Hoping to cut down on fraud and scams tied to the mortgage crisis, the U.S. Federal Trade Commission is tightening rules for companies and attorneys who perform loan modification and foreclosure rescue services.

The FTC announced today a rule that would prevent companies from collecting upfront fees for such services until homeowners have a written offer from their lender and decide the offer is acceptable. Illinois already has a law that prohibits companies from collecting upfront fees, but the federal rule would apply to companies operating outside the state too.

The FTC also passed a rule that attempts to reign in attorneys who are exempt from the ban on upfront fees. Beginning Jan. 31. 2011, attorneys will be required to place any advance fees they collect into what is known as a client trust account.

The accounts are an attempt to keep client funds separate from an attorney’s personal or business funds until the attorney has earned the money. Attorneys must give the client notice before withdrawing the money after they have proved they’ve done work for the client.

In September the Tribune wrote about a loophole in state and federal law that has made it easy for some attorneys to take advantage of residents struggling to keep their homes. Some mortgage rescue firms had been recruiting attorneys to collect upfront fees from consumers while other attorneys had set up their own shops.

Often times, instead of negotiating with a lender, some attorneys or the companies they worked for just kept the client’s cash and didn’t complete the job.

– By Ellen Gabler