Foreclosure Fairness Act 2012 Amendments

Posted by on Jul 10, 2012 in Memos | Comments Off on Foreclosure Fairness Act 2012 Amendments

 

The Foreclosure Fairness Act (the “Act”) was signed into law on April 14, 2011 and became effective July 22, 2012.   The amendments to the Act were signed into law on March 29, 2012, and the substantive provisions of the amendments will take effect on June 7, 2012.    The primary provisions of the Act, as amended, are substantially as follows:

 

I.                    “Meet and Confer” Provisions.

 

Prior law only required the lender on owner-occupied residential property to contact the borrower 30 days before commencing the non-judicial foreclosure (via a Notice of Default) to advise the borrower of the various means available to avoid foreclosure.

Under the Act, as amended, lenders on owner-occupied residential property must:

  1.  Advise the borrower in writing (the “Initial Contact”) that it has 30 days to respond to the lender, and that it should contact a Housing Counselor or attorney, and that failure to do so may result in losing the opportunity to meet with the lender or mediate the matter before a neutral party.  If the borrower fails to respond within 30 days, the lender may proceed with the Notice of Default after Lender completes the due diligence required by the Act;
  2. If the borrower responds within the 30 day notice period, a Notice of Default cannot be issued less than 90 days from the date of Initial Contact by the lender.  If the borrower responds, and requests a meeting with the lender, a meeting shall occur with the lender before any Notice of Default can be issued, and the meeting shall cover the borrower’s ability to modify the loan or other options to avoid a foreclosure (e.g. a short sale or deed in lieu).  The meeting may occur telephonically, unless the borrower makes a written request within 30 days of the Initial Contact for an in-person meeting (which would occur in the county where the borrower resides).  In any event, the lender’s decision maker must be available.  The parties shall attempt to meet no more than 90 days after the Initial Contact is made.  If the parties do not meet, the lender can issue the Notice of Default (as long as it can show that it used “due diligence” to schedule the meeting).
  3. The meet and confer provisions of the Act do not apply to borrowers that have voluntarily surrendered the property to the lender, lender’s agent or trustee.

 

 

II.                 Housing Counselor Provisions.

 

If a Housing Counselor is selected by the borrower to assist in negotiations with the lender, the Housing Counselor has a duty to negotiate with the borrower’s lender in good faith.  The Housing Counselor is required, pursuant to his duty of good faith, to prepare the borrower for meetings with the lender; advise the borrower regarding documents the borrower must have in order to seek a modification or other remedy; inform the borrower regarding alternatives to foreclosure; and refer the borrower to mediation, where appropriate.

A Housing Counselor is a counselor who has been approved by HUD or the Washington State Housing Finance Commission.

 

 III.              Mediation Provisions.

 

  1. The Act establishes a foreclosure mediation process that applies to borrowers and beneficiaries of deeds of trust on owner-occupied residential real property.
  2. A borrower may not be referred to mediation with the lender during the meet and confer period.  A Housing Counselor or attorney assisting the borrower may refer the borrower to mediation any time after the borrower has received a Notice of Default but no later than 20 days after the Notice of Sale has been recorded.
  3. The mediation proceeds as follows:
    • The Department of Commerce (“DOC”) will appoint the mediator and advise the lender and the trustee of the request within 10 days of receipt;
    • Within 23 days of receipt of DOC’s notice of referral to mediation, the borrower must transmit the required documents (including proof of the borrower’s current economic circumstances) to the lender and mediator;
    • Within 20 days of receiving the borrower’s documents, the lender must submit the required documents (including proof that the lender is better served by a foreclosure than a modification) to the borrower and mediator;
    • Within 70 days of receiving DOC’s notice of referral to mediation, the mediator must convene a mediation session;
    • The mediator must send written notice to the DOC and the parties 30 days prior to the mediation noting the date, time and location of the mediation and other required information;
    • Both the borrower and lender have a duty to mediate in good faith and a failure to mediate in good faith is a defense to a non-judicial foreclosure action;
    • If the lender has previously denied a loan modification, it must explain its reasons for denial in the mediation and provide its most recent Broker’s Price Opinion (BPO) or appraisal;
    • The mediator fee is for preparing, scheduling and conducting a mediation session and the parties must tender the mediation fee within 30 days of DOC’s letter referring the parties to mediation;
    • The mediator is immune from any civil suit based on the proceedings (except in the case of mediator misconduct), regardless of whether the mediator is an employee or volunteer of a dispute resolution center;
    • Within 7 business days of the mediation, the mediator must provide the DOC and the trustee with a written certification detailing the results of the mediation, whether the parties participated in good faith, and other required information;
    • If the parties were unable to reach agreement during the mediation, the lender may proceed with the foreclosure (or record a Notice of Trustee Sale if the borrower was referred to mediation before a Notice of Trustee Sale was recorded) after receipt of the mediator’s written certification;
    • The mediation provisions do not apply to seller financed Deeds of Trust, community associations foreclosing Deeds of Trust (e.g.condo associations), or lenders with fewer than 250 trustee’s sales on owner occupied property during a preceding calendar year.

 

IV.              Consumer Protection Act Violation.

 

It is a violation of the Consumer Protection Act for the lender to fail to mediate in good faith or make the Initial Contact with the borrower as required under the statute.

 

V.                Excise Tax.

 

When a transfer is made by a deed in lieu of foreclosure, and the borrower receives relocation assistance, the excise tax does not apply to the amount of relocation assistance.

 

VI.              Observations.

 

  1. The Act will be beneficial to a borrower with only one loan, and, in particular, will require the mortgage insurer to participate through the servicing entity;
  2. If the second is not foreclosing, it is not affected by the Act, and borrowers will usually be counseled to consider making the payments on the seconds to prohibit the referral of the file from loss mitigation to recovery.  It is an open question as to whether the same servicer on the first and second loan would voluntarily proceed on behalf of the second;
  3. The Act will result in a pre-approved short sale if the parties reach an agreement on a short sale (including the net to be received by lender) either in the meeting with the lender or the mediation;
  4. The lender is required to provide the note and deed of trust to the borrower at the mediation and certify that it is the owner of the debt, which will assist in eliminating claims that the lender is not the owner of the debt;
  5. The duty to mediate in good faith may force lenders to agree to short sales without requiring the borrower to go through a fruitless attempt at a modification when it does not have enough income to qualify for a modification, so long as the borrower meets the HAMP eligibility requirements.  Lenders have used this ruse as a basis for denial of HAFA relief;
  6. Borrowers will now be able to challenge the lender’s appraisal or BPO in the mediation;
  7. The mediation process will further lengthen the period that the borrower has to avoid foreclosure if the borrower exercises its right to a meeting or the borrower’s Housing Counselor or attorney seeks a mediation;
  8. It is imperative that borrowers act early to take advantage of these remedies; therefore, when borrowers see brokers before the Notice of Default is filed, or between the date of the Notice of Default and Notice of Trustee’s Sale, the brokers should advise their borrowers to seek counsel immediately to take advantage of these remedies;
  9. If no agreement is reached in mediation, yet the net present value of the modified loan exceeds the anticipated net recovery at foreclosure, this is a basis for the borrower to enjoin the foreclosure;
  10. Approximately two-thirds of the approved mediators are not lawyers or retired judges.  The non-lawyer mediators tend to conduct facilitative mediations and the lawyers/retired judges conduct evaluative mediations.  Whether facilitative mediations will succeed is problematic.  Some lenders and borrowers are now requesting that the DOC appoint only lawyers or retired judges as their mediators;
  11. While HUD counselors can seek mediation on behalf of their clients, a recent inquiry to the DOC revealed that approximately 40% of those borrowers who sought mediation through HUD counselors would not be represented by the counselor at the mediation;
  12. Recent statistics show that approximately 50% of mediations don’t result in agreement, 40% do result in agreement, and 10% are cancelled at the borrower’s request.
  13. Most credit unions and community banks will not be participating in mediations as they have certified to the DOC under Section 9 of The Act that they are not the beneficiary of deeds of trust in more than 250 trustee’s sales of owner occupied residential real property that occurred in Washington during the preceding calendar year.  (See the DOC website – http://www.commerce.wa.gov/foreclosures for the list of exempt lenders and approved mediators).

The following articles are published for informational purposes and not for the purposes of providing legal advice. Please contact Galvin Realty Law Group at 425.248.2163 for a consultation about your specific needs and circumstances.