A loan modification usually refers to the adjustment of monthly payments on a mortgage loan. This may involve a reduction or increase of the monthly payment amounts, and/or changes in interest rates. Or, it may involve a change to the overall type of mortgage being issued. Loan modifications are usually done if the borrower is having trouble keeping up with their current loan rates.
In most cases, loan modification terms are governed according to contract principles. That is, both parties must agree to any changes that may be planned for an already existing payment arrangement. However, violations of the agreement terms can lead to various legal issues and may even result in a foreclosure proceeding.
Loan modification disputes can be somewhat common, since there can be so many different legal aspects to consider. Some common loan disputes may include:
- Unauthorized increases in rates: There may be some dispute as to whether the lender was authorized to increase monthly pay rates. The borrower usually needs some sort of notice that the rates will change
- Failure to pay: Loan modifications usually occur because the borrower has already to failed to render some monthly payments. However, if they fail to make payments even after a modification, it could lead to a lawsuit for breach of contract
- Loan fraud: The use of deception or misrepresentation regarding loan terms is illegal. Knowingly withholding important loan modification information from a borrower can lead to legal penalties (sometimes criminal penalties) for the lender
- Coercion: The lender cannot use force or threats of harm to coerce the borrower into agreeing to a loan modification
Confusion over mortgage and modification terms can often be resolved by reviewing the loan documents that were signed between the lender and the borrower. These will usually state the original terms as well as any other changes to the original agreement.
However, if this cannot clarify the legal issues, it may be necessary for the parties to file a claim with a civil court. This may involve one party suing the other for economic losses. Or, the court may issue an injunction, which is an order requiring one party to take certain actions.
For example, the court may order the sale of the property if payments continue to be missed. Another common remedy is for the court to impose a lien on the borrower’s property, which would transfer title to the property to the borrower, in lieu of monetary payment.
Such remedies will depend on various factors, including the laws of the state, the original loan contract terms, and the financial background of each party involved.
Loan modifications can often be very helpful for both the borrower and the lender; such adjustments can help the parties maintain a working relationship. However, loan modifications can also be a source of legal dispute. If you’ve been involved in any type of loan modification dispute, you may wish to contact a qualified real estate lawyer for advice. Your attorney can provide you with legal guidance, and can represent you in court if necessary.