September 9, 2013
by Patricia Antonelli, Brian P. Gallogly, & David J. Pellegrino
Partridge Snow & Hahn LLP – USFN Member (Massachusetts)
Changes to Rhode Island foreclosure law are set to become effective for certain mortgage foreclosures on September 12, 2013. New Section 34-27-3.2 entitled “Mediation Conference” has been added to Rhode Island General Laws, amending Chapter 34-27 entitled “Mortgage Foreclosure and Sale” (referred to here as the “Mediation Law”). Companion bills (House 5335, Sub B and Senate 0416 Sub A) were signed by the governor on July 15, 2013 and, according to their terms, the changes are effective 60 days after, on September 12, 2013. The Mediation Law will be in effect through July 1, 2018.
To provide guidance and forms for implementation of the Mediation Law, the Division of Banking of the Rhode Island Department of Business Regulation (DBR), has released proposed changes to Banking Regulation 5. The proposed changes were filed as an emergency regulation, which is effective for 120 days starting on August 14, 2013 until December 12, 2013, with the ability to renew Regulation 5 as amended for another 90 days. A hearing scheduled for September 16, 2013 regarding the Banking Regulation 5 changes has been postponed to September 23, 2013. Mortgagees and servicers can rely on the proposed changes and forms found in amended Banking Regulation 5 because those changes were proposed on an emergency basis.
The policy behind the state-wide Mediation Law seeks to address increasing residential mortgage foreclosure problems including the displacement of homeowners who want to live and work in Rhode Island and increasing numbers of unoccupied buildings. The state-wide Mediation Law should resolve the confusion in complying with local mediation ordinances that were previously enacted in Cranston, East Providence, Providence, Warren, and Warwick. The Mediation Law preempts any existing or future foreclosure mediation or conciliation ordinances, and it is expected that the cities and towns with local foreclosure mediation ordinances will not seek to enforce those ordinances once the Mediation Law becomes effective.
Mortgages on Non-Residential Property and Non-Owner-Occupied Residential 1- to 4-Family Property are Not Entitled to Mediation
Before getting into the nuts and bolts of the Mediation Law and the amendments to Banking Regulation 5, it will be helpful to review the mortgages that are NOT affected by the Mediation Law. Section 34-27-3.2(c)(6) defines “Mortgage” as “an individual consumer mortgage on any owner-occupied, 1- to 4-unit residential property that serves as the owner’s primary residence; and Section 34-27-3.2(l) provides that the Mediation Law applies only to foreclosure of owner-occupied, residential property with no more than 4 dwelling units which is the primary dwelling of the owner. Thus, no Mediation Notice (discussed later in this article) is required for a foreclosure where the collateral is purely commercial-purpose, and for those mortgage loans that encumber investment residential property, the mortgagee will have to be able to show that the property is NOT owner-occupied, residential 1- to 4-family property. Neither the Mediation Law, nor Banking Regulation 5, provide for a form of affidavit attesting to the fact that a particular mortgaged property is not eligible for mediation for reasons other than the exemptions stated below.
The Mediation Law provides that no foreclosure deed may be submitted to a land evidence recorder until the provisions of the Mediation Law have been met, and an affidavit of compliance with Section 34-27-3.2 must be provided with the foreclosure deed when submitted for recording. Failure to comply with the requirements of the Mediation Law renders a foreclosure “void.” Of concern is mortgaged property where the purpose of the mortgage loan was purely commercial and/or as investment property. In instances where the mortgage loan is a commercial-purpose or investment loan but where the property is owned by an individual, mortgagees and loan servicers should anticipate push-back from recorders and/or from title insurers who will be looking for compliance with the Mediation Law.
Exemptions from Mediation Law for Mortgages that are 120 Days or More Delinquent on September 12, 2013 or where Mortgagee Qualifies as a “Locally-Based Mortgagee”
The Mediation Law contains two exemptions that remove additional pools of otherwise applicable mortgage loans from the mediation requirement. One exemption provides that mediation is not necessary for mortgages on properties that are already seriously delinquent and that may or may not already be in foreclosure. For mortgage loans that are more than 120 days delinquent on or before September 12, 2013, the mortgage holder is exempt from complying with the Mediation Law. Amended Banking Regulation 5, Section 4, Paragraph C(i) provides that mortgagees may submit the form found in Appendix D 2 when recording the foreclosure deed. The form in Appendix D 2 includes a statement that the mortgage loan is more than 120 days delinquent.
The second exemption exists for entities that qualify as “Locally-based Mortgagees,” which are defined in Banking Regulation 5, Section 3, Paragraph G as “a Rhode Island-based Mortgagee with headquarters in Rhode Island or with a physical office or offices exclusively in Rhode Island from which is carried out full-service mortgage operations including acceptance and processing of mortgage payments and provision of local customer service and loss mitigation and where Rhode Island staff have the authority to approve loan restructuring and loss mitigation strategies.” Appendix D 1 of Banking Regulation 5 contains the form of affidavit for completion by the mortgagee who qualifies as a “Locally-based Mortgagee,” and it should be submitted with the foreclosure deed for recording and may be used as evidence for title insurers.
Mediation Notice and Procedures
The Mediation Law provides that foreclosure may not be initiated unless its provisions have been met. Thus, once a determination is made that a mortgage meets the definition of “Mortgage” in the Mediation Law, and that the two exemptions discussed above do not apply, a mortgagee or its servicer must take steps to comply with the Mediation Law. The Mediation Law provides that written notice of a foreclosure may not go forward without participation in a mediation conference, the notice must be sent by certified and first-class mail to the address of the mortgaged real estate and, if different, to the address designated by the mortgagor in writing. The DBR has released proposed forms of the required notice in Banking Regulation 5, Appendix B in English, Spanish, and Portuguese, which will be collectively referred to as the “Mediation Notice.”
The provisions of the Mediation Law setting forth the timing of when a Mediation Notice must be sent versus the timing requirement in amended Banking Regulation 5 may cause confusion for mortgagees and servicers. The Mediation Law states that the Mediation Notice must be sent out “When a mortgage is not more than 120 days delinquent ... .” On the same point, Banking Regulation 5 states that the Mediation Notice must be provided to all mortgagors and owners (if other than mortgagor) when a mortgage is not more than 90 days delinquent. We surmise that the change in timing for when the Mediation Notice must be sent could benefit both mortgagees and mortgagors because a mortgagor will be more likely to be able to come up with the funds to bring a mortgage current at the 90-day delinquency point as opposed to when the mortgage loan is 120 days delinquent. Nevertheless, the proposed regulation conflicts with the Mediation Law, and it is expected that this issue will be raised at the September 23, 2013 hearing on the proposed regulation.
Another issue raised by the delinquency timing point is this: One could interpret the Mediation Law to mean that if a mortgage loan is more than 120 days delinquent, the mortgagee does not have to send out a Mediation Notice, and no mediation is required. Some mortgagees and servicers may conclude that they can delay commencing foreclosure until the delinquency is more than 120 days, and thus avoid mediation altogether. The authors’ firm does not believe that the General Assembly and the DBR intended to provide for a mechanism to avoid mediation, and it is not advisable to engage in such a delay. We reiterate the fact that the Mediation Law provides that failure of a mortgagee to comply with its provisions renders the foreclosure “void,” and a “void” foreclosure will require the mortgagee to go back and follow the Mediation Law provisions and redo the entire foreclosure; steps which will be very costly for the mortgagee.
Still another issue that is not addressed in the Mediation Law or in the proposed changes to Banking Regulation 5 is what might happen if a mortgagee allows the mortgage to become more than 120 days delinquent and has not sent out a Mediation Notice. Can a Mediation Notice be sent out when a mortgage is 150 days delinquent, and what affect does that have on the validity of the foreclosure?
The Mediation Notice may be sent out by the mortgagee or its agent. This means the Mediation Notice can be sent out by the servicer or even the foreclosure attorney. Any mortgagee subject to regulation and supervision by the DBR must maintain a duplicate of the Mediation Notice, including information regarding delivery of the Mediation Notice, and a mortgagee may put the text of the Mediation Notice on its own letterhead (or on the letterhead of its servicer or foreclosure attorney). It contains a statement advising the mortgagor of his/her right to a free, in-person or telephone mediation conference with an independent mediation coordinator, and the mortgagee may not foreclose unless it provides the mortgagor with the opportunity to participate in mediation. The mediation conference must take place within 60 days of the mailing date of the Mediation Notice.
The Mediation Notice must be completed with the applicable loan number, the correct name of the mortgagee, the address of the mortgage and, importantly, the name of the mortgagee’s authorized representative along with accurate contact information for that person. The Mediation Notice also contains a statement directed at the mortgagor: “You will be contacted by a foreclosure mediation coordinator to schedule that mediation conference.” There is no direction in the Mediation Law or in the amendments to Banking Regulation 5 as to how the mediation coordinator is to be notified; however, it is safe to say that it is the mortgagee’s responsibility to notify the mediation coordinator at the same time that the Mediation Notice is mailed because the 60-day requirement must be met.
No mediation coordinator is named in the Mediation Law; the Law defines “Mediation Coordinator” as a person designated by a Rhode Island-based HUD-approved counseling agency to serve as the unbiased, impartial, and independent coordinator and facilitator of the mediation conference, with no authority to impose a solution or otherwise act as a consumer advocate, provided that such person possesses the experience and qualifications established by the DBR. Because the changes to Banking Regulation 5 were made on an emergency basis in order that the mediation process is ready on the effective date of the Mediation Law, the DBR has named Rhode Island Housing as the qualified mediation coordinator. Rhode Island Housing is well-prepared for the role because it has been in the same role in the cities and towns that have local foreclosure mediation ordinances. The DBR anticipates that there will be a hearing held in the future to establish qualification and experience requirements so that other mediation coordinators can be appointed.
The Mediation Law provides that the mediation conference shall take place in person or by phone. The mortgagor must participate in the mediation and cooperate in such a way so as to provide all necessary financial and employment information and by completing any and all loan resolutions and applications as deemed appropriate by the mediation coordinator. The mortgagee must designate an agent to participate in the mediation conference and respond to all requests from the mediation coordinator or the mortgagor within a reasonable period of time not to exceed 14 days. The mediation will be free to the mortgagor, and the mortgagee must pay Rhode Island Housing as the designated mediation coordinator $500 per engagement.
It is the job of the mediation coordinator (once notified by the mortgagee) to contact the mortgagor and set up a mediation session. After two attempts by the mediation coordinator to contact the mortgagor (where the mortgagor has failed to respond, cooperate, and/or participate), the mortgagee will be deemed to have complied with the Mediation Law upon verification by the mediation coordinator that the Mediation Notice was properly sent. The mediation coordinator shall issue a certificate of compliance, which shall be recorded with the foreclosure deed. Issuance of the certificate means that the mortgagee is free to proceed and foreclose. The form of “Certificate Authorizing Foreclosure Pursuant to R.I. Gen. Laws § 34-27-3.2” is found in Appendix C to amended Banking Regulation 5.
If a mediation conference does take place after a “good faith effort” is made by the mortgagee, and the parties cannot come to an agreement to renegotiate the mortgage loan so that foreclosure is avoided, the mediation coordinator must complete the certificate in Appendix C (including Attachment 1, which sets forth the factors of “good faith”). “Good Faith” is defined in the Mediation Law as the mortgagor and mortgagee dealing honestly and fairly with the mediation coordinator in an effort to determine whether or not an alternative to foreclosure is economically feasible for the mortgagor and the mortgagee. The Mediation Law provides that some or all of the following factors are evidence of good faith: (i) mortgagee provided the Mediation Notice; (ii) mortgagee designated an agent with authority to participate in the mediation conference on the mortgagee’s behalf; (iii) mortgagee made reasonable efforts to respond in a timely manner to requests from the parties; (iv) mortgagee declines to accept the mortgagor’s work-out proposal, if any, and the mortgagee provided a detailed written statement of its reasons for rejecting the proposal; (v) where mortgagee declines to accept the mortgagor’s work-out proposal, the mortgagee offered to enter into an alternative work-out/disposition resolution proposal that would result in net financial benefit to the mortgagor as compared to the terms of the mortgage. It is important to note that the Mediation Law does not require that all five good faith factors must exist to evidence the mortgagee has acted in good faith, but that “some or all” of the five factors may be checked off in Attachment 1 of the certificate to evidence good faith.
Limitation on How Many Times a Mortgagor is Entitled to Mediation
If the mortgagee and mortgagor are able to reach an agreement to renegotiate the terms of the mortgage so that foreclosure is avoided, the agreement must be reduced to writing and signed by both parties. If such a written agreement is entered, and if the mortgagor fails to comply with the terms of the agreement, the Mediation Law shall not apply to any foreclosure initiated within 12 months of the execution date of the written agreement. A foreclosing mortgagee must include these factors in the foreclosure affidavit that will be recorded with the foreclosure deed so that its right to proceed to foreclosure has been established.
A copy of the Mediation Law can be found here, while the proposed changes to Banking Regulation 5 can be found here. Parties can utilize the guidance and forms in proposed Banking Regulation 5 because it has been released as an “emergency” regulation, but they should be aware that the regulation and forms may change after the September 23, 2013 hearing. The forms that are needed for issuing Mediation Notices and completing the necessary certificates and affidavits of exemption can be found in the linked regulation document. Note that the proposed regulation contains mention of two different effective dates for the Mediation Law (September 12, 2013 and September 14, 2013). It is recommended that mortgagees utilize September 12, 2013 as the effective date until that discrepancy is resolved in the final changes to Banking Regulation 5.
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