FTC & the MARS Rule (OR: Aug. 2011)

by Peg Ritenour
Vice President
Legal Services and Administration

The Federal Trade Commission (“FTC”) has issued its “Mortgage Assistance Relief Services” final rule (“MARS rule”) that affects most real estate professionals who represent clients involved in a short sale transaction.  Below are some common questions about the MARS rule.  For a background into the rule, go to www.realtor.org/topics/mars.

As discussed below, NAR is continuing to discuss MARS rule with the FTC and so real estate professionals should continue to monitor the status of the NAR/FTC discussions on the MARS page at www.realtor.org/topics/mars.

MARS Rule Basics

What is the MARS Rule?

The MARS rule is designed to impose uniform requirements on businesses that market and provide mortgage relief services to consumers.  The rule covers an entity or individual that, in exchange for consideration, offers to negotiate either a modification to a consumer’s loan or a short sale.  Anyone who provides those services or arranges for a consumer to receive those services is deemed a “MARS provider” and will need to comply with the rule’s various requirements, including the disclosure requirements.

How does the rule impact real estate professionals?

The rule covers short sale negotiations and so a real estate professional representing a client in a short sale transaction will need to be familiar with the MARS rule.  There are four specific instances when a real estate professional may be covered by the rule:

Advertising short sale negotiation services or other short sale expertise 

  • Communicating with a consumer about a possible short sale prior to the listing agreement being executed
  • Negotiating a short sale on behalf of a consumer
  • Arranging a short sale negotiation for a consumer
  • These four areas are covered below, including a discussion of the types of disclosures required by the rule.

Advertisements Covered by MARS

What types of advertisements are impacted by the MARS rule?

Any entity that specifically markets MARS to consumers must make certain general disclosures in all advertisements promoting its MARS services.  So, any brokerage that specifically solicits short sale sellers or promotes its short sale expertise will need to include these disclosures in all of its advertisements, including telephone solicitations.  Go to www.realtor.org/topics/mars to review the required disclosure language.

How will the FTC determine if an advertisement needs to comply with the MARS rule?

The FTC’s practice is to review ads on a case-by-case basis and determine the impression that a particular ad would make upon a reasonable consumer.
When will an advertisement need to comply with the MARS rule?
An advertisement promoting a real estate professional’s short sales brokerage business will likely need to comply with the rule, since the average consumer would have the impression that these advertisements are from a MARS provider.

What if I mention short sale experience along with other services that my brokerage provides? 

This determination will be made on an ad-by-ad basis.  A real estate brokerage that isn’t specifically seeking to be a MARS provider yet wants to mention its short sale experience/qualifications in its marketing materials may or may not need to provide the general MARs disclosures.

For example, an advertisement that discusses the accomplishments of a licensee, lists the types of services that the licensee provides to his/her clients, and also mentions the licensee’s experience with short sale transactions, among other services, may not need to comply with the MARS advertising rule.  An advertisement identifying a licensee as having the SFR designation, without more, is not likely subject to the MARS advertising rule. 

Does using the word “short sale” in an ad automatically mandate the use of the MARS advertising disclosure?

No, the entire ad will need to be considered. 

Do the requirements vary by communications medium?

The MARS rule applies to all communication mediums.  All emails, websites, broadcast advertisements, and printed materials need to contain the disclaimer.  Additional language needs to be added to disclosures made orally, such as over the phone or radio.  Video productions need to have both audio and visual disclosures occur simultaneously, with special rules on how to size the visual disclosures on the screen.

Ban on Upfront Fees

My brokerage uses a model where consumers pick from a menu of services and pay an upfront fee, such as a fee for listing the property in the multiple listing service, a fee for assisting clients with contract negotiations, and other services.  How does the MARS rule impact my business model?

One of the prohibitions in the MARS rule is a ban on upfront fees.  A MARS provider cannot receive a fee until the consumer’s loan is modified, which in a short sale context is when the lender releases its lien in exchange for the short sale proceeds.  Therefore, real estate professionals cannot take an upfront fee if they plan on negotiating a short sale with a lender or arranging these negotiations, since they will be acting as a MARS provider.
 
A real estate professional could still take an upfront fee for a property that may need a short sale and perform services such as marketing the property and inserting the property into a multiple listing service.  However, the real estate professional cannot negotiate with the lender or arrange MARS for a consumer.

“Negotiating” a Short Sale

What constitutes a “negotiation”?

 Negotiating short sales is one of the activities that trigger the need to comply with the MARS rule.  “Negotiate” includes communications with a lender about the possibility of a short sale transaction involving a consumer’s loan.  Therefore, if a real estate professional has discussions with a lender about the need for a short sale or knows that a specific client’s transaction will likely require short sale negotiations with a lender, the real estate professional will need to comply with the MARS rule to the extent indicated in these Q&As.

What if I am only providing the lender information about the offer my client received, such as the proposed purchase agreement and/or comparable property sales information in support of the offer?

For purposes of this rule, these interactions with the lender constitute a negotiation and the broker needs to comply with the rule to the extent indicated in these Q&As.

Consumer-Specific Commercial Communication Disclosure

What is this disclosure?

The Consumer-Specific Commercial Communication Disclosure is a disclosure that needs to be made by a MARS provider in all communications directed at a specific consumer prior to the consumer entering into an agreement with the MARS provider.  Go to www.realtor.org/topics/mars to read the rule’s required disclosure language.

I have read the rule’s disclosure language, and I find the statement that “you can stop doing business with us at any time” confusing and possibly misleading to consumers.  While I know this is only intended to cover my role as a MARS provider in negotiating a short sale, this language could lead consumers to believe that they can cancel the listing agreement.

I am also confused by how to list my compensation within the blank provided in the disclosure language.  I do not charge separately for this service, but rather this is one of the many services that I provide in exchange for the compensation provided in this listing agreement. What should I do?

NAR has discussed with the FTC the confusion caused by the language in the rule’s disclosures and some of the other requirements found in the MARS rule.  The FTC is considering possible options to help make the rule more applicable in a real estate brokerage context and is continuing to discuss the issue with NAR staff.  Real estate professionals need to comply with the rule as written for the immediate future, but should continue to monitor the status of the NAR/FTC discussions on the www.realtor.org/topics/mars on realtor.org

How should I deliver the disclosures to a consumer?

This will vary by the communication medium or by transaction.  The disclosure will need to be in all communications prior to the execution of the listing agreement of a home that is expected to be sold as a short sale.  This would include both phone calls and emails between the real estate professional and the consumer.

A client comes to my office to discuss possibly listing his/her home with me.  During the conversation, I discover that any transaction involving this property will likely require a short sale.  What does his mean for me?

If you pursue the listing and are intending to negotiate the short sale with the lender or arrange for the short sale negotiations, then you will need to make these disclosures to the consumer in each communication to the consumer until the listing agreement is executed.  Whether or not a transaction will require a short sale will be a factual determination, but if the listing price plus anticipated seller costs of sale is likely to be below the loan amount and the seller isn’t likely to pay the difference, then a short sale is a likely outcome and the disclosures should be made.  Another indicator of a potential short sale would be a case where the seller is on the brink of foreclosure, and the missed payments combined with the remaining loan amount exceed the projected sales price.

What if I don’t find out that a short sale is required until after the listing agreement is signed?

A broker who doesn’t learn that a short sale is required until after the listing agreement is signed will not need to make disclosures until that time.  This discovery could happen at the time the first offer is received, if the offer is substantially below the listing price or if the consumer for the first time discloses the need for a short sale.

The time for disclosure is similar to the requirement that many MLSs impose upon participant.  Under those rules, a participant has a duty to let other MLS participants know about the possibility of a short sale when it is “reasonably known” by the listing broker.  Real estate professionals should follow a similar process in making MARS disclosures to their clients.

What if I am representing a client in a short sale right now, but I did not make these disclosures in a timely manner.  Should I make them now?                               

Yes, you should make the disclosures to your client(s) immediately.  While making the disclosures will not absolve you from your failure to make the disclosures in a timely manner, it may serve as a mitigating factor at a later time.

Disclosures When Providing an Offer to Mortgage Relief to a Consumer

When is this disclosure required?

The third disclosure needs to be provided, in a clear and prominent manner, at the time the MARS provider presents its client with the lender’s offer for a short sale or loan modification. The communication from the lender should outline the material (1) differences between the consumer’s current loan and lender’s offer or (2) terms for approval by the lender of the short sale.  Go to www.realtor.org/topics/mars to read the rule’s required disclosure language.               

I have read the disclosure language, and I find the statement that “if you reject the offer, you do not have to pay us” confusing and possibly misleading to consumers.  While I know this is only intended to cover my role as a MARS provider, this language could lead consumers to believe that they can cancel the listing agreement.

I am also confused by how to list my compensation within the blank provided in the disclosure language.  I do not charge separately for this service, but rather this is one of the many services that I provide in exchange for the compensation provided in the listing agreement.  Also, the instruction for the blank states that the compensation field must contain the same amount as listed in the prior disclosure, but my compensation may be lowered by the lender as part of the short sale process. What should I do?

NAR has discussed with the FTC the confusion caused by the language in the rule’s disclosures and some of the other requirements found in the MARs rule.  The FTC is considering possible options to help make the rule more applicable in a real estate brokerage context and is continuing to discuss the issue with NAR staff.  Real estate professionals need to comply with the rule as written for the immediate future, but should continue to monitor the status of the NAR/FTC discussions at www.realtor.org/topics/mars.

What information must the disclosure contain and how should it be presented to the consumer?
 
The disclosure must be provided on a separate page, accompanying the approval letter from the lender.  The lender or service provider’s notice must describe all material differences between the seller’s current loan and the lender’s proposal to modify the loan if the seller accepts the short sale offer, which may include the lending hold the seller liable for the deficiency amount.  The notice should also discuss any changes to the brokerage’s commission.  This information will likely be contained in the lender’s short sale approval letter.

“Arranging” Short Sale Negotiations

If I don’t want to make the MARS disclosures, can I simply have someone else conduct the negotiations?

If you “arrange” to have another person or entity conduct the MARS negotiations for a consumer, then you are still required to comply with the MARS rule.  The MARS rule includes in the definition of MARs provider “any person that…arranges for others to provide any mortgage assistance relief service.”  Therefore, any licensee referring a client to a MARs provider will need to be careful that he/she is not “arranging” the mortgage relief services for its client; otherwise, the licensee will need to comply with the MARS disclosure requirements set forth in Section 5 and 6 of this Q&A and the other parts of the rule.

Does it matter if the negotiator is a member of my brokerage firm?

No, referring a client to a negotiator who is a member of your firm will probably count as arranging for others to provide MARS services.

What if I don’t want to comply with MARS but a consumer requests a recommendation for a MARS provider?

A real estate professional can refer a consumer to a MARs provider, but the real estate professional will need to be careful that he/she is not seen as “arranging” the short sale negotiations.  One possible way to avoid this problem is to offer the client a list of providers and allow the client to choose the MARs provider.  Whether the real estate professional is seen as arranging the transaction will again be a factual determination, but allowing the client to choose the provider and making it clear that the client is not required to use the MARs provider offered by the real estate professional should eliminate the need for the real estate professional to comply with the MARS rule.

Recordkeeping

What records to I need to keep and for how long?

For all transactions covered by the MARS rule, the real estate professional must retain for 2 years all MARS advertisements, sales records and covered transactions, customer communications, and customer contracts, including all of the disclosures made to consumers that were required by the MARS rule.

Who is required to maintain the records if my salespeople are independent contractors?

The MARS rule requires that a MARS provider assure that all “its employees and independent contractors” comply with this rule.  Therefore, a real estate broker will need to create brokerage policies for its independent contractor salespeople and create a system for maintaining the records.

In addition, there are special requirements in the rule for telemarketing by a MARs provider; if your business undertakes telemarketing services, then you will need to review the language of the rule for these special record-keeping requirements.

Other Issues

What are the penalties for a MARs violation?

The FTC can seek civil penalties of $16,000 per violation, which adjusts periodically to account for inflation.  However, in addition to seeking civil penalties, the FTC can also seek equitable monetary relief for consumer redress or the disgorgement of ill-gotten gains.  State attorneys general can also bring actions to enforce this section.

If you have further questions, please send those questions directly to NAR and we will work with the FTC to provide answers.  We will update the Q&A periodically with the most frequently asked questions.  Please send your questions to Finley Maxson at finley@realtor.org.