Attorneys General Push for Loan Reductions, Seek Bank Accord

State attorneys general are pushing lenders to reduce loan balances and said that they hope to reach a final settlement with banks over their mortgage-servicing and foreclosure practices within two months, Bloomberg News reported today. The states along with federal agencies submitted a 27-page settlement proposal last week to the country's five largest mortgage servicers and aim to reach an agreement that leads to more loan modifications for homeowners having trouble making their payments, attorneys general said yesterday. The companies that received the settlement terms service 59 percent of U.S. home loans and include Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Ally Financial Inc. and Citigroup Inc. The settlement sheet seeks to force procedural changes on servicers, including banning companies from initiating foreclosure proceedings while a loan modification is pending, providing borrowers with a single point of contact, and informing borrowers of denied modifications in writing.

http://www.bloomberg.com/news/print/2011-03-07/foreclosure-settlement-said-to-be-sought-by-states-u-s-within-two-months.html

AGs' Servicer Reform - The 27 Pages of Proposed Settlement Terms

The proposed 27-page settlement term sheet, provided to the five largest mortgage servicers by a national coalition of state Attorneys General and reportedly also by federal banking regulators.


The proposed terms touch on a variety of areas, including:

- Foreclosure and Bankruptcy Information and Documentation, including: (a) standards for affidavits and sworn statements in foreclosures and bankruptcies; (b) verification of borrower account information; (c) documentation of rights to note and chain of title; and (d) quality assurance systems and audits;

- Loss Mitigation Requirements, including: (a) a loss mitigation requirement; (b) prohibition on "dual tracking;" (c) requirements for a single point of contact and single electronic record; (d) outreach efforts for loss mitigation; (e) independent auditing for SCRA compliance; (f) loss mitigation "portals" for borrowers and housing counselors; (g) specific loss mitigation timelines; (h) independent review of loss mitigation denials; (i) required support and funding for state-based foreclosure prevention hotlines; (j) application of the FHA Short Refinance Program to non-FHA loans; (k) staffing and technology requirements; (l) standardization and disclosure of proprietary loan mod programs; (m) principal reductions; (n) second lien loan modifications; (o) free document delivery services through national retailers; (p) consideration of final or "back-end" DTI in loan modification applications; (q) monetary incentives and other provisions for short sales; (r) transfer of servicing issues; and (s) other loss mitigation related matters;

- Restrictions on Servicing Fees, including: (a) requirements that all such fees and bona fide, reasonable, and disclosed in detail to borrowers; (b) maintenance of a fee schedule for disclosure to borrowers; (c) limits on attorneys fees; (d) prohibition on so-called "pyramiding" of late fees and other late fee restrictions; (e) limits on third-party fees; (f) and requirements for lender-placed insurance;

- General Servicer Duties and Prohibitions, including: (a) a duty of good faith and fair dealing to borrowers; (b) a duty to ensure that distressed properties and charged-off loan properties do not become blighted; and (c) a duty not to unreasonably delay foreclosures and transfers of title as to abandoned properties;

- General Prohibitions, including: (a) prohibitions on deceptive conduct; (b) prohibitions on funds payment requirements that are more expensive to consumers than certified checks or attorneys checks; and (c) requirements to communicate with representatives of the borrower who provide written authorization and other reasonable assurances of authorization;

- Monetary Relief, in an unstated amount; and

- Compliance Review and Monitoring, including: (a) data reporting to federal and state regulators as to compliance with the settlement; (b) third-party review by auditor selected by the Ags and the CFPB, and (c) penalties for non-compliance.

When the mortgage company issues a 1099 for deficiency

Question:

Once the mortgage company has issued a 1099 to the (former) homeowner, is it too late to discharge the deficiency and avoid the income tax liability on the deficiency?  I thought there was an IRS regulation that prevented the mortgage company from burdening homestead homeowners with a 1099 when the homestead was lost to foreclosure.  Am I remembering correctly?

Answer:

My understanding is that when the taxable event occurs prior to filing the BK, the debtor is still responsible for the tax liability.  However, if the 1099 was filed on a homestead property (as homestead is defined by the IRS, which I believe requires living in the property 2 or 3 out of the past 5 years), the debtor will not have tax liability on the 1099 if the proper paperwork is filed when doing their taxes.  See the following IRS article on the Mortgage Forgiveness Debt Relief Act:

http://www.irs.gov/newsroom/article/0,,id=174034,00.html