Money Law Blog

Last Friday, the attorney generals of Arizona and Nevada filed suit against Bank of America alleging state consumer fraud violations for a practice that's come to be known as "dual tracking" -- bank employees are telling homeowners seeking modifications to make a reduced payment while the "modification is pending."

All the while, the lender is still holding the homeowner in breach of the contract and taking payments until such time as it decides to go ahead and foreclosure. It's a slimy tactic. If the homeowner knew they were getting nothing for the deal it would have been better to save the money and short sell or surrender the property in bankruptcy.

This bankruptcy law firm has seen a number of similar cases during the past year with homeowners in Maryland, Virginia and DC. We have written about this abuse against homeowners in another posting on this blog.

Most states, including Maryland, Virginia and DC, have similar consumers laws addressing "unfair and deceptive acts and practices."

Good for you Arizona and Nevada. May this suit go places.

The Internal Revenue Service reported this week that IRS audits are up 11% for this year. Frankly, it's not real surprising.

It's during hard times that taxpayers feel the pinch and are more likely to cut corners and try to pay a little less into the public fisc. Likewise, as tax revenue goes down, the government will look for more income by increasing audits, publicizing that fact, and thereby scare more taxpayers into compliance.

This tax law firm expects to have more than the usual number of cases in the near future as more unlucky taxpayers get caught in the taxman's web.

Here are tips to avoid an audit, especially for the self-employed and business owners, who tend to be favorite enforcement targets for IRS:

1. Be scrupulously honest. Report all income, even when you don't get a 1099 or W-2. Deposit all cash, religiously, into the business account. Don't take cash, bypass depositing it into an account, and use it to pay expenses. If the agent sees a lot of this, it'll make the case easier for unreported income. Remember: The burden of proof is on the taxpayer. Ignorance and sloppiness are not an adequate defense. Regarding deductions, don't try to reach. Always ask yourself: Is this a defensible position? Am I clearly entitled to the deduction? Here's an expression one hears often: "Pigs get fat, hogs get slaughtered." I'm told it was first uttered by a judge -- in a tax case.
2. Speaking of deductions, beware of "constructive dividends." This is a favorite of the IRS. Small business owners often use the corporate account to pay for personal goods or services, such a car used for the personal errands of the owner, non-business meals, vacations, home improvements, and so on. IRS and the state tax agents know it, and look for it. If it's personal, report it in your personal income tax return or reimburse the company and make sure to give it only the correct tax treatment as compensation, or dividend, in consultation with your accountant. This is often one of the charges in a tax criminal case.
3. Use a reputable tax preparer. Tax is very complicated. Furthermore, the law changes every year. The person preparing your return should have credentials (education and experience). Mistakes, including math errors, in one part of the tax return increase the odds that the whole return will be audited. Don't pick someone because they promise to get you the biggest refund or the lowest tax bill. That's a red flag signaling a fraudster. You don't want to be questioned by the IRS when they investigate this scammer's entire client list.
4. Keep good records. Of course this is something you should have done throughout the year, but you can still heed this advice for the coming year. Keep your receipts, especially for expenses you deduct. You will be asked for them on audit. Remember: To deduct actual mileage you must keep a "contemporaneous" log, i.e. at the time of the trip, not a reconstruction weeks afterward. Likewise, you want to have invoices for an payments you make. (Otherwise, on audit, how do you prove the deduction you took for office supplies wasn't just money you pocketed? Bring the paid bills from Staples.) Meticulously deposit all your income into an account and pay your bills out of that account or designated credit cards. If you're self-employed, or have a side-line business in addition to your employment, DO NOT commingle income and expenses of your business with your personal. Keep and use separate accounts, ATM cards, and credit cards for your personal transactions and your business transactions. One of the biggest problems we face as tax practitioners working with small businesses is the lack of good record-keeping. Just keeping "books" makes such a difference for business planning and profits, as well as defending an IRS audit
5. Keep regular books if you have a business. It's good business practice, too, to keep books during the year. Many of our clients get into tax trouble because they didn't pay estimated taxes during the year and so don't have the cash (or available credit) to pay when they file the tax return for the year. Had they paid estimated taxes during the year, this would have been avoided. From a business point of view, they would also had a better idea of profitability had they taken into account tax "accrual" expenses building up during the year. So many contractors under-bid because they don't take taxes into account, and end up subsidizing the buyer with the tax liability they will later face!

Good luck, but if you end up getting snagged, for individuals or businesses with tax problems in Maryland, Virginia and DC, we're happy to talk to you about ways you can minimize or eliminate tax problems and get back on track.

Fannie Mae and Freddie Mac have complete power to address a large part of the national foreclosure problem by demanding that the mortgage servicers and law firms they hire to execute foreclosures do so correctly and fairly.

At this foreclosure defense law firm, we see a large number of the same abuses discussed at the December 1, 2010, Senate Banking Committee hearing in our Maryland, Virginia and DC cases.

Among the worst abuses, the practice of putting homeowners in a dual-track:

Mortgage servicers (the bank departments administering loans from whom homeowners get all correspondence and bills on behalf of the mortgage holders) maintain discussions with homeowners about a modification while at the same they have directed attorneys to take steps toward a foreclosure. This is not disclosed to the loan modification applicant.

It's quite a surprise to homeowners who think they are negotiating a resolution when they get notice that the house has been sold and they need to move out! Had the homeowner known he could have taken steps such as initiating formal legal process to protect himself. This deceit happens all the time. I have written about how lenders abuse homeowner seeking modification in this blog and I warn everyone with whom I meet. This is how the Freddie Mac official responds, according to a Washington Post article on the hearing:

Meanwhile, Bisenius defended the dual-track approach to mortgage modification and foreclosure embraced by many of its servicers: Attempt to modify a loan to make it more affordable, but also prepare to foreclose if that is not possible.

"While we believe that borrowers who already are under significant stress arising from their financial situations should not be subjected to needless confusion, we also believe that unnecessary delays in an already lengthy foreclosure process would be counterproductive," Bisenius said.

He noted that foreclosures usually last well over a year, and sometimes close to two. "The dual-track process allows for a delicate balance between the need to minimize losses and protect communities while protecting borrower interests. Lengthy foreclosure delays impose substantial losses on Freddie Mac and taxpayers - by some estimates, $30 to 40 per day and $10,000 to $15,000 per year for every defaulted loan," Bisenius said. "These costs do not include additional losses resulting from depreciation in the value of the property."

That's hardly the case in the Washington, DC area. All foreclosures in Maryland, Virginia and DC are non-judicial -- that is, nothing is presented by the lender to a judge before the foreclosure is initiated to prove the lender's right to foreclose such as a valid note, deed of trust, or the existence of an arrearage. (In Maryland, foreclosures are "docketed" with the court, but nothing is presented to the court except an accounting afterwards for "ratification" of the foreclosure.)

Under Virginia law, a foreclosure can proceed in as little as three weeks. Maryland foreclosures can proceed quickly, but average about six months. DC foreclosures average a couple of months from start to finish.

Other servicer abuses complained about at the hearing, and which we see in this law office:

• Employees of mortgage servicers telling homeowners to stop paying or make a reduced payment to get a modification, without disclosing to them that there is NO legally enforceable agreement to forbear, and that the lender will still hold them default and eventually move the case to foreclosure. I have written about the dangers of lenders telling homeowners NOT to pay before in this blog.


• While the servicer continues to accept reduced payments, they pile on late fees and default charges which the servicer, at foreclosure, collects at 100%, generally right off the top of the foreclosure proceeds.

Most galling is the fact that Fannie Mae and Freddie Mac were also bailed out by the taxpayers, and salaries for employees at both firms are generally above the norm even for the Washington, DC area.

Homeowners and advocates can only hope lawmakers will force Fannie and Freddie to treat the public fairly.

Fannie Mae and Freddie Mac, government-backed businesses who together own or guarantee about half of the outstanding mortgages in the country, were in Washington, DC last week defending themselves before a Senate committee looking into abusive - and in some cases illegal - foreclosure practices that have come to light in recent months.

The excuses voiced by the company's top officials would be out-and-out laughable, if the consequences of the attitudes they demonstrate weren't so tragic. The arguments Fannie and Freddie made indicate just how clueless they are to what is actually going on but is well-known by homeowners with mortgage problems and the advocates who defend them. Here's an excerpt from a Washington Post article which drew from testimony prepared for the Wednesday, December 1, 2010, hearing :

Speaking to the Senate Banking Committee at a hearing on the national foreclosure debacle, Fannie and Freddie executives emphasized that they are not responsible for managing payments by borrowers on home loans or foreclosing on homeowners when they default.

These tasks, executives say, are the responsibility of mortgage servicers and law firms with which the companies contract.

"I want to underscore that Fannie Mae does not service loans. We rely on the loan servicing divisions of major banks and other financial institutions as the primary front-line operators and points of contact with the borrowers," said Terence Edwards, executive vice president for credit portfolio management at Fannie Mae. "We pay servicers significant fees during the life of a loan to work with borrowers. Servicers are required under our servicing contracts to help borrowers in trouble, not just collect payments."

Donald Bisenius, executive vice president of the single family credit guarantee business at Freddie Mac, made the same point. "Freddie Mac provides guidelines for the origination and servicing of our loans, and contracts with sellers and servicers to carry out these operations."

Reading this, I almost fell out of my chair. I was dumbstruck. As an attorney at a law firm devoted to helping Maryland, Virginia, and DC homeowners with mortgage troubles, I could not believe they would proffer this defense, and certainly not with a straight face.

In my own law practice, if I make an error of law, I cannot blame my paralegals - the employees and contractors I hired personally, whom I control, and for whom I am absolutely responsible. (A friend of mine at the Office of US Trustee and I joke about this as the "respondeat inferior" defense - a play upon the legal doctrine of "respondeat superior" where an employer is liable for the actions of his employees.)

If I tried this argument in court, I would not be surprised to see a judge to roll his eyes.