A new rule was put into place today by the Federal Trade Commission to protect troubled homeowners from mortgage-rescue scams. Almost since the housing bust became news, fraudulent debt settlement firms have been accused of preying on desperate homeowners, promising to get them loan modifications that could save their homes.

For-profit debt relief companies charging up-front fees have been the ones most frequently accused of illegality. Many have been accused of taking fees paid by homeowners and disappearing without providing any service at all.

The FTC announced today that companies will no longer be allowed to charge up-front fees for negotiation with creditors for mortgage loan modifications or other foreclosure prevention services.

“At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from homeowners without ever delivering results,” said FTC Chairman Jon Leibowitz.

“This rule will protect consumers from being victimized by these scams.”

Worst Companies Banned From Operation; FTC Will Require Results Before Payment

The FTC has brought more than 30 cases against fraudulent mortgage rescue companies, many of which had names that falsely implied they were sponsored by the U.S. government. As a result of lawsuits by the FTC and other parties, at least 19 companies have been banned from offering loan modification and foreclosure rescue services by the courts.

In particular, the FTC cited two companies that federal courts have banned from offering mortgage relief services: Homeowners Relief Inc. of Irvine, California, and Residential Relief Foundation Inc., of Baltimore, Maryland.

Because for-profit debt settlement firms have been so frequently accused of fraud, government officials and consumer advocates urge troubled homeowners to seek help from nonprofit housing counselors who don’t charge fees at all.

Under the new FTC rule, any company charging fees to assist with loan modification or other foreclosure prevention efforts will be required to get results before they get paid. The companies will now provide the consumer with an acceptable offer of help directly from their lender, in writing, before they receive any payment.

Source: Developments (Wall Street Journal blog), “FTC Bans Upfront ‘Foreclosure Rescue’ Fees,” Alan Zibel, November 19, 2010