The federal government created a boom market for loan-modification services when it launched the “Making Home Affordable” program in February 2009, at the depth of the nation’s financial crisis.
Unfortunately for struggling homeowners, many entrepreneurs who promised to guide them through the review process were scam artists who routinely collected hefty fees upfront, only to disappear or do little to help. Federal officials believed that banning all advance fees for arranging loan modifications would protect consumers from rip-offs. The Federal Trade Commission, which protects consumer interests, proposed the ban in June 2009.
But the proposal raised the ire of the American Bar Association, which represents the economic interests of lawyers, who typically collect at least some of their fees upfront.
The ABA and some state law groups argued in a March 2010 letter to the FTC that a ban on advance fees would discourage lawyers from helping people navigate the loan-modification system and impose “excessive new regulations on lawyers engaged in the practice of law.”
The American Bar Association also argued in the letter that the rule would undermine state courts, which “subject attorneys to stringent duties of competency, diligence, confidentiality, undivided loyalty, and the obligation to charge reasonable fees.”
In late 2010, when the FTC issued the final rule, called Mortgage Assistance Relief Services, or MARS, the agency exempted lawyers from the advance-fee ban under certain conditions. For instance, lawyers must be licensed in the state where the client’s property is located and must deposit advance fees in a trust account. They could lose the privilege for misleading clients and other infractions.
How and when the conditions apply — and who qualifies for them — has yet to be decided in the courts.
Leah Frazier, an attorney in the FTC’s Division of Financial Practices, said it’s not clear what role the MARS rule played in spreading loan-modification schemes.
“We acknowledge that attorneys are heavily involved,” Frazier said. “This is an issue that FTC is trying to tackle. It’s something we all have had our eyes on and are making efforts to address.”
The Consumer Financial Protection Board, which oversees lenders and financial companies, would not comment on the rule or its impact.
Yet the damage caused by attorneys fronting advance-fee loan modification plans, often in concert with aggressive marketing schemes, has been apparent for years.
Since 2010, a coalition of consumer and law enforcement groups that tracks foreclosure fraud has tied more than $60 million in consumer losses — many incurred by minorities and low-income people — to alleged misconduct by lawyers or their associates.
In a 2013 report, the Government Accountability Office cited the MARS rule for contributing to a surge in complaints about foreclosure “rescue” attorneys.
Cracking down on errant lawyers presents “unique challenges” to law enforcement, the GAO said, noting that attorneys can claim “attorney-client privilege” to duck subpoenas or slow down investigations.
In addition, courts and state bar groups, which work to discipline attorneys, conduct their investigations in secret and often take several years to share their results with law enforcement or the public.
The Consumer Financial Protection Bureau’s civil suit that accused the Mortgage Law Group lawyers of running a telemarketing scam is testing the limits of federal government authority over the practice of law.
For starters, the law group claimed attorney-client privilege in refusing to turn over consumer complaints sought by the government. In response, government lawyers took affidavits from 10 former clients to back up their claims that consumers were routinely misled and have tried to get the complaints before the judge.
Mark Pultz, of Waupun, Wisconsin, was one. He became a client after losing his job and failing to stay current on his mortgage payments.
He said he was told “there is no reason in the world” why he couldn’t get a loan modification and that “by hiring lawyers I would have an advantage,” he stated in a May 2015 affidavit.
Pultz said he paid $1,195 upfront and $795 a month over seven months, but received nothing in return and “never once communicated with a lawyer.”
Others said the sales team also left them with the impression they would be approved for a loan modification. The firm’s business records show that just 26 percent of clients received relief. The firm employed as many as 60 salespeople in Chicago with at most five attorneys on site, according to evidence in the suit.
If customers wondered why they should pay for a Mortgage Law Group attorney when nonprofit groups in their communities were offering to do the job for free, they were told the nonprofits often took too long, according to sales scripts. The company’s website added: “By not paying you may not have any leverage when something goes wrong or the process drags on for a dangerously long time.”
The telemarketer deposed by the government said he would tell customers it was okay to “strategically fall behind” in paying a mortgage. Asked in his deposition what that meant, he replied: “to stop paying your mortgage and then pay us instead.”
In court filings, The Mortgage Law Group denies that clients were misled. It says its employees were “client intake specialists,” not sales agents, who stuck to lawyer-approved scripts. The firm noted that clients signed retainer agreements which said it “could not guarantee a particular result.”
In January, a federal judge partly invalidated the MARS rule, but deferred a decision on whether the Mortgage Law Group qualified for the attorney exemption.