Most lawsuits don’t go to trial. If they did, our courts would be more congested than a South Korean freeway. When five of the largest United States banks were accused of questionable mortgage practices, including robo-signing documents and attempting to foreclose on mortgages that they didn’t even own, the case quickly settled for the bargain price of $25 billion.
Under the terms of the settlement, the banks wouldn’t have to pay the entire amount. Instead, they would be credited for activities designed to forgive debt and keep families in their houses.
It’s a win-win, right?
According to The New York Times, the bank's newest method of "helping" customers is to send letters declaring that the banks would graciously forgive the balance of the borrower's home equity loan. Free money! Wiped out debt! How is that evil?
According to the report, it turns out that the borrowers didn't actually owe that money. Many of the borrowers declared bankruptcy and already had the debt discharged. The banks are essentially forgiving a debt that is no longer owed.
The banks are defending this practice by stating that many of these customers still have liens on their property due to the previously-owed debt and that the process will wipe out the lien in order to make it easier for the homeowners to sell their property. Though the letters did not mention liens, Bank of America has clarified the issue on their website.
This means that the banks are either forgiving a non-existent debt, or releasing a lien based on a non-existent debt, and deducting the amount from that $25 billion settlement.
So what difference does this make to the homeowners? After all, they already have the debt forgiven. Releasing the lien saves the effort and expense of a quiet title action and other legal hassles. The creative accounting by the banks is actually helpful, right?
Not exactly. In at least one case, a Chase customer and her attorney pointed out that the lien had already been released during the bankruptcy proceedings three years ago. At least in her case, there was absolutely no benefit to the customer conferred by the "debt forgiveness" program.
Not only is the program useless, it often ends up costing the homeowner money. Forgiven debt is treated as taxable income by the Internal Revenue Service. These banks are reporting the forgiven faux-debt to the IRS, who then bills the customers for the taxes. Some of the forgiven debts cited by the Times were over $200,000. That means a hefty tax bill for the customer, money saved by the bank, and a whole lot of questionable accounting.
- Consult a New York Personal Injury Law Attorney (FindLaw)
- Homeowners Facing Foreclosure Get New Protections (NPR)
- Feds, Lenders Make $25 Billion Mortgage Settlement Official (FindLaw's Decided Blog)
- Foreclosure Victims Can Cash in on Banks' 'Robosigning' Settlement (FindLaw's Boston Real Estate News)