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Loan Modification

What Is a Loan Modification?

A loan modification usually refers to the adjustment of monthly payments on a mortgage loan. This may involve a reduction or increase of the monthly payment amounts, and/or changes in interest rates. Or, it may involve a change to the overall type of mortgage being issued. Loan modifications are usually done if the borrower is having trouble keeping up with their current loan rates. 

In most cases, loan modification terms are governed according to contract principles. That is, both parties must agree to any changes that may be planned for an already existing payment arrangement. However, violations of the agreement terms can lead to various legal issues and may even result in a foreclosure proceeding.

What Are Some Common Loan Modification Disputes?

Loan modification disputes can be somewhat common, since there can be so many different legal aspects to consider. Some common loan disputes may include:

  • Unauthorized increases in rates: There may be some dispute as to whether the lender was authorized to increase monthly pay rates. The borrower usually needs some sort of notice that the rates will change 
  • Failure to pay: Loan modifications usually occur because the borrower has already to failed to render some monthly payments. However, if they fail to make payments even after a modification, it could lead to a lawsuit for breach of contract
  • Loan fraud: The use of deception or misrepresentation regarding loan terms is illegal.  Knowingly withholding important loan modification information from a borrower can lead to legal penalties (sometimes criminal penalties) for the lender
  • Coercion: The lender cannot use force or threats of harm to coerce the borrower into agreeing to a loan modification

How Are Loan Modification Disputes Resolved?

Confusion over mortgage and modification terms can often be resolved by reviewing the loan documents that were signed between the lender and the borrower. These will usually state the original terms as well as any other changes to the original agreement.

However, if this cannot clarify the legal issues, it may be necessary for the parties to file a claim with a civil court. This may involve one party suing the other for economic losses. Or, the court may issue an injunction, which is an order requiring one party to take certain actions. 

For example, the court may order the sale of the property if payments continue to be missed. Another common remedy is for the court to impose a lien on the borrower's property, which would transfer title to the property to the borrower, in lieu of monetary payment. 

Such remedies will depend on various factors, including the laws of the state, the original loan contract terms, and the financial background of each party involved. 

What is a Mortgage Modification?

A mortgage modification is a specific type of loan modification that applies to residential real estate. It typically involves the reworking or changing of the terms of an original mortgage contract.

For example, an option to modify a mortgage loan may be made available to the owner of a home once they have been making regular payments on their initial mortgage loan for a period of time. In some cases, individuals encounter a challenge with continuing to make the same amount of payments and may be permitted to modify their mortgage.

Although loans are usually modified due to a high interest rate or a monthly payment which has become too expensive for the borrower, it may also be possible to increase the amount of the monthly payment. One reason an individual may want to increase their loan payments is so that they can pay off the loan sooner and avoid having to pay back additional fees or more accrued interest.

There are certain mortgage terms and concepts which constantly appear during negotiations for a modification, which may include:

  • Interest rates;
  • Payment schedules;
  • Back payments, such as when the homeowner has missed previous payments;
  • Penalties for non-payment; and
  • Possibilities for additional financing or obtaining a second mortgage.

In the majority of cases, the loan modification terms are governed according to contract law. This is because the conditions for a modification are typically included in the original mortgage agreement.

For example, there may be a provision which states that a mortgage modification may only occur after a certain specified amount of time has passed. Therefore, if no provision was specified when the parties entered into the original mortgage agreement, there may not be an option to modify the mortgage or the option may only be available in very limited or specific circumstances.

What are the Legal Issues Involved in a Mortgage Modification Lawsuit?

There are certain instances where it may be necessary to file a lawsuit because of a mortgage modification dispute. A mortgage modification lawsuit typically focuses on the issue of missed mortgage payments.

A mortgage modification lawsuit, however, may also involve numerous other legal issues, including:

A foreclosure occurs when an individual fails to make payments for a certain period of time and the lender takes possession of the property. A mortgage modification is commonly presented as an alternative to foreclosure actions or as a remedy to a foreclosure lawsuit.

If serious non-payment issues arise, a lender may sue in order to obtain a lien on a property. If it is granted, a lien will permit the lender to assume ownership of the home or property and then resell it to cover any debts owed on it.

Either party to a mortgage contract may be held liable for breaching that contract. If a breach occurs, it may result in the enforcement of real estate contract penalty clauses.

Predatory lending occurs when a lender seeks out a susceptible buyer, such as an elderly or first-time borrower. The lender then takes advantage of them by offering a loan with a significantly higher interest rate than what the loan is actually worth.

Both parties to a mortgage contract may be held liable for committing mortgage fraud. This most frequently occurs when a borrower lies on their loan application by making false statements, putting another individual's name on the documents, or fails to disclose crucial facts to the lender.

In the alternative, a lender may also commit mortgage fraud. This may occur when a lender forges the mortgage contract. If the forgery or fraud is discovered, the borrower will be able to assert it as a defense against the lender's foreclosure action. 

What are Some Legal Remedies in Mortgage Modification Lawsuits?

Confusion regarding mortgages and modification terms are often resolved by reviewing the loan documents which were signed between a borrower and a lender. These will typically state the original terms as well as other possible changes to the original agreement.

However, if the original loan documents do not clarify the legal issues, it may be necessary for the parties to file a lawsuit in civil court. A civil lawsuit may involve a party suing the other for economic losses. In some cases, the court may issue an injunction, which requires a party to either take certain actions or cease taking certain actions.

One of the most common legal remedies in a mortgage claim is a damages award which is given to cover financial losses. Often, a borrower is ordered to pay a lender what they owe in nonpayment.

Even after a lender has begun the foreclosure process, the borrower is given a grace period in which to pay missed payments. If the borrower fails to make up the missed payments by the end of the grace period, they may be reported to the credit bureau, which will likely cause their credit score to fall and their credit history be noted.

In some cases, a court may order the sale of a property if the owner continues to miss payments. The court may also impose a lien on the borrower's property which transfers title to the borrower in lieu of monetary payment.

Another possible remedy in mortgage claims are wage garnishments. With a wage garnishment, the court orders the borrower's employer to take a portion of their paychecks to be sent to the agency that processes their debt payments.

In some cases, the parties can agree to a new debt arrangement which would be more beneficial to all parties and potentially avoid a wage garnishment. The mortgage agreement will typically state whether or not it is possible to create a new debt arrangement for individuals who are behind on their mortgage payments.

The available legal remedies will depend on many factors, including the laws of the state, the terms of the original loan, and the financial background of the parties.

Has COVID-19 Affected the Legal Proceedings and Processes for Mortgage Modifications?

Many mortgage lenders are offering assistance during the COVID-19 pandemic, which will vary by lender. All a borrower has to do is contact their lender and advise them of their situation. Some lenders are offering forbearance plans to borrowers affected by the pandemic.

A forbearance is an agreement with a lender which allows the borrower to make a reduced payment or even no payment at all for a certain period of time. It is important to note, however, that interest still accrue and the skipped amount will have to be paid after the forbearance period.

Normally, a forbearance lasts about three months. However, during the pandemic, these times may be extended. If an individual is unsure of what to do, who to contact, or what questions to ask, an attorney is always happy to assist.

What Is Loan Modification Fraud?

Loan modification fraud occurs when someone misrepresents facts or uses deception when modifying a loan. To knowingly withhold vital loan modification information can lead to serious penalties.

How Does This Type of Fraud Occur?

An individual may lie, confuse, or intentionally withhold information during the mortgage modification application process. For instance, a borrower may print fake payroll receipts to show they have enough money in the bank to obtain the modification.

Who Can Commit Loan Modification Fraud?

Both a lender and a borrower can commit this type of fraud. For example, a mortgage borrower may submit a modification application with misstatements or omitted information on it. This is a type of fraud for housing. The borrower does not seek to profit off of the fraud, but commits fraud to obtain or keep a home.

Lender modification fraud involves complex collaborations and schemes by two or more people in the mortgage industry. These schemes are called fraud for profit because the lenders are seeking to make money from the modification transactions.

Who Are Often Involved in Lender Modification Fraud Schemes?

The parties involved in a lender modification fraud scheme often include:

  • Real estate agents
  • Mortgage brokers
  • Real estate appraisers
  • Attorneys
  • Accountants
  • Credit agencies
  • Investment bankers
  • Builders

What If I Made a Mistake When I Completed My Loan Modification Application?

Loan modification fraud requires intent. The borrower or lender must knowingly make omissions or misrepresentations. A borrower who mistakenly omits income does not commit fraud.

What Are the Criminal Penalties Associated with Mortgage Modification Fraud?

The specific penalties for modification fraud vary by jurisdiction. Typically, this type of fraud is considered a felony. A misdemeanor charge is possible when the fraud was for a small sum. Criminal penalties include:

  • Prison time
  • Restitution
  • Fines
  • Possible probation

Can a Lawyer Help Me with My Loan Modification?

Loan modifications can often be very helpful for both the borrower and the lender; such adjustments can help the parties maintain a working relationship. However, loan modifications can also be a source of legal dispute. If you've been involved in any type of loan modification dispute, you may wish to contact a qualified mortgage lawyer for advice. Your attorney can provide you with legal guidance, and can represent you in court if necessary.

Call our office today at 212-994-7777 or complete the convenient online contact form to set up a consultation.