Alert June 26, 2012

Federal Court Grants Injunction in Loan Modification Case

The United States District Court for the Central District of California has entered a preliminary injunction and temporary restraining order sought by the FTC against a pair of “mortgage modification advocates” and their principal officer, requiring that defendants cease operations, funds be frozen, and documents preserved pending investigation by an FTC-nominated receiver. The FTC alleged that defendants diverted borrowers away from legitimate, government-sponsored loan modification programs by marketing themselves as loan modification experts who would perform a “forensic loan analysis” to gain leverage in negotiations with lenders, while also advising borrowers to cease communication with their lenders, and, in some instances, to cease making payments.

The regulatory backdrop for the FTC’s action is the Mortgage Assistance Relief Services Rule, originally promulgated by the FTC, but now transferred to the CFPB. The FTC retains enforcement authority, and, by this action, has moved assertively to counter those who would defraud consumers under the guise of loan modification. The Court’s order states that defendants presumptively fall within the definition of a “mortgage assistance relief provider” under the Rule, while failing to make disclosures required of such providers under that Rule.  This action represents a clear effort by the FTC and CFPB to send the message that “mortgage modification advocates” must solicit customers subject to exacting disclosure requirements such that consumers who engage their services will knowingly do so at their own risk.