Info from Prof. Katie Porter re Reducing Principal on Loans Under the Settlement

The nation’s five largest mortgage servicers-Ally Financial, Bank of America, Citi Financial, JPMorgan Chase, and Wells Fargo-can receive credit towards their consumer relief obligations under the National Mortgage Settlement for reducing principal on loans they service, including second mortgages.

The Settlement only requires the servicers to perform second-lien modifications in two instances.  First, a servicer must modify a second lien when it has modified a first lien via its proprietary modification process, including a Settlement modification, and another servicer that agreed to the Settlement owns the second lien.  Second, a servicer must modify a second lien when another settling servicer has performed a first-lien modification.

The servicers can also perform second-lien modifications in addition to those required by the Settlement.  For example, Bank of America implemented an extensive second-lien extinguishment program under the Settlement. Bank of America sends borrowers, including those who have filed chapter 7 or chapter 13 bankruptcy, a one-page letter informing them that their second lien will be extinguished.  A homeowner who does not want the lien extinguished must contact Bank of America within 30 days.  If the homeowner does not respond, the second lien is released and the associated debt forgiven.  Given the opt-out structure, it is not surprising that participation rates in this program are extremely high.  Bank of America reports these accounts to the credit bureaus as “paid in full” and “closed.”   This second-lien extinguishment program is unique to Bank of America.

Borrowers receiving second-lien forgiveness under the Settlement should consult with a qualified tax professional to discuss any potential tax consequences. These borrowers should also anticipate that their lenders will report any forgiven second-lien debt to the IRS using the appropriate 1099 form.

More information about the National Mortgage Settlement is available at the site of the California Monitor Program: www.californiamonitor.org. Questions specific to bankruptcy can be directed to California Monitor attorney,Angelica Ornelas, at aornelas@law.uci.edu .

Katherine Porter Professor of Law, UC Irvine California Monitor, A Program of the Attorney General

2 Replies to Info from Prof. Katie Porter re Reducing Principal on Loans Under the Settlement

  1. To qualify, customers must have a second lien owned and serviced by Bank of America that meets certain threshold delinquency or property value criteria, or a second lien associated with a first-lien mortgage that is severely delinquent. It does not matter who owns and services the first lien.

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