The Federal Trade Commission proposed a new rule to prohibit third-party mortgage companies from charging upfront fees for foreclosure rescue and modification services. The FTC brought 28 cases against companies that charge a fee, promising the borrower a modification from the lender. The cases allege these companies never provided the services promised and that they misrepresent their affiliation with the government and other housing assistance programs, including the Home Affordable Modification Program (HAMP). "Homeowners facing foreclosure or struggling to make mortgage payments shouldn't have to contend with fraudulent 'companies' that don't provide what they promise," said FTC chairman Jon Leibowitz in a press statement. "The proposed rule would outlaw up-front fees so companies can't take the money and run." The new FTC rule would also bar the companies from telling borrowers to end communication with their lenders. It would require that the companies notify a potential client of their for-profit status. “Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered," US Treasury Department secretary Timothy Geithner said. "I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices." Several states already have similar laws in place, forbidding the upfront fees. Governor Arnold Schwarzenegger signed Senate Bill 94 in October 2009, which banned the fees. In a story in the November issue of HousingWire, a spokesman for the California attorney general’s office said that complaints of modification fraud increased with the same velocity as foreclosures. In 2007, consumers registered 27 complaints for the year, a number that grew to 163 in 2008. In September 2009 alone, the office heard 158 complaints, totaling nearly 2,000 for the year. In the story, an FTC spokesman warned borrowers against the fraudulent practice. “People should avoid any company or individual that requires a fee in advance, guarantees to stop a foreclosure or modify a loan, or advises the homeowner to stop paying the mortgage company,” the spokesman said. As the first step in the rule-making process, the FTC sought comment on the practices of the for-profit mortgage relief companies in June 2009. A month later, the FTC launched Operation Loan Lies, a coordinated national law enforcement effort to hunt down mortgage modification scams. The new proposed rule has a 45-day public comment period that ends March 29, 2010. Write to Jon Prior.