The FTC MARS Ruling (16 CFR Part 322) as issued December 1, 2010 has far reaching implications. As I did not see a prior discussion over this ruling (if I missed it, I apologize), I thought I should post it. This is from an exert from another Law Firm (I just read the entire ruling and this is an accurate restatement of the ruling)
KEY ISSUE: If you are a Short Sale Negotiator, you cannot take any fees until the lender and the property owner has reached an agreement plus additional disclosure and recordation issues. If you are an attorney, the up front fees MUST be placed in your trust account according to your state laws.
RESPONSE: I would like to hear from the community what everyone thinks about this ruling. The NO UPFRONT FEE component begins Feb. 1, 2011 with penalties up to $11,000 per day.
On November 19, 2010, the Federal Trade Commission announced a new ruleaimed at protecting financially distressed homeowners who use so-calledmortgage assistance relief services which is known as “MARS”. The new rule is15 pages long and is supported by more than 160 pages of explanation andhistory. This discussion is not intended to be an exhaustive review of the new rule.Rather, this article focuses only on the basic elements of the new MARS rule tohomeowners who are considering a short sale and to Short Sale Negotiators andreal estate brokers who attempt to negotiate short sales or refer their sellerclients to third party negotiators.
First, some key terms under the new rule.
• A “provider” includes any person who provides,offers to, or arranges for others to negotiate, obtain or arrange a short saleof a dwelling.
• A “dwelling” means a residential structure containing fouror fewer units, whether or not that structure is attached to real property,that is primarily for personal, family, or household purposes and includesindividual condominium units, cooperative units, mobile homes, manufacturedhomes and trailers.
Now, to be clear, the new MARS rule does not apply to real estatebrokers who provide only real estate brokerage services to their clients(e.g. listing, showing, negotiating the transaction with the buyer) and who do notattempt to negotiate or otherwise provide services related to obtaining lenderapproval of a short sale. In addition, attorneys who satisfy certain conditionsare exempt from the new MARS rule.
The MARS rule has three main elements.
FIRST ELEMENT – DISCLOSURE Short Sale Negotiators must nowprovide significant disclosures in any and all commercial communications issuedto homeowners. For purposes of the rule, “commercial communications” means anywritten or oral statement, illustration, or depiction, that is designed toeffect a sale or create interest in purchasing any short sale service, plan, orprogram. Promotional materials and items and Web pages are included in the term“commercial communication.”
With respect to general commercial communications that occur prior to theconsumer agreeing to use a Short Sale Negotiator (and that is not directed at aspecific consumer), Short Sale Negotiators must include the following:
(1) “(Name of company) is not associated with the government, andour service is not approved by the government or your lender.”
(2) “Even if you accept this offer and use our service, your lender maynot agree to change your loan.”
And there’s more. When making any commercial communications directed at aspecific consumer, the disclosures must also include the following:
“You may stop doing business with us at any time. You may accept orreject the offer of mortgage assistance we obtain from your lender [orservicer]. If you reject the offer, you do not have to pay us. If you acceptthe offer, you will have to pay us (insert amount or method for calculating theamount) for our services.”
For the purposes of this disclosure, the amount the consumer has to payconsists of the total amount the consumer must pay to purchase, receive and useall of the mortgage assistance relief services that are the subject of thesales offer, including, but not limited to; all fees and charges. Many ShortSale Negotiators attempt to get paid by the listing broker. Even if that is thecase, a disclosure of that fee must be made.
SECOND ELEMENT – FEES Under the MARS rule, a Short SaleNegotiator:
(a) may NOT request or receive payment of any upfrontfees or other consideration until the consumer has executed a written agreementwith their lender or servicer incorporating the offer of mortgage assistancerelief the Short Sale Negotiator obtained;
(b) MUST disclose, at the time the Short SaleNegotiator furnishes the consumer with the proposed written agreement withtheir lender or servicer (e.g. the short sale approval letter), the followinginformation:
“This is an offer of mortgage assistance we obtained from your lender[or servicer]. You may accept or reject the offer. If you reject the offer, youdo not have to pay us. If you accept the offer, you will have to pay us [sameamount as previously disclosed] for our services.” “and,
(c) MUST provide, at the time the Short SaleNegotiator furnishes the consumer with the written agreement specified inparagraph (a) above, a notice from the consumer’s lender or servicer thatdescribes all material differences between the terms, conditions, andlimitations associated with the consumer’s current mortgage loan and the terms,conditions, and limitations associated with the consumer’s mortgage loan if heor she accepts the dwelling loan holder’s or servicer’s offer.
THIRD ELEMENT – PERFORMANCE REPRESENTATIONS The MARS rulemakes it unlawful for any Short Sale Negotiator to engage in certain conductincluding:
(a) Representing in connection with the advertising, marketing, promotion,offering for sale, sale, or performance of the short sale negotiation service,that a consumer cannot or should NOT contact or communicatewith his or her lender or servicer;
(b)Misrepresenting any material aspect of the short sale service, including suchthings as:
- the likelihood of negotiating, obtaining, or arranging any represented service or result;
- the amount of time it will take the Short Sale Negotiator to accomplish the short sale negotiation;
- the consumer’s obligation to make scheduled periodic payments or any other payments pursuant to the terms of the consumer’s dwelling loan;
- the terms or conditions of the consumer’s dwelling loan, including but not limited to the amount of debt owed;
- that the mortgage assistance relief service provider has completed the represented services or has a right to claim, demand, charge, collect, or receive payment or other consideration;
- that the consumer will receive legal representation;
- the availability, performance, cost, or characteristics of any alternative to for-profit mortgage assistance relief services through which the consumer can obtain mortgage assistance relief, including negotiating directly with the dwelling loan holder or servicer, or using any nonprofit housing counselor agency or program;
- the amount of money or the percentage of the debt amount that a consumer may save by using the mortgage assistance relief service;
- the total cost to purchase the mortgage assistance relief service; or
- the terms, conditions, or limitations of any offer of mortgage assistance relief the provider obtains from the consumer’s dwelling loan holder or servicer, including the time period in which the consumer must decide to accept the offer.
(c) Making a representation about the benefits, performance, or efficacy ofany short sale negotiations service unless, at the time such representation ismade, the provider possesses and relies upon competent and reliable evidencethat substantiates that the representation is true.
For homeowners who are considering a short sale, thebenefits of the new MARS rule are clear.
- The new disclosures will arm consumers with more information about the relationship with the Short Sale Negotiator before they commit to the short sale process.
- The Short Sale Negotiator can accept no fees before the consumer agrees to the short sale terms offered by their lender.
- There are now clearly defined limits to the representations that can be made by a Short Sale Negotiator.
For Short Sale Negotiators, the new rule places significantregulatory constraints on their business. Any legitimate person or companyengaged in the providing of short sale negotiation services will quickly calltheir legal counsel for advice on how to comply with the new rule. With theadded costs of compliance, it is uncertain how many smaller Short SaleNegotiation firms will be able to stay in business.
For real estate brokers, the new rule should now make onething patently clear. Stay out of short sale negotiation unless you are readyto fully comply with the MARS rule. Remember, while typical real estatebrokerage services are not classified as a provider under the new MARS rule,you cannot use the real estate brokerage services as a shield to compliancewith the new rule if you are legitimately engaged as a Short Sale Negotiator.In addition, it is a violation of the rule for any person to providesubstantial assistance or support to any Short Sale Negotiator when that personknows or consciously avoids knowing that the provider is engaged in any act orpractice that violates this rule. So, any real estate broker who refers his orher client to a Short Sale Negotiator should be certain that the Short SaleNegotiator is fully compliant with the new MARS rule.
The Consequences for Violators can be significant andsevere; fines up to $11,000 per day for those who fail to comply with the newMARS rule.
Allparts of the new rule went into effect on December 29, 2010with the exception of the prohibition on advance fees that go into effecton January 31, 2011.
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Replies
Todd J Sullivan J.D. said:
Hi,
Not certain if the fee is permissible. I would think that it would be okay as the Rule is designed to protect the consumer from paying any upfront fees. Although my other attorneys are in full agreement that the Rule impacts any Realtor negotiating or referring short sales to third party negotiators (which simply means that everyone impacted must comply with the disclaimer, recordation, etc requirements of the Rule) and also includes any Title Company that has short sale processing services, we are still waiting for 'Official Response" from NAR and our local Chapters. The only Association that I have found to date that has issued any opinion is the Yakima Association of REALTORS which is very concerning as it would seem that any Realtor negotiating/referring and who is not in compliance is now subject to the "up to" $11,000 per day penalties:
Phone: 509-457-8191
For Sellers and Real Estate & Mortgage Professionals
Question: Is it true that a new federal rule is taking effect at the end of this month (December 2010) regulating short sale negotiators?
Answer: Yes. The acronym for the new federal program is MARS, perhaps because it is a regulation like this world has never seen. MARS stands for Mortgage Assistance Relief Services and is intended to prevent MARS providers from collecting fees upfront, for services that are never performed and/or results that are never achieved. In actuality, the new rule seems to do a good job of creating a balanced playing field for negotiators and consumers.
The MARS rule regulates many aspects of mortgage relief assistance, but this answer will focus only on the regulation of short sale negotiation providers.
It is critical for REALTORS to be aware that a real estate broker may violate MARS not only by providing non-compliant negotiation services but also by REFERRING a non-compliant negotiator to a consumer. REALTOR firms should take steps to insure their brokers have access to a list of short sale negotiation providers who are compliant with state and federal laws. Significant penalties, both legal and regulatory, may be imposed on any real estate broker who refers a short sale negotiator who is not compliant with both state and federal short sale negotiator requirements. Firms may want to consult their own legal counsel for assistance in drafting and executing indemnification agreements with short sale negotiators who substantiate themselves as compliant with all aspects of the law and who evidence the financial wherewithal to indemnify the REALTOR firm in the event of non-compliance. REALTORS who provide short sale negotiation services should hire legal counsel to assist broker in ensuring broker's compliance with state and federal authority.
Here is what the rule does:
· The rule prohibits the collection of any advance fees, fees paid prior to the consumer signing an agreement with lender regarding the terms of the short sale agreement.
· The rule requires negotiators to provide certain disclosures including, among others, that the consumer may stop using the negotiator's services at any time, that no payment is required if the consumer does not agree to the short sale negotiated, the amount of compensation due if the short sale agreement is entered, that there is no guarantee of outcomes, and if the negotiator advises, in any manner, that the consumer stop making mortgage payments, that the consumer could lose their home as a result.
· The rule forbids a negotiator from advising a consumer not to contact the consumers lender and from making misrepresentations including, among others, the likelihood of success, the time required to complete negotiations, the existing or negotiated terms owing from consumer and the fact that the consumer will receive legal representation.
· The rule establishes recordkeeping requirements for a short sale negotiator.
· The rule prohibits waiver of any provisions of the rule by any consumer and creates a rule violation for any person who attempts to obtain such a waiver.
· The rule exempts attorneys who provide mortgage assistance relief as part of the practice of law and who are licensed to practice law in the state where the property or the consumer is located. Further, the rule requires any attorney who collects an advance fee for MARS to deposit that fee in a trust account regulated by the attorney's licensing authority (in Washington, the Washington State Bar Association).
Here is what the rule does not do:
· The rule does not establish any cap on the amount that may be charged for the provision of MARS.
The rule does not dictate who may or may not pay for MARS.
The rule does not create any licensing requirement for MARS providers.
· As defined by the rule, a short sale negotiator is any person or service who offers, in exchange for compensation, to assist a consumer in negotiating, obtaining or arranging a short sale of a dwelling. A dwelling is 1-4 residential units, owner or non-owner occupied, real or personal property.
The federal rule takes effect December 29, 2010, except the ban on advance fees does not take effect until January 31, 2011.
Click here for a Short Sale Guide for Licensees
Click here for a Short Sale Advisory for Sellers
Richard Kirk said:
I think the new law is great for the consumer. For those of us handling/negotiating short sales the right way, it's really no major change. I do have a quick question for anyone out there regarding the upfront fee. We don't charge the Seller any upfront fee. However, we do charge a nominal upfront fee directly to the Listing Agent. I am assuming that this fee is still permissable??? Thanks
The interesting items to the new ruling as implemented February 1, 2011, is that no "Servicer" may accept upfront fees until the property owner (borrower) has reached a written agreement with the lender/servicer. In the Phoenix/Scottsdale, AZ area, I know of many negotiators and agents that take upfront fees or they allege that they cannot negotiate due to the nature of the business. I read in the history to the act that the FTC estimated approximately 500 business will be effected. I believe that number is very low as this applies to all Realtors if they are doing any short sale negotiations. There's a number of agents that take an upfront fee to do the negotiations on smaller properties. In speaking with several, they are going to change their contracts to reflect a listing fee and not negotiating fee. I advised them to be very careful in doing so.
NOTE: Regardless of what you hear, Realtors are required to comply with the new FTC MARS ruling even if they DO NOT accept compensation outside of their commission. I have a series of lectures starting this week and sponsored by a local Title Company to our Realtor community to help them be in compliance with the new rules and regulations. With fines up to $11,000 per day for violations, it's in everyone's best interest to be in compliance.
Rule Making Comments, Section 126:
As a general matter, the Final Rule is not intended to apply to the marketing of services
to assist consumers in selling their properties to third parties. The Final Rule, however,
does specifically cover the marketing of services involving the sale of properties
to third parties if those services are designed or intended to assist consumers in
averting foreclosure, e.g., through short sale or deed-in-lieu of foreclosure.
One commentator urged the Commission to exempt licensed real estate professionals from
the Final Rule. NAR at 1-2.
The commentator argued the Rule would restrict real estate agents in helping consumers
with the process of selling their homes through short sales. The Commission concludes that
an exemption for real estate agents is not necessary......
In addition to the Realtors that this is going to effect, we have title companies that provide certain services to Realtors that are doing short sale negotiations. Under the definition of Servicer/Provider, these Title Companies are implicated. The definition is so broad that even a referral to a negotiator makes that individual/entity a "Provider":
Sect: 322.2 Definitions:
(j)"Mortgage Assistance Relief Service Provider" or "Provider" means amy person that provides,
offers to provide or arranges for others to provide, any mortgages assistance relief service.....
The bottom line is that this MARS Ruling is extremely broad in it's width and depth and implicates anything/anybody doing any type of work with short sales even if merely referring a client to another party that negotiates. Negotiators, Realtors, Title, Forensic Auditors, Attorneys, etc will have to comply with the ruling even third party contractors assisting lenders that are paid a fee on the HUD must comply. I have a special package ready for Service Link (third party to IndyMac/OneWest) who reduced the commission on a deal from 6% to 5% and included a 1% fee on the HUD 1 payable to Service Link.
As if this wasn't hard enough, more regulation.
I LOVE this new law..yeah!!!!! I am tired of so many of these Negotiation companies that do NOT do their follow up, keep in contact, and if the going gets tough, they cannot wait to drop the file.
That being said, I also know there are some competent third party companies out there. I prefer handling my own Listings from list date to close date. I want to KNOW what is being said, what is being asked for, who I am dealing with..personal info that I have to get on my own and deal with.
I've had 2 deals concerning IRS liens. One that I handled at listing with my Seller, (who took care of it and lien was removed BEFORE we got to closing), and one that I had the Buyer side and oops, the negotiation company hadn't found it on the Title until we received our Demand Letter! Then, when I asked them what they intended, I was told "we do not handle IRS issues." What??? OK..I worked with Escrow, we got a new Demand Letter and submitted it to the IRS for a lien release, and are awaiting the IRS response. Unbelievable. When the going gets tough, I don't throw in the towel..I dig in and keep trying.
If this Short Sale stuff were so easy..EVERYONE would be doing it! Hang in there Short Sale Superstars..