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Defending a Home from Foreclosure: Consumer Debt Advice from NCLC
by Geoff Walsh, National Consumer Law Center (NCLC)

This is also the third in a series of three articles dealing with home mortgages. This article explains a homeowner’s general rights to defend or delay a pending home foreclosure, how a chapter 13 bankruptcy can avoid foreclosure, the homeowner’s rights after the foreclosure sale, and additional rights to deal with nine special types of foreclosures.

The first article dealing with home foreclosures covered how to obtain information about your mortgage payments, what happens if you make only a partial payment, disputing the amount due, and key information about escrow, property taxes, and insurance. The second article set out options to lower or delay mortgage payments for Fannie Mae, Freddie Mac, FHA, VA, and RHS mortgages.

You are not powerless when you face with a foreclosure sale, but you need to be realistic in defining your objectives.

You often have a good chance of achieving one of the following two objectives:

1. If you have the financial resources, you can keep your home by paying back delinquent payments and legitimate fees or costs. It also is possible to prevent foreclosure by “redeeming” your home.


2. If you do not have the financial resources, you can delay the foreclosure sale to give you enough time to find a long-term solution to the underlying problem that caused you to fall behind on your mortgage payments.

This article also has special advice for nine particular types of foreclosures:

• • If your mortgage is backed by three different government agencies—FHA, VA, or RHS;
• • If you or your spouse are now on active duty in the military;
• • If you have a land installment sale contract;
• • If your mortgage resulted from a home improvement scam;
• • If your mortgage is for a manufactured home;
• • If your manufactured home is facing eviction from a manufacture home park; and
• • If your condominium faces foreclosure for unpaid condominium fees.

Your Rights in the Mortgage Foreclosure Process

Preliminary Notices.

To protect your rights, you need to be informed about what is happening—the worst thing you can do is ignore everything. If you are behind on your mortgage payments, stay on top of things: carefully read the notices you receive, keep track of deadlines, and contact the servicer or foreclosure attorney at regular intervals.


In every state, you are entitled to notice of a pending foreclosure on your home. But do not rely on the fact that you will get this notice—either because of servicer negligence or problems with mail delivery. Always pick up any certified or registered mail, even if returned to the post office. Keep all the notices that you receive from the servicer, lender, or foreclosure attorney in one place, like a folder or notebook. Also document all related phone calls with the date, time, name of person that you spoke with, and the substance of your conversation.


Notice of Default.

You will almost always get a “notice of default” or “notice of delinquency” from the loan servicer that says that you have fallen behind on your payments. It may look like any other collection letter. It tells you how many payments you are behind and the payment amount to catch up and get out of default, often called “the arrears.” It will also give you a deadline to make this payment to avoid foreclosure.


Typically, your payment of the total amount of the arrears will stop any foreclosure. Partial payments are often rejected unless they are made as part of a workout agreement or loan modification.


If you cannot pay the total arrears, review the prior article in this series about seeking a workout agreement or loan modification. Otherwise, do not delay, but review immediately your other rights to deal with the foreclosure. The deeper you get into the foreclosure process, the harder it will be to stop it. A big advantage to paying off an arrearage when you get the initial notice is that you will not yet be responsible for major foreclosure fees and costs that come due after the case is referred to an attorney for foreclosure.


Notice of Acceleration.

After notice of default, or sometimes combined with the notice of default, you typically receive a notice of acceleration. It says that now you don’t just owe the past due installments, but you owe the full mortgage balance, payable either immediately or by a certain date. Receipt of a notice of acceleration indicates that the foreclosure process is moving quickly and that you must act immediately to deal with the pending foreclosure.


The Right to Reinstate.

Many states and mortgage contracts allow you a second chance even after the servicer demands the full balance on the loan, by “reinstating” the mortgage. Usually, this means getting caught up on your missed payments together with foreclosure fees and costs. Many mortgage contracts give you this “right to reinstate” up until five days before the foreclosure sale, and some servicers accept payment right up to the sale date. Your servicer may require that the payment be by certified or bank check and sent to the law firm handling the foreclosure.


Occasionally, servicers claim you did not meet your obligations in some other way, such as failing to keep the property insured. These defaults can also be “cured” by taking care of the problem.


Even where you do not have a legal right to reinstate your mortgage, servicers often will agree to reinstate voluntarily, although others will not. When the servicer will not allow reinstatement, you can often force the lender to allow a reinstatement by taking the matter to court. Most judges will not want to put your family on the street when you have money to pay the arrears, and even in states where judges do not have this power, offering to pay in front of a judge sometimes embarrasses the lender into accepting the payment.


Using Bankruptcy to Cure the Default.

Even where the servicer will not accept payment of your arrears to reinstate the mortgage, if you file for bankruptcy before a foreclosure sale is completed, you then have a right to cure any default by paying the amount overdue. In a chapter 7 bankruptcy, you have to pay the arrearage immediately if you want to avoid foreclosure. If you file under chapter 13, you can make those payments in installments over a period of years.


The Right to Redeem.

You also can “redeem” your home up to the time of a foreclosure sale (and in a few states for a limited number of days after the foreclosure sale). To redeem, you must pay the servicer the whole mortgage balance in one payment plus the lender’s foreclosure fees and costs. Some states allow a second type of redemption where, after the foreclosure sale, you pay the person who bought your home at the foreclosure sale the amount that person paid to purchase the home plus the person’s related costs. Unless you can obtain a new loan to do so, either type of redemption is clearly impractical for you if you are having trouble even making your monthly payments.


How Long Does Foreclosure Take?

A foreclosure can take from three months to a year or more. Much depends on your state, the servicer, and your own actions. Check local practice and stay on top of all foreclosure-related notices. But no matter how long the foreclosure takes, your own delay in developing a plan always will make matters worse for you.


How a Lender Gets Permission to Foreclose.

Foreclosure procedures are established by state law and by local practice. In some states, the lender first files suit in a court, usually in the county where your home is located. You receive a summons or a similar notice usually brought to the house by a sheriff, constable, marshal, or process server. This notice gives you a period of time to respond to the foreclosure lawsuit and to raise your defenses. Your answer must be in writing and filed with the court. If you do not respond at all, a default judgment will be entered against you. If you file a response the court may only enter a judgment against you if it finds your defenses have no merit. A court judgment for the lender gives the lender permission to sell your home unless you can work out an agreement or take some other action (such as bankruptcy) to prevent the sale.


[NOTE: OREGON LENDERS TYPICALLY USE NON-JUDICIAL IF THEY CAN SO YOU MUST GET HELP AS SOON AS YOU KNOW YOU ARE THREATENED WITH FORECLOSURE -- Don't wait for a summons that may never come!]

Other states use “non-judicial foreclosures.” Servicers are allowed to hold a foreclosure sale without a court or other official permission to go forward. They advertise the home for sale, using a legal notice in a newspaper. The servicer sends you a notice of the time and place for the sale. If you want to challenge this type of foreclosure, you must either file for bankruptcy or file a lawsuit and ask the court to stop the sale. With a lawsuit, you may have to file a bond protecting the lender.


The Foreclosure Sale.

Servicers must send you notice of the date and time your home will be sold. In some states, this notice is combined with the notice of acceleration, discussed above. The sale date is a key date because that is when you lose your rights as the owner to obtain a workout or to use the bankruptcy process to prevent foreclosure.


Generally, a foreclosure sale is a poorly advertised and poorly attended auction, either at your home or at a local courthouse or government building. Where a court ordered the foreclosure, the auctioneer will be a sheriff or court official. Otherwise, it will be conducted by someone hired by the servicer. Often only the foreclosing lender attends, who bids no more than the balance of the debt. You can bid at the auction, but you will have to make an immediate down-payment and pay the balance within a short period of time. After a foreclosure sale you will receive notices about eviction. In most states the servicer must go through a separate court procedure to get permission to evict you. Only a government official can carry out an eviction. The eviction consists of a supervised change of locks and removal of your personal property from the house.


The Mortgage Deficiency or Surplus.

Once a foreclosure sale is completed, pay careful attention to all notices you receive. These may include notices of who bought the property and how much they paid. Always ask on your own who bought the property and the sale price because sometimes this information is not sent to you.


[IN OREGON, YOU ARE NOT GENERALLY LIABLE FOR A DEFICIENCY ARISING FROM FORECLOSURE ON YOUR PRIMARY RESIDENCE, BUT YOU NEED TO SEE A LAWYER TO BE SURE.]


If the sale does not bring in enough to pay off the amount due on the loan, in many, but not all states, you will remain responsible for the balance, called a “deficiency”—the remainder due on the loan plus costs, minus the amount the lender was paid from the sale proceeds. You may also receive notices about the deficiency, including collection letters and court papers. In some states your deficiency can be limited if you act to protect your legal rights by responding to these notices or court papers. If you do have to pay a deficiency, this will be an unsecured debt like credit card or medical debt and it is thus low priority debt, until the lender sues you for that debt. Because deficiency claims are unsecured debts, they can be discharged in bankruptcy.


An exception is if your loan is insured, guaranteed, or made by the VA or the Rural Housing Service (RHS). When these agencies seek a deficiency, they can seize your federal tax refund. Also they can seize a portion of your Social Security and certain other federal benefits, although the first $750 a month is protected from seizure. But, even though the debt is owed to the federal government, you can also discharge it in bankruptcy.


On the other hand, if the sale brings in enough to pay off the amount due including all foreclosure costs, you are entitled to any amount by which the sale price exceeds that, called a “surplus.” Although consumers are rarely owed a surplus, if your home sells for more than the outstanding balance, contact the servicer or its foreclosure attorney. If they say you are entitled to a surplus, be sure to give them your new address when you move, so they can send you a check.


If the servicer does not tell you whether you are entitled to a surplus, send a Qualified Written Request to the servicer, as described in a prior article in this series. If fees and costs eat up your surplus, and they seem unreasonable, dispute them or even challenge them in court.


Getting Legal Advice to Stop a Foreclosure; Advice to Avoid

When threatened with foreclosure, immediately seek legal help. It is better to get this help too soon rather than too late. Free help may be available at a neighborhood legal services office (go to www.lawhelp to find a legal services office) or a bar association panel of pro bono attorneys. A small number of lawyers in your area may handle foreclosure defense cases for a fee and many lawyers will help you file a bankruptcy. Exercise care in hiring a lawyer. The highest priced lawyer may not be the best. Find someone you feel comfortable with, at a price you can afford. Also try to get a referral for the lawyer from someone you trust.


Another good source of help is nonprofit foreclosure prevention counseling (sometimes called “default counseling”). Contact a local nonprofit housing organization to find out where this service is offered in your community or call 800-569-4287 (TDD 800-877-8339) or visit www.hud.gov to find a HUD-approved housing counseling agency near you.


Scams to Avoid.

Some businesses offer help to people facing foreclosure in order to rip them off. A pending foreclosure of your home is public information and scam artists will find that information and then contact you. Scammers may ask for thousands of dollars, saying they are offering you a loan or have arranged a payment plan or loan modification. In reality they will do nothing. Even worse, these scammers may (even without you realizing it) have you sign your deed over to them, with a bogus option to buy it back.


If someone seeks you out to save your home, odds are the offer is bogus and will only get you deeper into debt and prevent you from taking the steps that will save your home or improve your situation. Requests for high fees or for money to pay the mortgage are another sign of a scam. An offer of a new mortgage as a way out of foreclosure will be on terrible terms and will just make your situation impossible to resolve. If you do sign a new mortgage under pressure of foreclosure, you have three business days to cancel.


Delaying the Foreclosure Process

Foreclosure can move very quickly, but you can exercise your legal rights to slow down the process. Delay gives you time to put in place a long-term solution, such as to refinance your mortgage, sell your home privately, arrange a workout agreement or loan modification, or save up money to get you caught up on your payments. You cannot properly delay foreclosure just because you need more time. The actions you take must be based on some underlying legal claim or defense that is raised in good faith.


Procedural Defenses May Delay the Process.

Foreclosures are rarely contested by homeowners, and lenders’ attorneys may be sloppy in their procedures and sometimes do not comply with pre-foreclosure requirements. Lender errors can be to your benefit when you are contesting foreclosure, forcing the lender to start over or at least to comply with procedural requirements.


You are likely to need the help of a lawyer or other professional to determine lender compliance with required procedures. Examples are failure to give you proper notice, failure to give you a fair chance to correct the default, failure to properly advertise the sale, failure to introduce the original documents in the foreclosure proceeding, failure to sue all the proper parties, failure to bring the foreclosure proceeding in the name of the real mortgage owner, or discouraging bids at the foreclosure sale. There may also be procedural requirements that involve considering you for loss mitigation options. Under certain state laws you may be able to defend against a foreclosure if the servicer seriously violated these procedures.


In states where foreclosure actions are brought in court, raise defenses in that action. In states where lenders use the non-judicial foreclosure process, you have to bring a legal case of your own, asking the court to stop the foreclosure.


Servicer’s Past Acceptance of Late or Partial Payments As Grounds for Foreclosure Delay.

Courts may refuse to allow foreclosure if the servicer surprises you by suddenly calling the whole loan due when the servicer has been lenient in the past in accepting late or partial payments. It instead must warn you that late or partial payments are no longer acceptable before it calls the whole loan due and attempts a foreclosure. If the servicer accepts a payment after the foreclosure has started, you can argue that there is no longer a default, and the servicer must restart the foreclosure process. This may involve giving a new notice of acceleration.


Asking the Court for More Time.

A judge may give you a delay if foreclosure will cause serious hardship. The hardship should be documented and involve more than just the loss of your home, such as that a family member has a serious illness. The hardship must be temporary as well; if permanent, the judge may feel that now is as good a time as any to allow the foreclosure.


If you have a great deal of equity in your home, a judge may allow you a short period of time to sell the home without foreclosure, allowing you to get the best possible price and recover your home equity. Even if you are unable to make payments during this time, the lender is not hurt because there is enough value in the property to eventually pay the lender’s full claim.


A Chapter 7 Bankruptcy May Create a Temporary Delay.

A chapter 7 bankruptcy case cannot address a foreclosure in the long term but filing the bankruptcy typically delays the foreclosure at least 60 days, as long as you have not recently filed another bankruptcy case. While the bankruptcy is pending, the lender cannot continue foreclosure without permission of the court.


You cannot file a chapter 7 bankruptcy solely to delay foreclosure. You must have some other legitimate purpose for filing bankruptcy. For most homeowners in financial distress, this is hardly a problem because there are lots of other debts outstanding.


A Chapter 13 Bankruptcy May Stop a Foreclosure Permanently

Unlike a chapter 7 bankruptcy that only delays a foreclosure, a chapter 13 bankruptcy filing may eliminate the threat of foreclosure by letting you slowly get caught up on past due payments over a period of years, while at the same time, you must continue to make your regular monthly payment. Do not file the chapter 13 bankruptcy too soon, and instead pursue options to modify your payments discussed in a prior article in this series. But you definitely do not want to wait too long and certainly should file the chapter 13 bankruptcy before the foreclosure sale.


You also need to leave yourself enough time to participate in required credit counseling with an approved credit counseling agency before filing bankruptcy. Fortunately you can do this over the Internet or by telephone.


Curing Delinquent Payments and Reinstating the Mortgage.

Chapter 13 bankruptcy works best where you fell behind in your mortgage payments because of a temporary financial setback and you have resolved the problem that caused your setback. Filing the chapter 13 bankruptcy (the same as in chapter 7) automatically stops the foreclosure—at least temporarily. In addition you can pay back your delinquent payments in installments over a period of three to five years, but you must also make your regular monthly payments as they come due. You may have to pay interest on the back-due amount, a commission to the bankruptcy trustee for handling your payments, and certain fees the servicer has already charged, if they are legitimate.


For example, assume you are six months behind on $800 monthly mortgage payments so that you owe $4,800 and also assume the servicer has charged $600 in various fees. In a five-year chapter 13 case, you cure by making future $800 payments as they come due and catching up on the past due $5,400 in sixty monthly payments of $90 each, plus interest and the trustee’s commission, so you pay $890 a month plus interest and the commission.


As long as there has not been a foreclosure sale, you can cure delinquent payments in a chapter 13 bankruptcy even if the servicer has already demanded you pay at once the full loan amount or even if a court has ordered a foreclosure sale. The bankruptcy process also gives you an opportunity to raise defenses to the lenders’ claim, including defenses that fees are excessive. These defenses can be raised as part of the determination as to how much you have to pay under your chapter 13 bankruptcy plan. Chapter 13 bankruptcy may also permit you to get rid of other liens and mortgages on your property.


Sale of a Home in a Chapter 13 Bankruptcy.

If you can no longer afford your future mortgage payments, you will not benefit from bankruptcy’s ability to cure past delinquencies. You can, however, use the bankruptcy process to sell the home on your own in an orderly fashion, thereby keeping your equity and avoiding the problems of a foreclosure sale. This is likely to work only if the home’s sale price is enough pay both the mortgage lender and at least something to your other creditors.


Request that the court approve your realtor. When a sale is arranged, many title insurance companies require that you obtain an order from the bankruptcy court approving the sale and allowing the property to be sold free of liens.


State Temporary Bans on Foreclosure;
Conference and Mediation Programs

Several states and local court systems have created programs that offer settlement conferences and mediations for foreclosures. These programs are designed to encourage the servicer to agree to alternatives to foreclosure. Even though how these programs work will vary, they all give you the the opportunity to discuss your situation with a live person as opposed to leaving messages in the servicer’s voicemail system. Often the programs refer you to housing counselors and other advocates who can help you through the process.


Carefully review any notices you receive about mediation programs. Sometimes a mediation session is scheduled automatically when a servicer starts a foreclosure. In other programs, you have to request mediation and you may have only a limited time to make the request.


State and local governments also have at various times authorized stays of foreclosures limited to the duration of a particular economic crisis or natural disaster. Check for any restrictions on foreclosures in your state. State bans are only temporary, but they may give you an opportunity to get back on your feet.


Your Options After the Foreclosure Sale

Redemption and Setting Aside the Sale.

Some states, for a very limited number of days after the foreclosure sale, allow you to “redeem” the home back from the lender—in other words, they allow you to pay off the full mortgage and related fees and charges. This way, you end up with clear title to the property. Another option in some states is to redeem your home from the person purchasing it at the foreclosure sale, paying that person the total purchase price plus interest and allowable costs. State law may provide you only a very limited number of days after a foreclosure sale to redeem in this manner, but other states give you up to a year to redeem from the purchaser. Even if you do not have a right to redeem after the sale, you may be able to buy the home back from the purchaser, particularly if the buyer was your mortgage lender.


In some areas there are local non-profit agencies that help borrowers with financing to purchase their homes back after foreclosures. Another option is to find another purchaser for your home willing to pay more than the redemption amount. You still lose your home, but you get to keep the difference between what you sell the home for and the redemption amount. Those funds may be very helpful in your search for new housing. Redemption has strict time deadlines and strict procedures, so it is best to try to have an attorney to assist you in redeeming the home.


You can also ask a court to set aside the foreclosure sale because proper procedures were not followed or because the price was unconscionably low. This is a long shot and you must act quickly, almost always with an attorney’s help.


Rights As a Tenant in Your Own House.

After the foreclosures sale, you are a tenant at will in your own home, now owned by someone else. To evict you, the new owner must comply with your state’s landlord-tenant eviction law. This usually means filing a lawsuit in court. You can save the new owner from dealing with the difficulty and time involved in an eviction processes by vacating voluntarily if the new owner gives you cash to help in the move and to find new housing. This option is called “cash for keys.” You can also offer the new owner that you will pay rent if you are allowed to stay in the home. Even a short extension can help you find a new place to live.


Special Protections Against Foreclosure for
FHA, VA, and RHS Mortgages

FHA Loans.

Lenders cannot begin legal foreclosure proceedings on an FHA-insured loan if your only default is an inability to pay an escrow shortage in a lump sum. They also cannot foreclose for missed payments until at least three monthly payments are overdue. After the President declares a disaster affecting your home, the lender may not start or continue a foreclosure on your home for 90 days.


You also may be able to delay a foreclosure if the servicer has failed to comply with servicer requirements for an FHA-insured mortgage loan. Key requirements are that the servicer must:

• • Consider whether you qualify for FHA loss mitigation options before initiating a foreclosure.
• • Give you notice of your default by the end of the second month of your delinquency, explaining what you must do to get reinstated.
• • Make reasonable efforts to arrange face-to-face or telephone interviews with you before three full monthly installments are overdue.

If you have an FHA mortgage and are threatened with foreclosure, and you do not have an attorney, you should at least contact a HUD-approved counselor. To find a HUD-approved counselor, call 800-569-4287 (TDD 800-877-8339) or check www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm Sometimes a counselor can convince a lender to give you a second chance. Alternatively you can call HUD for help at 877-622-8525. Stay on the line until a HUD field officer picks up.


VA Mortgages.

If you have a VA mortgage, the lender cannot foreclose unless you fail to make three full monthly payments. The lender must give the VA thirty days’ warning of its intent to foreclose and must make all reasonable efforts at forbearance before actually foreclosing on the property. The lender must consider temporary suspension of payments, extension of the loan, and acceptance of partial payments. If the lender still intends to foreclose, you can stop the foreclosure by paying all overdue payments, all late charges, and any of the lender’s foreclosure expenses to date.


The lender’s failure to meet its obligations in this area can be a defense to foreclosure. For example, send a letter to the lender asking it to consider foreclosure avoidance strategies. The lender’s failure to respond appropriately is evidence of its failure to meet its responsibilities. Another option is to contact the regional VA office serving your state, explain the reasons for your default, and ask about the best plan for getting your mortgage payments back on track.


RHS Mortgages.

For private loans guaranteed by the Rural Housing Service (RHS), the lender must follow RHS guidelines when they foreclose. For example, you can assert a defense to foreclosure that the lender failed to consider RHS loss mitigation options before foreclosing.


Other loans come directly from the RHS. Before it forecloses, RHS must notify you about loss mitigation options, consider you for them if you ask, and implement the options you qualify for. RHS’s failure to perform any of these obligations can be raised as a defense to foreclosure. You can also appeal the RHS’s loss mitigation decisions with the Department of Agriculture (RHS’s parent agency), and a foreclosure should not proceed until an appeal has been resolved.


Special Protections for Active Duty Military

If you are on active duty in the military or left within the past nine months, or you are the spouse or dependent of someone on active duty, you have special protections from foreclosure under the Servicemembers Civil Relief Act. This Act applies to all types of mortgage loans, but only applies if you entered into the loan before your current period of active duty.


Even if you are in a state that allows non-judicial foreclosures, the lender must obtain a court order or your written permission to foreclose on your home. You can also ask make a written request with the court for a ninety day (or even longer) delay in any court foreclosure case brought against you. The request must explain why your military duties affect your ability to appear in court, give the date when you will be able to appear, and include a statement by your commanding officer that your military duties prevent you from appearing in court and that leave is not authorized.


Make sure you get in writing that the case against you has been delayed. The court also can lower your mortgage payments or add your back payments to your loan balance if your military service affects your ability to make your payments.


Foreclosure of Land Installment Sales

Your foreclosure rights are very different if you have a special type of home mortgage called an “installment land contact,” “land sale contract,” “contract for deed,” or “bond for deed.” This article calls them “land installment sales.” In a land installment sale scenario, you do not take title to your home until you have made all the monthly payments that are due, often for more than 10 or even more than 20 years. You pay property taxes and are responsible for repairs, but you do not yet have title to your home.


Land installment sales have far fewer protections from foreclosure than do other types of home mortgages because state foreclosure laws often do not apply. You may not have the right to certain notices, and may not have the right to reinstate or cure delinquent payments or to redeem your home.


In fact, if you miss a payment, the lender may try to evict you under your state’s rules for landlords and tenants, which offer you less protection than state laws dealing with foreclosures. Fortunately, this is not always the case—for example, in Illinois, Maryland, Ohio, Oklahoma, and Texas, your rights are closer to those that apply in a normal home foreclosure.


Some (but not all) bankruptcy courts treat land installment sales like mortgage loans, so that a chapter 13 bankruptcy plan can cure back-payments over a three-year to five-year period. When bankruptcy courts do not treat land installment sales like mortgages, you still have important rights in bankruptcy to keep your home.


Foreclosure Protections
Where Mortgage Resulted from a Home Improvement Scam

You have special rights if your foreclosure results from a home improvement loan and the contractor deceived you or performed shoddy work, and the contractor was the one who initiated the loan or referred you to the lender. In this scenario, you can argue in court that you do not have to pay the loan because of the contractor’s performance.


The loan agreement may even say that you can raise the seller’s conduct as a defense on the loan. Because you do not owe on the loan, they cannot foreclose. On the other hand, small errors or minor problems with the work probably will not be enough to be a foreclosure defense.


You will have to raise this issue either in the judicial foreclosure action or in your own court action where the lender seeks to foreclose without a judge’s order. You may fare best where you get the help of an attorney. Ask the attorney to refer to NCLC’s Federal Deception Law Chapter 4.


Foreclosures of Manufactured (Mobile) Homes

The law often is unclear as to whether a manufactured home is considered real estate. If the manufactured home is treated as real estate, the foreclosure rules are similar to any other home. If the manufactured home is treated as personal property, the foreclosure rules then are similar to car repossessions discussed in a prior article in this series. The answer will vary from state to state and often will depend on where the home was when the loan documents were signed. Was it on the dealer’s lot or was it attached semi-permanently to your own land or at a manufactured home park? Is there a title to the home or are the ownership documents recorded in the local land records?


You should consider seeking a loan modification (as discussed in a prior article in this series) if you are behind on payments, whether your manufactured home is classified as real estate or as personal property. Similarly, no matter how your state law treats manufactured homes, filing bankruptcy can stop its seizure and provide options for curing the default. In addition, manufactured home loan documents often state that you have the right to “cure” your delinquent payments. You can stop the seizure if within 30 days of the notice date you pay past-due amounts, late charges, and related fees.


If your manufactured home is treated as personal property, a lender may send a representative to repossess your manufactured home; more likely, however, your lender will take you to court and try to have the court order a sheriff to seize your manufactured home. Like other court actions, you should get legal help as soon as possible to defend against the lender’s claims.


Manufactured Home Evictions from Parks.

If you rent park space for your manufactured home, failure to make your lot rent payments can result in your eviction. Typically, the park owner must first file a legal action to evict you. In some states, this legal action will be similar to other landlord and tenant actions. Other states have special legislation dealing with manufactured home park evictions, and these may even allow a park owner to seize your home.


You will need to check with a specialist who is knowledgeable about these issues in your state, such as a lawyer, manufactured home park tenants’ association, or manufactured home owners’ association. You should deal with your lot rent as a priority debt just as high as your manufactured home loan payment.


Foreclosure for Unpaid Condominium Fees

If you do not pay your condominium fees, in many states the condo association has a priority lien on your home, meaning that it can foreclose on your unit to collect the amount due. Such a lien can also complicate your ability to obtain a loan modification from your mortgage lender, unless you first get caught up on your condo fees. Other times the condo association may just sue you in court for the fees.


Communicate with the condo association’s trustees or property manager if you cannot pay your condominium fees. Let them know the reason and see what kind of payment plan you can work out. As the other owners are your neighbors, they may be willing to work out an agreement that helps you through difficult times.

library.nclc.org
Current Options to Lower Mortgage Payments: Consumer Debt Advice from NCLC
Author: Geoff Walsh



This is the second in a series of three articles dealing with home mortgages. This article details options to lowering or delaying mortgage payments for Fannie Mae, Freddie Mac, FHA, VA, and RHS mortgages. The prior article covered how to obtain information about your mortgage payments, what happens if you make only a partial payment, disputing the amount due, and key information about escrow, property taxes, and insurance.


The Help Offered Depends on the Lender Involved

Different lenders have different loss mitigation guidelines. Fortunately, just a few entities own, insure, or guarantee almost all residential mortgage loans in the United States: Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the U.S. Department of Agriculture’s Rural Housing Service (RHS).

You must identify who owns or insures your mortgage in order to know your options for modifying your mortgage payments. To determine who owns your loan, use these tips:

• • Fannie Mae: Go to www.knowyouroptions.com/loanlookup.


• • Freddie Mac: Go to https://ww3.freddiemac.com/loanlookup.


• • FHA: Because some lenders use FHA forms for all their mortgages, do not assume you have an FHA mortgage just because your loan documents say FHA or HUD. Look at your monthly statements for an itemized charge for FHA insurance. Or look for a box checked off “FHA insured” on your settlement statement.


• • VA-insured: Loans and billing statements identify VA insurance.


• • RHS guaranteed loan: Closing documents will reference to RHS insurance coverage. Older loans may refer to FmHA insurance or guarantees.


• • RHS direct loans: Closing documents should mention the “Section 502 Single-Family Housing Program” and the loan will be serviced by a national servicing center in St. Louis identifying itself as a servicer of RHS direct loans.


• • For all loans: Send a request for information letter to your servicer (see the previous article in this series.).

In unusual situations, someone other than the above entities will own your mortgage loan, and then it may be more difficult to learn your loss mitigation options. Try asking for options similar to those available for Fannie Mae and Freddie Mac loans, since these set the industry standard.


The HAMP Program Has Expired for New Applications. The Home Affordable Modification Program (HAMP), a major federal effort to reduce foreclosures during the Great Recession, and related programs expired at the end of 2016. This article instead describes loan modification programs in place today. (Note though that FHA calls its current loan modification program FHA-HAMP.)


Options for Fannie Mae and Freddie Mac Loans

Fannie Mae and Freddie Mac are large government-chartered corporations that own or guarantee over one-half of the home mortgages in the country. Fannie Mae and Freddie Mac have similar loss mitigation guidelines, divided between short-term options for temporary problems and long-term options for significant changes in your financial circumstances. When you ask for loss mitigation help for a Fannie or Freddie loan, your servicer must review your request by considering a series of specific options in a required order. If you do not qualify for the first one on the list, your servicer must go on to the second, continuing until you qualify for some form of relief.


To request loss mitigation from either Fannie or Freddie, complete and submit Form 710—Mortgage Assistance Application to your servicer. Indicate you are experiencing hardship, either a loss of income or increase in expenses. You need not be in default, if default is “imminent” due to a change in your financial circumstances.


Options for Temporary Hardships.

Under Fannie and Freddie guidelines, if your servicer considers your hardship to be temporary, it should offer you a repayment or forbearance plan. A temporary hardship might be a short-term drop in income (such as a loss of your job) or a one-time major expense. You may not agree with a servicer’s assessment that your hardship is only temporary, such as when your loss of income is long-term due to a divorce or medical condition. Press this point because, as described below, you have more options where a hardship is long term.

Repayment plans are applicable when your temporary hardship is now over, but you are so far behind on your mortgage payments that you cannot get caught up right away. Fannie and Freddie will offer you a repayment plan where for up to a year you make each month your regular mortgage payments and a portion of your back-due payments. The repayment plan must be realistic, so that you can make the increased payments over the repayment plan period. In judging what you can afford, remember that your temporary financial difficulties will also have left you with other overdue obligations, such as utility bills or urgent needs for your children that have been postponed.
Forbearance plans, on the other hand, apply when you are currently experiencing a temporary hardship. A forbearance plan allows for reduced or suspended payments for up to six months, and even longer if you are unemployed. At the end of the forbearance period, the servicer must evaluate you for a long-term solution. What that option will be will depend on your financial circumstances at the time. It could be a repayment plan, a permanent reduction in payments, or an option involving your loss of ownership of the home.

Home Retention Options for Long-Term Hardships—The Flex Modification.

The Flex Modification is Fannie and Freddie’s primary loss mitigation option for borrowers who want to keep their homes but are facing a long-term hardship (such as your disability, the death of your spouse, or divorce). Your servicer can offer you a “Flex Mod” in response to your loss mitigation application, or your servicer can offer this option unsolicited, based on its unilateral determination that you qualify.

The Flex Mod Based on the Servicer’s Unilateral Evaluation. Fannie and Freddie require that their servicers review all borrowers for eligibility for a Flex Mod when a borrower is between 90 and 105 days behind in payments (they can also do this review a second time later). The servicer performs this evaluation based solely on information from its own records, including a property valuation, your current interest rate, the amount of your arrearage, and the unpaid balance that you owe. The servicer does not need income or any other information directly from you to decide on your eligibility. Instead, it applies a formula to the information it already has.


If the result shows you are eligible, the servicer will offer you a trial modification plan that will lower your payments. After you make three-to-four required monthly trial payments, you sign a permanent Flex Modification agreement and your loan is modified so that your mortgage payments are reduced.


The Flex Mod Based on Your Loss Mitigation Application. You can also apply directly to your servicer for a Flex Modification using the Form 710 application. To qualify, the servicer must find that your hardship is not temporary and that you are at least 60 days in default or meet the “imminent default” standard if you are less than 60 days behind. You can apply for a Flex Mod as long as a foreclosure sale has not yet occurred. If you submit your initial complete application at least 37 days before a scheduled foreclosure sale, the foreclosure must be delayed.


The Flex Modification Terms. With one exception which will be discussed below, the terms of a Flex Mod is the same whether you receive a unilateral offer from your servicer or apply for the modification yourself. The Flex Mod formula favors borrowers with little or no equity in their homes, and particularly borrowers who are underwater (meaning they owe more on the mortgage than the home is worth). The formula can also provide a significant benefit for borrowers whose interest rate is well above the current market interest rate. The servicer must offer you the modification if the modification reduces your monthly payment.


The flex modification involves four changes to your loan terms. First the servicer adds your current arrearage to your unpaid principal balance, so that you repay your arrearage gradually each month over the full term of the loan. Second, as long as your equity in the home is less than 20% of the home’s current market value, the servicer reduces your interest rate to a current national market rate. Third, the servicer extends the repayment term of your loan to forty years from the date of the modification, thus reducing your monthly payments.


And fourth, you are charged interest only on part of the principal balance, called principal forbearance; the remainder of your loan principal is a zero interest loan. The smaller the portion of your balance that is subject to interest charges, the lower your monthly payment. You still owe the part of the principal that has zero percent interest and you must repay it eventually; also, this portion of the loan is still secured by your home. First, the servicer sets aside the amount of your outstanding principal on the loan that exceeds your home’s current market value. For that part of your principal, you pay zero percent interest.


After modifying your loan using the four steps described above, the servicer determines if the resulting payment of interest and principal reduces your payments by at least 20%. If not, the servicer may further reduce the interest-bearing principal to an amount equal to only 80% of the property’s current market value, further reducing your monthly payment. Nevertheless, no more than 30% of your principal can be charged zero interest.


The Special Flex Mod Terms for Borrowers Who Submit an Application. In a Flex Modification calculation available only for those who initiate the application process before the loan is 90 days overdue, the servicer targets a new payment (for principal, interest, and escrow) that is not more than 40% of the borrower’s gross household income. This is over and above any reduction created by the Flex Mod evaluation described immediately above.

Options That Involve Giving Up Your Home.

If your servicer finds you are not eligible for other Fannie or Freddie loan modification options, it must then evaluate you for options that involve giving up your home. You may also want to consider these scenarios even though you qualify for an option that instead reduces or delays your mortgage payments.

No one likes to give up their home, but there are options which involve giving up your home that are better for you if a foreclosure is otherwise inevitable. This is a hard decision, as it involves emotional as well as family and financial considerations. But sometimes not saving your home is the wisest financial move you can make, particularly if your house is worth substantially less than the combined amount of your mortgages.


On the other hand, moving may involve leaving your neighborhood, result in your children having to change schools, or require you and your partner to make a difficult commute. You will have to consider the costs and benefits of renting as well.
Fannie and Freddie may propose a “short sale” that offers you benefits if your home is worth less than the mortgage balance. In this scenario, you would sell your home yourself to a third party, usually through a realtor. Fannie or Freddie accepts the sale proceeds to satisfy your mortgage, even if the proceeds are less than the amount owed. Realtors, particularly those who have experience dealing with a particular servicer, may help convince the servicer to agree to a short sale. As a last resort, the servicer will consider a “deed in lieu of foreclosure” transaction, where you voluntarily transfer title to your property to the servicer in exchange for a release from your liability on the mortgage debt.


Servicers are authorized to provide relocation assistance up to $3,000 in connection with these options. In the “deed in lieu” scenario, there is also a short-term lease option available which can ease the move from the home.


Short sales and deeds in lieu are almost always poor choices if your home is worth significantly more than your outstanding mortgage balances. If you have to lose your home, it is far better to sell it on your own because you get to keep the amount by which the sale price exceeds the total of first and second mortgages on the home. But you have to act quickly before the home is sold in foreclosure. If you ask, the servicer is likely to give you a short delay in a foreclosure to let you sell the home yourself, but only if you already have made substantial progress toward a sale, such as a signed “purchase and sale” agreement.


If you have favorable mortgage terms, it might be attractive for the buyer of your home to assume your mortgage, that is take over your mortgage payments. A mortgage is assumable if the original loan documents say it is or, in most states, if the documents are silent on the issue. Other mortgages contain a “due-on-sale” clause, preventing assumption in most situations. But even then lenders cannot block certain transfers from parent to child or from one spouse to another. Lenders also may voluntarily agree to an assumption even when the mortgage contains a due-on-sale clause.


You should apply for a short sale or deed in lieu of foreclosure by completing and sending the servicer the same Form 710 loss mitigation application, which prevents a foreclosure sale while your request is being considered. For both short sales and deeds in lieu the documentation requirements are less strict the further behind in payments you are. If your financial documentation shows that you have the ability to contribute funds to reduce the amount owed, the servicer can require that you make some contribution to reduce the debt before a short sale or deed in lieu can be approved. Be sure to get the terms of a short sale or a deed in lieu in writing, including any release from liability that the servicer agrees to give you.


Second mortgages and other liens against your property may create barriers to a short sale or a deed in lieu, because the new owner will not have clear title. However, Fannie and Freddie guidelines allow the servicer to advance you funds to get rid of small junior liens if this facilitates the transfer of the property.

Tax Consequences of Short Sales and Deeds in Lieu.

Many short sales and “deeds in lieu of foreclosure” cancel part of your debt, which has tax implications since forgiveness of debt can be treated as taxable income in the year the forgiveness took place. Nevertheless, you will typically not owe any additional taxes. There are several common situations where the IRS will not count the discharged debt as income. Because tax issues are complicated, get help from a qualified tax professional.

Some lenders will still send an IRS Form 1099-C both to you and to the IRS any time they agree to forgive your debt. Do not ignore this Form 1099-C, but instead file IRS Form 982 with the IRS, attaching an explanation, if applicable, why the discharged debt should not count as income. You also will have to file the longer Form 1040 tax return.

Options for FHA-Insured Mortgages

When you get behind on an FHA loan, you may be sent a useful pamphlet “How to Avoid Foreclosure.” This pamphlet is also available at www.hud.gov/offices/adm/hudclips/forms/files/pa426h.pdf. FHA’s comprehensive handbook covering its loss mitigation guidelines, FHA Single Family Housing Policy Handbook (HUD Handbook 4000.1), is available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/handbook_4000-1.


HUD-funded foreclosure prevention counseling can be obtained from your HUD regional office or you can call 800-569-4287 (TDD 800-877-8339) or go on www.hud.gov to find HUD-approved counselors. Check a counseling agency’s website to see if it provides foreclosure prevention counseling.


If you experience difficulties with a servicer who is not following FHA guidelines, you can seek help through the FHA National Servicing Center (NSC). Mail Department of Housing and Urban Development, National Servicing Center, 301 N.W. 6th St., Suite 200, Oklahoma City, OK 73201 or call 888-297-8685. Be sure to send your servicer a copy of any letter you send to the NSC.


Servicer Initial Obligations When You Are Delinquent.

Servicers will send you notice of your default of an FHA mortgage which explains what you need to do to get your loan reinstated. Servicers must also make reasonable efforts to arrange a face-to-face interview with you before three full monthly installments are overdue. The servicer may not initiate foreclosure until it has considered whether you qualify for one of the loss mitigation options discussed below.


Before You Get to the FHA-HAMP Program.

While FHA-HAMP can reduce your monthly loan payment, some borrowers are not eligible for FHA-HAMP—they only qualify for a repayment plan or a forbearance agreement, which do not permanently change the basic terms of their loans. In a repayment plan, each month you make your normal monthly payment plus pay a portion of your delinquent payments on top of that. The plan gives you the opportunity to get caught up on your back-due payments over a period of months. A forbearance agreement does not excuse you from eventually making all your payments, but does allow you for a period of months to reduce or skip your payments.


There are three basic situations where you will only be offered a repayment plan or a forbearance agreement instead of the FHA-HAMP program:

1. If you have not experienced a verified loss of income or increase in living expenses, the servicer must offer you a short-term repayment plan or forbearance agreement. If the plan is going to extend for longer than three months, it must be in writing; shorter plans can be provided orally. The plans cannot extend longer than six months, unless HUD authorizes the extension.


2. You do not have “continuous income” that is reasonably likely to continue through at least the next twelve months. Continuous income includes employment income, pensions, Social Security, disability, veterans’ benefits, and child support payments. FHA’s option for borrowers without continuous income is a special forbearance plan that reduces or suspends your payments for a fixed time or until you begin to receive continuous income, up to a maximum of one year. At the end of the forbearance period the servicer must evaluate you for the full range of FHA loss mitigation options.


3. If you have too much income, you can be forced into a repayment agreement of up to six months. This happens if you have sufficient net income left after you pay your normal monthly living expenses and your recurring monthly debt, so that you can handle a repayment agreement that will bring you current within six months. In addition, if your current total mortgage payments take up less than 31% of your gross income, you must also be considered for a repayment plan of up to six months.

Who Qualifies for the FHA-HAMP Program.

Unless you are excluded by one of the threshold tests described above, your servicer must evaluate you for FHA-HAMP which can permanently reduce your monthly payments. FHA-HAMP uses a complicated formula set out below to determine your loan modification, based on your income and loan payment. Once this loan modification is determined, you will be on a three-month trial plan on reduced payments. If that goes well, you will receive a permanent modification with lower mortgage payments.


To qualify for the FHA-HAMP program, the property must be owner-occupied. The borrowers must be in default or at imminent risk of default. Borrowers who have received a chapter 7 bankruptcy discharge and did not reaffirm their mortgage debt are eligible for FHA-HAMP, as are borrowers currently in bankruptcy. A default on an FHA-HAMP trial modification does not preclude later eligibility for a new modification, so long as the borrower can demonstrate changed circumstances justifying the new application. Borrowers are limited to one permanent FHA-HAMP modification in a two-year period.


Calculating Your FHA-HAMP Loan Modification.

The first step in determining your FHA-HAMP loan modification is to calculate a monthly payment that FHA thinks you can afford, called the “target payment amount.” Select the greater of 80% of your current monthly payment (including escrow) with 25% of your gross monthly income. The target payment is the lesser of that resulting number and 31% of your gross monthly income.


The next step initially calculates a proposed modification. The total amount of outstanding unpaid interest, advances, and legitimate foreclosure fees and costs are added to the existing principal balance to form a new modified principal balance. This new balance is amortized over a 360-month term running from the modification date. A new fixed interest rate is set at a current market rate. These calculations generate a new monthly payment, which is added to the current monthly escrow payment to produce an estimated total monthly modified payment.


If this initial modification calculation produces a number at or below the “target payment amount,” the servicer should offer you a modification with those fixed terms. If it produces a number higher than the “target payment amount,” then FHA determines that you need more help. Your servicer must then reduce the principal balance to which the new interest rate and 360-month term is applied to reach a lower monthly payment for you. With one exception discussed below, the principal balance is reduced enough so that your payment gets down to the target monthly payment. FHA calls the amount of the principal balance that is reduced a “partial claim.”


A partial claim does not eliminate your obligation to pay the amount reduced from your principal balance, but instead is an interest-free loan, secured by a secondary lien on your home. You do not have to pay this loan off until you pay off your FHA first mortgage or stop living in the home. The FHA-HAMP program can provide you with as large a partial claim as you will need to bring your payments down to a “target payment,” but the total number of partial claims FHA will offer you during your mortgage is limited to 30% of the unpaid principal balance owed at the time of default.


If the cap is reached, your payment is lowered as far as possible until the partial claim cap is reached, as long as your total
modified monthly payment is lower than 40% of your gross monthly income. If your payment would be higher than 40% of your gross income, you should be considered for special forbearance or an option involving loss of your home.



Short Sales and Deeds in Lieu of Foreclosure.

FHA provides for a short sale, letting you sell your home and use the proceeds to satisfy your mortgage even if the proceeds are less than the amount you owe on the loan. The FHA limits approvals of short sales based on the ratio of the property’s value to the outstanding debt and on the ratio between the short sale purchase price and the property’s value. To qualify for an FHA short sale you must document financial hardship. No documentation is needed if you occupy the property, are ninety days or more delinquent, and have a credit score below 620.


You must be able to sell your home within four months of your approval. This period may be extended for two more months if you have a signed purchase and sale agreement or if your lender qualifies under certain program rules. The sale proceeds must pay off any liens that are junior to the FHA mortgage. The FHA will provide you with an incentive payment of up to $3,000 when you complete the short sale.


FHA offers a “deed in lieu of foreclosure” option that lets you transfer your home voluntarily to the FHA in exchange for a release from all your obligations under the mortgage. You must submit verification of hardship, and a complete application with calculation of your cash reserves. You can avoid this documentation requirement if you occupy the property, are ninety days or more delinquent, and have a credit score below 620. The FHA will generally not accept a “deed in lieu” if you have a tenant. Instead you must first attempt to sell your home through a short sale.


The FHA pays you $2,000 for completing a deed in lieu. However, if there are any other liens on the property, the payment may be used to help pay off those liens. The deed in lieu option will not be approved unless all junior liens can be paid off with the transfer.


A short sale and a deed in lieu of foreclosure can have tax implications. For more on both these tax implications and for other useful information about short sales and deeds in lieu, refer to the discussion above in this article concerning Fannie Mae and Freddie Mac short sales and deeds in lieu.


Options for VA Mortgages

For mortgage loans guaranteed by the Department of Veterans Affairs (VA), the VA expects the servicer to exhaust all possible alternatives before pursuing foreclosure. (In some cases, the VA actually takes over the loan and then you work with the VA instead of the servicer.)

If the servicer fails to exhaust the alternatives discussed below, contact one of the eight VA regional centers. The contact information for the center serving your state is found at www.benefits.va.gov/HOMELOANS/contact_rlc_info.asp.


The major loss mitigation options for VA-guaranteed loans are describe below. For more information, see VA Servicer Handbook M26-4, available at www.benefits.va.gov/WARMS/M26_4.asp.


Repayment Plans.

A repayment plan is a written agreement between you and your servicer to reinstate a loan that is at least two months in default. For a period of at least three months (you can request a longer period) you pay the normal monthly payment and an agreed upon portion of the arrearage. Repayment plans may be renegotiated at any time.


Special Forbearance.

Special forbearance is a written agreement between you and the servicer setting out terms for reinstating a loan that is at least two months in default. The servicer agrees to suspend all payments or accept reduced payments typically for three-to-four months, but the forbearance can be approved for longer periods. You agree to pay the total delinquency at the end of the forbearance period or agree to some other repayment option at that time.



Modifications.

The servicer may modify a VA-insured loan without the agency’s prior approval. The loan must be in default or, with VA approval, at imminent risk of default. The cause for the default must have been addressed so that it is not expected to re-occur. You must be considered a good credit risk, but a past default is not determinative for this factor, and you must have made at least twelve payments on the loan.


If you meet these conditions you can qualify for a “standard VA modification,” where your servicer adds unpaid interest, taxes, insurance, certain assessments (such as for water and sewer charges) to the new principal balance. Legal fees and foreclosure costs may also be added to the modified balance, if they do not exceed the VA’s fee schedule. Late fees and processing costs may not be added. The new principal balance is then amortized over a longer period of time and with a different interest rate, thus lowering your mortgage payments.


The standard modification may result in a decrease or up to a one percent increase in the interest rate, and the new rate must be fixed. The modification may extend the loan term to the shorter of 360 months from the date of the modification or 120 months from the original loan maturity date (unless the original loan term was less than 360 months, in which case the loan term may be extended to 480 months from the loan origination date).


Without VA approval, a loan cannot be modified more than once within three years and not more than three times during the life of the loan. A modification that does not meet the standard guidelines discussed above may still be approved if the VA determines that the modification is in the best interest of the veteran and the agency.


A “VA Affordable Modification” is another option that targets a total monthly payment not greater than 31% of your gross monthly income. After your arrears are added to your principal balance, the interest rate may be reduced to a fixed level based on current market rates, the term may be extended, and payments may be further reduced through principal forbearance. You must submit a complete loss mitigation application to be considered for this option.


Finally, the VA allows servicers at their discretion to offer a trial plan for a “Streamline Modification” without a complete application. The offer should provide for a reduction in the principal and interest payment of at least 10%. The borrower accepts the offer by beginning trial plan payments, and, after making three monthly payments, signs a permanent modification agreement.


Assumptions.

If a workout is unsuccessful, your servicer may hold off a foreclosure for a reasonable amount of time to permit you to sell or transfer of the property to someone else. It may be attractive for the new owner to “assume,” that is take over, your mortgage payments. The VA must approve the assumption and the new owner must pay a fee of one-half of 1% of the loan balance as of the date of transfer. There is also a processing charge that cannot exceed $300 and the cost of a credit report, unless state law sets a lower amount. The VA in appropriate circumstances can even reduce the loan balance for the new owner to the amount the new owner paid for the home.


Compromise Sales and Deeds in Lieu of Foreclosure.

A “compromise sale” is what the VA calls a short sale. For both the compromise sale and deed in lieu of foreclosure, the servicer does not have to review your financial information if you are more than 60 days past due (being past due is also referred to as being “in arrears”). For both options, you lose your home, but your mortgage loan debt is fully satisfied. The VA authorizes servicers to advance you up to $1,500 for moving expenses.


In a compromise sale, you sell the home yourself. In the “deed in lieu” scenario, you turn the home’s title over to the servicer. The VA must approve any deed in lieu, although it strongly encourages servicers to accept deeds in lieu if no alternative allows retention of the home and there is little likelihood of a short sale. The deed in lieu will usually not be accepted if there are any junior liens on the property. For more advice on short sales and deeds in lieu, see this article’s discussion concerning Fannie Mae and Freddie Mac short sales and deeds in lieu.


Options for the Rural Housing Service (RHS) Guaranteed Loan Program

The Rural Housing Service (RHS), a division of the U.S. Department of Agriculture and formerly known as FmHA, runs two home loan programs. This section describes options for the program that guaranties loans made by private lenders. For more detail, see chapter 18 of RHS Handbook HB-1-3555, available at www.rd.usda.gov/files/hb-1-3555.pdf. The next section describes options for the RHS program that makes government loans directly to borrowers.


Special Forbearance.

An RHS special forbearance is an agreement between you and the servicer to temporarily reduce or suspend payments for one or more months, followed by a repayment plan which may be combined with a loan modification. There is no time limit on the repayment plan, so long as, during the term of the plan, the amount past due (also referred to as “accumulated arrears”) do not exceed an amount equal to twelve monthly mortgage payments. To be eligible for a forbearance plan you must have experienced a loss of income or increase in expenses and your payment must be at least thirty days past due (“in arrears”).


Modification.

RHS offers two modification options that permanently change one or more loan term. These options, described below, are available if you have experienced a permanent drop in income or increase in expenses, have regular income to support reduced payments, and are in default or at imminent risk of default.


The Standard Modification. This option allows your servicer to add onto your principal balance delinquent interest, escrow advances, and foreclosure fees and costs (except for late fees and administrative costs). It then sets a fixed interest rate that can even be below the current market rate, and extends the repayment term up to thirty years from the date of the modification. No trial period is required. If the loan has been modified within the last two years, the RHS’s approval is required to authorize a second modification.


The “Special Loan Servicing” Modification. This option allows for a more flexible restructuring of the loan by extending the term up to forty years, reducing the interest rate to the current market rate or below, and setting aside a portion of your principle balanced called a “mortgage recovery advance.” The advance amount, which is a non-interest bearing lien on the property, cannot exceed an amount equal to twelve months of principal and interest due under the mortgage plus foreclosure fees and costs. Subject to this limit, the servicer must apply enough of an advance so that the modified total monthly payment (including escrow) is no more than 31% of your current monthly gross income. After the modification, the ratio of the total debt payments to your monthly income can be no more than 55%. If you are in default you must complete a three-month trial plan before the modification becomes permanent. You can receive only one permanent Special Loan Servicing Modification over the life of your loan.


Preforeclosure Sale and Deed in Lieu of Foreclosure.

A pre-foreclosure sale is the RHS’s term for a short sale. It allows you to cancel the mortgage debt with the proceeds of a market sale, even if the sale proceeds are less than the amount owed. You must submit an application and be approved for this option. The sale price must fall within a certain range based on the property’s market value and the sale must be completed within a designated time frame. Get written confirmation that you do not owe anything on the loan even if the sale proceeds are less than the outstanding debt.


A deed in lieu of foreclosure lets you voluntarily transfer the property in exchange for a release from all your obligations under the mortgage. The agreement must be in writing and should clearly state that you have no further obligation on the mortgage loan after turning over the deed. Other loss mitigation options should be considered first, including a pre-foreclosure sale. More information about short sales and “deeds in lieu” is found earlier in this article’s section on Fannie Mae and Freddie Mac short sales and deeds in lieu.


The RHS Direct Loan Program

RHS administers a direct loan program where the U.S. Department of Agriculture extends the loan and remains the owner of the loan at all times, including during foreclosure. You deal with the single Customer Service Center (formerly the “Centralized Servicing Center”) in St. Louis, Missouri, 800-793-8861. It is easier to get assistance if you have your account number handy.


RHS offers a number of special servicing programs designed to assist you, but only when your mortgage payments are at least two months overdue. Apply for these special servicing options quickly, because foreclosure can start just a month later.


Payment Assistance.

You may be eligible for payment subsidies, referred to as “interest credit” or “payment assistance.” The subsidies are set yearly and reduce the amount of interest you have to pay. If your income drops during the year, you can lower your payments by documenting this promptly with the Customer Service Center. Much but not all your payment subsidies are added back on to the principal balance owed if you sell the property, so that the amount you owe may not even go down over time.


Payment Moratorium.

A payment moratorium is available when circumstances beyond your control mean that you are temporarily unable to continue making full payments without substantially impairing your standard of living. Courts are divided as to whether you can apply for a payment moratorium after RHS has decided to foreclose.


Under a payment moratorium your monthly payments may be reduced or suspended, based on need, for up to two years. Eligibility for the moratorium program is reviewed at least once every six months and you should be provided with sixty days’ notice before the moratorium is terminated.

When the moratorium is terminated, your monthly payments are recalculated based on the balance at that time. If you are unable to afford the payments after they are recalculated, some or all of the interest that came due during moratorium may be canceled.


Delinquency Workout Agreement.

A “delinquency workout agreement” allows you, over a period of no more than two years, to get caught up on delinquent payments by paying a portion of the delinquent amount in addition to your scheduled mortgage payment.


Protective Advance.

A “protective advance” is an RHS advance of money to pay your taxes or insurance and then recalculates the loan balance and payments. The RHS may demand the advance’s repayment within one year or amortize the advanced amounts over the loan’s remaining life.


Loan Modification.

Sometimes repayment plans are not feasible because your finances have suffered a long-term setback and will not recover. In such a situation the RHS can add onto your principal balance the unpaid interest and escrow advances (but not foreclosure costs, late fees, and other administrative expenses). Because the length of the repayment term of RHS direct loans cannot be extended for any substantial additional time, these modifications almost invariably increase your monthly payment.


Short Sale and Deed in Lieu of Foreclosure.

A short sale allows you to satisfy the full debt owed to the government with the proceeds of a sale, even if the sale proceeds are less than the amount of the debt. RHS must approve short sales and the price must meet RHS requirements related to the value of the property and size of the total debt. RHS may set time limits for the completion of the sale. The short sale is overseen by a local RHS office and not by the centralized Customer Service Center.


If you apply for debt forgiveness and the application is approved, a deed in lieu of foreclosure allows you to transfer the home voluntarily to the government in return for a release of all liability for the debt. The RHS typically looks at this as the last option, when a short sale cannot be arranged.


In a short sale and in a “deed-in-lieu,” follow the correct procedures to make sure you are not liable for the remaining debt after the sale proceeds are deducted, particularly when your RHS subsidies are added back onto the debt when you sell the home or provide a deed in lieu. Otherwise the federal government aggressively pursues these remaining balances. Submit an application with current financial information to RHS. If approved, you will receive written confirmation of the release of liability from the full debt. More information about short sales and deeds in lieu is found earlier in this article’s section on Fannie Mae and Freddie Mac short sales and deeds in lieu.


Appeals.

You can appeal certain RHS decisions, such as a denial of a moratorium application or the commencement of foreclosure. You lose the right to appeal if you do not act within the required time (usually 30 days from notice of the decision). Appeal options include mediation or a formal hearing before a USDA hearing officer.


The Loss Mitigation Application Process

Start Loss Mitigation Discussions As Early As Possible.

Starting early avoids the difficulty of negotiating at the last minute with a potential foreclosure sale date pending and also avoids potential foreclosure fees and costs, which can be substantial. It is better to begin negotiations before the lender has turned the matter over to a foreclosure lawyer. You also appear more responsible if you try to prevent the problem from getting out of hand.


In some cases you can even apply for relief before you default on your mortgage when a default is reasonably foreseeable—for example, after you lost your job or your adjustable rate mortgage is about to reset to unaffordable monthly payments. Some servicers are reluctant to consider loan mitigation if you are not in default, but they may have the authority to do that if your default is imminent.


When a foreclosure is pending, careful attention must be given to preventing the sale as part of your request for a modification. A foreclosure sale cuts off your ability to modify the mortgage loan and also ends your ownership in your home. You should also request a modification prior to filing for bankruptcy. Once bankruptcy is filed, some servicers may (incorrectly) act as though their options for assisting you are more limited, when they in fact are not.


The Importance of Getting Help.

Find a nonprofit counselor or lawyer with experience with mortgage workouts to help you through the process. In many cases, counselors will have access to programs and lender personnel that you cannot reach directly yourself.


Find a nearby HUD-approved counseling agency by calling 800-569-4287 (TDD 800-877-8339) or by checking www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm. Many cities and states also have programs to assist homeowners in default.
[Including Oregon]

Contact your local government housing office or a community group that addresses housing and homeownership to see if they can refer you to a counselor. If you received pre-purchase education about homeownership, contact the organization that provided your classes to find out if they also provide foreclosure prevention assistance or can refer you to an organization that does. It also can’t hurt to ask the servicer if it has a program for homeowner assistance in your community.


If someone unsolicited offers to help, make sure you are dealing with a legitimate nonprofit agency with experience in default and delinquency counseling. Too often, someone who advertises or approaches you about mortgage counseling is really just a con artist who will get you into more trouble.


Your Loss Mitigation Application.

In applying for loss mitigation, do not contact the owner of your mortgage loan, but instead, contact your mortgage servicer. The servicer should have workout specialists who will tell you what documents you need to provide, take your application, and provide information on the application process.


Some servicers will ask you to speak only to their attorney once the legal process of foreclosure has begun. Although some attorneys will readily participate in workout discussions or give you permission to speak with the servicer directly, others will need to be pushed. Unresponsive attorneys should be reported to the servicer or to the mortgage owner if necessary.
Federal rules require that your servicer assist you in completing the application. As long as a foreclosure sale is not scheduled within 45 days, your servicer must acknowledge in writing within 5 days that it received your application and must describe any missing documents you still need to send.


As long as the servicer has received your complete loss mitigation application at least 37 days before a scheduled foreclosure sale, it must within 30 days evaluate you for all available loss mitigation options and tell you which ones you are eligible for. You do not have to ask for a specific option, although there is nothing wrong with doing so. The servicer’s letter must give specific reasons for any denial of a loan modification. As long as the servicer receives your complete application at least 90 days before a scheduled foreclosure sale, you can appeal the denial of a loan modification.


These rules only apply to your initial application to a given servicer. You can always submit multiple applications to the same servicer, however the servicer has more discretion as to the nature and speed of its responses for any subsequent applications.


Pay Attention to Any Pending Foreclosure Sale.

It is not unusual for mortgage servicers to continue with a foreclosure while you request loss mitigation options. Often the servicer’s loss mitigation department and the servicer’s lawyers conducting a foreclosure sale do not communicate. But if you submit your first complete loss mitigation application at least 37 days before a scheduled foreclosure sale, federal rules require the servicer to delay the sale, review the application, and give you a written decision before allowing a sale.
If this rule does not protect you, always request a delay of a foreclosure sale long enough to complete the loss mitigation review. Unless the servicer agrees in writing to suspend the foreclosure proceeding, assume that the foreclosure process will continue. If the foreclosure sale is a court-supervised process, make sure you notify the court of your agreement with the servicer to delay the foreclosure. Always verify that the sale is actually canceled.


Loss Mitigation Fees, Foreclosure Fees, and Late Charges.

While modification fees are not permitted under some loss mitigation programs, servicers otherwise may charge a fee for handling workout options. Some servicers want this fee at the beginning of the workout process regardless of the application’s outcome. Request a waiver or a fee reduction to make the workout affordable. Late charges will almost always be waived.


The servicer’s out-of-pocket costs to modify your mortgage, such as appraisal fees and credit report charges, probably will not be waived. The servicer will also expect reimbursement from you for foreclosure fees and costs if the servicer has already begun to incur such fees. Examine all fees to make sure that they are reasonable. You can also request an agreement to pay some or all of the fees in installments or to have the fee lumped together with the loan balance.
Where you are charged attorney fees for a foreclosure and the foreclosure does not take place due to your loss mitigation agreement, ask for them to be credited back to your account. Refunds or credits for fees paid to auctioneers, sheriffs or court officials, or for legal advertisements should also be made depending upon when the foreclosure sale is canceled. To the extent foreclosure fees and costs are valid, they need to be paid or otherwise accounted for in the loss mitigation process.


Documenting a Workout Agreement.

Even if there is a delay in signing the final forms for the workout, make sure you have a writing spelling out the agreement’s basic terms and that any foreclosure proceeding is postponed or stayed. Never sign a release or similar agreement asking you to give up all your legal claims against the lender until after the actual workout agreement is finalized. Make sure the lender signs the agreement and it is recorded, if necessary, with the mortgage in the property registry.


If Your Loss Mitigation Review Is Not Going Well.

If you aren’t receiving sufficient cooperation from a servicer in reaching a loss mitigation resolution, ask to speak to a supervisor. You also can appeal a denial, and the servicer’s supervisory staff not involved in the original decision must review your appeal and notify you in writing of their decision. You can also complain directly to the mortgage’s owner or insurer. Fannie Mae, Freddie Mac, and some other owners have “loss-mitigation” departments that will intervene, if pushed, to address a proposed workout.


You can also send the servicer a notice of error and request for information, as described in the previous article in this series. This may get your servicer to focus appropriately on your loss mitigation review. You can also register a complaint about a mortgage servicer directly with the Consumer Financial Protection Bureau that may attempt at least an informal resolution at www.consumerfinance.gov/complaint.


Your efforts in all of these steps may be more effective with the help of a housing counselor or attorney. Even if you tried to obtain a workout on your own, it may be time to seek help if the negotiation with the lender is not working out well.

Really important to read the post excerpt below and to watch the whole Netflix video (trailer above):

Watch “The Bleeding Edge” And Demand Medical Device Safety Reform
(from Max Kennerly's blog)
 
Imagine if lights, kitchen equipment, and home electronics didn’t need to be tested for electrical shock and fire hazards, and that no one ever certified that the devices were safe. Would you put them in your home?
 
 
What about a car that had just one crash test, at low speed, and Congress had passed a special law making it impossible for anyone to sue the car company, so the company couldn’t be held responsible for people’s injuries? Would you put your family in one?
 
 
Yet, those examples above describe the state of the $156 billion American medical device market. Most medical devices aren’t tested with clinical trials. The medical devices which are tested can pass with a minimal showing, and Congress passed a special law that says that this minimal showing is enough to shut the courthouse doors on victims.
 
 
The Bleeding Edge, a documentary just released on Netflix, details the many problems with medical devices today, with an emphasis on the suffering of thousands of people due to Bayer’s Essure contraceptive, DePuy’s ASR hip implant, Johnson & Johnson’s transvaginal mesh, and the Da Vinci surgical robot. I know these awful products well; most of my law practice is representing victims of medical devices and pharmaceuticals.
 
 
If no one ever watched The Bleeding Edge, the film would still be a remarkable success: soon after it premiered, Bayer announced it will discontinue sales of Essure.
 
 
But everyone should watch it. Essure was just one part of a broken regulatory system and a corrupted market, and medical device companies often lobbying Congress to make it even worse.
 
(more at link)

HOW YOU CAN COMMENT:

The comment page should be available by tomorrow when the proposed rules hit the federal register;
you can find it by searching at  https://www.regulations.gov/  
for RIN 1840-AD26;
Docket ID ED-2018-OPE-0027

There will be a 30 day comment period from the date it is posted in the federal register.

National Consumer Law Center Contacts: Abby Shafroth (ashafroth@nclc.org) or Jan Kruse (jkruse@nclc.org); (617) 542-8010
 
Education Department Proposes New Rules
that Would Make it Much Harder for Students Harmed by For-Profit Schools to Get Loan Relief
 
Boston - Today, the U.S. Department of Education proposed new rules, replacing 2016 rules, that would make it much harder for students who are harmed by illegal school conduct or closures to get relief from their federal student loans or to hold schools accountable for illegal conduct. The Department proposes to severely restrict access both to “borrower defense” loan relief for students cheated by predatory schools that used illegal enrollment tactics and to loan relief for students whose schools closed before they completed their education. 
 
“The federal student loan system is supposed to promote economic mobility and provide a ladder to a better future for low-income Americans,” said National Consumer Law Center attorney Abby Shafroth. “But for too many Americans it has done the opposite—putting targets on low-income, financial aid eligible students and veterans who are recruited by predatory institutions focused on growth and profit rather than on education and career training. It doesn’t have to be this way. The Department can and should apply rules that deter schools from lying to students to get them to enroll and that ensure students who were taken advantage of have real access to relief.”
 
Troublingly, the Department announced that it is considering severely restricting access to relief for student borrowers who are not in default. It is even considering refusing to allow students who are not in default to apply for borrower defense relief based on their school’s illegal conduct.  Either alternative would unfairly punish borrowers who manage to stay out of default—and may even encourage default.  The new rules would also narrow the grounds for federal student loan relief and eliminate the process to provide relief to groups of students who were subject to widespread misconduct or fraud. It would require students to submit more evidence (which borrowers often don’t have access to) and prove more difficult facts (such as what the school knew when providing false information). It would create a lopsided process that gives schools, but not students, the opportunity to respond to all the evidence and appeal adverse decisions. Additionally, the rule would make it harder for students to hold schools directly accountable for their illegal conduct by allowing schools to use forced arbitration clauses and class action bans to deprive students of their constitutional right to bring claims to an impartial judge or jury.
 
Moreover, despite recent widespread school closures that have left students with huge debts and no degree, the Department’s proposal would severely restrict federal student loan relief to students harmed by school closures. Its proposal would render students ineligible for closed school relief so long as their school provides an option to complete their program at a different school (as closing schools are generally already legally required to do), and would axe a 2016 rule that would have automatically discharged loans for eligible borrowers whose schools closed.
 
The Department has refused to implement borrower defense rules finalized in 2016 and plans to apply these new rules instead. Secretary of Education Betsy DeVos characterized the 2016 rules as making it too easy for student loan borrowers to get relief. The Department’s summary of the new rules states that they are designed to address concerns expressed by a for-profit school industry trade group and other industry representatives that the 2016 rules would impose financial liabilities that might imperil the viability of some schools. The proposal reflects an ongoing shift to protecting the multi-billion dollar for-profit education industry at the expense of students, and comes at a time that concerns about conflicts of interest have been raised about the role of former for-profit school executives hired by the Department.
 
Shafroth, a staff attorney for the National Consumer Law Center’s Student Loan Borrower Assistance Project, participated as a representative for legal aid organizations in rulemaking meetings held by the Department of Education in Washington, D.C. that preceded this proposed rule. Shafroth and other representatives for students, veterans, and low-income borrowers made numerous suggestions to the Department to ensure that the rule would provide student borrowers reasonable access to relief, but those suggestions were not included in the proposed rule.
 
 “If these proposed rules are implemented, schools will continue to break the law and harm students with impunity, and student borrowers will continue to pay the price,” said Shafroth. “We urge the Department of Education to promptly implement the 2016 rules and to use this rulemaking to make it easier, not harder for students to get relief.

We also urge students and the people who care about them to send comments to the Department of Education telling it to put students and taxpayers first over predatory schools.” 
 
 
Related NCLC Resources

Issue Brief: The Borrower Defense Rule protects students and taxpayers against fraud and abuse in higher education. (January 2017)
 
Comments of NCLC to the Department of Education Re: Borrower Defense Rule Delay and Intent to Establish Negotiated Rulemaking Committee (July 12, 2017)
 
Comments of NCLC and 16 other legal aid groups to the Department of Education re: Proposed regulations on borrower defenses and use of forced arbitration by schools in the Direct Loan Program, and proposed amendments to closed school and false certification discharge regulations. (August 1, 2016)
 
Blog: Who is the Department of Education Looking Out For? Another Delay of Student Protections Follows a String of Actions Protecting Industry Profits Over Students 

Further Information on school-related cancellation of federal student loan debt.

From Paul Bland of Public Justice:

There are a couple of things about this case, as explained in the video, that are striking. 

First, the corporate behavior – a payday lender misleading customers, getting them into a cycle of debt, lying about its nature, abusing the law – is truly ugly. Nearly every American should hate this kind of behavior, and see why it’s important for the legal system to address it.

Second, the video explains how the civil justice system, and class actions, got real justice for the consumers: tens of millions of dollars in refunds to consumers, illegal debts wiped away, and peoples’ credit records fixed. 

Third, the video focuses a great deal on Mr. Inetianbor, showing that the class action wasn’t just a lawyer-driven thing, but that the consumer played a huge role in protecting other consumers and working to fight this problem.

Finally, the video helps explain how vile a system forced arbitration is, and why the defendants’ efforts to use forced arbitration were a real scam.
 

library.nclc.org
What Every Homeowner Should Know About Mortgage Payments:
Consumer Debt Advice from NCLC [National Consumer Law Center]

by John Rao

First in a series of three articles dealing with home mortgages. This article covers

* how to get information about your mortgage payments
* what happens if you make only a partial payment
* disputing the amount due, and
* key information about escrow, property taxes, and insurance.

The next article will cover new guidelines to modify mortgage loan payments, and the third article will explain rights to defend or delay a foreclosure.

First Considerations
Mortgage problems tend to have a snowballing effect if not resolved quickly. Small issues grow into big problems that can eventually lead to foreclosure—always act sooner rather than later.


If you are having trouble resolving mortgage-related problems on your own, try a nonprofit housing counselor or attorney. The Department of Housing and Urban Development (HUD) certifies housing counseling agencies and you can locate such an agency by calling HUD at 800-569-4287 (TDD 800-877-8339) or by going to www.hud.gov.

[In Oregon, try Oregon Homeowner Support]

If a housing counselor cannot help, the counselor may refer you to a local attorney or legal services program.

Do not wait too long to get assistance.
An experienced advocate in your corner may help you fix the trouble before it grows.


Your Mortgage Servicer Plays the Key Role.

To resolve an issue with your mortgage, do not contact the lender owning your mortgage loan.
Always contact your mortgage servicer who has been hired by whoever owns your mortgage loan.

The servicer receives your mortgage payments, applies them to your mortgage balance, and deals with other day-to-day activities on your account. If you have any questions about your mortgage—always contact your mortgage servicer.

Occasionally the owner of your mortgage, the servicer, and the original lender are the same entity, but more often they are three different companies. For example, Acme Mortgage Company may have given you a loan, and then sold your loan to Best Bank that has hired ABC Servicing Company as its mortgage servicer.

You may have several different servicers during the life of your loan. Your servicer changes if the owner of your mortgage loan decides to hire a new servicer, or if the owner sells your loan to someone who uses a different servicer. Whenever your mortgage loan is sold to a new owner, you will get notice of the contact information for both the new owner and your new servicer. You also can request in writing that the servicer tell you the name and contact information for the owner of your mortgage loan.


Your Rights When Your Servicer Changes. Federal law requires that you get notice whenever your servicer changes, including the effective date of transfer and the new servicer’s contact information, including a toll-free number to call with questions. You also get notice as to the date when you should start sending payments to the new servicer instead of the old one.


You can keep sending on-time payments to the old servicer for up to 60 days after that date, and the new servicer must treat it as a timely payment, and cannot charge a late fee, claim your account is in default, or report the payment as late on your credit report. This applies even if the old servicer does not forward the payment in a timely way to the new servicer.


Surprising Facts About Partial Mortgage Payments

Try not to make a mortgage payment for less than the amount due (a partial payment). The servicer typically does not apply a partial payment to your mortgage. Instead the servicer may return your partial payment check back to you un-cashed. If so, you should set the money aside and not use it to pay other bills, so you can use it later to help with your mortgage payments. In the worst case scenario, if foreclosure becomes inevitable, you will have some money saved for moving expenses.


Other servicers keep your partial payment in a “suspense account” until you pay the remaining amount due for that one monthly payment and instead assess you a late fee. As a result, it is easy to get confused as to how much you owe. To avoid problems, check your most recent mortgage statement for the monthly payment amount, since it can change over time. Also check your statement each month to be sure last month’s payment was applied correctly. If a partial payment is put in a suspense account, the statement must explain what you must do for the payment to be applied.


How to Determine the Status of Your Mortgage Loan

You receive monthly statements from your mortgage servicer or a coupon book with similar information. The statements include the amount due for the billing period; an explanation of the total amount due on the account including fees; a breakdown of how your last payment was applied; transaction activity; partial payment information; and contact and account information.


If you are more than forty-five days behind on your mortgage payments, the monthly mortgage statement also includes: the date when the account became delinquent; a notification of possible risks, such as foreclosure, and of the expenses that may be charged if the account is not brought current; an account history for the previous six months or the period since the last time the account was current; a notice indicating any loss mitigation program to which you have agreed, if applicable; a notice of whether the servicer has started foreclosure; the total payment amount needed to bring the account current; and a list of homeownership counselors and counseling organizations that you can contact.


Disputing the Amount Due

You can dispute the amount the servicer says is due in a monthly statement. For example, your servicer may have failed to or incorrectly credited your payment, neglected to make payments out of your escrow account and instead forced you to pay for extra insurance, charged unnecessary or duplicative fees, or improperly refused to accept a payment. Contact the servicer right away.


Dealing with your mortgage servicer can sometimes be frustrating. Many mortgage servicers are large companies that handle tens of thousands or even hundreds of thousands of mortgages. You may speak to a different person each time you call, and you may get conflicting or confusing information from one person to the next. Make a note in a notebook each time you talk to someone at the mortage servicing company, including the date, time, name of the person you spoke with, and what you talked about.


Provide any documentation that the servicer requests and keep copies for yourself. Make a note in your notebook of what you provided, when you provided it, and how you sent it to the servicer (email, fax, mail, overnight mail service). If the servicer does not provide you with the information you requested or if you dispute how the servicer is handling your account, you may send the servicer a more formal request, called a “notice of error” or “request for information,” to ensure that they respond in a timely manner and correct any errors.


Sending Your Servicer a Notice of Error or Request for Information.

Your servicer must respond to a written request for information or investigate any claims of error concerning your account, including your escrow account. Your writing must identify your account, such as an account number, along with your name and the address of the property. Include the reasons you believe the account is in error. Be clear and as specific as possible about any question you have or information you are requesting. Your letter can both dispute an error and ask for more information.


Your request should not be written on a payment coupon or included with your payment, but should be in a separate letter to your servicer. Make a copy and send the letter return receipt requested, so that you have a record of when the servicer receives it.


You must send the notice to the address the servicer has identified as appropriate for such a request, which often is different than the address for mailing payments. Otherwise, the servicer may not respond or you may lose the legal right to force your servicer to correct the error. The servicer may have sent you a separate letter listing the address or it may be listed on a transfer of servicing statement, an annual escrow statement, or a monthly billing statement. You can also check the servicer’s website or call the servicer’s customer service center. Be sure to send your notice to the correct address as your servicer may have many different addresses listed on its website and statements.


Here is an example of such a letter to the servicer:


SAMPLE “REQUEST FOR INFORMATION/NOTICE OF ERROR”
Ken and Susan Consumer
12 Budding Bloom Lane
Elizabeth, New Jersey

January 23, 2019

Last Dollar Mortgage Co.
398 Rockefeller Drive St.
Albans, WV 25177

Attention: Borrower Inquiry Department RE: Account #123234 Dear Last Dollar Mortgage Co.:

We dispute the amount that you claim is owed on our monthly Mortgage Statement and request that you send us information about the fees, costs, and escrow charges on our loan. Please treat this letter as a “notice of error” and a “request for information” under the Real Estate Settlement and Procedures Act (section 2605(e)).

Specifically, we are requesting the following information:

• • A payment history or schedule that can be easily read and understood listing the dates and amounts of all payments and transactions credited or debited to our account, including any escrow account and any suspense account, and showing how they have been applied or credited or, if not applied, showing how they have been treated;
• • A breakdown of the amount of claimed arrears or delinquencies on our account, including an itemization of all fees and charges you claim are currently due;
• • The current balance in any suspense account and the reason why such funds were deposited in the account;
• • The payment dates, purpose of payment, and recipient of all foreclosure fees and costs that have been charged to our account or have been advanced on our behalf since [insert date Last Dollar Mortgage took over the servicing];
• • The payment dates, purpose of payment, and recipient of all escrow items charged to our account in the last twenty-four months;
• • A breakdown of our current escrow payment showing how it was calculated and the reasons for any increase or decrease in the last twenty-four months (include a copy of any annual escrow statements prepared within the last twenty-four months); and
• • Any notes created by your personnel reflecting communications with us about our mortgage account.
• Also, on October 1, 2018, we sent our October payment to First Dollar Mortgage Co., which had been servicing our mortgage before it was transferred to you. Our October payment was never credited to our account. Please correct this error. Thank you for taking the time to acknowledge and answer this request as required by the Real Estate Settlement Procedures Act (section 2605(e)).
  
• Very truly yours, Ken and Susan Consumer [certified mail]
  

The servicer must acknowledge receipt of your request within five business days of receipt, and must respond within thirty business days (forty-five days if it notifies you of the extension). The response cannot simply state that it was right or that it has no information. Federal law requires that the servicer conduct a “reasonable investigation” based on your request. Its written response should show that it did this investigation. For sixty days after you send a notice of error about a payment dispute, the servicer cannot give any information to credit reporting agencies that a payment related to your inquiry is overdue.


Request Validation of the Debt. The first time an attorney for the lender or for the servicer sends you a letter demanding payment, that letter should include a notice of your right to dispute the mortgage debt. Sometimes the notice of your right to dispute will arrive seperately within five days after the attorney first communicates with you about the debt. If you then dispute the debt in writing within the next thirty days, the attorney must stop collection efforts while your dispute is investigated.


Setting Up a “Tender” Defense. If you dispute the amount you are delinquent on your mortgage loan, you may want to offer the undisputed amount that is delinquent, while not paying the amount you dispute. This is called a “tender.” The letter should also state that the amount is offered in “full satisfaction of the dispute.” That way, if you are right about what is owed, you are not delinquent and the servicer should not be able to foreclose. On the other hand, if you also withhold the amounts that are not in disputed, the servicer can claim it has the right to foreclose.


Most often, your tender will be returned and then you may have the defense that the money was offered and refused, depending upon your state law. Keep your letter and the servicer’s response as proof. You should set the money aside, if possible in a bank account, while the dispute is being resolved. You can add the claim of tender to your defenses in the legal process, if the matter reaches foreclosure.


Escrow, Taxes, and Insurance

Your Rights Concerning Your Escrow Account. If your monthly mortgage payment includes an amount to cover property insurance and taxes on your home, you have a mortgage with an “escrow” or “impound” account. Your servicer is supposed to pay the insurance and tax bills for you when they are due.


Under federal law your servicer must give you an initial statement when your escrow account is first set up and periodic statements at least once per year after that. These statements must include the amount of your current escrow payment, the amount your escrow payment will be for the next year, the total amount you paid into the escrow account during the past year, and the total amount paid out of the escrow account during the past year for taxes, insurance premiums, and other escrow bills. However, the servicer is not required to send this statement if you are more than thirty days behind in payments.


If your annual escrow account statement shows that there is a balance of $50 or more from the previous year, you are entitled to a refund. If your statement shows that your account has a balance smaller than expected (a “shortage”) or a negative balance (a “deficiency”) your servicer will include this amount in your next annual escrow statement so that it is paid back in future escrow payments over the next year. If you want to spread out repayment of this shortage or deficiency for more months than the servicer is offering you, ask the servicer. If that does not work, ask for the supervisor in the escrow or collection department. On the other hand, as long as you pay what the servicer requests for escrow, the servicer must pay your property tax and insurance even if there is not enough money in your escrow account.


Servicers should pay from your escrow your taxes, property insurance, and other escrow bills on time, before the deadline for avoiding penalties such as interest or late fees. You should not have to pay for interest and late fees, and should ask the servicer for a refund if these are included in your escrow account statement. If the bill for interest or some other penalty is sent to you instead, send this bill to your servicer (keeping a copy) and insist that they pay it with their funds.


Avoid Force-Placed Insurance.

If you do not have an escrow account and the servicer believes you do not have homeowner’s insurance covering your home, it will purchase over-priced insurance providing you only limited protection, and then charge you for it or add it to your monthly payments. This is called “force-placed insurance” and you should avoid this at all costs.


If your own insurance company or servicer notifies you that you do not have homeowner’s insurance, take this seriously and act immediately. If you do have insurance, provide the servicer with proof—the policy number, the name of your insurance company or agent, and written proof you have the insurance. If you don’t have insurance, obtain your own insurance as soon as possible, and provide the servicer with proof and request that they cancel the insurance that they purchased for you.
If your insurance is being canceled for nonpayment and there is an escrow account on your mortgage, the servicer must pay your existing insurance policy rather than purchase force-placed insurance, even if there is not enough money in the escrow account to pay your policy. The servicer will then require that you repay any money it advanced to pay your policy, usually by adding the amount to your future escrow payments.


Private Mortgage Insurance.

Most mortgage borrowers are required to purchase private mortgage insurance (PMI) protecting the lender against a mortgage loan default. This cost is included in your monthly payments. PMI is expensive and only protects the lender. Cancelling PMI brings down your mortgage payments and has no down-side for you. If you have PMI, the servicer must cancel it on your request if your remaining mortgage loan balance is less than 80% of your home’s purchase price. Also try to ask the servicer to cancel PMI whenever your home is worth a lot more than your mortgage balance.


Credit Life and Disability Insurance.

Credit life, disability, and unemployment insurance coverage pays off some of your mortgage loan if you pass on, become disabled, or unemployed. This insurance is overpriced, expensive, and offers limited protection. Consider cancelling it, particularly when you are having trouble paying your mortgage. Look at your loan documents and monthly statement to see if it is listed there.

Reduced Mortgage Rates for Active Duty Military

When a homeowner entered into a mortgage loan prior to become active duty military, federal law requires that the homeowner while on active duty and for one year thereafter shall not pay an interest rate exceeding 6%. This includes any fees or other charges payable on the loan (late charges, for example). Any interest that you have been paying over 6% is eliminated while you are on active duty and for another year—the excess interest is not just put off until later.


If you are paying more than 6%, you not only can get your rate reduced, but the lender has to give you a credit for any interest charged to you above that rate while you were on active duty. One year after you leave active duty, the rate can be increased to the old rate.

To take advantage of this law, you must provide the lender or other creditor with written notice including a copy of the orders calling you to military service and any orders extending active duty. This must be done no later than 180 days after the date of the termination of military service. The interest rate reduction is then retroactive to the date active duty began.

(Continued in Parts II and III)

library.nclc.org

Criminal Justice Debt: Consumer Debt Advice from NCLC
Brian Highsmith

An important and increasingly widespread category of consumer debt is fines, fees, surcharges, and other costs assessed by courts, state agencies, or even private parties as a result of a consumer’s law violation—everything from a traffic ticket to a fee for using a government-appointed lawyer to the premium on a commercial bail bond. Nonpayment of these criminal justice debts can have serious consequences, and you should never ignore them, but instead understand your rights and deal with these debts in a careful and reasoned manner.

This article helps you identify your criminal justice debts, explains why such debts require immediate and careful attention, and then provides advice on dealing with these debts. The article explains your defenses to incarceration for nonpayment, provides advice on how to keep your driver’s license when it was suspended for nonpayment of criminal justice debt, and describes your ability to obtain a payment plan or otherwise reduce or delay payment. Finally the article sets out your rights in responding to a collection action on criminal justice debt—that a debt is too old, that state law protects your income or assets from seizure, and what a bankruptcy filing can and cannot do to deal with criminal justice debt.

More than for most other debts, the advice of an attorney is recommended and this article has tips on finding an attorney.


Identifying the Type of Criminal Justice Debt You Have
When you are being dunned for a debt, it is important to determine if it is criminal justice debt, and if so, the type of debt and to whom the debt is owed. This will often determine how you respond to that debt. If you think it might possibly be criminal justice debt, contact your lawyer in the criminal proceeding to ask them to send information about how much you owe, to whom, for what, and what your options for payment are. If you don’t have a lawyer, ask the court clerk or the company or government office that is demanding payment.


Types of Government and Court Debt:

• • Fines: Monetary fines are imposed by courts as penalties for committing an infraction, misdemeanor, or felony.


• • Fees: User fees or costs are imposed to help government recover the costs of prosecuting, incarcerating, or supervising criminal defendants, or to otherwise pay the costs of the legal system. Examples include jury fees, expert witness costs, costs of extradition, costs of incarceration, and appointed defense counsel costs. Unlike fines, fees and costs are not intended to be punitive and the amount charged may be based on the cost of providing the service or based on a preset schedule.


• • Surcharges: Surcharges are a flat fee or percentage added to a fine to fund a particular government function, rather than being tied to the cost involved in prosecuting the defendant.


• • Interest, collection costs, payment plan costs, and penalties: If you do not immediately pay your fine, fee, or surcharge, the amount may grow with interest, collection costs, late payment penalties, and costs associated with a payment plan.


• • Restitution: A defendant pays restitution to compensate crime victims for losses suffered as a result of the defendant’s actions. Usually it is sent to the victim, but in some states it goes to a government agency.

Debts Owed to Private Companies.

Surprisingly, many criminal justice debts are now owed to private companies rather than to the state. These private companies may offer and charge you for bail bonds, prison phone and video-calling services, debit release cards, probation, court-ordered rehabilitation programs, and GPS monitoring. Your rights may be different dealing with debts owed to a private company than to the government.

Who Is Now Seeking to Collect the Debt?

Often the government, court, or private party that imposed the debt on you is the person who is now trying to collect on the debt. Other times, private debt collection agencies are even hired to collect debts owed the government.


Why You Must Pay Special Attention to Criminal Justice Debt

In some states, not paying criminal justice debts can result in your imprisonment. Outstanding criminal justice debt can lead to your arrest on debt-related warrants and your detention in jail while awaiting a hearing to explain the reasons for your failing to pay. Your payment also may be a condition of your sentence or probation, and your probation is extended until the debt is paid. Many “clean slate” programs that expunge criminal records require participants to have fully paid off their fines and fees.


If you have outstanding criminal justice debt, you may be required to appear at regular court review hearings, which can be disruptive of your other obligations. The government can also seize your tax refunds and bank accounts and part of your wages, offset your public benefits, and even seize your property. Government agencies can also hire debt collectors and report your debt to a credit bureau.


Unpaid criminal justice debt also can get larger over time, due to mandatory interest, penalties for late payment or nonpayment, or other collection costs that accrue from the date of judgment or missed payment. In some states, interest may even accrue when you are in prison or jail.


For these reasons, pay close attention to criminal justice debt. Both governments and private companies have the unique ability—beyond what is available to most other creditors—to enforce collection of criminal justice debt through the criminal legal system. These are high priority debts, which should be prioritized ahead of credit card, medical, and many other debts.


Carefully read any mail from courts or government agencies. Show up to court appointments, or contact the court as soon as you can if you can’t make that date. If going to court interferes with a job or otherwise is a hardship, ask about ways to make reports or payments to the court online or over the phone rather than in person. If you cannot pay criminal justice debts, explain to the court or government agency why you cannot pay. Talk to an attorney about ways to cancel or reduce your debt.


The Risks of Using a Bail Bondsman.

If you cannot pay your bail, a bail bondsman may pay your bail, and charge you a premium of around 10% of the bail. You permanently lose this 10% even if you show up in court and even if you win the case. You also agree that you and anyone who guarantees your bail must repay the bondsman if you fail to appear and the bail is forfeited.


If the bail is forfeited, you or your guarantors who put up property as collateral for the loan may lose that property if the amount is not paid immediately.

You and your guarantors are also likely to be subject to harsh and deceptive collection attempts, including threats to send arrestees back to jail without a legal basis to do so, forcing bail bond cosigners to turn over property that was used as collateral in cases where the arrestee complied with the terms of the bail, and threatening or apprehending individuals in order to coerce them to make premium payments. Bail bondsmen may seek to collect undisclosed or illegal fees and may engage in deception about the terms of the bail agreement and your legal options. Do not always believe what a bail bondsman tells you.


Defending Against Incarceration for Nonpayment of Criminal Justice Debt

If you face incarceration for nonpayment of criminal justice debt, you should seek legal counsel and press your constitutional rights. The government should not imprison you because you cannot afford to pay a debt. The U.S. Supreme Court has ruled that it is unconstitutional to imprison you for debt without a meaningful consideration of your ability to pay or the availability of alternative punishments.


Nevertheless, not all courts in practice consider your ability to pay and some do so only in a cursory or inadequate manner. This is where having a lawyer can help. You can ask the court to appoint a free attorney for you, or contact your local public defender office, legal services office, or bar association for help finding an attorney.


If you do not have an attorney, you should tell the court that you are unable to pay the court debt and should not be punished for that reason. Be prepared to explain why you cannot afford the debt, and to provide evidence of your inability to pay, such as proof of your income, necessary expenses for yourself and your family, receipt of public benefits, outstanding debts, and reasons you have been unable to work or to earn more, such as disability, incarceration, childcare obligations, or unsuccessful efforts to get a new job.


The more information and details you document the better. Documenting your financial circumstances is not an assessment of character. In most cases, honestly conveying financial hardship will help you and will not result in more jail time due to your inability to pay.


Keeping or Reinstating Your Driver’s License

Forty-three states and the District of Columbia suspend millions of drivers’ licenses for nonpayment of traffic violations as well as other criminal justice debts—even if you cannot afford to pay the fine. In many states, driving with a suspended license is misdemeanor offense that can lead to a criminal conviction, violation of probation or parole, and additional fines and fees.


Reinstating a suspended driver’s license can be an onerous process. Many states keep a suspension in place until you have either made full payment on your all criminal justice debts owed to the state or entered into a payment plan to do so. Some states also charge an additional reinstatement fee.


Contact the Department of Motor Vehicles in your state to find out what criminal justice debts resulted in your license being suspended and how to go about getting the license reinstated. Using this information, contact they appropriate court or state agency to whom the debt is owed. Ask how much you owe and whether you are eligible for a payment plan or payment alternatives like community service. If interest was accruing on the debt while you were incarcerated, you may ask to have the interest charges waived.


If your court debt is related to probation, parole, or a suspended jail sentence, you may want to check with a criminal defense attorney before contacting the court on your own. Although unlikely, it is possible that contacting the court about unpaid court debt could lead the court to take enforcement action against you.


Payment Plans and Other Ways to Delay or Reduce Payment

Especially with the assistance of an attorney, you may be able to reduce or even cancel (often called “remit”) your criminal justice debt, either in whole or in part. Alternatively, you may be able to enter into a payment plan—or modify a plan you are currently on—based on your financial situation or other relevant factors. In some states, courts may also be able to stop your payments altogether for a certain period if you are on public benefits or have little income.


Many states allow judges, based on financial hardship, to modify or cancel a criminal justice debt owed to the government. You can ask for this relief in a hearing to show cause for nonpayment, in a probation or payment status hearing, or through an affirmative petition to the court to remit the debt.


A payment plan might be a good way to manage payment of a criminal justice debt that you cannot afford to pay off all at once. Only agree to a payment plan you can afford. Be honest about your ability to make future payments. Ask about payment plan options as soon as possible; your ability to get into a payment plan may depend on how long you have been behind on your payments. In some states you must request a payment plan before your debt is sent to a collection agency.


Sometimes lawyers can work things out with a probation officer or other monitoring official to gain you more time to make a payment. Again, this is easier to do if you raise it as soon as possible.


Community Service As an Alternative.

If you cannot get criminal justice debts waived, and are unable to pay them, in at least some states you can ask the court to consider community service instead of a fine or fee. Community services can be an excellent option for you if the work will be meaningful, promotes useful job skills or connections, and is reasonably convenient. But it is not for everyone, particularly if you have physical or mental disabilities, substance abuse issues, lack of access to transportation, or inflexible schedules due to work or child care obligations, or other responsibilities. If you have debts from different courts, it may not be possible to complete community service for each of them simultaneously.


Asserting Your Rights Against Collection

Statute of Limitations.

In some states, after a certain number of years, you no longer have to pay your unpaid criminal justice debt. How many years this will be depends on your state—the answer is found in laws sometimes called “statutes of limitations” or “statutes of repose” or laws that say that after a certain number of years your criminal justice debt shall be “written off.” Federal court criminal justice debt, on the other hand, can be collected up to twenty years after the debt is imposed or you are released from incarceration on the underlying charge, whichever is later.

Protecting Assets and Income Against Garnishment.

While governments can seize part of your wages, your bank account, and other assets to pay your criminal justice debt, there are limits to their ability to do so. As explained in a prior article, federal law protects most of your wages, payments for Social Security, Supplemental Security Income (SSI), VA, and certain other federal benefits, from seizure to pay criminal justice debt.


Whether a state court or agency can seize your state public benefits, your bank account, or even your home, car, or other assets is a more complicated question. The assets that state exemption laws protect vary by state, but may include state public benefit payments, tools of your trade, your home and car up to a certain value, and even a certain amount of cash. Nevertheless, in some states these exemption laws do not apply to the collection of criminal justice debt. Your best approach is to find a lawyer to help you understand how much of your income and property can be seized to pay your criminal justice debts and how much is protected from seizure.


Filing for Bankruptcy.

Bankruptcy is a powerful tool for dealing with criminal justice debt. Filing bankruptcy can eliminate some of your criminal justice debt entirely and provide an orderly way for paying those criminal justice debts that bankruptcy cannot eliminate.


Bankruptcy can also allow you to take advantage of state programs to expunge or seal your criminal record that may otherwise be unavailable to you due to your outstanding criminal justice debt. A bankruptcy filing can also protect your driver’s license or vehicle registration from being suspended if that suspension is based on your nonpayment of traffic fines or other court debt that you can discharge in bankruptcy.


The relief you will receive from criminal justice debt by filing bankruptcy will depend on whether you file under chapter 7 or chapter 13.

The purpose of a chapter 7 bankruptcy will be to eliminate or “discharge” certain debts entirely. A chapter 7 bankruptcy can discharge only certain criminal justice debt, but not most other types. It cannot discharge traffic debts, parking debts, and other fines and civil penalties. Also not dischargeable in a chapter 7 bankruptcy are criminal justice debts flowing from a court order for you to pay restitution. Parents can discharge restitution debts based on the actions of a juvenile.


More complicated is whether debt based on “costs” and surcharges are dischargeable in a chapter 7 bankruptcy, such as costs of prosecution, indigent defense fees, costs of probation, and surcharges assessed to a defendant. Also complicated is whether forfeited bail and bond debt owed either to the state or a bail bondsman is dischargeable in a chapter 7 bankruptcy. You should discuss these issues with a bankruptcy attorney.


A chapter 13 bankruptcy will offer more effective options for dealing with criminal justice debt. When you file a chapter 13 bankruptcy, you submit a plan to repay your creditors all or part of what they are owed. When you have successfully completed your chapter 13 plan, you receive a discharge that typically resolves much of your criminal justice debt.


In a chapter 13 bankruptcy, you can spread out payment for all of your criminal justice debt in installments over the life of your chapter 13 plan, typically from three to five years. In addition, with the exception of punitive fines or restitution entered as part of a sentence in a criminal case, you typically do not have to pay 100% of your criminal justice debts over the life of the plan. Instead you may have to pay only 10 cents or even zero cents on the dollar if your income is low enough and your assets fully exempt. For punitive fines and restitution you have to make full payment, but you can do so in installments over the three to five year length of your chapter 13 plan.


Seeking Legal Advice.

If you have low or no income, you may be able to obtain free legal representation on criminal justice debt issues, particularly if you are facing incarceration for nonpayment. If you were represented by a lawyer in a criminal case in which the fines, fees, or other debts were imposed, you may want to contact that lawyer. Your lawyer may be able to represent you or at least counsel you about your options for dealing with the debt, or refer you to another lawyer who can. If you were not represented by a lawyer when the debt was imposed, you may want to look into whether legal help is available by contacting the court that imposed the debt or the local public defender’s office.


Legal services offices, pro bono attorneys affiliated with local bar associations, and other civil attorneys may also play important roles in representing clients in collection-related proceedings—including when incarceration is a potential risk. Attorneys with expertise in debt collection actions and in representing indigent clients may provide a valuable service by defending clients in collection actions or representing them in hearings related to criminal justice nonpayment. Additionally, legal services and pro bono attorneys may provide valuable representation in affirmative proceedings to modify a debt obligation or repayment plan.