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22. Legal Aspects of Loan Modification

On legal matters, a borrower’s most reliable source of information is always to consult with an attorney who is knowledgeable about real estate and mortgage law. However, the following is general overview of some of the relevant legal issues.

Federal laws

While there are many mortgage modification and foreclosure prevention programs being rolled out by lenders across the country, there are very few laws at the federal level that govern loan modifications. Two federal laws that borrowers should be aware of are Section 6 of RESPA, and The Mortgage Forgiveness Debt Relief Act of 2007.

Section 6 of RESPA

RESPA is the Real Estate Settlement and Procedures Act. RESPA governs all residential real estate transactions of one- to four-unit properties. With respect to inquiries about mortgage loan modifications, per Section 6 of RESPA, lenders have 20 days to respond in writing to a Qualified Written Request (QWR). While all requests aren’t QWRs (a note hand-written on a payment coupon does not constitute a QWR), a sample can be found on the HUD website at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/re... Once the lender receives the QWR, they have 60 days to respond as to what action they plan to take in response to it. Although the process may take more than 60 days to complete, the lender still has to respond within that time.

The Mortgage Forgiveness Debt Relief Act of 2007

In cases where a lender decides to forgive all, or a portion of the mortgage balance, the amount by which the loan was reduced is normally considered taxable income for the borrower. The Mortgage Forgiveness Debt Relief Act of 2007 says that as long as the property is the primary residence of the borrower, this income is non-taxable. Borrowers should consult their tax professional for specifics on their specific situation.

State and Local Laws

Borrowers should first consult both their state and local governments with respect to the laws that govern loan modifications in their area. When inquiring online, look for departments such as Department of Financial Regulations. Also consult the better business bureau in your area and do online searches for companies that you may want to represent you, as they may have integrity issues. Before contacting or working with any loan modification company (more info on that in other articles in this guide), contact your lender first. If borrowers plan on working with a loan modification company, they also need to know what the regulations are regarding these types of companies in their state.

Borrower Obligations and Rights

Borrowers that are looking to have their mortgage modified have the obligation to work with the lender in good faith. This means reporting all income and expenses, and potential income and expenses accurately. If the borrowers arrive at a point where they are quite confident that they will be unable to make a payment, even after a modification, they need to accept the fact that the mortgage is out of reach for them at this time, and tell the lenders. This is advantageous to the borrower in that they will hear about options from the lender that they may not have heard of if they lead the lender to believe that they were in a better financial position. If they mislead the lender and wind up in foreclosure, there will be little chance that they will get another modification. A lender would rather have the borrower be honest and up front in beginning of the process than go through the process of a loan modification, then have to wind up going through a foreclosure. Loan modifications are both time-consuming and costly for a lender in terms of lost revenue; overall, lenders are more likely to be responsive to borrowers who are being up-front and cooperative with them. There are other options for the borrower, including attempting, in good faith, to sell the property. Delaying the process will eventually limit the number of options that the borrower will have available to them. When borrowers close on a mortgage, they sign a form called a 4506-T. This form authorizes the lender to pull federal tax returns. Should the lender pull tax returns and finds that the borrower has overstated his income, he will have committed fraud, and may disqualify himself from being able to continue with the process. Should the lender discover that the borrower lied, or provided, false documentation to the point of trying to defraud the lender, they, the lender in extreme cases, may file charges against the borrower.

Lender Obligations and Rights

Lenders have the right to expect that borrowers who are asking for loan modifications are doing so in good faith. This means that the borrowers are being truthful as to what their expectations of further hardship and income will be. Lenders, as do borrowers, need to act in good faith, by giving borrowers correct and timely information, and by understanding that at the other end of the phone is a borrower who is on the verge of losing their home.