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08/10/09: Privacy Hurts Former Spouse

Housing Counsel

By: Benny L. Kass

Q: My husband and I purchased a house four years ago. We were legally separated 16 months ago and the house was deeded over to me. I have been paying the mortgage since our separation. I tried to contact the lender several times but was told I need his permission to talk to them because the loan is in his name only. I can’t claim the 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 continuing to pay.

A: This is a continuing – and major – problem when people get divorced, separated, or one spouse dies and is the only one who is obligated under the loan documents. The privacy acts prohibit a lender from discussing a loan with someone who is not on that loan.

Back in l999, Congress enacted the Financial Modernization Act, commonly referred to as the Gramm-Leach-Bliley Act (named after the Congressional sponsors). 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.”

Accordingly, 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 loan. The new loan will pay off the existing one, and you will be able to contact your lender at any time.

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

I have many clients in this same boat, and 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 indicating how much interest was paid 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 contained in the law. According to an Internal Revenue Service Regulation, even if a taxpayer is not directly liable on a mortgage, the taxpayer may nevertheless deduct the mortgage interest paid if she or he she is the legal or equitable owner of the property which 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 member of the Federal Reserve Board and the Office of the Comptroller 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 this immediately 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.

– Boilerplate –