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Mortgage Servicing and Loan Modifications: 11.9.3a.5.1 Individual arbitration

Where an enforceable arbitration agreement forecloses class arbitration, class action litigation in court, and individual court litigation, adequate client representation may require raising the consumer’s claims in an individual arbitration proceeding. Even if an arbitration agreement is not enforceable, it can take years to resolve this issue before even reaching the merits.

Mortgage Servicing and Loan Modifications: 11.10.1 Introduction

Under the tax code, gross income is broadly construed as income in any form (money, property, or services), from any source, unless specifically excluded by law.739 Generally, the amount of gross income minus applicable deductions is taxable.740 Consequently, money damages and loan forgiveness or “cancellation of debt” resulting from a court award or settlement is generally considered taxable income.

Mortgage Servicing and Loan Modifications: 11.10.2 Pain and Suffering Damages

The tax code excludes from gross income damages (other than punitive damages) received on account of personal physical injuries or physical sickness.747 In general, emotional distress is not treated as a physical injury or physical sickness.748 Usually compensation for purely emotional distress (other than medical expenses) is taxable, even when that emotional distress is accompanied by such physical symp

Mortgage Servicing and Loan Modifications: 11.10.5 Damages Relating to Overpayment

Capital returned to the homeowner, whether by cash payment or cancellation of debt, is not taxable income.756 In home defense cases, there may be compensation for amounts improperly overcharged or taken from the homeowner, routine out-of-pocket expenses, including medical bills, transportation costs, or property damage. Homeowners may also be entitled to a return of other monies wrongfully paid, including a refund of excess interest.

Mortgage Servicing and Loan Modifications: 11.11.2 Confidentiality

Settling defendants often request that the settlement prohibit the parties from disclosing the terms of the settlement to anyone. A second, less extreme clause does not prohibit disclosure altogether, but prohibits publicity. Such clauses raise a host of concerns. They enable defendants to cover up massive wrongdoing, and create procedural obstacles if judicial enforcement of the settlement becomes necessary.

Mortgage Servicing and Loan Modifications: 11.11.4.2 Settlement Should Specify Nature of All Damages

In all cases, attorneys should take care to specify the source of the damages. Replacement for out-of-pocket costs will be non-taxable; replacement for lost income, occasioned by, for example, time off work, will be taxable. Out-of-pocket costs may include repairs made to a home, return of excess interest paid, the inflated value of a purchased home, as well as more mundane out-of-pocket expenses, such as medical bills and transportation costs.

Mortgage Servicing and Loan Modifications: 11.11.5 Attorney Fees

Defendants often seek to “divide and conquer” by offering a settlement that does not include attorney fees, or includes an inadequate proposal for fees creating a conflict between the homeowner and the homeowner’s attorney. This can be a significant problem in foreclosure defense cases where a settlement offer from the defendant may simply provide for a modification of the loan (e.g., write down of principal and/or reduction of interest) without any cash payment.

Mortgage Servicing and Loan Modifications: 11.11.9 Other Considerations

Change the account number: Most servicers use automated recordkeeping systems. Unless a thorough purge of the existing computer records is done, it is likely that, at some point, when the servicer generates a payment statement or history, some of the forgiven fees in the loan modification may get picked up and swept into the client’s current information.

Mortgage Servicing and Loan Modifications: 11.12.2 Historical Context

The law of preemption has changed over time and was curtailed significantly by the Dodd-Frank Wall Street Reform Act of 2010 (hereinafter the Dodd-Frank Act).831 The Dodd-Frank reforms became effective on July 21, 2011. Prior to that date, the rules governing preemption for national banks differed somewhat from those governing preemption for federal savings associations.832

Mortgage Servicing and Loan Modifications: 11.12.4 The OCC’s Current Preemption Regulation

Any analysis of the scope or application of the Dodd-Frank Act’s preemption provision is complicated by the preemption rules published by the Office of the Comptroller of the Currency (OCC). On July 21, 2011, the OCC published amendments to its 2004 preemption rules,845 purporting to conform them to the Dodd-Frank Act’s requirements. There are, however, significant questions about the scope and validity of the OCC’s 2011 preemption regulations.