What Happens to the Loan When a Couple Separates?

By Benny L. Kass
Saturday, August 15, 2009

Q: My husband and I bought a house four years ago. We were legally separated 16 months ago, and the house was deeded to me. I have been paying the mortgage since our separation. I tried to contact the lender several times but was told I need my husband's permission to talk to them because the loan is in his name only.

I can't claim the mortgage-interest tax deduction even though I am making the mortgage payments. When I contacted the lender, I was told that the mortgage is not assumable.

What are my options? Do I stop paying the mortgage or continue to pay?

A: This is a continuing -- and major -- problem that comes up when people get divorced or separated, or when one spouse dies, having been the only one obligated under the loan documents. Privacy laws prohibit a lender from discussing a loan with someone who is not on that loan.

In 1999, Congress passed the Financial Services Modernization Act, commonly referred to as the Gramm-Leach-Bliley Act. Among other provisions, the law states that "it is the policy of the Congress that each financial institution has an affirmative and continuing obligation to respect the privacy of its customers and to protect the security and confidentiality of those customers' nonpublic personal information."

While this is creating problems, the bank is legally correct in refusing to talk with you. What recourse do you have?

If you are financially able, the easiest way to resolve this is to refinance. Mortgage interest rates are quite low -- and may even be lower than your current rate. The new loan would pay off the existing one, and, as the borrower, you would be able to contact your lender at any time.

Otherwise, I suggest that you talk with your husband (you are still married) and tell him to, in writing, authorize you to talk with the lender. Tell him that if he does not cooperate, you may decide to stop making payments, which will hurt his credit (although you may lose the house).

I have many clients in this boat who have to go through the authorization route to finally be able to talk with the lender. But even if you are able to make contact, this will not guarantee that you will get the annual form 1098 from the lender, which indicates how much mortgage interest was paid on the loan. This is important for tax purposes.

The general rule is that in order to claim the mortgage-interest deduction, the mortgage must be the obligation of the taxpayer claiming the deduction, and not the obligation of another. However, there is an exception. According to the Internal Revenue Service, even if a taxpayer is not directly liable on a mortgage, the taxpayer may nevertheless deduct the mortgage interest paid if she or he is the legal or equitable owner of the property that is the subject of the mortgage.

Clearly, you are the legal owner and should be entitled to claim the tax deduction. Talk with your bank, and explain this to them. If they remain unwilling to communicate with you -- unless your husband provides you with written authorization -- I suggest that you consider filing a claim with the appropriate federal agency that regulates your lender.

For example, the Federal Reserve Board regulates state-chartered banks; the Federal Deposit Insurance Corporation regulates other banks that are not members of the Federal Reserve system, and the Office of the Comptroller of the Currency supervises national banks, including those in the District of Columbia.

You should confirm with your husband that he has not been claiming the interest deduction on his income tax return. If he has, remind him that you have been making the payments and that he not only should stop claiming the deduction but should give the savings he obtained back to you.

Getting in touch with lenders in today's economy is very difficult, if not impossible. Filing a formal complaint to a federal regulator, however, will get their attention.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.

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