St. Louis, Mo., Nov. 29, 2010 – New rules from the Federal Trade Commission that ban collection of advance fees by companies that promise to rescue struggling homeowners from foreclosure may be too late to help St. Louis area homeowners victimized by a Maryland firm that federal authorities have shut down.
The Better Business Bureau (BBB) said court action against Residential Relief Foundation of Halethorpe, Md., serves as yet another warning to homeowners looking for outside help in reducing payments and avoiding foreclosure.
“Many families have been persuaded that debt settlement or mortgage modification is an easy fix that will make their debt melt away effortlessly,” said Michelle L. Corey, BBB president and CEO. “The truth is that there is no magic formula for debt relief. In many cases, dealing with these firms is a recipe for personal financial disaster.”
The Federal Trade Commission said that Residential Relief Foundation representatives violated federal law by falsely claiming they could modify loans and significantly lower mortgage payments. The FTC also said the company improperly disposed of consumers’ information by placing them in unsecured dumpsters. In addition, the company wrongly implied it was affiliated with the federal government.
A federal court ordered Residential Relief shut down, appointed a receiver and froze the defendants’ assets, pending trial.
The BBB has processed more than 60 complaints about the company this year, including several from Missouri and 27 other states.
Among the victims is an unemployed laborer from Dittmer, Mo., in Jefferson County. He said he and his wife paid Residential Relief Foundation $2,190 after the company promised to lower their mortgage interest rate to nearly zero and cut their house payment to $588 a month from $986. The company only contacted the man’s bank after he filed a complaint with the BBB.
Such promises would be illegal under the new FTC rule, which also prohibits companies from collecting fees until homeowners have a written offer from their lender or servicer that they find acceptable.
The BBB has received more than 3,500 complaints about misleading debt settlement offers in the last three years. Many consumers said the firms left them deeper in debt instead of providing help in paying off creditors.
In addition to the advance fee loan ban, the new FTC rules require companies to disclose key information to protect consumers from being misled. Companies must disclose that:
- They are not associated with the government, and their services have not been approved by the government or the homeowner’s lender.
- The lender may not agree to change the consumer’s loan.
- Borrowers could lose their home and their credit rating may be damaged if they stop making payments.
Companies cannot make false claims about the likelihood that consumers will get the results they seek or about their affiliation with a government or private firm.
The FTC also bars companies from telling consumers to stop communicating with their lenders or mortgage servicers. Companies also must be able to back up any claims they make about the benefits, performance or effectiveness of their services.
Attorneys are exempted from the rules if they are engaged in the practice of law, if they are licensed in the state where the consumer or the house is located and if they are complying with state laws and regulations. Attorneys may only collect advance fees if the money is placed in a client trust account and if they abide by state laws and rules covering those accounts.
The advance fee loan ban takes effect Jan. 31. All the other provisions of the FTC rules take effect Dec. 29.
The BBB advises consumers who are having trouble paying their mortgages to first talk to their lender. Some lenders may be willing to work out a payment plan or consider a loan modification if the borrower isn’t too far behind or still has equity in the house. Some nonprofit community groups and government agencies also may be able to provide help renegotiating a loan.
The BBB advises consumers to ask questions, consider fees and all other financial obligations before entering into a new or modified mortgage. Things to watch out for include:
- Excessive Mortgage Broker Compensation. Some mortgage brokers attempt to sell the borrower on a loan with the most fees and highest interest rate possible to increase the broker’s compensation. Some charge fees of 8 to 10 points. That means that on a $100,000 loan, the borrower is paying and financing an additional $8,000 to $10,000.
- Excessive Points and Fees. Most borrowers can expect to pay a 1% origination fee and possibly another 1% of the loan amount in points, as well as basic closing costs, which would include appraisal and attorney's fees. Some predatory lenders load up loans with these up-front charges and charge additional "junk fees" to pad the closing costs.
- Emphasis on Monthly Payment. Many brokers advertise "bill consolidation" home equity loans, which consolidate all debts into one loan. The problem with this is that the consumer is trading short-term debt for long-term debt. Instead of paying off credit card bills in three to four years, the new consolidation loan will take 15 to 30 years to pay off.
- Balloon Payments. Another way for a predatory lender to reduce the monthly payment is to have the borrower pay only the accrued interest each month. Such financing will result in a huge balloon payment at the end of the repayment term, usually after 15 years. If the borrower is elderly, it will be very difficult to refinance the loan, and foreclosure may become inevitable.
- Equity Stripping. Unscrupulous lenders target consumers with a significant amount of equity in their home, offering to lend more than the borrower can afford. The borrower defaults and the lender then forecloses and sells the house, stripping the homeowner of the equity he has earned over the years.
- Flipping. This occurs when predatory lenders encourage consumers to repeatedly refinance their loan. Each time the loan is refinanced the lender charges more fees, placing the borrower further in debt over a longer period of time.
Before doing business, check with the BBB for a Reliability Report on a business or charity by going to www.bbb.org or by calling 609-588-0808.