I don't have a modem, just internet cable directly into my core and on the other nic I have my local network (basic setup I suppose). The ISP IS sending me the localhost address since this is in the leasefile:
option domain-name-servers 127.0.0.1,184.108.40.206,220.127.116.11;
Tell your isp to fix the dns numbers they are sending you. This is not an lmce problem that I can see.