MARS and the investor who buys pre-foreclosures: when your marketing becomes “relief”

An investor rarely needs mortgage relief services on a business-purpose loan, but investors who court homeowners in foreclosure can become MARS providers — or violate state equity-purchaser and foreclosure-consultant laws — the moment their pitch promises to stop a foreclosure or negotiate with the lender.

Regulation O, the MARS rule, regulates anyone who offers for a fee to help a homeowner with a dwelling loan avoid foreclosure, obtain a modification or negotiate with the servicer. Two things follow for an investor. First, the rule is built around consumer dwelling loans, so a distressed investor looking for help with a DSCR or hard money default generally has no MARS-covered provider to turn to and no MARS protections — the advance-fee ban and the mandatory disclosures do not police a consultant who promises to renegotiate your business loan. Second, and far more important in practice, the rule can apply to you when you market to owner-occupants facing foreclosure.

The line between buying a house and offering relief

A plain offer to buy a home at a stated price is not a mortgage assistance relief service. The offer becomes one when the pitch includes stopping the foreclosure, negotiating a short sale or payoff with the lender on the owner’s behalf, arranging a lease-back so the family can stay, or obtaining a modification — services that are the core of MARS. Investors who run “we stop foreclosures” campaigns, collect an option fee or consulting fee before delivering anything, or represent that the lender will accept a short sale are exposed to the advance-fee ban (no payment until the homeowner accepts a written offer from the lender) and to the rule’s ban on misrepresenting results. The FTC enforces MARS against individuals, and state attorneys general enforce their own versions.

State laws written for investors

• Equity-purchaser (home equity sales) statutes in California, New York, Minnesota, Maryland and other states impose written-contract requirements, cancellation periods (often five business days), bans on unconscionable terms, and rescission rights of two years or more when an investor buys a residence in foreclosure from an owner-occupant.
• Foreclosure-consultant laws treat anyone who promises to help for compensation as a consultant subject to registration, bonding and contract rules, frequently without an investor exemption.
• Sale-leaseback and reconveyance rules presume that a sale with a right to buy back is an equitable mortgage in many states, which can convert your purchase into a loan subject to usury and foreclosure law.

If you are the distressed borrower

A consultant who promises to renegotiate a hard money loan or stop a trustee sale on your rental is outside the MARS framework and should be judged on the contract alone. Demand a written scope, no advance fee, and proof of past results; better still, contact the lender directly with a written extension or workout proposal, as our exit strategy guide describes. If the distressed loan is on your own home, the full protections on the MARS overview apply, including the right to withhold any fee until a lender offer is in hand, and the foreclosure rescue scams guide lists the warning signs.

What to check

• Keep purchase marketing to a price and a closing date; remove any promise to stop a foreclosure, negotiate with the lender or let the owner stay.
• Never collect a fee, option payment or deposit from a homeowner in foreclosure in exchange for help with the lender before a written lender offer exists.
• Check the equity-purchaser and foreclosure-consultant statutes in the property’s state for cancellation periods, rescission rights and required contract language.
• Treat any sale-leaseback with a repurchase option as a potential equitable mortgage and have a local attorney structure it.

Frequently asked questions

Can I charge a homeowner in foreclosure a fee to negotiate a short sale before I buy the house?

Not safely. Negotiating with the servicer on a homeowner’s behalf for compensation is a mortgage assistance relief service, and the MARS rule prohibits collecting any fee until the homeowner has received and accepted a written offer from the lender. Several states also require foreclosure consultants to register and bond. Buy the house at a price the owner accepts, or leave the negotiation to a licensed agent or attorney.

Does the MARS rule protect me if someone offers to fix my defaulted hard money loan for a fee?

Generally not, because Regulation O is framed around consumer dwelling loans and a business-purpose loan on a rental is outside that frame. The FTC Act’s general ban on deceptive practices and state consumer protection laws still apply, and the contract governs the rest. Insist on a written scope and refuse any advance fee; most credible workout help on an investor loan comes from a real estate attorney billing hourly.

The rule in full: MARS rule (Regulation O): mortgage assistance relief services. The borrower profile: Real estate investors. Related guides: DSCR loans vs conventional for investment property: qualify on rent or on income · BRRRR: refinancing a hard money rehab into a conventional or DSCR loan · Foreclosure rescue scams: the six patterns and the federal rule that bans upfront fees · HUD-approved housing counselors: free help that servicers take seriously.

Other federal rules for real estate investors

TILA / Reg Z · RESPA · TRID disclosures · ECOA · Fair Housing Act · HMDA · SAFE Act / NMLS · ATR / QM · HOEPA · HPA / PMI · Servicing rules · FCRA · Flood insurance · SCRA · LO compensation

MARS rule for other borrowers

First-time buyers · Conventional borrowers · Veterans · Self-employed · Retirees · Bad credit · Foreign nationals · Physicians · Heroes · Rural buyers · Condo & second home · Refinancing