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Borrowers suing banks

July 6, 2011

It seemed Sarah Spears’s financial issues were behind her when the mortgage on her Victorian residence in a Tennessee mill town was chopped by hundreds of dollars a month.

She soon learned that her troubles had just begun.

Weeks soon after creating her 1st payment under the new rate, the school district staffer began receiving past-due notices, documents showing wildly inaccurate loan balances and letters threatening foreclosure. She now fears she’ll lose her property.

“How can they take away what I have worked so hard for?” Spears stated.

Spears is one of two named plaintiffs in a proposed class-action lawsuit alleging breach of contract by Bank of America NA and subsidiary BAC Residence Loans Servicing LP.

The suit, which was filed in Memphis federal court since BAC is situated nearby, is among a growing number of legal complaints accusing banks of disregarding what should be binding agreements to minimize the monthly mortgage payments of troubled borrowers.

The suits involve permanent modifications by way of the U.S. Treasury-administered Property Reasonably priced Modification Program, which delivers incentives to loan servicers who extend modifications, at the same time as so-called proprietary modifications, which banks provide independently of the government guidelines.

They represent a brand new wave of complaints against banks which have already weathered years of criticism for their reluctance to modify loans and for foreclosing on borrowers following offering them trial modifications.

Some have faced lawsuits alleging that the foreclosures amounted to a violation of the deal they struck with the government when they accepted funds from the $700 billion Wall Street rescue. And earlier this month, U.S. Treasury officials announced it was withholding incentives from Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. for incorrectly determining that many borrowers were ineligible for HAMP modifications, a claim that the banks denied.

Recently, though, government officials and mortgage lenders have been touting statistics showing an increase in the number of modifications being extended.

The U.S. Treasury stated in its April HAMP report, the most recent, that 70 percent of the trial modifications initiated since June 1, 2010 under the program’s guidelines have been made permanent, up from 42 percent for trials started before that date.

Meanwhile, the Hope Now group – an association of large banks, mortgage servicers and others – reported that its members had modified 1.8 million loans in 2010, up from 1.2 million modifications in 2009.

But even as troubled borrowers increasingly manage to pry modification deals from reluctant banks, they’re finding that issues persist long right after the ink dries on their new loan contracts.

The Connecticut Fair Housing Center looked at 655 mortgage modifications granted in recent years to clients of partner organizations in 10 different states and found that nearly a quarter were having troubles with inaccurate balance statements, erroneous default notices and other issues.

Spears’s lawsuit cites remarks from an unidentified former call center worker who said staff received bonuses for collecting more than was due under the modification deals. Attorney William Shapiro declined to make the worker available, but stated the worker would testify or provide a declaration if needed during trial.

However Tracey Seslen, a real estate finance professor at the University of Southern California’s Marshall School of Business, stated the banks are probably just overwhelmed.

“There’s not the kind of manpower for the quality control that’s needed to make sure these things don’t happen,” he said.

Whether the problems are due to clerical errors, lack of oversight or something nefarious, the impact on homeowners is severe.

Julia Smith, a 44-year-old mother of four, modified her contract with CitiMortgage Inc. for her Syracuse, N.Y. house right after getting a divorce and suffering injuries in a car wreck that kept her from working.

In October 2010, right after accepting her modified payments for more than a half year, CitiMortgage told her the modification had been denied, according to documents filed as part of a federal lawsuit in New York.

Bank agents now visit her street to take pictures of her property or hang fliers on her doorknob demanding that she call to discuss purportedly late payments.

“The banks act like bullies,” stated Smith.

CitiMortgage spokesman Mark Rogers said legal restrictions kept him from discussing Smith’s situation.

In Staten Island, Paul Taylor and Tamie Jones are having problems getting Chase to recognize a HAMP modification that it made permanent in September 2010.

After accepting the couple’s 1st payment under the modified plan, the bank stated the modification was invalid and stopped cashing their checks, according to a motion filed with New York state court. Chase lawyers have since assured the couple’s attorney the modification was valid, but the bank still returns their checks uncashed.

Chase spokesman Gary Kishner stated he could not comment on pending litigation.

And in the Seattle suburb, Nathan and Evelyn Kenmore, both 29, saw a missed payment notice appear erroneously on their account statement soon right after BAC approved their permanent modification in October 2010.

BAC customer service staffers have repeatedly assured Nathan Kenmore that the charge was a mistake, but it remains on the account eight months later, along with late fees.

Bank of America spokeswoman Shirley Norton declined to comment on the cases involving the Kenmore or Spears, who are co-defendants in the proposed class-action lawsuit.

Spears’s difficulties began when she sought to modify a loan she refinanced years earlier to finish repairs to her Victorian-style property.

The 44-year-old single mother stated she wanted to minimize her housing expenses simply because she was about to begin repaying a graduate school loan and had recently taken in a niece and nephew soon after the death of her sister.

Spears made all of her payments under the modification she was granted in April 2010, but three months later received an account statement that misidentified her mortgage as being an interest-only loan. Over the following months, she was sent bills demanding late fees for payments she never owed.

In November, when she referred to as the bank to ask about letters she received threatening foreclosure, she was told that she was actually ahead on her payments, according to the lawsuit. But the next month, she received four separate foreclosure notices, each giving a different figure as her monthly payment amount.

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