Are Banks Illegally Denying Loan Mods?

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The non-profit journalism center ProPublica claims that banks are leading loan modification candidates astray by denying them a deal for reasons that are at best, specious, and at worst, illegal. The center’s investigation focused on larger banks like JPMorgan Chase (Stock Quote: JPM) and Wells Fargo (Stock Quote: WFC). What it found sees to be a violation of the loan modification rules laid down by the federal government.

The investigation focuses particularly on JPMorgan’s propensity to reject loan modification applications because homeowners file applications that indicate personal income reduction could be "temporary," at least in the eyes of the bank. In other words, if a homeowner seeking a loan modification cites a layoff as a proof of economic hardship, banks may view that situation as "temporary," and use it as a reason to reject the loan modification.

You can read the entire story here, but the ProPublica investigation specifically cites Chase’s treatment of a Chicago homeowner who applied for and was granted a loan modification deal. The arrangement cut his monthly mortgage payments from $3,300 to $2,400 per month. The homeowner lived up to his end of the bargain, paying the revamped mortgage seven months in a row under a “trial” loan modification.

But after the seven-month period, the homeowner, Nathan Reynolds (a local mortgage broker, no less), received a notice that his application for permanent loan modification relief was denied. In its denial, Chase told Reynolds that he didn’t meet the criteria for hardship relief, essentially saying that his hardship was only temporary. The primary reason was a seemingly innocuous one: Reynolds had indicated on his application that the economy (especially the housing market) was bound to improve, at which time his personal financial situation would improve, as well.

A Chase spokesperson specifically said that Reynolds’ loan modification was denied, “because the skill and ability is still there to earn the income.” Since he’d “stated in his letter that business would be picking up,” it was “not considered a permanent hardship,” the spokesperson said.

But the U.S. Treasury Department’s own guidelines for loan modification programs says banks can’t reject loan modification applicants for such a specious reason (you can download the agency’s relevant FAQs here). Language in the FAQ says that such programs do not  “distinguish between short-term and long-term hardships for eligibility purposes.”

Says ProPublica, “Reynolds’ experience — along with the cases of two other homeowners examined, shows how servicers have created unnecessary hurdles that, in some instances, violate the loan program’s rules.”

The stakes are high. According to banking industry figures, the largest U.S. banks account for 60% of the 3.4 million mortgages eligible for the federal government’s $75 billion loan modification program. Still, approved loan deals are few and far between. Chase alone has 425,000 homeowners eligible for loan readjustments, according to the U.S. Treasury Department. Yet the bank has only approved 7,000 for permanent loan modification status.

It’s those kinds of numbers that will increasingly draw the attention of homeowner advocacy groups – and with any amount of luck, those advocates hope, the U.S. government, too.

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