Mortgage Servicing Industry Seeks To Standardize The Loan Modification Process
Written by Patrick Barnard
on February 18, 2017 No Comments
Categories : Featured, Mortgage Servicing
Can Quicken Loans do for mortgage modifications what it did on the front end for originations via Rocket Mortgage?

During a lively panel session presented during the Mortgage Bankers Association’s (MBA) annual National Mortgage Servicing Conference & Expo 2017 in Dallas, Michael S. Malloy, vice president of servicing for Quicken Loans, told a packed room that he has directed his team to figure out a way to get the loan modification approval process down to just minutes.

“The vision I have – and what I’ve asked my team to figure out – is how can we take a [borrower] and use the integration of data and information from third-party sources – to plug into a model that would meet the needs of any investor – and give that [borrower] a decision on a modification or other solution, while they’re on the phone with our team member, that would be safe and sustainable for the investor and would meet [agency] requirements,” Malloy told the crowd. “It’s possible. We do it on the front end with Rocket Mortgage. And we can do it together, as an industry, on the back end.”

The session, dubbed “The Future Of Loss Mitigation,” essentially covered the recent evolution of loss mitigation, from the inception of the Home Affordable Modification Program (HAMP) in 2009, through its sunsetting on Dec. 31, 2016, to the development of Fannie Mae and Freddie Mac’s Flex Modification program, a HAMP replacement, and the recent efforts of the MBA and industry stakeholders to develop the One Mod program, which aims to standardize the loan modification framework industry-wide.

Moderated by Pete Mills, senior vice president, residential policy and member engagement, for the MBA, the session also included panelists Ivery W. Himes, director of the Office for Single Family Asset Management in the U.S. Department of Housing and Urban Development; Erik Schmitt, managing director for JPMorgan Chase; and Prasant K. Sar, supervisory policy analyst, servicing policy and asset management for the Federal Housing Finance Agency.

All of the panelists agreed that standardizing the mortgage modification process is the key to holding down costs while at the same time eliminating risk from the process, and thus is the future of default servicing. They were also in agreement that the key to standardizing the modification process – just as with originations – is to utilize technology and, in particular, automation, including automated employment, income and asset verification as well as automated underwriting. Using a mix of technologies and database integration, it will be possible to not only standardize the loan modification process, but make it much simpler for borrowers, as well.

When asked what lessons the mortgage servicing industry learned from HAMP, Malloy characterized the program as one of the first efforts to try to standardize the modification process.

“When we went through the crisis, it was the Wild West,” Malloy said. “Some [servicers] did loan mods – some didn’t – because the underlying securities prevented them. So, there were all kinds of ideas and thoughts [about how to do loan mods]. So, when the Treasury got the industry together and came up with [HAMP], it was a way to … all work together and arrive at what a loan modification should look like … to say, ‘Here’s how it can be appropriately done, as a matter of securities law.’ Sure, there were a lot of bumps along the way – if I say ‘supplemental directives,’ every servicer in the room gets a shiver up and down their spine, right? But it standardized the industry and created a template – and, built on top of it were a lot of proprietary programs. So, it did move the industry forward, in a time of uncertainty.”

Malloy said the main lesson learned from HAMP is “that simplicity is genius.”

“We learned that asking a borrower for 14 documents when they’re already in trouble is only going to make things harder,” he said. “We learned that when a modification only delivers a slight reduction in payment that it’s not going to resonate the borrower and it’s going to be a challenge.”

He further added that a borrower “must feel like a loan mod is a lifeline and not just them being asked for a stack of paper.”

Himes said the main lesson servicers learned from HAMP is that they “must provide quality communications to borrowers once they are in default” and also that “early intervention is really important.”

“You have to connect with the borrower and get them to trust you, so that they are willing fill out that application, tell you about their situation and, more than anything, that they will call you back,” Himes told the group.

Servicers also learned that they “must be able to understand the other things that are going on in a borrowers life – that they could be worried about other things beyond losing their home,” she said.

Himes emphasized that simplicity in the application package is critically important.

“We must have a simple application package – something that he borrower can really understand,” she said. “We need standard terms – and a new form application.”

Another lesson learned from HAMP, she said, “is the significance of working with our housing counseling partners, because a lot of time [the borrower] does not trust us [their servicer] – but they might trust someone who they feel is on the outside of the industry – someone who can help the borrower understand the terminology, the options and what we need from them to help them calculate a sustainable payment.”

Sar, speaking from the investors perspective, said “one of the big takeaways from the crisis is that government can be impactful.” He said the development of HAMP over time resulted in standardization of the loan mod process and, as a result, “servicers are now much more uniform in how they solicit borrowers.”

The main downside of the program, from an investors perspective, he said, was that it further complicated the loss mitigation landscape, because it meant that two types of HAMP loans were in play, in addition to all the proprietary loan mods.

“With the HAMP standard and streamlined [programs], there were multiple loss mitigation products – and that made for a more complex compliance review,” Prasat said. “To conduct a compliance review was really challenging for servicers, really changing for the government and really changing for Fannie and Freddie.

“And that lesson is what has led us [to where we are now], which is trying to develop a more simplified product,” he said. “We believe that all stakeholders have their individual interests – but we all have the same goal: For servicers, investors, borrowers and the government, it is all about sustainability; getting borrowers into the right solution.”

Another lesson learned from HAMP, the panelists said, was that borrower debt-to income (DTI) is not as important of factor in bringing loans back to re-performing status. Rather, the percentage by which a borrower’s monthly payment is reduced is more important. Thus, using DTI as a determinant for eligibility is flawed, as it leads to borrowers getting approved for mods that simply do not reduce their monthly payment enough.

This was underscored when Malloy said Quicken Loans in January had implemented Fannie Mae and Freddie Mac’s Flexible Modification program, a HAMP replacement that does not rely on DTI for underwriting and which aims to reduce borrowers’ monthly payments by an average of 20%. He said so far his company has processed hundreds of Flex Mods and that, of those, “we’ve had an 80% approval rate and an average payment reduction of 23%.”

Schmitt added that recent research shows that DTI “does not make a material difference” in whether a loan becomes re-performing, rather, “What makes a difference in performance is the amount of the reduction.”

Meanwhile, the MBA continues to refine its One Mod program, which, as explained in a recent white paper, is based on four key tenets: “Accessibility, affordability, sustainability and transparency.”

“Accessibility: Make it easier for borrowers to get into the door – simplify the doc set,” Malloy said. “Affordability: Aim for payment reduction. Solve for DTI, yes, but know that performance is directly related to the amount of payment reduction. If you do that, then you’ll have a lot fewer documents than [if you are] calculating DTI.

“Sustainability: If you can reduce payment and get more people in the door, you can shoot for a lower default rate. You need a product that can flex up and down,” he continued. “And Transparency: Client service – being able to explain to folks on the phone, ‘If you can give me these two or three things, I can help you.’”

“That transparency – and the ability to market – is critical,” he said.

www.gallerlaw.com

Student loan forgiveness may be a sweet deal for borrowers, who have collectively accumulated more than $1.3 trillion in debt. The downside: a potentially big tax bill down the road.

The federal government currently offers two types of loan forgiveness for student debt: public service loan forgiveness and loan forgiveness provided by income-based repayment plans, the latter of which requires two decades or more of loan repayment.

The public service route is tax-free while debt canceled by income-based repayment plans is taxed. That potential tax liability could be crippling to lower-income borrowers.

“It replaces student loan debt with tax debt,” said Mark Kantrowitz, publisher of Cappex, a website that connects students with colleges and scholarships.

Tax trouble on the horizon

As currently structured, July 2019 is the earliest any borrower may receive loan forgiveness under an income-based repayment plan and a tax bill from the IRS.

However, unexpected tax bills have already arisen for people who have had their student debt discharged after death or because they are permanently disabled.

In April, a bipartisan group of U.S. senators introduced a bill to eliminate the tax penalty levied on student loans forgiven for death or permanent disability.

“Families grieving the loss or permanent disability of a child did nothing wrong, and they should not be punished by the federal government with a massive tax bill,” Republican Sen. Rob Portman of Ohio said in a statement when he co-sponsored the bill.

“The same tragic reason they cannot pay back their student loans is the reason that they cannot afford an enormous tax increase so contrary to the purposes of our student loan system.”

The taxman doesn’t care if your school closes either. If the 35,000 students enrolled in the recently shuttered ITT Tech schools successfully applied for loan discharges, they may still owe taxes on the amounts canceled.
The number of people affected by tax liabilities from income-based repayment plans will dwarf taxes owed for loan discharges from death, permanent disability and school closures.
The percentage of federal student loan borrowers enrolled in income-based repayment plans has quadrupled over the past four years from 5 percent in 2012 to nearly 20 percent in 2016. Though most borrowers in income-based repayment plans will pay off their debts, low-income workers likely will barely manage to cover the interest on their student loans as their balances grow.

Upon receiving student loan forgiveness, low-income borrowers will owe the IRS up to 25 percent of whatever amount is forgiven plus additional state taxes. Alexander Holt, an education policy analyst at New America, a nonpartisan think tank, used this example:

Take a person who started with $20,000 in debt and had a $20,000 salary in her first year out of college with a 2 percent raise every year. She would have about $44,000 ($30,000 in today’s dollars) forgiven after 20 years. Having never paid more than $10 dollars a month, she would owe the IRS at least $4,000 in today’s dollars in additional taxes that year, which would quadruple her income-tax payment (not including extra state taxes she may owe as well). Overall, that year her federal tax payment would be around 30 percent of her actual, near-poverty-level income.
“A plan that promises borrowers they never will owe a burdensome payment but eventually creates an impossibly large payment out of ‘forgiveness’ is deceptive and has the potential to stop low-income borrowers from enrolling in the program out of fear of the tax,” Holt wrote in his January analysis of student loan forgiveness.

He estimated that the cost of tax-free loan forgiveness for borrowers in income-based repayment plans would be less than $20 million. That sum is tiny compared with the $11 billion the Department of Education spends on income-based repayment plans each year.

The long road

Eligibility for loan forgiveness hinges on the borrower’s ability to make on-time payments. And loan forgiveness programs do not apply to private student loans, which make up about 7.5 percent of the educational lending market.

No borrower will be eligible for the federal public service loan forgiveness until October 2017. The program cancels the remaining balance on your federal student loans after you have made 120 monthly payments while working full time for an approved employer.

In 2012, the Department of Education introduced a voluntary employment certification form to help borrowers track their progress toward meeting the requirements for public service loan forgiveness. Nearly 432,000 people have submitted forms that the department has approved for public service loan forgiveness eligibility.

“One of the biggest questions I’m asked is ‘Am I eligible for public service loan forgiveness?'” said Andy Josuweit, co-founder and CEO of Student Loan Hero, a website that provides free tools to help borrowers manage their debts. In August, the site launched a free calculator to help users determine the benefits of public service loan forgiveness.

If you work in public service, check to see if your state offers a forgiveness program. Often these programs are designed for teachers, social workers, health-care providers and lawyers who work for government agencies or nonprofits. The tax liability of the loan forgiveness depends on the state program.
For those who do not work in public service, loan forgiveness through an income-based repayment plan is an option. Among the four different repayment plans the Department of Education provides, you will need to make 20 years or 25 years of steady payments to be eligible.

Gradible offers a free online student loan evaluation to determine if a repayment plan is right for you.

Borrowers who make it through the gantlet of their repayment plans and still owe on their debts will have their federal student loans forgiven. To satisfy the tax bill, borrowers will have to pay it off in full or enter into a monthly payment plan with the IRS. To start a monthly plan, you will need to fill out Form 9465, Installment Agreement Request.

“The key to such an agreement with the IRS is that you must keep to the terms of the agreement,” said Grafton Willey, a CPA and managing director at accounting and professional services firm CBIZ MHM. “If you default on the agreement, the IRS is not too forgiving.”

New rules to ensure mortgage lenders, servicers treat borrowers fairly

POSTED: September 12, 2016
It came as quite a shock to many distressed homeowners that the U.S. Treasury’s Home Affordable Modification Program and Home Affordable Refinance Program would end Dec. 31.

You still have until then to get out from the “under” that the bursting of the housing bubble put you in.

Although the programs were extended past their original expiration dates because the nationwide foreclosure crisis was deeper and lasted longer than anyone had imagined, this is it.

For me, this means my lender will not mention HARP when it sends me the 8,000th offer to refinance my mortgage without an appraisal. I didn’t qualify anyway, and the lender wasted postage and UPS delivery charges.

There is a difference of opinion on how well the two programs worked, and continuing concerns about the high percentage of defaults among these modified loans.

One constant, however, has been complaints about the treatment of distressed borrowers by lenders and servicers, something that the Consumer Finance Protection Bureau is hoping to address with new measures “to ensure that homeowners and struggling borrowers are treated fairly by mortgage servicers.”

I touched on these briefly in an Aug. 4 article, but I thought it was important to expand on some of the CFPB’s changes, which take effect in 12 months.

Under existing rules, a servicer must give borrowers foreclosure protections – including the right to be evaluated under the bureau’s requirements for options to avert foreclosure – only once during the life of the loan.

The new rule will require servicers to give those protections again to a borrower who has brought a loan current at any time since submitting the previous complete loss-mitigation application.

This change will be particularly helpful for borrowers who obtain a permanent loan modification and later suffer an unrelated hardship – such as the loss of a job or the death of a family member – that could otherwise cause them to face foreclosure.

If a borrower dies, current rules require that servicers promptly identify and communicate with family members, heirs, or other parties, known as “successors in interest,” who have a legal interest in the home.

The new rule establishes a broad definition of “successor in interest” that generally includes people who receive property upon the death of a relative or joint tenant, or as a result of a divorce or legal separation, through certain trusts, or from a spouse or parent.

This ensures that those confirmed as successors in interest will generally receive the same protections under the mortgage-servicing rules as the original borrower.

Servicers are now prevented from taking certain actions in foreclosure once they receive a complete loss-mitigation application from a borrower more than 37 days before a scheduled sale.

In some cases, borrowers are not receiving this protection.

The new rule clarifies that, if a servicer has already made the first foreclosure notice or filing and receives a timely complete application, servicers and their foreclosure counsel must not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, even if a third party conducts the sale proceedings, unless the borrower’s loss-mitigation application is properly denied or withdrawn or the borrower fails to perform on a loss-mitigation agreement.

These clarifications will aid servicers in complying with, and assist courts in applying, the dual-tracking prohibitions in foreclosure proceedings to prevent wrongful foreclosures, the CFPB said.

For-Profit Colleges Account for a Third of All Federal Student Loan Defaults

Even though they account for just 26% of all federal loans.
Over one-third of federal student loan defaults can be attributed to students at for-profit schools.

Students at for-profit colleges accounted for 35% of defaults during the three year period starting in 2013—down from 44% two years earlier, according to new data from the Department of Education, released Wednesday. Though it should be noted that students at for-profit colleges account for just 26% of all borrowers.

The report measured the number of students or former students who had failed to make a payment for 360 consecutive days since the loan was first issued during the fiscal year ending September 2013.

That comes at a time the DoE has been increasingly cracking down on for-profit colleges such as ITT Technical Institute, DeVry, Corinthian Colleges, and Brown Mackie College. Critics have accused for-profit institutions of deceiving consumers and pushing low-income students into costly loans.

In early September, the ITT Educational Services said it would shut its doors after the DoE said that students at the college were no longer eligible for federal funding. It was a death blow, as federal student loans accounted for 68% of the company’s revenue in 2015. Corinthian Colleges was also forced to close last year, while Brown Mackie College whittled itself down from 28 locations to just four.

Adam Looney from the U.S. Treasury and Constantine Yannelis of Stanford University attribute the higher rate of student loan defaults among for-profit colleges to the poor job prospects and low earnings facing graduates in a 2015 Brookings Institute report.

“For most borrowers (and the majority of the student loan portfolio) the education investments financed with their loans are associated with favorable economic outcomes, and borrowers are able to repay their debt even during recessionary periods,” the authors wrote. “These non-traditional borrowers were drawn from lower income families, attended institutions with relatively weak educational outcomes, and experienced poor labor market outcomes after leaving school. ”

While 15% of for-profit student borrowers on a federal loan have defaulted since 2013, 7% of students at private schools and 11.3% of borrowers at public universities defaulted in the same period.

Overall, the three-year federal student loan default rate fell from 11.8% to 11.3%, the DoE reported. Though the number of borrowers has also increased from 5.1 million to 5.2 million. And that, combined with the $1.4 trillion worth of student debt in the U.S., has weighed on the minds of voters.

Both Democratic presidential nominee Hillary Clinton, and Republican presidential nominee Donald Trump have weighed in on the issue of student loans. While Clinton has recommended lowering the price of tuition, Trump’s platform is less clear.

“We’re going to restructure it, we’re going to make it possible for people to borrow money, go through college, get through it, we’re going to make it affordable,” Trump said in a Twitter video session. The businessman though, is currently in hot water for his own for-profit education company (not a for-profit college, nor were its students eligible for federal student aid), Trump University.
ITT Campus in Chantilly, Virginia
For call with Student loan problems, contact Galler Law , LLC
770-671-8830

You may need help with the IRS if you received an IRS collection notice. If you owe back tax debt to the IRS, you will receive letters with “number codes” on the upper right hand side of the letter.

Those “number codes are very important as each IRS collection code signifies a certain step in the IRS collection cycle of your back tax debt.

Each IRS collection notice is a warning to you as to the next step that the Internal Revenue Service is going to take with respect to the collection of your back taxes. Here are some of the codes and what they mean:

531 T Notice of Deficiency

You will likely receive this IRS collection notice after an IRS audit is finished. You have 90 days to go to Tax Court or you can hire a tax attorney to negotiate a possible tax settlement with the Internal Revenue Service.

​4549 Income Tax Examination Changes

If after your tax audit, you owe back tax debt to the IRS, form 4549 will show what deductions or other items the IRS did not allow on your income tax return.

The IRS will also include what penalties and interest you owe based upon the changes. At this point, either you or your tax lawyer has 30 days to respond to the income tax examination changes.

​3254 Examination Appointment

Unfortunately, you are being audited by the IRS. Audits are often caused by certain deductions that are “red flagged” by the IRS.

​688-D Release of Levy/Release of Property from Levy

Many of our clients call us when there is a bank levy or IRS wage garnishment in place. At this point, we have to take action quickly to enter into a tax settlement with the IRS so that we can get the IRS levy released.

​CP 14 Notice of Unpaid Taxes

A CP14 Notice of Unpaid Taxes lets you know how much in income taxes you owe and for how long you have owed the taxes.

At this point, it would be a good idea to a seek the advice of tax attorney to explore your tax resolution options if you cannot pay the back tax debt in full.

​CP 504 Notice of Intent to Levy

This IRS collection notice often gets the attention of many people who may have ignored the prior notices. The IRS is getting more serious about getting your attention and they are very close to issuing a bank levy or wage garnishment.

​1058 Final Notice of Intent to Levy

At this point, all prior IRS notices have been ignored. If you haven’t responded by now, you will have your wages garnished or your bank account levied within 45 days from receipt of this notice.

​IRS Collection Notice Help

If you need help with an IRS collection notice contact Galler Law. wwww.gallerlaw.com

 

Tax resolution firms are a misnomer.  They exact high fees from unassuming consumers and seldom resolve anything.   These firms are a relatively recent development, and they are becoming a serious problem for consumers in our country.

Tax resolution scams advertise heavily, offering to settle Federal tax obligations for a fraction of the amount owed, even for “pennies on the dollar.”  I have heard ads announcing a “special IRS program” to compromise tax balances, available for only a “limited time.”   One firm claims to have saved “tens of thousands of taxpayers tens of millions of dollars.”

These ads are, of course, false.   The IRS rarely accepts an offer in compromise.  There are much better ways of securing relief from a threatened or actual levy (seizure) of a taxpayer’s wages or bank account.  But the unsophisticated people targeted by the ads do not know this.   Many taxpayers are facing IRS levy of their wages or bank account.   A taxpayer who calls the tax resolution firm is connected with a high-pressure salesperson, and maybe with two of them.   The taxpayer is assured that the firm will settle and resolve the taxpayer’s tax obligations. The salespeople earn commissions and large bonuses.  Tax resolution firms take large retainers, typically $5,000-$10,000.  The taxpayer somehow comes up with the retainer money.   It is unlikely that an offer in compromise will even be submitted to IRS on the taxpayer’s behalf.

 Employees of the tax resolution firm send the taxpayer form letters requesting information by artificial deadlines.   When there is no response to the letters, the tax resolution firm does not bother to call the taxpayer.  Instead the tax resolution firm deems the matter concluded and closes its file, the taxpayer realizing no relief.   If the taxpayer requests a refund of fees paid to the tax resolution firm, the firm relentlessly refuses.   All of this is pursuant to fine print in the retainer agreement which the tax resolution firm required the taxpayer to sign.  That fine print also undoubtedly has language exculpating the tax resolution firm from liability to its client.

The taxpayer still owes his balance to the IRS.  In fact the balance is now higher with additional accrued penalties and interest.  And the taxpayer is out the fees paid to the tax resolution scam.

Not surprisingly, there is much litigation against tax resolution firms.  J.K. Harris & Co., of Charleston, South Carolina is the largest such firm, with 325 local offices and $100 million in annual revenue.   CPA John K. Harris founded the firm in 1997.   The firm has been sued numerous times throughout the country.  In 2007 it settled a class action brought in Charleston County, South Carolina Circuit Court for $6.2 million.  In 2008 it settled a suit brought by the attorneys general of 18 states for $1.5 million.

Attorney Roni Deutch, of North Highlands, California, opened her tax resolution firm in her condo in 1991.  Today it enjoys $25 million in annual revenue.  Deutch advertises heavily on TV, especially in California, where she is known as “the Tax Lady.”  Deutch has been the object of much litigation.  In 2007 she settled a suit brought by the New York City Department of Consumer Affairs agreeing to pay $200,000 restitution to consumers and $100,000 in fines to the City.  On August 25, 2010, the California Attorney General sued Deutch in Sacramento County Superior Court seeking $33.9 million in restitution, civil penalties, and a permanent injunction.   The pleadings and exhibits are eye-opening.   To view them go tohttps://services.sacourt.com/publicdms2/DefaultDMS.aspx and enter the case number―34-2010-00085933.

Founded by CPA Patrick Cox just a few years ago, Houston’s TaxMasters, Inc. sold its stock in a public offering in 2009.  No doubt the proceeds of the stock offering fund TaxMasters’ national advertising campaign.  On May 13, 2010, the Texas Attorney General sued TaxMasters on behalf of over 1,000 consumers.

The Better Business Bureau has issued its lowest rating of “F” to JK Harris, Deutch, and TaxMasters.   The California Attorney General’s Complaint alleges that, by August, 2010, 69% of clients who retained the Deutch firm in 2006, 67% of clients who retained the Deutch firm in 2007, 63% of clients who retained the Deutch firm in 2008, and 51% of clients who retained the Deutch firm in 2009 had either cancelled the firm’s services or been terminated as a client of the firm.  Quite a business model.

I find that tax collection cases can be  resolved to the client’s satisfaction.  Usually that involves entering the client into an installment agreement with the IRS or having the client posted as CNC.  Sometimes it involves litigation with the taxing authority.  Once in a great while it involves making an offer in compromise.  Currently I am doing an offer in compromise for a client who suffers chronic heart disease and diabetes and is permanently disabled from working.   He has difficulty talking because of shortness of breath.

Taxpayer lawsuits against tax resolution firms have a beneficial effect.  The Federal Trade Commission should also act against tax resolution firms.  The firms advertise nationally across state lines.  The FTC is uniquely able to investigate tax resolution firms and bring them to justice.

The IRS has been inexplicably, shamefully quiet about tax resolution firms.  These firms enrich themselves with funds that should be used to pay taxes, to the detriment of taxpayers and the Federal treasury.

Lack of professional regulation of tax resolution firms is a large problem.  The IRS allows only Enrolled Agents, licensed CPAs, and licensed attorneys to represent taxpayers before it.  But the IRS rarely exercises its disciplinary authority over representatives of taxpayers.

Enrolled Agents pass a test administered by IRS and are qualified to represent individuals and small businesses in routine matters before the IRS.

CPAs are trained not to represent taxpayers in tax controversies but to audit companies’ financial statements.  Even a CPA with an MS in Taxation does not possess the skills of advocacy.

Neither Enrolled Agents not CPAs can litigate.  In a tax controversy, it important for the taxpayer that IRS personnel understand that there is potential that the case will go to litigation.

Taxpayers are best served by a reputable tax lawyer—CPA, JD, and LLM in tax law is the best group of credentials.   Lawyers know law, and how to research it and argue it.  They are trained in the art of advocacy.  Lawyers are subject to disciplinary authority of their state bar.

Communications between a client and his lawyer are privileged, meaning that neither the client nor the lawyer can be compelled to divulge those communications, unless the privilege has been waived.  There is no privilege in Federal practice for communications between a client and an accountant or between a client and a tax consultant.

Many of the people who work taxpayer files at tax resolution firms are not subject to any professional regulation at all.  These include salespeople and clerical personnel who send out letters to clients requesting information and who close files the case when the requested information is not received.

According to the California Attorney General’s Complaint against the Deutch firm, Deutch pays employees who work on taxpayer files as little as $12 per hour.  But in justifying refusal to refund any part of a taxpayer’s retainer, Deutch claims as much as $300 per hour for such employees’ time.

The California Attorney General’s Complaint alleges that when a client fails to make a scheduled payment due to the Deutch firm, collection personnel of the firm call the client and use aggressive, rude, and harassing language to collect the balance, including screaming  and cursing at the client.

As already noted, an offer in compromise is rarely in a taxpayer’s best interests.  About the only time the IRS accepts one is when the taxpayer is permanently disabled from working.  The making of an offer in compromise tolls the 10-year statute of limitations on collection of the tax.   If the offer is for a lump sum, and the taxpayer’s income is above what IRS considers the poverty level, the taxpayer must pay a deposit of 20% with the offer.  When the IRS rejects the offer it keeps the deposit.

When the IRS issues a notice of intent to levy or a notice of levy against a taxpayer, the taxpayer’s representative should call IRS collections and inform them that the taxpayer wishes to enter into an installment agreement with the IRS or that the taxpayer qualifies to pay nothing to the IRS (this is called being posted as “currently not collectible” or “CNC”).  The representative  should request a hold on collection action to give the representative time to submit a Form 433-A to IRS for the taxpayer.  The IRS will generally grant two weeks for this purpose.  More time can be requested if necessary.

 The California Attorney General’s Complaint alleges that when a client fails to make a scheduled payment due to the Deutch firm, collection personnel of the firm call the client and use aggressive, rude, and harassing language to collect the balance, including screaming  and cursing at the client.

As already noted, an offer in compromise is rarely in a taxpayer’s best interests.  About the only time the IRS accepts one is when the taxpayer is permanently disabled from working.  The making of an offer in compromise tolls the 10-year statute of limitations on collection of the tax.   If the offer is for a lump sum, and the taxpayer’s income is above what IRS considers the poverty level, the taxpayer must pay a deposit of 20% with the offer.  When the IRS rejects the offer it keeps the deposit.

When the IRS issues a notice of intent to levy or a notice of levy against a taxpayer, the taxpayer’s representative should call IRS collections and inform them that the taxpayer wishes to enter into an installment agreement with the IRS or that the taxpayer qualifies to pay nothing to the IRS (this is called being posted as “currently not collectible” or “CNC”).  The representative  should request a hold on collection action to give the representative time to submit a Form 433-A to IRS for the taxpayer.  The IRS will generally grant two weeks for this purpose.  More time can be requested if necessary.

 A Form 433-A is a detailed, six-page personal financial statement.    I review  it with the taxpayer, request information from them, and complete it for them.  It is important that the Form 433-A be completed accurately and in good faith, as the taxpayer signs it under penalty of perjury.   Moreover, the Form 433-A serves as the basis of the IRS’ determination of the amount of the taxpayer’s installment payment, or whether to post the taxpayer as CNC.

One of my clients, an attorney, is embarrassed that he has unpaid tax obligations.    He is practicing on his own after parting ways with his firm in the down economy.    As he is an attorney, I sent him a blank Form 433-A to complete and send back.  I know that he had been struggling financially. When the Form 433-A came back, the client had erred on the side of overstating his income and the value of his assets.  This was human nature—a matter of personal dignity.  It certainly would not help his situation with the IRS.  I called the client and went over the Form 433-A with him.  We came up with a realistic Form 433-A, which the attorney and his wife signed and we submitted to the IRS.

An installment agreement can be either formal or informal.   In an informal installment agreement, the taxpayer promises to make monthly payments in an agreed amount which will pay off his balance within two years.  A formal installment agreement is a written agreement in which the taxpayer promises to make, and IRS agrees to accept, monthly payments in a specified amount.  A taxpayer can allocate payments, such as against the trust fund portion of employment taxes, under an informal installment agreement but not under a formal installment agreement.

IRS collection personnel are generally reasonable people.  If an IRS collection employee sets a taxpayer’s installment payment at an amount which the taxpayer’s representative believes is too high, the representative can speak with the collection employee’s manager.  If the representative is unable to resolve the amount of the employee’s installment payment by talking with the collection employee’s manager, he can appeal the matter to the IRS appeals office.

Once IRS enters into an installment agreement with the taxpayer, or posts the taxpayer’s account as CNC, the IRS removes the taxpayer’s account from collection status.  If the IRS has already issued a notice of levy against property of the taxpayer, the IRS will issue a discharge of it.  But a discharge of levy has prospective-only effect.  Thus, a discharge will stop a continuing wage levy.  But once a levy attaches to a bank account, the IRS owns the balance then in the account, notwithstanding a discharge of the levy later issued by the IRS.

The 10-year statute of limitations on collection continues to run while an installment agreement is being negotiated and while it is in effect, and while an account is in CNC status.  During that time the IRS will seize any Federal tax refunds due the taxpayer, and it may record a notice of Federal tax lien against the taxpayer in the local register of deeds office, but will not take any other collection action again the taxpayer.

Once the IRS enters into an installment agreement with a taxpayer or posts his account as CNC, it is important that the taxpayer timely file all of his Federal income tax returns and pay all tax reported on those returns.   Noncompliance by the client will void his installment agreement or CNC posting and return his Federal tax account to collection status.

Once the statute of limitations on collection of a Federal tax account expires, the IRS can no longer lawfully collect the tax, notwithstanding the unpaid balance of an installment agreement.

John K. Harris refers to the tax resolution “industry.”  Let’s prove him wrong.  Let’s get out the word and bring an end to this terrible scourge upon consumers.

Ringleader of massive, brazen mortgage modification fraud scheme pleads guilty

Joins co-conspirators in admitting guilt

Prison jail bars

The supposed ringleader of a massive mortgage modification fraud scheme pleaded guilty earlier this week to charges that he and others conspired to defraud struggling homeowners by falsely promising mortgage loan modifications they did not actually provide.

According to the U.S. Attorney’s Office for the District of Connecticut, Aria Maleki joins Mehdi Moarefian, who is also known as “Michael Miller,” and Daniel Shiau, who is also known as “Scott Decker,” in pleading guilty to charges stemming from a scheme that resulted in more than 1,000 homeowners suffering losses of more than $3 million total.

Moarefian and Shiau pleaded guilty last month to their involvement in the scheme that included the group operating a series of California-based companies that falsely purported to provide home mortgage loan modifications and other consumer debt relief services to numerous homeowners in Connecticut and across the United States in exchange for upfront fees.

And now, Maleki has pleaded guilty as well.

According to court documents, the group did business under at least 30 different company names, including several that closely resembled the names of legitimate businesses in the mortgage finance space, most notably Green Tree Servicing and Nationstar Mortgage. For instance, company names included Green Tree Financial and Nation Star Financial.

Court documents showed that the group also did business as First Choice Financial Group, Inc., First Choice Financial, First Choice Debt, Legal Modification Firm, National Freedom Group, Home Care Alliance Group, Home Protection Firm, Hardship Center, Network Solutions Center, Inc., Premiere Financial Center, Premiere Financial, Rescue Firm, International Research Group LLC, Hardship Solutions, American Loan Center, Loan Retention Firm, Clear Vision Financial, Enigma Fund, Inc.,“National Aid Group, Southern Chapman Group LLC, Save Point Financial, Best Rate Financial Solutions, and Nation Star Fin Group.

According to court documents, the group cold-called homeowners and offered to provide mortgage loan modification services to those who were having difficulty repaying their home mortgage loans.

Homeowners were charged fees that typically ranged from approximately $2,500 to $4,300 for their services.

In order to induce homeowners to pay these fees, the group made a series of false representations, including: stating that the homeowners already had been approved for mortgage loan modifications on “extremely favorable” terms; stating that the mortgage loan modifications already had been negotiated with the homeowners’ lenders; stating that the homeowners qualified for and would receive financial assistance under various government mortgage relief programs, including the Troubled Asset Relief Program and the Home Affordable Modification Program; and promising that if, for some reason, the mortgage loan modifications fell through, the homeowners would be entitled to a full refund of their fees.

But, the homeowners had not been pre-approved for mortgage loan modifications with lenders, mortgage loan modifications had not been negotiated with the lenders, homeowners had not qualified for and did not receive any financial assistance through government mortgage relief programs, and homeowners did not receive a refund of their fees upon request.

According to the U.S. Attorney’s Office, Maleki presided over the entire structure of this scheme, and pleaded guilty to one count of conspiracy to commit mail and wire fraud, an offense that carries a maximum term of imprisonment of 20 years.

Maleki also agreed to pay restitution of approximately $3 million. Maleki’s sentencing is scheduled for June 14, 2016.

Maleki also has agreed to forfeit approximately $350,000 that investigators seized from various bank accounts, approximately $362,000 seized from a Bitcoin account, a $100,000 cashier’s check, and a 2013 Ferrari 458 Italia, which carries a Kelly Blue Book suggested retail price of approximately $245,000.

Image: Makenzie Vasquez of Everest College

Makenzie Vasquez, of Santa Cruz, Calif., poses for a picture in Washington, Monday, March 30, 2015. Former and current college students calling themselves the “Corinthian 100” say they are on a debt strike and refuse to pay back their student loans. Manuel Balce Ceneta / AP

Students at the abruptly shuttered Corinthian Colleges campuses have some tough choices to make in the coming weeks. The 16,000 affected students can seek debt forgiveness for their student loans, but to do so, they have to walk away from the time and money they already invested in their education.

Through the Department of Education’s closed school discharge, current students and others who withdrew within the past 120 days can apply to have their federal student loans dismissed — but only if they don’t transfer their credits and complete a comparable program at another school.

“Do they decide to continue on in coursework they may have started or do they decide to step away and get a fresh start from debt?” said Ben Miller, higher education research director of the education policy program at think tank New America.

For instance, if a student who was enrolled in a nursing assistant program transferred credits to a community college and got a nursing assistant certification there, he or she wouldn’t be eligible for a loan discharge. But if that nursing student got to the community college and decided to be a radiology technician instead, it’s likely the loans could be discharged. Most students are unlikely to transfer credits they’re not able to use if they plan to switch fields of study.

The situation has students frustrated and confused. “I would like to know if I am allowed to transfer my credits, if the credits even mean anything,” Dominique Avila, 35, who withdrew from Heald College’s campus in Roseville, Calif., late last year, told The Associated Press. Avila is trying to get her transcripts transferred to another school. “What does that mean as far as my debt goes?”

The Attorney General of California, where many of the closed schools are located, has a page on itswebsite with resources for students seeking relief from student debts they incurred at Corinthian. California also has a student tuitionrecovery fund that provides relief from private student loans, and advocacy group the National Consumer Law Center has a list of other states with similar funds.

Corinthian College Closings Leave Students Without Schools1:41

California is one of nine states whose attorney generals sent a letter earlier this month to Secretary of Education Arne Duncan, urging him to waive all Corinthian students’ loans after an investigation found the school gave students false information about their job and earnings prospects. Student advocacy groups also are arguing for the loans to be waived.

Some current and former students have gone on a student loan “strike,” holding off payments in protest.

“The issue that we and others have raised is for students who are at Corinthian campuses that did not close today…those students are not being offered closed school discharges,” said Pauline Abernathy, vice president of The Institute for College Access and Success. “Given the widespread evidence of fraud and the use of bogus job placement rates…those students also deserve the option of a federal student loan discharge,” she said. The National Consumer Law Center also has a petition urging the department to waive Corinthian students’ debts.

No easy road

Even the students who have the option to discharge their debts won’t have an easy road forward. The process can be confusing, and the burden of figuring it out is largely on students’ shoulders, Miller said. “That’s really the challenge. There is a clear process for students at these campuses to get these loans discharged, but the question is, how good is the advice going to be…and how easy or difficult will the process be?”

Since student loans have a six-month grace period, Robyn Smith, of counsel at the National Consumer Law Center, said students shouldn’t panic and make any decisions without doing their research. They should especially be leery of solicitations from other for-profit schools, she said.

The Department of Education plans to participate in transfer fairs with Corinthian. The goal would be to match students up with other schools where they can transfer their credits and complete their education, but there’s no guarantee this will be successful for many students, since most nonprofit institutions won’t accept credits from for-profit schools.

“For-profit credits are largely not transferrable,” Smith said.

It might not be financially smart for students to get some of their credits accepted, she warned. “If you even transfer one credit, you won’t be able to get a closed school discharge.”

Applying for a loan discharge has other financial implications for students who want to start from scratch earning a degree. For-profit schools aggressively pursue and enroll financially vulnerable populations like single moms, veterans and minorities, many of whom qualify for federal Pell Grants. These don’t need to be repaid, but there’s a lifetime cap.

“Unfortunately, under current federal law, they don’t get those back,” Abernathy said. “If they used up their allotment… the clock doesn’t turn back on their Pell Grants.” Students who relied on these grants in the pursuit of a virtually useless Corinthian degree will have to complete their education without that assistance the second time around.

Michael Hulshof left the University of La Verne in 2012 with his law degree and $145,000 in student debt. Today, that figure is about $220,000 and, by the time he’s 55, he figures it will be around $400,000. That’s when his real problems could begin.

Hulshof, a 33-year-old attorney in Antioch, California, entered into a payment plan for graduates who took out federal student loans and who have low income-to-debt ratios. The plan, known as “income-driven repayment,” is intended to help graduates who can’t afford to pay off their loans within 10 years.

On his income of $90,000 a year, Hulshof pays about $575 per month toward hisstudent loans. It’s an affordable payment, but it doesn’t come close to covering the $1,500 a month the loans accrue in interest at rates ranging between 6.5 and 8.5 percent.

Under the repayment plan, Hulshof’s remaining debt will be forgiven after 25 years. But there’s a catch: That forgiven debt is considered income by the Internal Revenue Service, which means he and his wife will face a big tax bill when they finally get out from under the debt cloud.

“Me and my wife talk about it all the time, how we’ll deal with it at that point,” Hulshof said, estimating that he could owe upward of $175,000 in taxes. “It’s incredibly depressing to think about, that bankruptcy may be your only option … to start over at 55 when you worked so hard to get an education to better yourself and society.”

Income-based repayment was originally passed by Congress in 1994, but it was mostly unused until the introduction of new plans between 2009 and 2015. Today, there are five different income-based repayment plans and more borrowers than ever before: As of Sept. 30, more than 4.2 million borrowers of federal direct student loans were enrolled in one of the plans, an increase of more than 50 percent from the year prior and an increase of more than 160 percent from 2013, according to the U.S. Department of Education.

What’s the Best Way to Save for College? 0:42

The plans do offer lower payment options to graduates who otherwise would likely default on their loans. But critics, including borrowers, student advocacy groups and their supporters in Washington, D.C., say they need to be adjusted to insure that borrowers don’t face massive tax bills at the end of their repayment periods.

“Programs such as the income-based repayment program have helped in a small way to ensuring that students can continue to pursue their dreams and get on with their lives while they responsibly pay off their student debt,” Rep. Jim McDermott, D-Wash., said in a statement to NBC News. “However, slamming students and families with a massive tax bill after they have played by the rules is just wrong.”

McDermott introduced legislation last year to address the problem, either by allowing borrowers to refinance student loans at lower rates so that repayments would reduce the principal or by exempting the retired debt from federal income taxes. Neither approach passed muster with the House Ways and Means Committee. (A spokesperson for the committee did not respond to requests from NBC News for comment.)

The Obama administration also proposed changing the tax code to exempt the forgiven debt from taxes, but the provision did not make it into the final budget agreement passed by Congress and signed by President Obama in December.

mocrats are trying again this year. Legislation introduced on Jan. 21 by Sen. Elizabeth Warren, D-Mass. — the Reduce Student Debt, or REduce Student (RED) Act — would allow debtors to refinance their loans at between 3.86 and 6.41 percent, depending on the type of repayment plan they are on.

The varying rates are indicative of a confusing array of income-based repayment plans.

Hulshof’s repayment plan is called income-contingent repayment, the first plan passed in 1994. The plan lowers monthly payments to 15 percent of discretionary income and forgives the debt after 25 years.

The Consumer Finance Reform bill passed in 2009 introduced a new income-based repayment plan, capping payments at 15 percent and forgiving the debt after 25 years. Since then, the government has introduced three other variations, including a new version of income-based repayment.

The differences among them can get confusing.

Which colleges give best bang for your buck? Princeton Review says… 3:45

“All this stuff is part of the problem,” said Natalia Abrams, executive director of the group Student Debt Crisis. “We have five different programs with different dates and different set-ups and it creates confusion for the student loan borrower.”

That confusion extends to the retirement of the debt, she said. Many borrowers don’t understand the tax bill that awaits them upon forgiveness.

“When we talk to any borrower now, we say, think about the fact that you will pay a tax bill,” she said.

While Abrams and other advocates for relief wait to see if Congress will act, they are waiting to see how the IRS handles borrowers who face tax on their forgiven debt: Those who signed up for income-driven repayment in 1994 — the first year it was available — will be first to face the potential consequences in 2019.

Joshua Cohen, a lawyer specializing in student debt, said that the high number of students in the program and the likelihood that few will be able to pay taxes suggests the IRS may just look the other way.

“How (is the IRS) going to get the manpower to collect on all this?” he said.

Indeed, the IRS has in the past chosen not to pursue taxes that it could have collected, says Alice Abreu, a professor at Temple University School of Law.

However, those instances — such as its decision to not tax frequent flier miles or hotel reward points earned on hotel reward points — are rare and usually involve ambiguous statutes that give the agency some leeway.

“In this particular case, I would be shocked if the IRS took such action,” Abreu said, noting that an existing statute explicitly exempts forgiven debt from taxation for borrowers who work for a qualifying government agency or nonprofit.

How Bad is the Student Debt Crush? 1:39

That leaves debtors on an income-driven repayment plan with little choice but to make the reduced payments and hope that lawmakers come up with a solution before the tax bill comes due.

Cohen, the student-debt attorney, is himself is on an income-driven repayment plan and currently owes about $200,000 on a loan at a 6.3 percent interest rate.

“What I tell myself is the same thing I tell my clients: The tax bill is still less than what you would owe” if you paid the loan in full, he said.

In the meantime, he urges them not to drive themselves crazy working two jobs or cutting expenses to the quick to try and pay down the loan principal.

“You go to school to live,” he said. “You don’t live to pay your debt