The Federal Trade Commission is cracking down on fraudulent loan modification companies who promise to help struggling homeowners stay out of foreclosure. As a part of that effort, the FTC has charged a national debt settlement company with illegal practices and is demanding that they pay restitution to their victims.

The Palm Beach County-based company, variously known as U.S. Mortgage Funding Inc., Debt Remedy Partners Inc., and LowerMyDebts.com LLC, along with individuals David Mahler, Jamen Lachs and John Incandela Jr. (also known as Jonathan Incandela Jr.), is accused of violating the FTC Act and the FTC’s Telemarketing Sales Rule.

The company allegedly falsely claimed that it could drastically reduce mortgage payments for desperate homeowners. It represented itself as affiliated with large mortgage lenders, which was apparently not true. In exchange for an up-front fee, the company promised it could help homeowners — even those who had already been denied a loan modification or had received a foreclosure notice — and said it had nearly a 100 percent success rate.

The up-front fee was typically around $1,300 — half of the total fee. The company also promised customers that their fees would be refunded in full if the company failed to reduce their monthly mortgage payments through negotiation with their creditors.

While claiming to be working on negotiations, the company advised the homeowners not to contact their mortgage lenders and to stop making their mortgage payments.

According to the FTC’s complaint against the company, the firm targeted distressed homeowners using direct mail, Internet advertising, and telemarketing — and that it violated the FTC’s Telemarketing Sales Rule by calling numbers that were listed on the National Do Not Call Registry. Finally, the FTC alleges the company never even paid the fee to access numbers on the Registry.

The FTC complaint was not brought under the new rule prohibiting up-front fees

Earlier this year, the FTC issued a new rule, called the Mortgage Assistance Relief Services Rule, prohibiting debt settlement firms from charging up-front fees. However, the advertisements in question regarding this particular company were placed before the new rule was issued.

Under a mortgage brokerage law passed in 2009, Florida law now requires that any person or company attempting to negotiate a loan modification for an existing mortgage must be a licensed mortgage broker. That licensing is handled through the Florida Office of Financial Regulation

Additionally, new disclosures are required on agreements to negotiate for loan modifications. The disclosures must be in large print on the contract, and homeowners must be given a three-day rescission period during which they can cancel the contract.

“The days of simply opening up shop and starting a loan modification business have come to an end in Florida,” explained one Fort Lauderdale foreclosure defense attorney. “Individuals or businesses providing loan modification services must be licensed as a mortgage broker by the OFR in order to conduct business and cannot charge advance fees.”

Source: Tampa Tribune/Hernando Today, “FTC sues Florida loan firm,” Bill Lewis, March 16, 2011