New Requirements for short sales: The “MARS” Rule (OR: April 2011)

by Peg Ritenour
Vice president
Legal Services & Administration

The FTC has recently issued a rule that may impact real estate professionals who are involved in short sale negotiations.  Referred to as the “MARS” (Mortgage Assistance Relief Services) rule, this new regulation prohibits certain practices and requires certain disclosures to consumers.

Although the purpose of the rule is to curb unfair and deceptive practices engaged in by some foreclosure rescue companies, it broadly defines “mortgage relief services” to include “negotiating, obtaining or arranging a short sale.”

According to the FTC, the rule covers real estate agents “who promote their services as a way to help consumers to avoid foreclosure…by getting the lender to approve a short sale.”  Therefore, it is important for Realtors who engage in such short sale negotiations to familiarize themselves with the MARS rule and comply with its provisions.

The provisions of the MARS rule fall into three categories:
Prohibited conduct;
Required consumer disclosures;
Recordkeeping and oversight duties.

The following is a summary of the provisions in each of these areas:

Prohibited conduct

The MARS rule prohibits the collection of an upfront fee from a consumer for negotiating a short sale.  Under the rule, no fee can be collected until a short sale offer is made by a lender and the property owner accepts that offer.

The MARS rule also makes it illegal to misrepresent any “material aspect” of your services to a consumer.  This would include representations that are likely to affect a consumer’s decision to use your services.  The following are examples of claims that are prohibited by the MARS rule:

• Telling the owner they can’t contact the lender or servicer;
• Misrepresenting your services;
• Stating that you are affiliated with or approved by any government entity, non-profit housing agency or program, or lender;
• Misrepresenting the likelihood of obtaining a particular result;
• Misrepresenting that the consumer will receive legal representation.

Disclosures

Under the rule, there are three types of disclosures that must be made:

• Disclosures when advertising;
• Disclosures to a specific consumer;
• Disclosures when presenting a short sale offer.

Disclosures when advertising

The rule requires mandatory language be included in any “general commercial communication” to the public offering MARS services (i.e., short sale negotiations).  This means if you advertise that you can assist a seller with a short sale or that you are a short sale specialist, you will be required to include the mandatory disclosure in your ad.  This includes print, internet, TV, and radio advertising.

The required language that must be included is:

IMPORTANT NOTICE: ____________________________________ (Name of Company) is not associated with the government, and our service is not approved by the government or your lender.  Even if you accept this offer and use our service, your lender may not agree to change your loan.  If you stop paying your mortgage, you could lose your home and damage your credit.
If the ad is oral (i.e., radio), the above must be preceded by the statement: ”Before using this service, consider the following information.”

Consumer specific disclosure

The second instance where the rule requires a consumer disclosure is when you are communicating directly with a consumer about providing MARS services.  Under the rule, if you are going to handle short sale negotiations for a seller, this disclosure must be provided to the seller before you begin doing so.  Even if you arrange for someone else to provide this services (i.e., a short sale negotiator), you must make this disclosure.

Obviously, the timing for providing the disclosure will vary depending on when you become aware the transaction will be a short sale.  In some instances, this may be known when you list the property; in other instances, that fact may not become clear until later in the listing process.  Again, the MARS disclosure should be made as soon as you become aware the transaction will be a short sale.

To comply, the following mandatory language must be included in a separate document signed by the owner.

IMPORTANT NOTICE:  You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender (or servicer). If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us ____________________ (insert amount or method for calculating the amount) for our services.
___________________________________________________ (Name of Company) is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.  If you stop paying your mortgage, you could lose your home and damage your credit rating.

Disclosures upon presentation of short sale offer

The final disclosures required by the rule must be provided at the time you present the seller with the lender’s short sale approval letter.  The first one must be done on a separate page and must state:

IMPORTANT NOTICE:  Before buying this service, consider the following information:

This is an offer of mortgage assistance we obtained from your lender (or servicer). You may accept or reject the offer. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us _____________________________(insert same amount previously disclosed to Seller) for our services.  If you stop paying your mortgage, you could lose your home and damage your credit rating.

You are also required to provide notice from the lender/servicer that describes the material difference between the offer of mortgage relief and the consumer’s current loan and whether the seller is liable for any deficiency.  The cover notice for this information must state:

IMPORTANT INFORMATION FROM YOUR ________________________ (Name of lender or servicer) ABOUT THIS OFFER:

Format requirements

The rule provides that all of the disclosures described above must be clear and prominent.  For printed materials, the disclosure must be the larger of 12 point type or ½ the size of the largest letter used in the brokerage name.

Recordkeeping

Under the rule, anyone providing MARS must keep certain records for 24 months from the date the record was created.  (Of course, Ohio license law requires the maintenance of records for a three year period.)  To satisfy this requirement, the following are the documents you must keep:

• Any agreement with consumer for short sale services;
• Written communications with consumer;
• Marketing materials;
• Disclosure forms; and
• Consumer file with contact information and a description of services provided.

Compliance/Oversight

Finally, it is required that any brokerage providing MARS must take reasonable steps to ensure that its agents comply with the MARS rule requirements.  Such steps include:

• Providing consumers with the required disclosure;
• Random recording and testing if telemarketing is used;
• Establishing a procedure for receiving and responding to complaints;
• Investigating consumer complaints promptly and fully taking corrective action;
• Record retention to demonstrate the MARS compliance.

Clearly there are some conflicts between the MARS rule and real estate practices.  NAR has met with the FTC to discuss how obligations that exist under real estate brokerage agreements can be incorporated into and made consistent with the MARS disclosure.  NAR has indicated that the FTC is receptive to the concerns of REALTORS and will provide additional guidance in the next few weeks.  OAR will notify its members as soon as this update becomes available.