. Disclosure Requirements                               mortgage assistance we obtain from your                compliance requirements by limiting
                                                                                                       lender [or servicer]. If you reject the                the need to record communications to
                                                 As discussed above, the Rule requires                 offer, you do not have to pay us. If you               providers who telemarket their services.
                                              several disclosures that MARS providers                  accept the offer, you will have to pay us
                                              must place in commercial                                 (insert amount or method for calculating               C. Estimated Hours Burden and
                                              communications for MARS and must                         the amount) for our services.’’ The Rule               Associated Labor Costs
                                              state to specific consumers who seek                     also broadens when the required
                                              such services. Generally, commenters                                                                              Commission staff believes that the
                                                                                                       disclosures must be made in
                                              strongly supported the disclosures.515                                                                          above noted disclosure and
                                                                                                       commercial communications, such that
                                                 In each general commercial                                                                                   recordkeeping requirements will impact
                                                                                                       all of the disclosures—with the
                                              communication and consumer-specific                                                                             approximately 500 MARS providers. No
                                                                                                       exception of the disclosures regarding
                                              communication, providers must state                                                                             comments specifically addressed and
                                                                                                       total cost and the obligation to pay
                                              that: (1) ‘‘(Name of company) is not                                                                            refuted this estimate nor staff’s
                                                                                                       fees—must be made in every general
                                              associated with the government, and our                                                                         associated PRA burden assumptions and
                                                                                                       and consumer-specific commercial
                                              service is not approved by the                                                                                  calculations. Apart from more recent
                                              government or your lender;’’ and (2)                                                                            available data to update staff’s labor cost
                                              ‘‘Even if you accept this offer and use                  B. Recordkeeping Requirements                          estimates, the FTC retains its previously
                                              our service, your lender may not agree                      The Rule also imposes several                       published estimates without
                                              to change your loan.’’ In consumer-                      recordkeeping requirements. Several                    modification. The related PRA burden
                                              specific communications, providers also                  commenters argued generally that the                   assumptions and calculations follow.
                                              must disclose the total cost of MARS.                    proposed recordkeeping requirements
                                                 Based on the rulemaking record,516                                                                           (1) Disclosure Requirements
                                                                                                       were burdensome, in particular for
                                              the Final Rule adds two new disclosures                                                                           The Final Rule calls for the disclosure
                                                                                                       attorney providers.518 To address those
                                              to consumers seeking MARS, and it                                                                               of specific items of information to
                                                                                                       concerns, the Final Rule exempts
                                              modifies one existing disclosure                                                                                consumers and adds two additional
                                                                                                       attorney providers from the
                                              substantially. First, if MARS providers                                                                         disclosures for MARS providers.
                                                                                                       recordkeeping provision. Most record
                                              advise consumers, expressly or by                                                                               Largely, the content of the disclosures is
                                                                                                       retention requirements, however,
                                              implication, to stop making mortgage                                                                            prescribed. Thus, the PRA burden on
                                                                                                       pertain to records customarily kept in
                                              payments, they must warn consumers in                                                                           providers is greatly reduced.520 Staff
                                                                                                       the ordinary course of business. This
                                              all communications that: ‘‘If you stop
                                                                                                       includes copies of contracts and                       conservatively estimates, however, that
                                              paying your mortgage, you could lose
                                                                                                       consumer files containing the name and                 the incremental burden to prepare these
                                              your home and damage your credit
                                                                                                       address of the borrower, telephone                     documents will be approximately 2
                                              rating.’’ 517 Second, at the time providers
                                                                                                       correspondence and written                             hours. Staff assumes that management
                                              furnish the consumer with a written                                                                             personnel will implement the disclosure
                                                                                                       communications, and materially
                                              agreement from the lender or servicer                                                                           requirements, at an hourly rate of
                                                                                                       different versions of sales scripts and
                                              memorializing the result the providers                                                                          $46.65.521 Based upon these estimates
                                                                                                       related promotional materials. As such,
                                              have obtained, they must disclose: ‘‘This
                                                                                                       their retention does not constitute a                  and assumptions, total labor cost for 500
                                              is an offer of mortgage assistance we
                                                                                                       ‘‘collection of information,’’ as defined              MARS providers to prepare the required
                                              obtained from your lender [or servicer].
                                                                                                       by OMB’s regulations that implement                    documents is $46,650 (500 providers ×
                                              You may accept or reject the offer. If you
                                                                                                       the PRA.519                                            2 hours each × $46.65 per hour).
                                              reject the offer, you do not have to pay                    In other instances, the Rule requires
                                              us. If you accept the offer, you will have               MARS providers to create as well as                      520 According to OMB, the public disclosure of
                                              to pay us [same amount as disclosed                      retain documents demonstrating their                   information originally supplied by the Federal
                                              pursuant to § 322.4(b)(1)] for our                       compliance with specific Rule                          government to a recipient for the purpose of
                                              services.’’ At the same time, providers                  requirements. These include the
                                                                                                                                                              disclosure to the public is excluded from the
                                              also must provide consumer’s with a                                                                             definition of a ‘‘collection of information.’’ See 5
                                                                                                       requirement that providers document                    CFR 1320.3(c)(2).
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                                                514 See
                                                                                                       the following activities: (1) The                        521 This estimate is based on an averaging of the
                                                        44 U.S.C. 3502(3)(A).                                                                                 mean hourly wages for sales and financial managers
                                                515 See, e.g., NAAG at 4; MA AG at 3; CUUS at
                                                                                                       mortgage relief obtained by the provider
                                                                                                                                                              provided by the Bureau of Labor Statistics. Bur. of
                                              4–5; LOLLAF at 3; CSBS at 2–3; AFSA at 4–5.              from the lender or servicer before                     Labor Statistics, National Compensation Survey:
                                                516 See supra § III.D.2.
                                                                                                                                                              Occupational Earnings in the United States, 2009,
                                                517 Section 322.4 sets forth the format and content       518 See supra § III.H.2 and accompanying text and
                                                                                                                                                              tbl. 3, at 3–1 (2010), available at http://
                                              of the notice, which varies depending upon the           § III.G.                                      (‘‘Occupational
                                              medium used.                                                519 See 5 CFR 1320.3(b)(2).                         Earnings Survey’’).

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                                     75137

                                              (2) Recordkeeping Requirements                           will have a significant economic impact                  burden.’’ 530 In contrast, another
                                                 As noted above, the Rule                              on a substantial number of small                         consumer advocacy group stated that
                                              contemplates that MARS providers will                    entities.526 The RFA requires an agency                  complying with the disclosure and
                                              create and retain records demonstrating                  to provide an Initial Regulatory                         compliance requirements would be
                                              their compliance with several                            Flexibility Analysis (‘‘IRFA’’) 527 with                 ‘‘prohibitively expensive’’ for consumer
                                              obligations set forth in the Rule. Staff                 the proposed rule and a Final                            protection attorneys with small
                                              estimates that each of the estimated 500                 Regulatory Flexibility Analysis                          practices and impossible for sole
                                              providers will spend approximately 25                    (‘‘FRFA’’) 528 with the Final Rule, if any.              practicioners.531 However, commenters
                                              hours to institute procedures to monitor                 The Commission is not required to make                   raised more significant concerns about
                                              sales presentations. Although                            such analyses if a Rule would not have                   the potential costs and burdens of the
                                              Commission staff cannot estimate with                    such an economic effect.529                              advance fee ban, as discussed in
                                              precision the time required to document                     As of the date of the NPRM, the                       Sections III.E.1.b. Several small firms
                                              compliance with the Rule provisions, it                  Commission did not have sufficient                       and sole practitioners owned by
                                              is reasonable to assume that providers                   empirical data regarding the MARS                        attorneys asserted that they would go
                                              will each spend approximately 100                        industry to determine whether the Rule                   out of business if the Commission
                                              hours to do so. This includes preparing                  would impact a substantial number of                     imposed an advance fee ban.532 Many of
                                              records demonstrating steps taken to                     small entities as defined in the RFA. It                 the commenters did not focus
                                              seek payment for services performed,                     was also unclear whether the Rule                        specifically on the costs faced by small
                                              handling consumer complaints, and                        would have a significant economic                        businesses relative to those that would
                                              conducting training. Additionally, staff                 impact on small entities. Thus, to obtain                be borne by other firms. Rather, they
                                              estimates that retention and filing of                   more information about the impact of                     argued that the costs to be borne by all
                                              these records will require approximately                 the proposed rule on small entities, the                 firms—including small firms—would be
                                              3 hours per year per provider.                           Commission decided to publish an IRFA                    excessive.
                                                 Commission staff assumes that                         pursuant to the RFA and to request                          The Commission concludes that the
                                              management personnel will prepare the                    public comment on the impact on small                    Final Rule’s modifications to the
                                              required disclosures at an hourly rate of                businesses of its proposed amended                       recordkeeping and compliance
                                              $46.65.522 Based upon the above                          Rule. In response to questions in the                    requirements and the advance fee ban
                                              estimates and assumptions, the total                     NPRM, the Commission did not receive                     reduce the economic impact of
                                              labor cost to prepare the required                       any comprehensive empirical data                         compliance on all MARS providers,
                                              documents to demonstrate compliance                      regarding the revenues of MARS                           including small businesses. For
                                              is $2,915,625 (500 providers × 125 hours                 providers or the impact on small                         example, attorney providers who meet
                                              each × $46.65 per hour).                                 businesses of the Rule.                                  certain conditions are exempt from the
                                                 Commission staff further assumes that                                                                          recordkeeping and compliance
                                                                                                       A. Need for and Objectives of the Rule                   requirements and only providers who
                                              office support file clerks will handle the
                                              Rule’s record retention requirements at                    The objective of the proposed rule is                  engage in telemarketing must comply
                                              an hourly rate of $13.63.523 Based upon                  to curb deceptive and unfair practices                   with the telephone call taping
                                              the above estimates and assumptions,                     occurring in the MARS industry. As                       requirement. Moreover, the Final Rule
                                              the total labor cost to retain and file                  described in Sections II and III, above,                 permits attorney providers who are
                                              documents is $20,445 (500 providers ×                    the Rule is intended to address                          exempt to receive payments from a
                                              3 hours each × $13.63 per hour).                         consumer protection concerns regarding                   client trust account, provided certain
                                                                                                       MARS and is based on evidence in the                     conditions are met.
                                              D. Estimated Capital/Other Non-Labor                     record that deceptive and unfair acts are                   As noted above, the Rule will prevent
                                              Cost Burden                                                                                                       unfair and deceptive conduct by MARS
                                                                                                       common in the provision of MARS to
                                                The Rule should impose no more than                    consumers.                                               providers through a combination of
                                              minimal non-labor costs. Staff assumes                                                                            conduct prohibitions, disclosures,
                                              that each of the estimated 500 MARS                      B. Significant Issues Raised by Public                   affirmative compliance obligations, and
                                              providers will make required                             Comment, Summary of the Agency’s                         recordkeeping provisions. As discussed
                                              disclosures in writing to approximately                  Assessment of These Issues, and                          in detail in the NPRM, the Rule’s reach
                                              1,000 consumers annually.524 Under                       Changes, If Any, Made in Response to                     is limited. First, the Rule will only cover
                                              these assumptions, non-labor costs will                  Such Comments                                            entities that are within the FTC’s
                                              be limited mostly to printing and                           As discussed in Section III above,                    jurisdiction under the FTC Act. The
                                              distribution costs. At an estimated $1                   commenters raised concerns about the                     FTC Act specifically excludes banks,
                                              per disclosure, total non-labor costs                    burden of the proposed rule. One                         thrifts, and federal credit unions from
                                              would be $1,000 per provider or,                         consumer advocacy group stated that                      the agency’s jurisdiction. Further, the
                                              cumulatively for all providers,                          the Rule would ‘‘not eliminate                           definition of ‘‘mortgage assistance relief
                                              $500,000.                                                competition; it will simply get rid of bad               service provider’’ is limited to third
                                                                                                       actors who take consumers money while                    parties offering for-fee services and does
                                              V. Regulatory Analysis and Regulatory                                                                             not extend to free services provided by
                                              Flexibility Act Requirements                             failing to deliver results. MARS
                                                                                                       providers who are engaged in legitimate                  lenders or mortgage servicers and their
                                                 The Regulatory Flexibility Act of 1980                practices should have no added                           agents. In addition, the Rule would give
                                              (‘‘RFA’’) 525 requires a description and                                                                          attorney providers who meet certain
                                              analysis of proposed and Final Rule that                   526 The RFA definition of ‘‘small entity’’ refers to   conditions with a limited exemption
                                                                                                                                                                from the advance fee ban, as well as
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                                                                                                       the definition provided in the Small Business Act,
                                                522 Id.                                                which defines a ‘‘small-business concern’’ as a
                                                523 This estimate is based on mean hourly wages        business that is ‘‘independently owned and                 530 CUUS    at 9–10.
                                              for office file clerks found at Occupational Earnings    operated and which is not dominant in its field of         531 NCLC    at 4. The commenter does not indicate
                                              Survey, supra note 521, tbl. 3, at 3–23.                 operation.’’ 15 U.S.C. 632(a)(1).                        how many attorney MARS providers are small
                                                524 Associated costs would be reduced if the             527 5 U.S.C. 603.
                                                                                                                                                                business or solo practitioners.
                                              disclosures are made electronically.                       528 5 U.S.C. 604.                                         532 See, e.g., SJMA at 2; Rogers at 1; GLS at 1; LCL
                                                525 5 U.S.C. 601–612.                                    529 5 U.S.C. 605.                                      at 8; Holler at 1.

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                                              75138               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              with an exemption from the conduct                           D. Description of the Projected                         ban, affirmative compliance obligations
                                              prohibitions, disclosures, substantial                       Reporting, Recordkeeping and Other                      and recordkeeping provisions—are
                                              assistance or support prohibition, and                       Compliance Requirements of the                          necessary in order to protect consumers
                                              recordkeeping and compliance                                 Proposed Rule, Including an Estimate of                 considering the purchase of MARS. For
                                              provisions of the Rule.                                      the Classes of Small Entities Which Will                each of these provisions, the
                                                                                                           Be Subject to the Rule and the Type of                  Commission has attempted to tailor the
                                              C. Description and Estimate of the                           Professional Skills That Will Be                        provision to the concerns evidenced by
                                              Number of Small Entities Subject to the                      Necessary to Comply                                     the record to date. For example, to
                                              Final Rule or Explanation Why No                                The Final Rule sets forth specific                   reduce the burden on business,
                                              Estimate Is Available                                        recordkeeping requirements to ensure                    including small entities, the
                                                                                                           efficient and effective law enforcement,                Commission limited the compliance
                                                 The Rule will apply to MARS                                                                                       requirement to record telephone calls to
                                              providers. Based upon its knowledge of                       to identify individual wrongdoers, and
                                                                                                           to identify potential injured consumers.                MARS providers who telemarket. On
                                              the industry, the Commission believes                                                                                balance, the Commission believes that
                                                                                                           In large measure, the recordkeeping
                                              that a variety of individuals and                                                                                    the benefits to consumers of each of the
                                                                                                           provisions require MARS providers to
                                              companies provide or purport to                              retain documents—consumer files and                     Rule’s requirements outweighs the costs
                                              provide such services, including                             documentation of consumer                               to industry of implementation.
                                              telemarketers, mortgage brokers, lead                        transactions—that are kept in the                          The Commission considered, but
                                              generators, payment processors,                              ordinary course of business. Other                      decided against, providing an
                                              contractors that provide back-room                           recordkeeping requirements would                        exemption for small entities in the Rule.
                                              services, and attorneys.                                     ensure covered entities can demonstrate                 The protections afforded to consumers
                                                 Comments in response to the NPRM                          compliance with specific Rule                           are equally important regardless of the
                                              suggest that the number of MARS                              provisions, which are discussed below.                  size of the MARS provider with whom
                                              providers purporting to assist distressed                       The Rule has three other kinds of                    they transact. Indeed, small MARS
                                              homeowners is growing in response to                         compliance requirements: (1) Prohibited                 providers have no unique attributes that
                                              the crisis in the home mortgage                              acts and practices that are deceptive or                would warrant exempting them from
                                                                                                           unfair; (2) disclosures to ensure that                  provisions, such as the required
                                              industry, but do not offer empirical data
                                                                                                           consumers receive the truthful and                      disclosures or conduct prohibitions. The
                                              on the number of such entities.533 The
                                                                                                           accurate information they need to make                  information provided in the disclosures
                                              available data suggest that there are a                      an informed decision whether to
                                              few hundred such providers. For                                                                                      is material to the consumer regardless of
                                                                                                           purchase MARS; and (3) compliance                       the size of the entity offering the
                                              example, FTC staff sent warning letters                      obligations to monitor sales promotions
                                              to 71 MARS providers in the course of                                                                                services. Similarly, the protections
                                                                                                           and consumer complaints. As discussed                   afforded to consumers by the advance
                                              its investigation of the industry. In its                    above, these requirements are necessary                 fee ban are equally necessary regardless
                                              comments to the ANPR, NAAG stated                            to prevent unfair or deceptive acts and                 of the size of the entity providing the
                                              that its members have investigated 450                       practices, to ensure compliance with the                services. Thus, the Commission believes
                                              companies and brought suits against 130                      Rule, and to achieve effective law                      that creating an exemption for small
                                              under state law.534 Accordingly,                             enforcement.                                            businesses from compliance with the
                                              Commission staff has taken a                                    The classes of small entities, if any,               Rule would be contrary to the goals of
                                              conservative approach and estimates                          covered by the rule have been discussed                 the Rule because it would arbitrarily
                                              that there are approximately 500 MARS                        in the preceding section of this
                                                                                                                                                                   limit its reach to the detriment of
                                              providers. Determining a precise                             analysis.536 The professional or other
                                              estimate of how many of these are small                      skills necessary for compliance with the
                                                                                                           Rule are discussed in the Paperwork                        Nonetheless, the Commission has
                                              entities, or describing those entities                                                                               taken care in developing the Rule to set
                                              further, is not readily feasible because                     Reduction Act analysis elsewhere in
                                                                                                           this document.537                                       performance standards, which establish
                                              the staff is not aware of published data                                                                             the objective results that must be
                                              that reports annual revenue figures for                      E. Steps the Agency Has Taken To                        achieved by regulated entities, but do
                                              MARS providers.535 Further, the                              Minimize Any Significant Economic                       not establish a particular technology
                                              Commission’s requests for information                        Impact on Small Entities, Consistent                    that must be employed in achieving
                                              about the number and size of MARS                            With the Stated Objectives of the                       those objectives. For example, the
                                              providers yielded virtually no                               Applicable Statutes                                     Commission does not specify the form
                                              information. Based on the absence of                           As previously noted, the Final Rule is                in which records required by the Rule
                                              available data, the Commission believes                      intended to prevent deceptive and                       must be kept. Moreover, the Rule’s
                                              that a precise estimate of the number of                     unfair acts and practices in the MARS                   disclosure requirements are format-
                                              small entities that fall under the Rule is                   industry. In drafting the Rule, the                     neutral; they would not preclude the
                                              not currently feasible.                                      Commission has made every effort to                     use of electronic methods that might
                                                                                                           avoid unduly burdensome requirements                    reduce compliance burdens. In sum, the
                                                                                                           for entities. The Commission believes                   agency has worked to minimize any
                                                                                                           that the Rule—including the conduct                     significant economic impact on small
                                                                                                           prohibitions, disclosures, advance fee                  entities.
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                                                   533 See,   e.g., MN AG at 1; CRL at 2–3; CUUS at        American Industry Classification System (‘‘NAICS’’)     North American Industry Classification System
                                              2.                                                           as follows: All Other Professional, Scientific and      codes (Aug. 22, 2008), available at http://
                                                   534 NAAG (ANPR) at 4.                                   Technical Services (NAICS code 541990) with no
                                                   535 Coveredentities under the proposed rule are         more than $7.0 million dollars in average annual        sba_homepage/serv_sstd_tablepdf.pdf.
                                                                                                                                                                     536 See supra § V.C.
                                              classified as small businesses under the Small               receipts (no employee size limit is listed). See SBA,
                                              Business Size Standards component of the North               Table of Small Business Size Standards Matched to         537 See supra § IV.

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

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                                              75140               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                                                                                LIST OF COMMENTERS AND SHORT-NAMES/ACRONYMS—Continued
                                                                  Short-name/Acronym                                                                                     Commenter

                                              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                                                • FTC v. LucasLawCenter ‘‘Inc.’’, No.            VI. Final Rule
                                              Actions                                                                      SACV09–770 DOC (ANX) (C.D. Cal.
                                                                                                                                                                               List of Subjects in 16 CFR Part 322
                                                                                                                           filed July 7, 2009)
                                                 • FTC v. Residential Relief Found.,                                                                                             Consumer protection, Trade practices,
                                              Inc., No. 1:10-cv-3214–JFM (D. Md. filed                                        • FTC v. US Foreclosure Relief Corp.,
                                                                                                                           No. SACV09–768 JVS (MGX) (C.D. Cal.                 Telemarketing.
                                              Nov. 15, 2010)
                                                                                                                           filed July 7, 2009)                                 ■ For the reasons set forth in the
                                                 • FTC v. U.S. Homeowners Relief,                                                                                              preamble, the Federal Trade
                                              Inc., No. SA–CV–10–1452 JST (PJWx)                                              • FTC v. Freedom Foreclosure
                                                                                                                           Prevention Specialists, LLC, No. 2:09-cv-           Commission amends title 16, Code of
                                              (C. D. Cal. filed Sept. 27, 2010)                                                                                                Federal Regulations, by adding a new
                                                 • FTC v. Nat’l Hometeam Solutions,                                        01167–FJM (D. Ariz. filed June 1, 2009)
                                                                                                                                                                               part 322, to read as follows:
                                              LLC, No. 4:08-cv-067 (E.D. Tex. filed                                           • FTC v. Data Med. Capital, Inc., No.
                                              Aug. 30, 2010) (contempt action)                                             SACV–99–1266 AHS (Eex) (C.D. Cal.,                  PART 322—MORTGAGE ASSISTANCE
                                                 • FTC v. Dominant Leads, LLC, No.                                         App. Contempt filed May 27, 2009)                   RELIEF SERVICES
                                              1:10-cv-00997–PLF (D. D.C filed June                                            • FTC v. Dinamica Financiera LLC,
                                              15, 2010)                                                                    No. 09–CV–03554 CAS PJWx (C.D. Cal.                 Sec.
                                                                                                                                                                               322.1 Scope of regulations in this part.
                                                 • FTC v. First Universal Lending,                                         filed May 19, 2009)                                 322.2 Definitions.
                                              LLC, No. 09–CV–82322 (S.D. Fla. filed                                           • FTC v. Fed. Loan Modification Law              322.3 Prohibited representations.
                                              Nov. 18, 2009)                                                               Ctr., LLP, No. SACV09–401 CJC (MLGx)                322.4 Disclosures required in commercial
                                                 • FTC v. Truman Foreclosure                                               (C.D. Cal. filed Apr. 3, 2009)                           communications.
                                              Assistance, LLC, No. 09–23543 (S.D. Fla.                                        • FTC v. Ryan, No. 1:09–00535 (HHK)              322.5 Prohibition on collection of advance
                                              filed Nov. 23, 2009)                                                                                                                  payments and related disclosures.
                                                                                                                           (D.D.C., Amend. Compl. filed Mar. 25,               322.6 Assisting and facilitating.
                                                 • FTC v. Debt Advocacy Ctr, LLC, No.                                      2009)                                               322.7 Exemptions.
                                              1:09CV2712 (N.D. Ohio filed Nov. 19,                                            • FTC v. Home Assure, LLC, No.                   322.8 Waiver not permitted.
                                              2009)                                                                        8:09–CV–00547–T–23T–Sm (M.D. Fla.                   322.9 Recordkeeping and compliance
                                                 • FTC v. Kirkland Young, LLC, No.                                         filed Mar. 24, 2009)                                     requirements.
                                              09–23507 (S.D. Fla. filed Nov. 18, 2009)                                                                                         322.10 Actions by states.
                                                                                                                              • FTC v. New Hope Prop. LLC, No.                 322.11 Severability.
                                                 • FTC v. 1st Guar. Mortgage Corp.,                                        1:09-cv-01203–JBS–JS (D.N.J. filed Mar.
                                              No. 09–CV–61840 (S.D. Fla. filed Nov.                                        17, 2009)                                             Authority: Public Law 111–8, section 626,
                                              17, 2009)                                                                                                                        123 Stat. 524, as amended by Public Law
                                                                                                                              • FTC v. Hope Now Modifications,                 111–24, section 511, 123 Stat. 1734.
                                                 • FTC v. Washington Data Res., Inc.,                                      LLC, No. 1:09-cv-01204–JBS–JS (D.N.J.
                                              No. 8:09-cv-02309–SDM–TBM (M.D.                                              filed Mar. 17, 2009)
                                              Fla. filed Nov. 12, 2009)                                                                                                        § 322.1    Scope of regulations in this part.
                                                                                                                              • FTC v. Nat’l Foreclosure Relief, Inc.,           This part implements the 2009
                                                 • FTC v. Fed. Housing Modification
                                                                                                                           No. SACV09–117 DOC (MLGx) (C.D.                     Omnibus Appropriations Act, Public
                                              Dep’t, Inc, No. 09–CV–01753 (D.D.C.
                                                                                                                           Cal. filed Feb. 2, 2009)                            Law 111–8, section 626, 123 Stat. 524
                                              filed Sept. 16, 2009)
                                                 • FTC v. Infinity Group Servs., No.                                          • FTC v. United Home Savers, LLP,                (Mar. 11, 2009), as clarified by the
                                              SACV09–00977 DOC (MLGx) (C.D. Cal.                                           No. 8:08-cv-01735–VMC–TBM (M.D.                     Credit Card Accountability
                                              filed Aug. 26, 2009)                                                         Fla. filed Sept. 3, 2008)                           Responsibility and Disclosure Act of
                                                 • FTC v. United Credit Adjusters,                                            • FTC v. Foreclosure Solutions, LLC,             2009, Public Law 111–24, section 511,
                                              Inc., No. 3:09-cv-00798 (JAP) (D.N.J.,                                       No. 1:08-cv-01075 (N.D. Ohio filed Apr.             123 Stat. 1734 (May 22, 2009).
                                              Amend. Compl. filed Aug. 4, 2009)                                            28, 2008)
                                                                                                                                                                               § 322.2    Definitions.
                                                 • FTC v. Apply2Save, Inc., No. 2:09-                                         • FTC v. Mortgage Foreclosure
                                                                                                                                                                                  For the purposes of this part:
                                              cv-00345–EJL–CWD (D. Idaho filed July                                        Solutions, Inc., No. 8:08-cv-388–T–                    (a) ‘‘Clear and prominent’’ means:
                                              14, 2009)                                                                    23EAJ (M.D. Fla. filed Feb. 26, 2008)                  (1) In textual communications, the
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                                                 • FTC v. Loss Mitigation Servs., Inc.,                                       • FTC v. Nat’l Hometeam Solutions,               required disclosures shall be easily
                                              No. SACV09–800 DOC (ANX) (C.D. Cal.                                          LLC., No. 4:08-cv-067 (E.D. Tex. filed              readable; in a high degree of contrast
                                              filed July 13, 2009)                                                         Feb. 26, 2008)                                      from the immediate background on
                                                 • FTC v. Cantkier, No. 1:09-cv-00894                                         • FTC v. Safe Harbour Found. of                  which it appears; in the same languages
                                              (D.D.C., Amend. Compl. filed June 18,                                        Florida, Inc., No. 08–C–1185 (N.D. Ill.             that are substantially used in the
                                              2009)                                                                        filed Feb. 27, 2008).                               commercial communication; in a format

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                         75141

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

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                                              75142            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                              limited or general partnership,                             (vi) Any other individual, entity, or              § 322.4 Disclosures required in
                                              corporation, or other business entity,                   program;                                              commercial communications.
                                              except to the extent that any person is                     (4) The consumer’s obligation to make                 It is a violation of this rule for any
                                              specifically excluded from the Federal                   scheduled periodic payments or any                    mortgage assistance relief service
                                              Trade Commission’s jurisdiction                          other payments pursuant to the terms of               provider to engage in the following
                                              pursuant to 15 U.S.C. 44 and 45(a)(2).                   the consumer’s dwelling loan;                         conduct:
                                                 (l) ‘‘Servicer’’ means the individual or                                                                       (a) Disclosures in All General
                                              entity responsible for:                                     (5) The terms or conditions of the                 Commercial Communications—Failing
                                                 (1) Receiving any scheduled periodic                  consumer’s dwelling loan, including but               to place the following statements in
                                              payments from a consumer pursuant to                     not limited to the amount of debt owed;               every general commercial
                                              the terms of the dwelling loan that is the                  (6) The terms or conditions of any                 communication for any mortgage
                                              subject of the offer to provide mortgage                 refund, cancellation, exchange, or                    assistance relief service:
                                              assistance relief services, including                    repurchase policy for a mortgage                         (1) ‘‘(Name of company) is not
                                              amounts for escrow accounts under                        assistance relief service, including but              associated with the government, and our
                                              section 10 of the Real Estate Settlement                 not limited to the likelihood of                      service is not approved by the
                                              Procedures Act (12 U.S.C. 2609); and                     obtaining a full or partial refund, or the            government or your lender.’’
                                                 (2) Making the payments of principal                  circumstances in which a full or partial                 (2) In cases where the mortgage
                                              and interest and such other payments                     refund will be granted, for a mortgage                assistance relief service provider has
                                              with respect to the amounts received                     assistance relief service;                            represented, expressly or by
                                              from the consumer as may be required                        (7) That the mortgage assistance relief            implication, that consumers will receive
                                              pursuant to the terms of the mortgage                    service provider has completed the                    any service or result set forth in
                                              servicing loan documents or servicing                    represented services or has a right to                § 322.2(i)(2) through (6), ‘‘Even if you
                                              contract.                                                claim, demand, charge, collect, or                    accept this offer and use our service,
                                                 (m) ‘‘Telemarketing’’ means a plan,                   receive payment or other consideration;               your lender may not agree to change
                                              program, or campaign which is                                                                                  your loan.’’
                                              conducted to induce the purchase of                         (8) That the consumer will receive
                                                                                                                                                                (3) The disclosures required by this
                                              any service, by use of one or more                       legal representation;
                                                                                                                                                             paragraph must be made in a clear and
                                              telephones and which involves more                          (9) The availability, performance,                 prominent manner, and—
                                              than one interstate telephone call.                      cost, or characteristics of any alternative              (i) In textual communications the
                                                                                                       to for-profit mortgage assistance relief              disclosures must appear together and be
                                              § 322.3   Prohibited representations.
                                                                                                       services through which the consumer                   preceded by the heading ‘‘IMPORTANT
                                                It is a violation of this rule for any                 can obtain mortgage assistance relief,                NOTICE,’’ which must be in bold face
                                              mortgage assistance relief service                       including negotiating directly with the               font that is two point-type larger than
                                              provider to engage in the following                      dwelling loan holder or servicer, or                  the font size of the required disclosures;
                                              conduct:                                                 using any nonprofit housing counselor
                                                (a) Representing, expressly or by                                                                            and
                                                                                                       agency or program;                                       (ii) In communications disseminated
                                              implication, in connection with the
                                              advertising, marketing, promotion,                          (10) The amount of money or the                    orally or through audible means, wholly
                                              offering for sale, sale, or performance of               percentage of the debt amount that a                  or in part, the audio component of the
                                              any mortgage assistance relief service,                  consumer may save by using the                        required disclosures must be preceded
                                              that a consumer cannot or should not                     mortgage assistance relief service;                   by the statement ‘‘Before using this
                                              contact or communicate with his or her                      (11) The total cost to purchase the                service, consider the following
                                              lender or servicer.                                      mortgage assistance relief service; or                information.’’
                                                (b) Misrepresenting, expressly or by                                                                            (b) Disclosures in All Consumer-
                                                                                                          (12) The terms, conditions, or                     Specific Commercial Communications—
                                              implication, any material aspect of any                  limitations of any offer of mortgage
                                              mortgage assistance relief service,                                                                            Failing to disclose the following
                                                                                                       assistance relief the provider obtains                information in every consumer-specific
                                              including but not limited to:                            from the consumer’s dwelling loan
                                                (1) The likelihood of negotiating,                                                                           commercial communication for any
                                                                                                       holder or servicer, including the time                mortgage assistance relief service:
                                              obtaining, or arranging any represented                  period in which the consumer must
                                              service or result, such as those set forth                                                                        (1) ‘‘You may stop doing business
                                                                                                       decide to accept the offer;                           with us at any time. You may accept or
                                              in § 322.2(i);
                                                (2) The amount of time it will take the                   (c) Making a representation, expressly             reject the offer of mortgage assistance
                                              mortgage assistance relief service                       or by implication, about the benefits,                we obtain from your lender [or servicer].
                                              provider to accomplish any represented                   performance, or efficacy of any mortgage              If you reject the offer, you do not have
                                              service or result, such as those set forth               assistance relief service unless, at the              to pay us. If you accept the offer, you
                                              in § 322.2(i);                                           time such representation is made, the                 will have to pay us (insert amount or
                                                (3) That a mortgage assistance relief                  provider possesses and relies upon                    method for calculating the amount) for
                                              service is affiliated with, endorsed or                  competent and reliable evidence that                  our services.’’ For the purposes of this
                                              approved by, or otherwise associated                     substantiates that the representation is              paragraph, the amount ‘‘you will have to
                                              with:                                                    true. For the purposes of this paragraph,             pay’’ shall consist of the total amount
                                                (i) The United States government,                      ‘‘competent and reliable evidence’’                   the consumer must pay to purchase,
                                                (ii) Any governmental homeowner                        means tests, analyses, research, studies,             receive, and use all of the mortgage
                                              assistance plan,                                         or other evidence based on the expertise              assistance relief services that are the
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                                                (iii) Any Federal, State, or local                     of professionals in the relevant area, that           subject of the sales offer, including, but
                                              government agency, unit, or department,                  have been conducted and evaluated in                  not limited to, all fees and charges.
                                                (iv) Any nonprofit housing counselor                   an objective manner by individuals                       (2) ‘‘(Name of company) is not
                                              agency or program,                                       qualified to do so, using procedures                  associated with the government, and our
                                                (v) The maker, holder, or servicer of                  generally accepted in the profession to               service is not approved by the
                                              the consumer’s dwelling loan, or                         yield accurate and reliable results.                  government or your lender.’’

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                                                               Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations                                              75143

                                                 (3) In cases where the mortgage                       of mortgage assistance we obtained from                 (2) The likely amount of the
                                              assistance relief service provider has                   your lender [or servicer]. You may                    scheduled periodic payments and any
                                              represented, expressly or by                             accept or reject the offer. If you reject             arrears, payments, or fees that the
                                              implication, that consumers will receive                 the offer, you do not have to pay us. If              consumer would owe in failing to
                                              any service or result set forth in                       you accept the offer, you will have to                qualify.
                                              § 322.2(i)(2) through (6), ‘‘Even if you                 pay us [same amount as disclosed
                                              accept this offer and use our service,                   pursuant to § 322.4(b)(1)] for our                    § 322.6    Assisting and facilitating.
                                              your lender may not agree to change                      services.’’ The disclosure required by                  It is a violation of this rule for a
                                              your loan.’’                                             this paragraph must be made in a clear                person to provide substantial assistance
                                                 (4) The disclosures required by this                  and prominent manner, on a separate                   or support to any mortgage assistance
                                              paragraph must be made in a clear and                    written page, and preceded by the                     relief service provider when that person
                                              prominent manner, and—                                   heading: ‘‘IMPORTANT NOTICE: Before                   knows or consciously avoids knowing
                                                 (i) In textual communications the                     buying this service, consider the                     that the provider is engaged in any act
                                              disclosures must appear together and be                  following information.’’ The heading                  or practice that violates this rule.
                                              preceded by the heading ‘‘IMPORTANT                      must be in bold face font that is two                 § 322.7    Exemptions.
                                              NOTICE,’’ which must be in bold face                     point-type larger than the font size of
                                              font that is two point-type larger than                                                                           (a) An attorney is exempt from this
                                                                                                       the required disclosure; or
                                              the font size of the required disclosures;                                                                     part, with the exception of § 322.5, if the
                                                                                                          (c)(1) Fail to provide, at the time the            attorney:
                                              and                                                      mortgage assistance relief service
                                                 (ii) In communications disseminated                                                                            (1) Provides mortgage assistance relief
                                                                                                       provider furnishes the consumer with                  services as part of the practice of law;
                                              orally or through audible means, wholly                  the written agreement specified in                       (2) Is licensed to practice law in the
                                              or in part, the audio component of the                   paragraph (a) of this section, a notice               state in which the consumer for whom
                                              required disclosures must be preceded                    from the consumer’s dwelling loan                     the attorney is providing mortgage
                                              by the statement ‘‘Before using this                     holder or servicer that describes all                 assistance relief services resides or in
                                              service, consider the following                          material differences between the terms,               which the consumer’s dwelling is
                                              information’’ and, in telephone                          conditions, and limitations associated                located; and
                                              communications, must be made at the                      with the consumer’s current mortgage                     (3) Complies with state laws and
                                              beginning of the call.                                   loan and the terms, conditions, and                   regulations that cover the same type of
                                                 (c) Disclosures in All General                        limitations associated with the                       conduct the rule requires.
                                              Commercial Communications,                               consumer’s mortgage loan if he or she                    (b) An attorney who is exempt
                                              Consumer-Specific Commercial                             accepts the dwelling loan holder’s or                 pursuant to paragraph (a) of this section
                                              Communications, and Other                                servicer’s offer, including but not                   is also exempt from § 322.5 if the
                                              Communications—In cases where the                        limited to differences in the loan’s:                 attorney:
                                              mortgage assistance relief service                          (i) Principal balance;                                (1) Deposits any funds received from
                                              provider has represented, expressly or                      (ii) Contract interest rate, including             the consumer prior to performing legal
                                              by implication, in connection with the                   the maximum rate and any adjustable                   services in a client trust account; and
                                              advertising, marketing, promotion,                       rates, if applicable;                                    (2) Complies with all state laws and
                                              offering for sale, sale, or performance of                  (iii) Amount and number of the                     regulations, including licensing
                                              any mortgage assistance relief service,                  consumer’s scheduled periodic                         regulations, applicable to client trust
                                              that the consumer should temporarily or                  payments on the loan;                                 accounts.
                                              permanently discontinue payments, in                        (iv) Monthly amounts owed for
                                              whole or in part, on a dwelling loan,                    principal, interest, taxes, and any
                                                                                                                                                             § 322.8    Waiver not permitted.
                                              failing to disclose, clearly and                         mortgage insurance on the loan;                         It is a violation of this rule for any
                                              prominently, and in close proximity to                      (v) Amount of any delinquent                       person to obtain, or attempt to obtain, a
                                              any such representation that ‘‘If you stop               payments owing or outstanding;                        waiver from any consumer of any
                                              paying your mortgage, you could lose                        (vi) Assessed fees or penalties; and               protection provided by or any right of
                                              your home and damage your credit                            (vii) Term                                         the consumer under this rule.
                                                                                                          (2) The notice must be made in a clear             § 322.9 Recordkeeping and compliance
                                              § 322.5 Prohibition on collection of                     and prominent manner, on a separate                   requirements.
                                              advance payments and related disclosures.                written page, and preceded by heading:                   (a) Any mortgage assistance relief
                                                It is a violation of this rule for any                 ‘‘IMPORTANT INFORMATION FROM                          provider must keep, for a period of
                                              mortgage assistance relief service                       YOUR [name of lender or servicer]                     twenty-four (24) months from the date
                                              provider to:                                             ABOUT THIS OFFER.’’ The heading                       the record is created, the following
                                                (a) Request or receive payment of any                  must be in bold face font that is two-                records:
                                              fee or other consideration until the                     point-type larger than the font size of                  (1) All contracts or other agreements
                                              consumer has executed a written                          the required disclosure.                              between the provider and any consumer
                                              agreement between the consumer and                          (d) Fail to disclose in the notice                 for any mortgage assistance relief
                                              the consumer’s dwelling loan holder or                   specified in paragraph (c) of this                    service;
                                              servicer incorporating the offer of                      section, in cases where the offer of                     (2) Copies of all written
                                              mortgage assistance relief the provider                  mortgage assistance relief the provider               communications between the provider
                                              obtained from the consumer’s dwelling                    obtained from the consumer’s dwelling                 and any consumer occurring prior to the
                                              loan holder or servicer;                                 loan holder or servicer is a trial                    date on which the consumer entered
jlentini on DSKJ8SOYB1PROD with RULES6

                                                (b) Fail to disclose, at the time the                  mortgage loan modification, the terms,                into an agreement with the provider for
                                              mortgage assistance relief service                       conditions, and limitations of this offer,            any mortgage assistance relief service;
                                              provider furnishes the consumer with                     including but not limited to:                            (3) Copies of all documents or
                                              the written agreement specified in                          (1) The fact that the consumer may                 telephone recordings created in
                                              paragraph (a) of this section, the                       not qualify for a permanent mortgage                  connection with compliance with
                                              following information: ‘‘This is an offer                loan modification; and                                paragraph (b) of this section;

                                         VerDate Mar<15>2010    20:59 Nov 30, 2010   Jkt 223001   PO 00000   Frm 00053   Fmt 4701   Sfmt 4700   E:\FR\FM\01DER6.SGM    01DER6
                                              75144            Federal Register / Vol. 75, No. 230 / Wednesday, December 1, 2010 / Rules and Regulations

                                                 (4) All consumer files containing the                 mortgage assistance relief service                    Statement of Commissioner J. Thomas
                                              names, phone numbers, dollar amounts                     provider determines is not complying                  Rosch
                                              paid, and descriptions of mortgage                       with this rule, which may include
                                                                                                                                                             Mortgage Assistance Relief Services
                                              assistance relief services purchased, to                 training, disciplining, or terminating
                                                                                                                                                             Rule, File No. R911003
                                              the extent the mortgage assistance relief                such individual; and
                                              service provider keeps such information                     (4) Maintain any information and                      I support the Commission’s adoption
                                              in the ordinary course of business;                      material necessary to demonstrate its                 today of the final Mortgage Relief
                                                 (5) Copies of all materially different                compliance with paragraphs (b)(1)                     Services Rule (‘‘MARS Rule’’) and its
                                              sales scripts, training materials,                       through (3) of this section.                          accompanying Statement of Basis and
                                              commercial communications, or other                         (c) A mortgage assistance relief                   Purpose. I write this separate statement
                                              marketing materials, including websites                  provider may keep the records required                to explain my decision to vote in favor
                                              and weblogs, for any mortgage                            by § 322.10(a) through this section in                of the MARS Rule in light of my
                                              assistance relief service; and                           any form, and in the same manner,                     dissenting vote against the issuance of