Client trust accounts will be necessary under new rule
Hoping to cut down on fraud and scams tied to the mortgage crisis, the Federal Trade Commission is tightening rules for companies and attorneys who perform loan-modification and foreclosure-rescue services.
On Friday the FTC announced a rule that would prevent mortgage-relief companies from collecting fees from consumers until a homeowner has a written offer from a lender and decides the offer is acceptable.
Loan-modification and rescue schemes have flourished as the financial and mortgage crisis squeezes consumers. Unscrupulous companies often collect fees from consumers, yet fail to do any work.
Illinois banned upfront fees for loan modifications in 2006, but the federal law will allow the FTC to police the industry too.
The FTC also passed a rule Friday that attempts to rein in attorneys who are often exempt from bans on upfront fees.
In September the Tribune wrote about a loophole in state and federal law that allowed attorneys to collect upfront fees for modifying mortgages. Often, instead of negotiating with a lender, some attorneys or the companies they worked for just kept the client's cash and didn't complete the job.
Under the new FTC rule, attorneys will be required to place advance fees into what is known as a client trust account. The accounts are an attempt to keep client funds separate from an attorney's personal or business funds until the attorney has earned the money.
The FTC and state attorneys general offices would be able to enforce the federal rules by issuing injunctions, civil penalties and trying to recover money for consumers.
The Illinois State Bar Association and the American Bar Association have opposed the rule, arguing that, among other reasons, it interferes with state courts' regulation of lawyers. The federal rule could be challenged by attorneys.
Tom Pahl, with the FTC, said the new federal rules provide another layer of enforcement because attorneys can be sued by the federal government in addition to facing discipline by their state bar and action by the attorney general's office.
Federal investigators also will proactively review advertisements and Web sites, as opposed to lawyer regulatory groups that usually wait for consumer complaints, he said.
Mark D. Hassakis, president of the Illinois State Bar Association, said lawyers who take money from clients without performing any work are committing fraud and would be dealt with by the state's lawyer regulatory board.
"Stealing is wrong," he said. "This is just another version of stealing."
David Berenbaum, chief program officer of the National Community Reinvestment Coalition, said the new federal rules should help crack down on some mortgage scams, but attorneys are a growing concern. They are "not following through on commitments made to consumers," he said.
In California, the legislature passed a law last year that bars anyone, including attorneys, from collecting upfront fees for loan modifications.
In Illinois, Attorney General Lisa Madigan's office said it is reviewing whether additional legislation is necessary.
By Ellen Gabler, email@example.com, Tribune reporter
Source: Chicago Tribune