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How Consumer Remedies Were Gutted By Little- Noticed Tax Code Changes

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Tax code changes effective in 2018 inflicted a crippling blow to consumers who must sue to enforce their rights.  And few have yet noticed.

The tax deduction for miscellaneous itemized deductions under IRC Section 212 is gone. So now, consumers who prevail under statutes that award attorneys fees to the successful plaintiff are denied a deduction for the legal expense of winning that victory.

The income is taxed but the cost of producing that income is no longer deductible.

So, a large hunk of a consumer’s recovery goes, not to the injured consumer, but to the IRS.  Or even, all of a consumer’s judgment is consumed by taxes.

What happened to consumer litigants

IRC Section 212  has long allowed individuals to deduct the ordinary and necessary expenses incurred to produce income. At least partially.

That is, until the Tax Cuts and Jobs Act, passed December, 2017, including this zinger:

Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.  Section 67(g)

So the deduction for the expense of producing income as a miscellaneous itemized deduction for individual tax payers vanished.  Poof.

The rational for its removal sounds great:

“Not that many taxpayers itemize their deductions so the deduction(s) won’t be missed.”

And thus, a bedrock principle of taxation, that the expenses of producing that income is deductible before tax is imposed, was cast aside.  With dire consequences for consumer rights, whether intended or not.

Tax changes abound

Miscellaneous itemized deductions weren’t the only victims of the 2017 tax act. HUGE things happened in the world of taxation on Jan  1, 2018 when the tax bill became effective.

For good or ill, perhaps wholly or partially dependent on your politics, the practical world of untold millions of individual taxpayers changed radically.

  • What would be alimony and heretofore deductible isn’t. (At least for most January 1, 2018 divorces.)
  • One very important protection afforded for debt relief from the disposition of a personal residence lapsed and has not been resuscitated.

There are many others.

But the devastation inflicted by Section 67(g) was initially far from obvious. It typically doesn’t become clear  until it’s time to file a federal tax return.

What had been a longtime method for getting at least some deduction for real expenses is gone.

Gone…

But thereby hangs a tale. Most taxpayers don’t itemize UNTIL THEY NEED TO DO SO. Now they can’t. Not even a little. And it gets much worse.

The power to tax….

The deduction allowed by  under IRC 212 prior to 2018 was already a ludicrously constructed monkey-motion system.  Lawsuit recoveries are typically reportable to the recipient in the GROSS recovery amount without diminution for attorneys’ fees payable to the attorney(s) whose services were indispensable in creating the income,

In order to get any deduction for attorneys fees paid, IRC Section 67 mandated:

The miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.

This calculation often results in a sizeable bite coming out of the deduction the hapless taxpayer ultimately gets to take.

Now after Jan. 1, 2018, there is no deduction at all.

Picture the average non-itemizing single parent taxpayer suing for wrongful termination under this new tax regime.

  • The legal pushback from the errant employer is fierce and attorneys’ fees on both sides are high.
  • The settlement calls for $500,000 to be paid to the plaintiff .and,
  •  40% of the recovery goes to the plaintiff’s attorney as fees.

In the typical course of things post Jan 1, 2018, the plaintiff will be taxed on the FULL $500,000 recovery. Plaintiff gets NO deduction for the $200,000 in attorneys’ fees paid. None…

The plaintiff walks away (limps away actually) having paid taxes on AT LEAST $500,000 of income out of the $300,000 of money they actually net. (Yes, the attorney then pays tax on the $200,000 already included in the plaintiff’s income.)

Kinda discourages injured individuals from using consumer protection laws to protect themselves, doesn’t it?

Statutory penalties without deduction

If you perhaps think this isn’t so bad, picture the many hundreds of thousands of suits brought where the plaintiff is entitled to a fixed fee, fine or other relatively low statutory amount.

The purpose of these consumer lawsuits is to promote regulation of activities like as an example, lending-related abuses. In these cases the state consumer laws providing for the suits often allow the attorneys for the plaintiff to collect their fees from the lender or other business.

These suits now regularly result in the plaintiff being in deep debt to the IRS with insufficient funds to pay even the tax. AKA: Tax Hell.

Without direct decisive legislative change this horrendous damage will play out across the country for years.

It will continue until the right people suffer from its effects. Only then will there be any change(s).

 

 

 

How Guarantors Can Escape Tax On Soured Debt

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Tax lawyer Bill Purdy and I shared a client with a small interest in a failed corporation with a huge SBA loan.  Could our client escape the tax consequences should we be able to settle his  liability on a million dollars in unpaid loan.  Was the client looking at a million dollars of cancellation of debt income? Here’s the marvelous result that Bill’s caper through the IRS regs returned.  Cathy

Ever guarantee the debt of another? Ever meet anyone who has?

Chances are if you’re in business and the business is a C-corporation, an S-corporation, an LLC , or a partnership, when that business borrows money, the lender will require one or more persons who own/control the entity to personally guarantee the business debt.

It seems harmless at the time. But signing a personal guarantee is as serious as a hard attack.

It can feel just like one if the lender tags you to actually pay the debt. Institutional lenders including but certainly not limited to, the SBA, don’t hesitate to demand payment from guarantors when the actual debtor fails to pay.

When regulations are your friend

Against this backdrop Treasury Regulation §1.6050P-1(d)(7) might take your breath away:

Guarantors and sureties. Solely for purposes of the reporting requirements of this section, a guarantor is not a debtor. Thus, in the case of guaranteed indebtedness, reporting under this section is not required with respect to a guarantor, whether or not there has been a default and demand for payment made upon the guarantor.

Did I read that right?

The regulation just cited is the official US Treasury guide for issuing (or NOT issuing) Form 1099-C when a debt is settled for less than the amount owed.  And that’s critically important since the usual consequence of a 1099-C is the inclusion of that amount in taxable income.

The regulation’s language is careful to limit its reach solely to the issue of whether or not a Form 1099-C should be issued.

But unlike so many other regulations and provisions of the Internal Revenue Code, it is NOT followed by endless provisos, exceptions and intricacies.

A lender who settles a debt for less than face is not supposed to issue a Form 1099-C to a guarantor because none is required. It doesn’t matter if the debt was settled with the actual debtor or if the lender demanded payment from the guarantor upon default by the debtor.

Given that reporting financial institutions are

  • responsible for issuing Form 1099-C in a timely and accurate fashion,
  • often fail to do so correctly and
  • face no consequences if they don’t,

this is potentially a very important rule to know.

What is much more important is to know why.

Love letter from the IRS

The “why” is found in Internal Revenue Service INFO 2002-0024 (released 3/29/2002).

In it, the IRS flatly states that a guarantor is not debtor who recognizes Form 1099-C debt relief, whether or not the creditor formally looks to guarantor for payment or settles with the actual debtor.

Once again the Service’s conclusion is sweeping and admitting of very little wiggle room ( which is hardly characteristic of that organization).

Unlike many attorneys and some court cases, the IRS DOES NOT ground its statement in the warm and fuzzy idea that the taxpayer received nothing of value in the way of loan proceeds or other benefits at the inception of the loan.

Instead, the Service bases its position on the idea that what the guarantor potentially gives (pays) is the basis for exclusion from debt relief.

This conclusion rests squarely on statutory law. IRC 108(e)(2).

Where payment by the guarantor would have given rise to either a business bad debt deduction or a capital loss deduction, the Service blesses the guarantor with an exemption from taxable debt relief.

Full stop. End of story.

Escape hatch for homeowners, too

homeowner taxOrdinary homeowners who receive Form 1099-C(s) are supposed to get the benefit of Section 108(e) (2) as well.

Any interest forgiven by lenders which would otherwise be deductible if paid by the homeowner are supposed to be removed from the calculation of taxable debt relief on the Form 1099-C.

Indeed the interest amount is supposed to be separately stated on that form in Box 3.

Given the massive number of defaulted loans with accrued interest, and negatively amortized loans that were “modified” with the accrued unpaid interest added to principal to make a “new modified principal balance” your guess is as good as mine as to whether lenders handily disguised hundreds of billions in interest income by transmuting it to “principal” on which they NEVER paid taxes.

There is little doubt this accrued interest was not correctly removed from modified debts when Form 1099-C(s) were issued on foreclosure or short sale.

Down the rabbit hole

And then, there’s Bullock.

A tax court, no less, held held that the taxpayer who actually signed a direct promise to pay as debtor did not incur a bona fide debt and was actually a guarantor. Bullock TC Memo, 2017-219.

One would assume the IRS was less than amused by the result in this case.

The judge actually references the idea that there was no net accretion of wealth to the taxpayer and then likens her situation to that of a homeowner where a tornado misses the home and thus she has no real net economic benefit.

Eh? Gadzooks!

Please don’t rely on Bullock as authority for the idea that a guarantor is not a debtor and thus no form 1099-C should be issued. Here the Tax Court emptied the baby’s bathwater out on the courtroom floor and started over.

Then much hemming and hawing ensued with citations to Dixie Dairies Corp. v. Commissioner, 74 T.C. at 494 and the existence of no bona fide debtor creditor relationship. (Sharp intake of breath…) Bullock manufactures a de-facto guarantor out of what was clearly direct debtor paperwork signed by the taxpayer, a high risk legal result at best.

Walk the Walk

The Bullock court may have felt great deciding as it did, but don’t count on any court to decide no real debt existed where your client signs on as a named debtor.

Especially here in California with some of the most obsequious and deferential judges alive when it comes to supporting lenders and the financial industry.

To get the one of the very few benefits of being a guarantor for tax purposes, be a guarantor in writing and in fact.

More Bill

When the 1099 is wrong

Danger in the long silent second mortgage

6 rotten reasons not to file bankruptcy

 

Guest author Bill Purdy is a tax and real estate lawyer with Simmons and Purdy in Soquel, California. I’m always tickled to share Bill’s pointed perspective on places our practices overlap.

          Bill and his partner Pam Simmons are my go-to resource for all matters of tax and mortgage law.  Bill assists clients with outstanding federal and state income tax liabilities, Form 1099-A and 1099-C related issues, collection resolution, failure to file returns and employment tax related liabilities. 

Tax Form 1099 Needs A Closer Look: Chances Are It’s Wrong

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Tax attorney Bill Purdy says:  don’t take IRS form 1099 at face value.

Hundreds of thousands of taxpayers at this moment are looking at, or thinking about, Form 1099-A or Form 1099-C documents they have received.

  • Some arrived in the tax year a debt was allegedly cancelled.
  • Others are issued by financial instructions many years after they should have been issued.
  • Some should never have been issued at all.

Some taxpayers “feel” or outright suspect these 1099 forms must be wrong somehow. Others are dutifully resigned to paying the ordinary income tax that follows the way the form was filled out.

Look again!

At least 50% of the forms issued by financial entities are wrong in one or more respects. Recently, the average number of defective forms coming across my desk is running 75%.

Consult with someone very knowledgeable before OR even after you have filed and/or paid.

Didn’t that debt go away?

Canceled debts can exact a high price at the moment the debt dies, or many years later.

Many people assumed that following the Late Great Financial Unpleasantness, debts dried up and blew away like weeds that died for lack of water.

Some debts actually did die legally speaking. But even dead weeds can choke a garden.

Dead debts, like dead weeds, leave a stubborn root that looks bad on one’s credit record for a long time. That dead root runs deep and often has to be pulled or dug out.

What lenders should do

Lenders are responsible for issuing Form 1099-A and Form 1099-C. They are legally responsible for issuing these forms timely and accurately.

What happens if they don’t do so, you ask?

Absolutely nothing.

Given lenders and financial institutions of all kinds face no consequences if they don’t issue forms with the right information, there seems to be no incentive to get it right.

At least every other form 1099 of this type that I’ve seen in the last 10 years has been wrong in at least one, if not multiple, respects. Worse still, the vast majority of the errors are to the detriment of YOU the recipient/borrower.

Five frequently occurring errors

I hope this article gets readers’ financial juices flowing to the point where they double-check the reality of 1099’s.

Here’s a list of errors deserving of Dishonorable Mention for California taxpayers. While there isn’t time to review these in detail,  here’s the gist of each error and the likely effect:

1. California Statutory Purchase Money Debt Cancelled: Under California law, borrowers have no personal liability for loans used to purchase their residence. CCP 580(b). Yet following a foreclosure or a short sale, the 1099 form clearly (AND INCORRECTLY) says the borrower is personally liable for the debt. The cancellation of purchase money debt should trigger no tax.  But the form claims otherwise.

2. Debt Discharged in Bankruptcy: Lenders issue tax documents that blissfully ignore fact that debt was discharged during bankruptcy proceeding. In 2019, 1099 forms make no reference to debts discharged in bankruptcy. Thus taxpayers may not know relief from these debts is typically NOT taxable when the relief occurs in a bankruptcy proceeding.

3. Accrued but Unpaid Interest Forgiven: This is an odd exception but a very important one. There is no taxable debt relief to the extent payment of the amount forgiven would have been deductible to you the debtor. IRC Section 108(e).

Interest on home mortgages is the best example of this one. It is Box 2 on Form 1099-A and Box 3 of Form 1099-C. Especially in the case of mortgages that negatively amortized for years, the actual amount of forgiven principal is often far less than what is shown on the form thus reducing the amount of taxable debt relief.

4. Fair Market Value of the Property: Without going into great detail here, this number radically affects whether there is any taxable debt relief and the amount of it (if any). Financial intuitions use a dart boards, Ouija boards, soothsayers, the entrails of an owl, and basically any number they feel like using for the fair market value. Frequently the number supplied is ludicrously inaccurate AND on the low side. This usually increases your taxable debt relief. (Box 4 Form 1099-A Box 7 on Form 1099-C.)

5. The Old “Identifiable Event Ploy”: This is Box 1 on Form 1099-A and 1099-C. It is supposed to have the date that the debt relief actually occurred. It often has the date the creditor gets around to writing the debt off on their books and issuing the Form 1099-A or C.

Look at these instructions from the 2019 Form 1099-C:

“If an identifiable event has occurred but the debt has not actually been discharged, then include any discharged debt in your income in the year that it is actually discharged, unless an exception or exclusion applies to you in that year.”

Yes! That means lenders send out Forms 1099-A and 1099-C when an “event” occurs as far as THEY are concerned, not when debts are actually discharged by operation of law as with foreclosures, bankruptcies, and most California short sales.

This causes ABSOLUTE HAVOC. Many debtors believe they have lost the benefit of statutory exemptions that have now expired but hadn’t when the debt relief actually occurred.

Your to-do list

The rabbit hole goes deeper but please double check with a tax professional you can trust before you pay taxes based on these forms.

If you’ve already paid, explore filing an amended return.

The financial entities who prepared these forms do not give them even a cursory degree of care.

They did the same exact thing a decade ago when they booked millions of loans that should never have been made. Nothing happened to them then, and nothing will now.

It’s up to you.

     Guest author Bill Purdy is a tax and real estate lawyer with Simmons and Purdy in Soquel, California. I’m tickled to share Bill’s pointed perspective on this tax problem too many face.  

     Bill and his partner Pam Simmons are my go-to resource for all matters of tax and mortgage law.  Bill assists clients with outstanding federal and state income tax liabilities, Form 1099-A and 1099-C related issues, collection resolution, failure to file returns and employment tax related liabilities. 

More from the Soapbox on tax issues

Cathy’s tax tips

Tax deductions hidden in Chapter 13

The secret tax penalty for settling debt

The Worrisome Truth About Silent Second Mortgages

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silent mortgagesLike a sleeping bear, long-silent second mortgages hibernate in people’s houses these days.  They are quiet, a snoozing predator, just waiting for spring.

And it can be bloody when those sleeping mortgages awaken hungry and look around for something to fill its pocket.

Here in California the coming slaughter is particularly noticeable because the value of real estate has rebounded to 2006 levels and beyond in many areas of the state.

Waves of foreclosures have now started lapping on the financial beach just as the federal government declares that everything is coming up roses for the economy.

These foreclosures are kin to the FIRST WAVE that devastated the nation. Both were triggered the largest financial fraud in US history. (A massive systemic fraud the US taxpayer was obliged to finance while being victimized.)

The current wave of foreclosures involves the “Sleeping Giant Second Mortgages” on millions of homes across the country.

“I Thought It Went Away”

For more than half a decade, the gigantic financial fraud carried out by Wall Street and the lending industry jack-hammered real estate prices to such low levels that second mortgages had no chance of receiving a penny if they foreclosed.

Worse still, if they foreclosed, they would be saddled with paying a first mortgage that was no longer fully secured by the value of the real estate. In the icy financial winter that followed, many second mortgages holders took the “long nap”.

Second lenders stopped calling the homeowner. They stopped sending the homeowner ANY notices relative to their second mortgage(s). They hibernated.

Here in California many second mortgage holders went even further.

They told homeowners typically over the phone that the lender had “charged the loan off their books”. Then the lenders coupled this a form 1099-C. (Sometimes a 1099-A, or my personal favorite, the form 1099-MISC which is an absolute outrage. We’ll talk about form 1099(s) issues by the lending industry in another article soon.)

What was a homeowner to think? “They didn’t call”…”They didn’t write”…”They charged it off”…”They sent out a form 1099 for debt cancellation.”

Homeowners by the millions concluded “It went away.” But it didn’t.

A Second Mortgage isn’t a Puppy that Follows You Home

You aren’t getting a “free” loan that you don’t have to repay because the lender needs to show you the note or because MERS is illegal.

Don’t waste your time on this nonsense.

In California the horrible truth is that EVEN the issuance of a form 1099 for debt relief in the situation described above, DOES NOT, in and of itself, mean the debt has been cancelled within the meaning of Section 108 of the Internal Revenue Code.

It can simply mean a particular lender has written the debt of their books. In all probability it means the debt was sold to someone else to collect. (They virtually always end up in the hands of another creditor.)

If there is a recorded deed of trust or mortgage instrument, and there virtually always is, the loan is a secured loan.

A loan secured by real estate is just about the best form of long term debt anyone can hold DEPENDING ON THE VALUE OF THE REAL ESTATE.

So when the value of real estate began to go up decisively, these secured second mortgages begin to “bloom” like California Poppies in spring.

When the Second Mortgage Wakes Up, You Need To

mortgage lender awakenedWhen a second mortgage holder comes out of hibernation, they are typically ravenous.

Like a grizzly bear with an empty stomach, they will initiate foreclosure and eat your home with little ado. It is a very good bet the lender is well versed as to the current value of the real estate and will feel quite confident that they can obtain the yield necessary to make the process worth their while.

Actually it’s much better if you “wake up” before the second mortgage holder does.  You almost always have better options if you face this problem as early as you can.

There are still rare cases in which the value of the property currently is less than the first mortgage.  If so, a Chapter 13 bankruptcy can be used to strip off the second and discharge it for virtually pennies-on-the-dollar while the homeowner retains the house.

If the house still has a very depressed value the homeowners may be able to  negotiate a reduced settlement figure and permanently cancel the debt. (In which case a form 1099 should be expected for the tax year in which the note is cancelled in exchange for the reduced payoff.)

There may be other moves a homeowner can make, like using a bankruptcy to catch up all the missed payments on a sleeping second. I hate this one but in the case of folks who can afford the payments, and who want to keep the home, this may be viable.

Sometimes it’s time to sell the house. I like my homeowners to sell their homes at premium prices long before some “snarling second” files a Notice of Default (N.O.D.) artificially depressing the value of the real estate.

Avoid a Notice of Default if You Can

If at all possible, don’t let a second mortgage holder get to the point where they have filed a Notice of Default before you take action.

You are then on the defensive and your options dwindle with each passing day. Worse yet, lenders will deliberately engage you in fruitless dialogue to try to draw out the time until they can sell your property.

I’ve seen this type of violation of the duty of good faith and fair dealing by lenders over and over again. Almost none of the dialogue will be in writing and it’s hard to prove in court.

Especially don’t wait until a date has been set to sell your property.

In California the non-judicial foreclosure train has left the station once an N.O.D has been filed. There are only three general methods to “stop or slow” this train.

Each method has its benefits and burdens. Often one or more of the methods are practically impossible for the homeowner to utilize.

You need to start early. There are no EASY ANSWERS.

But there are more options and better answers the sooner you shake off your winter slumber and sneak up on the sleeping giant in its lair.

Guest author Bill Purdy is a tax and real estate lawyer with Simmons and Purdy in Soquel, California.  He and his partner Pam Simmons are my go-to resource for all matters of tax and mortgage law.  I’m tickled to share Bill’s pointed perspective on California mortgage law.

When Mortgage Lenders Monkey With Your Loan

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Spoiler Alert:  As a borrower, you  are an expendable resource in home loan servicing to be exploited for fees and charges.

And those who could do something “hear no evil, see no evil, speak no evil”.

Meanwhile, you and other borrowers are the enemy in something once referred to decades ago as “Combat Loan Servicing”.

This sequel to the horrific saga of “What Loan Mod?” fulfills my promise to explain in my “next article” why servicers do certain things to their customers that seem to make no sense

Borrowers just trying to keep their homes are subject to a campaign of systematic and deliberate deception. This fundamental deception is now often combined with the fraudulent surcharging of fees costs and other “expenses” designed to make vast additional amounts of money for lender/servicers.

When used aggressively, their techniques run homeowners slowly into foreclosure, resulting in the permanent loss of home(s).

If the hapless borrower manages to retain the home, lender/servicers make hundreds of millions of dollars of additional annual revenue at little or no cost. (They make this money by doing as little as possible and getting you to do or not do things for which they can aggressively bill you.)

In many cases, both the Racketeering Influenced Corrupt Organization Act (“RICO”) plus the federal mail and wire fraud criminal laws are  violated. Federal and state regulators have known about these practices for years. However, Lender/servicers have had a de-facto exemption from enforcement.

Sound overdramatic? Read on and decide.

Representing without Representation…

The homeowner/borrower nightmare(s) typically start with an endless cavalcade of ever-changing parties “representing” the lender/servicer.

Here’s the REALITY:

Lender/servicers frequently subcontract out the process of servicing your loans including applying for (among other things) loan modifications. By this I mean lender/servicers actually “farm these functions out” to ACTUAL SUBCONTRACTORS (FULFILLMENT COMPANIES) WHO DO NOT WORK FOR THE LENDER/SERVICER.

In the case of Ocwen, it was recently fined by the State of Washington for subcontracting out sensitive loan servicing functions to unlicensed entities in India and the Philippines.

Please note the federal government and the government of California seem to have NO problem with such practices by Ocwen or anyone else.

These subcontractors answer the phone, act, walk, and talk like they ARE the employees of the lender/servicer.

But in many cases these subcontractors are not tied into the lender’s computerized system in any way. They are sometimes in fact not even DIRECTLY employed by the lender.

They may work on the lenders’ premises or in remote locations neither owned nor operated by the lender/servicer. They have letterhead that says they ARE writing to the borrower as though they are the lender/servicer. The letterhead even has the lender/ servicer’s address and a phone number on it… AND IT LOOKS GOOD.

But it isn’t so. The result is utter chaos for the homeowner.

These subcontractors literally don’t have the authority to do anything. Often, they have to strictly follow  a pre-approved script for all their interactions with borrowers. The subcontractors will have a half dozen or so “canned form letters” they are permitted to send. NO OTHER WRITTEN COMMUNICATIONS WHATSOEVER are permissible. These subcontractors cannot change ANY language in the form letter(s) or modify them even slightly.

  • Ever receive a letter from your “authorized contact” at the lender/servicer that seemed totally disjointed and disconnected from everything you had labored to achieve with him/her up to that moment?
  • Ever receive a letter totally non-responsive to the written request you faxed to your point of contact?
  • Ever receive a letter telling you the EXACT opposite of what you’d discussed verbally on the phone?
  • Ever been told on the phone your loan mod was approved and then receive a letter saying you did not send documents required?
  • Ever try to get your “contact” to fax you a confirmation in writing that your loan mod was approved (or that your foreclosure was postponed) after they assured you of this verbally on the phone?

Ever notice that you are often told your phone call(s) to a lender/servicer “…may be recorded for quality assurance” yet lender/ servicers ABSOLUTELY REFUSE to allow you to record them from your end of the phone?

Your telephone is not your friend, it’s their friend.

In our law office, we’ve heard scores of variations on every theme listed above. We’ve spoken to hundreds of homeowners with the identical problem(s) and different lenders across California and the country.

The State of  Washington fined Ocwen $900,000 for using unlicensed, off shore entities to service Washington home loans.

Multiple federal agencies have been made well aware of these facts by tens of thousands of homeowner/borrowers. The present and past Attorney(s) General of the State of California have been told by desperate homeowners struggling to save their homes as well as by those who lost their homes.

The California AG has done nothing about this. They are not supposed to do anything about it because THIS (subcontracting out critical functions) is a technique governments have been using for years. Now it’s gone main-stream and is being used to service your mortgage.

How They Do It In 10 Steps

1. Use an endless stream of disappearing individuals “representing” the lender/servicer but really working for the subcontracting “fulfillment entity”.

If you are dealing with subcontractors “ AKA: organizational transients” with less staying power than a candle in a windstorm, no one is around long enough to pinned down to any narrative save the one the lender wants. These people don’t actually work “there” so they are not likely to be “there” very long.

You’ll get a “single point of contact” alright, it just will be a different one almost every time you call. Of course your home is the most important financial asset many of us will ever have, but no matter.

2.  Only allow borrowers to send letters/documentation by FAX. 
No email addresses are to be given out. Instruct personnel to inform borrowers that direct post office and email address are unavailable and/or cannot be given out to “non-authorized personnel.”

They insist upon the fax because there is absolutely no legal way for the borrower/homeowner to prove they sent anything to the lender/servicer AND that the lender/servicer actually received it. Lender/servicers then have plenary power to claim that they never received any document the borrower/homeowner sends.

No, the little printout you get that says the transmission was “good” doesn’t prove the lender physically received your documents.

What other vitally important business dealings do you have in your entire life with anyone who refuses to supply any contact info except a fax number?


3.  Make the borrower/homeowner keep sending the same information and/or going over the same items week after week.
Subcontractors are typically compensated for their time handling a matter NOT for getting you a loan mod or unscrambling the mess the lender/servicer made out of your escrow account. The more time they spend, they more they typically earn. Hence work expands to fill the amount of hours that can be billed to accomplish as little as possible.)
4.  Give the borrower/homeowner very specific BIZARRE instructions as to where to send payments and the specific manner for doing so.
This often means the people you are dealing with on behalf of the lender/servicer are not integrated into the lender/servicer’s actual computerized system for “boarding” loans.

In other words your money is going off into the “ether” and may or may not EVER show up in the lender/servicer’s records in the place and category it should be in.

Often as not these payments find their way to a “suspense account”. That is very bad for the borrower because these payments are virtually never put where they should have gone. PLUS they are not posted as payments hence you are “late”, then you attract late payment charges and ultimately you may end up in default.

Often the borrower/homeowner is obliged and instructed to send monthly house payments by certified check, Western Union, SPEEDPAY etc.

Almost certainly this means your loan is not in the lender/servicer’s actual computer system. This also facilitates letting the subcontracted “fulfillment” entity handle the process (and your money) off the lender’s actual books.
5.  Halt monthly statements to the borrower under one or more pretexts.
As the new servicer or subcontractor, claim to have records of only the original unmodified loan. When statements are restarted do not reflect the loan mod terms in the statement.

This typically means after some decent interval they will begin demanding a much larger amount than the modified payment borrower has been paying. You can’t figure out what the lender/servicer is doing if they don’t give you anything to look at.

This is really not good.

One of the most basic features of having a REAL loan is a monthly statement reciting what is owed, what has been paid and when lender/servicers often “interrupt” statements when a new servicer “takes over” for the previous one, especially a loan modification was previously implemented.

Many lender /servicers will stop sending notices when you are in bankruptcy even though they clearly could do so with appropriate precatory language appended to the statements. By “going dark” they can “come back at” the debtor when they emerge from bankruptcy with a demand that utterly obliterates any hope that they got current in bankruptcy.

All the while the lender/servicers will claim they “had to do so”.

This practice got so bad, Chapter 13 bankruptcies now contain a “put up or shut up” motion that can be filed at plan completion, legally obliging the lender to “speak now or forever hold their peace.”
6.  Insist the borrower send in loan modification (complete with notarized signatures) back to the lender/servicer.
6.  Require borrowers make payments indefinitely while rebuffing any and all requests by the borrower to record proof of their modified loan for the public record.

Refuse to either give the borrower a recordable copy of the borrower’s loan medication, so as to “keep all options open for disavowing a modified loan” or allow future purchasers of the loan to do so.

Subcontractors working for lender/servicers will almost never provide recordable proof of the loan’s modification, and may even go so far as to tell you that it isn’t the lender’s policy to provide even a fully countersigned copy of the loan modification.

NOTE: It is extremely common for loan modifications to specify in writing that they ARE NOT VALID unless and until countersigned by the lender. But then again how will you ever know this if they won’t give you a recordable copy? Or any copy?)

7.   Never provide a street address or even a P.O. Box where borrowers can send ANY correspondence or documents if it can be avoided.
No matter how many times the borrower asks, insist that the lender/servicer cannot receive documents ANY other way EXCEPT BY FAX. If necessary, tell borrowers it will take much longer if they attempt to use mail or P.O. Box.

This is part of the “you gotta fax it to us ” scam discussed above. A real address would allow you to do two CRITICAL THINGS:

  • You could determine you’re not actually dealing with the lender/servicer (by Googling the address.) and/or
  • You could legally prove that you sent and they received critical items.

Email addresses and mailing address prevent the “strategic disavowal” of communications documents and the existence of contractual and fiduciary duties that lender/servicers don’t want to be held to, while holding the borrower/homeowner to only those rights that the lender/servicers want them to have.

This has worked for years. Not one federal or state agency has ever required lenders to cease these practices across the board in dealing with their customers. It would be so simple to require but state and federal regulators never did…

I don’t count RESPA, even in its current form, as I regard it critically deficient for the most part. RESPA never did go far enough and it still doesn’t.

What is worse by the time you use RESPA, lender/servicers have typically already “legally” done the damage to you that is discussed above. RESPA basically gives you the autopsy on your own financial murder.

8.  Make sure nothing happens.
Yes I mentioned this in my previous article, but “nothing” is the worst symptom of all because. in this context, NOTHING IS SOMETHING AND IT’S BAD.

“Nothing” is the one thing that should not be happening as you deal with the subcontractor for the your lender/servicer about specific concrete issues concerning the most valuable financial asset most of us will ever have.

Something should be happening. Something should be happening on at least a weekly basis until the issue resolved. Otherwise it almost NEVER turns out well for the borrower/homeowner, and it almost always goes REALLY well financially, for the lender/servicer.

Allowing “nothing” to happen for extended periods of time is virtually always construed by banks, attorneys and judges AGAINST borrowers. “Nothing” happening is always construed to be the borrowers fault.
9.  Induce the borrower to “reapply for a modification” if the borrower insists that they already have one.
If possible attempt to “explain” that the modification was only temporary, was defective, or was not approved by the investor. Make the borrower think that the “loss” of the loan modification is or must be THEIR fault.

Subcontractors and lender/servicers use this ruse to attempt to wipe out any prior loan modification you may have, or any progress you’ve made submitting paperwork. If they can get you to reapply you find that they will later argue any rights you may have had were superseded or waived.
10.  Play dumb.

Subcontractors and lender/servicers pretend, feign, ape and otherwise act the part of incredulous bystanders who’ve “Never seen anything like it.”

  • They don’t know why you think you have a loan modification when nothing shows up on “their system”.
  • They never received the documents you sent then yesterday or last week.
  • They don’t know why you thought your foreclosure was postponed.
  • They called or wrote you multiple times even though you have voicemail and received no letters.
  • They never received your letters proving you have homeowners’ insurance.

They play dumb because they can. They can because they have used the tactics in 1-9 above to script, cleanse, and control the record.

Typically, neither the prior subcontractor-lender/servicer nor the current subcontractor-lender/servicer will actually assist you though they may pretend to do so.

This is especially true if you are on the phone with them. Instead they will express confusion, shock, awe, mock sympathy or an out-and-out aggressive refusal to recognize you have a modified loan or any other rights.

REMEMBER! It’s an act.

They know exactly what it was that happened to you. You are not the first person to have these issues. Thousands of people have said the same things to the individuals working as subcontractors and the lender/servicers.

It’s one of the reasons personnel are moved around so frequently. It is a technique that has been very successful in exacting huge penalties, fees and charges and profits.

Lender/servicers work on very thin margins and this is how they make BIG MONEY. They have done this for years with impunity.

Fight Back

Whenever you deal with a subcontractor-lender/servicer do the following:

1. ALWAYS Use OVERNIGHT MAIL WITH PROOF OF RECEIPT or UPS or FedEx with tracking.

Make them give you an address.

2. CONFIRM EVERY phone conversation with the subcontractor-lender/servicer in writing via overnight mail with proof of receipt, and DEMAND these written confirmations be added to your loan file.

3. DO NOT STOP sending your payments under a modified loan agreement because of anything a subcontractor-lender/servicer says. Keep paying even if they return the funds. Take the returned funds and hold them in an account for later use in court. Judges love it when they see you tried to pay, the lender would not let you, and you put the money aside to “pay what you owe”.

4. GET LEGAL HELP before  foreclosure proceedings are filed.  In California, foreclosure starts with a Notice of Default.

5. DO NOT ALLOW THE SALE OF YOUR HOME TO GO THROUGH if they do file a notice of default. (Once the home is sold in foreclosure it may be impossible to recover and the subcontractor-lender/servicers will have a massive payday.)

Consider filing Chapter 13.

6. ASK POLITELY ,THEN FILE SUIT. The legal system has actually been interpreted and twisted to protect the activities outlined above. That’s why so many of you who read this will say:

“That happened to me…”

It’s grossly fraudulent and yes…they do it with impunity. (Or at least they have in the past.)

Since prosecutors at the federal and state level don’t wish to file deceptive business practice, RICO, and mail fraud cases against national lenders, their servicers and the subcontractors they hire, it falls to you to hire an attorney and sue them.

Judges are becoming less likely to buy the lender’s malarkey.

Getting A Loan Modification Is Only Half The Fight

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loan modification battlesFor all of you who stressed, strained, fretted, wheedled, worried, fought, kicked, and even gouged to finally wrest a loan modification from the lender/servicer that controls of your home loan, I have a message.

The fight may not be over.

“We Don’t Have Any Record of Your Loan Modification.”

I’ve seen and heard dozens of different variations on this theme. When my law partner and I see more than 2 or 3 unrelated clients with the exact same fact patterns, we know that the problem is massive.

We’ve seen scores of homeowners with the exact same problem.  It’s the same despite the fact that they are dealing with different lenders in different parts of California and out of state.

The themes for this horror-story fall into at least two different categories.

The Train Never Was on the Track

[Read more…]

Six Rotten Excuses Not To File Bankruptcy

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Reasons Not To File Bankruptcy, Rotten & WrongI am not a bankruptcy attorney. I never have been.  I am a mortgage law attorney.

But in the current financial climate, I see clients in my office daily who desperately need to file bankruptcy…And they won’t.

The reasons they give, and the parade of horrors they’ve built up in their minds about bankruptcy, are heart-felt, but wrong.

I’ve listed the six misconceptions below in the rough order of the frequency with which  I hear them.

Consider this my humble attempt to obliterate those “…nattering nabobs of negativism.” as Vice President Spiro Agnew once put it.

Bankruptcy Turns My Credit into Poo for Ten Years

Nope. Not so. [Read more…]

Miracles Possible in Mortgage Mess

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INVOKE THE SECOND DIVINE MIRACLE OF THE VANISHING EQUITY

Why Many Homeowners Need to Run,  Not Walk, to Bankruptcy Court and File for Chapter 13 Bankruptcy.

Strip Off Liens NowThe world has many sacred sites.

Places that inspire great faith.

Places where people go to express, renew, and sometimes discover their faith. Rome, Mecca, and the Holy Land come to mind.

But there are humbler locales like Bakersfield, or maybe it was Barstow, where, nestled in a modest single family home, one hears tell of the visage of Jesus appearing in the genuine imitation wood-grain veneer on the bathroom door when the homeowner takes a shower.

Closer to home, the forest near Pinto Lake in Watsonville California, is said to contain a tree in which the face of the Virgin Mary appears to true believers. Cool…

In the Internet Age, you don’t have to travel the world to see a miracle, discover your faith, or renew it. Miracles have bubbled up much closer to home than they’ve ever done before, creating a little mini-Lourdes springing forth beneath your feet.

Miracle one

For Americans who are still in their homes, the first miracle may be just to have retained your home against the onslaught of deliberately deceptive neg-am mortgages, mail fraud, wire fraud, conspiracy, forgery, and perjury committed by the financial industry, all of which has gone completely unpunished.

All of  those constitute serious felonies that the federal courts, yet the Untied States Attorneys and of course the FBI, can’t do enough to ignore. Meanwhile these crimes continue to be uncovered daily by civil attorneys fighting desperately, house by house, to save the homes of individual homeowners.

The Miracle You Perform

The hidden miracle under your feet may be something much greater… It’s the second miracle of the disappearing value of the real estate you call “home”. It may  time for you to make lemonade from your biggest lemon.

That “underwater” lemon that is your house could be your own personal financial savior. That is, if salvation consists of keeping your home.

If you want to give the holder of your second and third mortgage that taste of cold steel many of them so richly deserve, now may be the time.

Enter Chapter 13

With lenders engaged in a cruel, corrupt and one-sided game of loan-modification-water-torture, there is a way for many homeowners to level the playing field. It’s known as a Chapter 13 Bankruptcy strip-off AKA lien stripping. For many homeowners it’s now time to quote chapter and verse from the Federal Bankruptcy Code.

Time to do it now. Before a Congress, completely co-opted by the financial industry, does the bidding of its paymasters and removes this tool from the pathetically tiny toolbox of homeowner rights.

Stripping Off Your Second Mortgage in Bankruptcy

In the 9th Circuit of the federal court system, which sadly includes California, federal district and appellate court judges generally despise distressed homeowners. They’ve made no secret of their hatred of homeowners. The body of decisions emanating from this group reads like and ode to the sanctity of any and all things that will satisfy the lending industry’s every whim.

Standing defiantly removed from that not so august cabal, are the U.S. Bankruptcy Court’s decisions and the judges therein. In particular Zimmer, 313 F.3d 1220 and Lam, 211 B.R. 36 (9th Cir.BAP (Cal.). Together these cases establish a potentially massive source of relief for beleaguered homeowners in Chapter 13 by utilizing a simple formula:

If the value of your home is less than the amount of your first mortgage, and you have a second, third or more mortgages mortgage on your home, those junior mortgages can be reclassified as an unsecured debt and treated essentially like credit card charges.

They can be discharged and “stripped off” in a Chapter 13 Bankruptcy proceeding for pennies on the dollar over the period of the repayment plan.

There is no way out of this for the lender and no adverse debt relief tax for the debtor due to the bankruptcy exception provided in Internal Revenue Code Section 108.

For once the lender has to do something they’ve been making California homeowners do for the last 7 years: they gotta stand there and take it.

They who destroy equity in the homes of the people shall in turn have their liens destroyed.  So sayeth the law.

Guest author Bill Purdy practices real estate and tax law in Soquel, California specializing in foreclosure relief, predatory lending, and short sales.  Bill has written on 1099’s and foreclosure and The Don’t Do List for Troubled Mortgages.

Image courtesy of MGChan.

 

 

                 

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