With the downturn of the real estate market in 2008, a rising tide of foreclosures created an entry opportunity for what are called foreclosure consultants or mitigation experts. Often, these consultants and experts team up with investors or equity purchasers. The stated purpose of individuals and organizations involved in foreclosure consulting or mitigation is to help distressed homeowners avoid foreclosure. It is the threat of foreclosure that drives short sale listings and brings real estate licensees into contact with foreclosure consultants, mitigation experts and the like. Click here for Frequently Asked Questions on foreclosure consultants and short sale negotiators.

Although there are honest and reputable people involved in foreclosure consulting and loss mitigation, these activities can involve very sharp business practices and even fraud. The federal Department of Housing and Urban Development (HUD) publishes a list of “HUD-approved Organizations” that provide foreclosure prevention related counseling. The list is available at: www.dfcs.oregon.gov/ml/foreclosure/counselors.html. The Oregon Department of Finance and Corporate Securities (DFCS) publishes extensive information about foreclosure scams. The information is available at: www.dfcs.oregon.gov/ml/foreclosure/foreclosure_fraud.html. General information about preventing and dealing with foreclosure is available from the Oregon State Bar on their Legal links Cable Television Show. The relevant episodes are available here.

Desperate homeowners facing foreclosure will often clutch at straws and are therefore easy prey for sharp operators. It is for that reason that the Federal Trade Commission (FTC) publishes a consumer information pamphlet called “Foreclosure Rescue Scams: Another Potential Stress for Homeowners in Distress.” The publication is available online from the FTC at: www.ftc.gov/bcp/edu/pubs/consumer/credit/cre42.shtm. The pamphlet warns consumers about foreclosure scams, explains how common scams work and offers a list of “red flags.” The FTC also publishes a list of lawsuits against, and settlements with, foreclosure “rescuers” here.

The FTC and multiple state attorney generals have been actively prosecuting foreclosure rescue companies that are conducting these types of scams on distressed homeowners. Some states, including Oregon, have enacted laws that specifically regulate these types of businesses. The FTC began its own rulemaking process in 2009 and has now issued a final rule impacting many real estate licensees in what is being called the MARS Rule (Mortgage Assistance Relief Services Rule) which became effective January 31, 2011.

The MARS rule covers short sale negotiations. The rule defines Mortgage Assistance Relief Services as a service, plan or program offered or provided to the consumer in exchange for consideration that provides services in relation to a consumer mortgage, including a possible loan modification which includes negotiating a short sale of a dwelling on behalf of a consumer. Additionally, the FTC defines Mortgage Relief Service Provider as someone who provides or offers to provide, or arrange to provide, any mortgage assistance relief service.

As you can see, these FTC definitions mean that, absent an exception, the MARS rule can have an impact on a real estate licensee who handles almost any type of short sale transaction.

While the rule is primarily aimed at companies that offer loan modification services to consumers, the rule falls squarely on real estate licensees as well and requires a disclosure be given by parties, including real estate licensees, who are involved in negotiating short sales. The FTC has defined negotiate to include contacting a lender about the possibility of short sale transaction involving a consumer loan. Therefore, it is recommended that the disclosure be given anytime you are dealing with a short sale where you represent the seller until and unless an exemption is granted to real estate licensees by the FTC. For a sample disclosure and more information on MARS please click here. However, due to response from real estate licensees, the FTC issued a statement that it would not enforce most provisions of its MARS Rule against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales from their lenders or servicers. Read more about the FTC forbearance here.

Like the federal government, Oregon has moved to protect homeowners from foreclosure scams. In 2007, the Oregon legislature responded to growing concern about foreclosure scams when it passed the Oregon Mortgage Rescue Fraud Protection Act: House Bill 3630 (HB 3630). A copy of the entire bill is available from the Oregon Legislature at: www.leg.state.or.us/08ssorlaws/0019.html. The new law is codified at ORS 646A.700 through 646A.765. Click here for a copy of the statutes. The Act has a number of features real estate licensees should be familiar with.

The Oregon Mortgage Rescue Fraud Protection Act applies to a person who acts as a “foreclosure consultant.” The term is broadly defined to include anyone who, for compensation, offers to help a homeowner stop foreclosure or in some way renegotiate or otherwise modify a loan or rights under a trust deed or mortgage. Real estate licensees are exempt from the Act “if acting within the scope of that license.” To act within the scope of a real estate license means to act under a listing agreement or as the representative of a buyer.

The Fraud Protection Act creates contractual notice, rescission and cancellation rights for homeowners who contract with foreclosure consultants. Foreclosure consulting can be done only under a written contract. The written contract must be presented to the homeowner at least twenty-four hours before it is signed by the homeowner. It must be in the language spoken by the homeowner and used in discussion between the homeowner and the consultant. The terms of the service and payment must be plainly expressed. The contract must contain a statutory notice that begins with the following warning: “THIS IS AN IMPORTANT LEGAL CONTRACT AND CAN RESULT IN THE LOSS OF YOUR HOME. YOU SHOULD CONTACT A LAWYER OR OTHER PROFESSIONAL ADVISER BEFORE SIGNING.” If the consultant does not meet the requirements of the Act, they are in violation of the Unlawful Trade Practices Act.

Under the Act, foreclosure consulting contracts can be cancelled at anytime by the homeowner. The consultant must provide the homeowner with a statutory cancellation form. A copy of a form that meets the statutory requirements is available here. If the homeowner exercises their right to unilaterally cancel the contract, they must pay for any services actually delivered prior to cancellation and any money expended by the consultant on their behalf. Any consideration received by the consultant from a third party must be fully disclosed to the homeowner in writing. If the consultant is involved in facilitating or arranging for an equity conveyance (typically, to an “investor” or “equity purchaser”), the consultant cannot be paid by the equity purchaser.
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