On Friday, May 29, 2009, the Federal Trade Commission (“FTC” or “Commission”) announced two sweeping rulemaking proceedings involving (1) loan modification services and foreclosure rescue; and (2) mortgage acts and practices.
The FTC is seeking public comment to determine whether certain practices by companies providing these services are unfair or deceptive and should be reined in by proposed rules that would set standards to protect consumers.
As detailed below, both of these rulemakings include questions and issues that are ripe for comment by the housing counseling community. In addition, the comment process will afford housing counseling agencies the opportunity to raise their public profile, highlight the benefits they provide to homeowners in financial distress, and show support for the Commission’s consumer education and outreach efforts, including support of nonprofit housing counseling.
Of particular interest to housing counseling agencies is the Commission’s seeking comment on a series of questions related to the possible rules’ scope, such as exemptions it should recognize (e.g., HUD-approved housing counseling agencies); and substantive issues, such as whether foreclosure counseling should be provided to homeowners before foreclosure.
In addition, both rulemakings generally ask for comment on whether the FTC should promulgate a rule to address foreclosure rescue services and mortgage acts and practices with respect to the scope of the practices. After examining the submitted comments, the Commission will determine whether to incorporate them into a possible proposed rule, and how such an incorporation would occur if they decide in favor of the rule. Below is a brief overview of the two rulemakings, including excerpts of key questions and issues raised that are relevant to housing counseling agencies, along with some additional details. A copy of each Advance Notice of Proposed Rulemaking (“ANPR”) is available online on the FTC’s website, www.ftc.gov.
- The Mortgage Assistance Relief Services rulemaking addresses the proliferation of loan modification and foreclosure rescue services in the current economy. Housing counseling and the HOPE Now Alliance are mentioned prominently within the text of the ANPR. In addition, some servicer and lender practices are cited as examples of unfair and deceptive conduct. Predictably, the FTC is interested in receiving comment on the costs and benefits of prohibiting or restricting the payment of advance fees for loan modification and foreclosure rescue services, disclosures, and empirical data.
- Deadline: The Mortgage Assistance Relief Services ANPR has a 45-day public comment period ending Wednesday, July 15, 2009.
- “Key Housing Counseling-Related” Questions and Issues Identified by the FTC:
“C. Are there any unfair or deceptive acts and practices by providers or advertisers of loan modification and foreclosure rescue services that neither the FTC nor the states have addressed that a proposed FTC rule should address? If so, how should these acts and practices be addressed and why?”
“4. Scope of Covered Entities
A. As described in the text, an FTC proposed rule would not cover banks, thrifts, federal credit unions, and non-profits. To what extent do these types of entities provide or advertise loan modification and foreclosure rescue services? To what extent do these entities compete with entities that an FTC proposed rule would cover and what effect would an FTC proposed rule have on such competition?
B. As described in the text, many states have exempted attorneys from laws (e.g., foreclosure consultant laws) which regulate the conduct of providers and advertisers of loan modification and foreclosure rescue services. What are the costs and benefits of exempting attorneys from these laws? What has been the effect of such exemptions on competition between attorneys and non-attorneys in providing or advertising loan modification and foreclosure rescue services?
Should an FTC proposed rule include an exemption for attorneys or any other class of persons or entities? Why or why not?”
- Mortgage Acts and Practices rulemaking, which addresses activities that occur throughout the life cycle of a mortgage loan: advertising and marketing; origination, including underwriting, loan terms, and disclosures; appraisals; and servicing. The FTC is leaving no stone unturned when evaluating possible rules it might make to regulate conduct of financial service providers. Past alleged abuses by servicers and others are highlighted in the background section. The FTC is particularly interested in receiving comments about mortgage servicing practices. Notably, the ANPR puts the issue of a mandate for pre-foreclosure housing counseling on the table.
- Deadline: The Mortgage Acts and Practices ANPR has a 60-day public comment period ending Thursday, July 30, 2009.
- “Key Housing Counseling-Related” Questions and Issues Identified by the FTC:
“20. Should the FTC consider prohibiting or restricting as unfair or deceptive certain acts and practices related to how mortgage servicers handle loan performance and loss mitigation issues, such as: ***
a. taking foreclosure action without first verifying loan information and investigating any disputes;
b. taking foreclosure action without first giving the consumer an opportunity to attend foreclosure counseling or mediation;
c. requiring consumers to release all claims (or other requirements, such as requiring binding arbitration agreements) in connection with loan modifications or other workout agreements/repayment plans; or
d. making loan modifications or other workout agreements/repayment plans without regard to the consumer’s ability to repay?
Identify any such act or practice, and for each, please answer the following questions:
i. Why is it unfair or deceptive under Section 5 of the FTC Act?
ii. Should it be prohibited or restricted? If so, how? For all loans or only certain types of loans? What are the costs and benefits of such prohibitions or restrictions?
iii. What would be the effect on competition and consumers if the Commission were to prohibit or restrict non-bank financial companies with respect to the act or practice, but banks, thrifts, and federal credit unions were not similarly prohibited or restricted?”
- FTC Rulemaking Authority – These FTC rulemaking proceedings are required by Section 626 of the Omnibus Appropriations Act of 2009, which was authored by Senator Byron Dorgan. Although the law specifies neither the types of conduct nor the types of entities any proposed rules should address, the Commission has used its organic statute, the Federal Trade Commission Act (“FTC Act”), in establishing the parameters for this rulemaking. In particular, the types of conduct that the FTC proposes to cover include acts and practices that meet the FTC’s standards for unfairness or deception under Section 5 of the FTC Act.
- FTC Authority/Jurisdiction over Mortgage Loans and Non-Bank Financial Companies and Services – The FTC has said that it intends for any proposed rules to apply only to entities within the FTC’s jurisdiction under the FTC Act, which excludes banks, thrifts, and federal credit unions. (The Federal Reserve Board and other federal banking agencies enforce rules related to mortgage loans under Regulation Z, which implements the Truth-in-Lending Act and the Home Ownership and Equity Protection Act.) However, the FTC has said that non-bank affiliates of banks, such as parent companies or subsidiaries, are subject to the FTC’s jurisdiction. Likewise, the FTC has jurisdiction over entities that have contracted with banks to perform certain services on behalf of banks, such as credit card marketing and other services.
- “Key Housing Counseling-Related” Opportunity – Exemption for Nonprofits – Of particular note is the fact that the Commission, under the FTC Act, does not have jurisdiction over nonprofit organizations. The FTC does, however, have jurisdiction over for-profit entities that provide mortgage-related services as a result of a contractual relationship with a nonprofit organization, brokers, lenders and others that advertise or offer mortgages, including entities that market loans on behalf of lenders, mortgage servicing agents, and debt collectors, those that market credit repair or debt relief services, including entities that offer foreclosure assistance. In addition, the FTC has, on occasion, asserted its jurisdiction over certain “sham charities” that operate as for-profit entities in practice, which has been a central issue in several cases brought by the Commission against select credit counseling agencies.
- CARD Act of 2009 – In addition, the Commission has said that the scope of any proposed rules will conform to the clarifications on the Commission’s rulemaking authority under the Credit Card Accountability Responsibility and Disclosure Act of 2009, which President Obama signed into law on May 22, 2009.
- Violation of a Final Mortgage Assistance and Mortgage Loan Rule – The Commission may seek civil penalties ($16,000 per violation) as a remedy for a violation of a final rule enacted under these rulemakings. In addition, the law would allow a state to bring a civil action, in either state or federal court, to enforce the FTC rules and obtain civil penalties and other relief for violations. Before initiating an enforcement action, the law requires that a state must notify the FTC, at least 60 days in advance, during which time the Commission may intervene in the action.
The Commission strongly supported being granted this rulemaking authority and, presumably, will use it. FTC Commissioner Jon Leibowitz recently said, “We deeply appreciate Senator Byron Dorgan’s and Chairman Jay Rockefeller’s efforts to give us the authority to use standard, efficient rulemaking procedures to begin this process.” The issues that the rulemakings address are front and center. We expect a wide variety of financial services and consumer groups to comment. In any event, rules are anticipated to be proposed by the Commission, but there will unquestionably be an opportunity to influence the rules.