April 9, 2015
by Susana Chambers (Davila)
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)
Washington’s Foreclosure Fairness Act (FFA) was enacted in 2011 as an amendment to the Washington Deed of Trust Act, RCW § 61.24, the statutory guidance for nonjudicial foreclosure in Washington State. The FFA established a foreclosure mediation program (Mediation Program), which is administered by Washington’s Department of Commerce (Commerce). Commerce reports annually to the legislature on the performance and results of the Mediation Program.
Looking Back – Best Practices Established
Over the last three years, foreclosure mediation “best practices” have emerged as a result of more than 6,300 mediation referrals in the state. Beneficiaries with organized mediation groups who regularly employ these best practices generally experience success in the Mediation Program.
By now, most beneficiaries have successfully adapted to the Washington foreclosure mediation program, and the beneficiaries’ attorneys often find that the bank mediation representative on the phone is familiar with the mediation process in Washington. However, avoidable delays still occur, resulting in additional mediation sessions and unnecessarily elongating foreclosure timelines. To avoid these delays and the inevitable expense of additional attorneys’ fees and mediation costs associated with them, beneficiaries should consider the following best practice suggestions:
- Assign the same underwriter for the loss mitigation review who will also be available to attend the mediation session. This continuity provides stability to the mediation process and is consistent with federal rules regarding a specific point of contact.
- Beneficiary representatives participating in mediation should be familiar with the loan investor’s guidelines and be prepared to explain, in detail, the reason for a denial for modification, or other loss mitigation option. It was the legislature’s intent that the foreclosure mediation provide transparency for the borrower; this includes clearly explaining any denial for loss mitigation options and providing the applicable investor guidelines to the mediation parties.
- Beneficiaries should promptly review borrower applications for loss mitigation upon receipt and stay in close contact with their attorney’s office about incomplete documentation, so that the financial package does not become stale-dated. Consistent with the Consumer Financial Protection Bureau’s Regulation X, beneficiaries should already be notifying the borrower (within five business days of receipt of their financial package) of any missing information needed to complete the financial package. (12 CFR § 1024.41.)
- During the mediation session, beneficiaries should request a private caucus with their attorney if they are unsure of how to respond to a legal question during the mediation session.
Beneficiaries who utilize these suggested practices generally experience more success in the Mediation Program, such as: fewer mediation sessions, shortened foreclosure timelines, less risk of a “bad faith” finding from the mediator, and reduced likelihood of litigation.
Looking Back – Commerce’s Annual Report
In October 2014, Commerce published its third annual report to the legislature on the status and progress of the Mediation Program. Commerce reported that from July 2011 through June 2014, it had received 6,319 referrals to mediation. Of the mediation referrals, Commerce deemed 88 percent of them eligible for mediation, and they were then assigned to one of the 126 approved foreclosure mediators in the state.
Now that the Mediation Program has been in existence in Washington for nearly four years, the results of the program have become clear; of the 4,059 mediated cases reported by Commerce:
- 883 resulted in agreements where the borrowers stayed in their homes through modification of the loan, repayment of the arrears, or reinstatement of the loan;
- 248 resulted in agreements where the borrowers did not keep their homes — such as a pre-foreclosure sale, deed-in-lieu of foreclosure, or cash for keys;
- 1,359 mediations resulted in no agreement between the parties; and
- 1,569 did not occur. The majority of these mediation cases were closed because an agreement was reached between the parties before the mediation occurred — primarily, the borrower was offered, and accepted, a loan modification.
Borrowers were found to have mediated “not in good faith” more often than a beneficiary. Commerce reported that there were 362 cases where the borrower did not mediate in good faith, and 199 cases where the beneficiary did not mediate in good faith.
The failure of a beneficiary to mediate in good faith constitutes a defense to the nonjudicial foreclosure action and may be a violation of the Consumer Protection Act, RCW § 19.86. A borrower's failure simply allows the beneficiary to move forward with the nonjudicial foreclosure, but does not result in any other legal consequence to the borrower.
Looking Forward – The Foreclosure Fairness Fund
For each Notice of Default issued on owner-occupied residential real property in Washington, the beneficiary is required to pay a $250 fee into the Foreclosure Fairness Fund (Fund). This is commonly referred to as a “foreclosure tax.” The money deposited into the Fund is allocated amongst several groups as provided by RCW § 61.24.172:
- 71%: Housing Finance Commission — goes to Homeowner Counseling.
- 18%: Department of Commerce — goes to Program Implementation and Administration.
- 6%: Office of the Attorney General — goes to Consumer Protection.
- 3%: Department of Financial Institutions — goes to Education and Outreach.
- 2% Office of Civil Legal Aid — goes to Homeowner Legal Representation.
As of June 30, 2014, a total of $15,908,275 had been deposited into the Fund. The highest amount of quarterly deposits into the Fund was during the second quarter of 2013, a total of $2,097,750. Since then, deposits into the Fund have dramatically dropped. For the second quarter of 2014, the total deposits were $916,500, less than half of the deposits reported in that same quarter, the year before. As the funding of the Mediation Program continues to drop, the public resources available to support the program will also decrease.
Looking Forward – Exemption from the Mediation Program.
Besides the decreasing budget of the Fund, RCW § 61.24.174, provides some beneficiaries an exemption from the foreclosure tax if they certify that they are FDIC-insured institutions, and that they issued less than 250 notices of default in the preceding year. As of January 31, 2015, over 200 beneficiaries appeared on the exemption list — nearly double the number exempted from mediation in 2011. As foreclosures are anticipated to continue declining, more beneficiaries will become eligible to be exempted from mediation, further shrinking the number of beneficiaries participating in the foreclosure mediation program, and further reducing the foreclosure tax paid to Commerce.
The FFA, amended three times since its implementation in 2011, does not include a sunset date for the Mediation Program. As foreclosures continue to decline throughout the nation, the long-term viability of the Mediation Program in Washington remains questionable for fiscal and practical reasons.
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