August 1, 2013
by Susana Davila
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)
In July 2011, the Washington State Legislative enacted the Foreclosure Fairness Act (FFA) as an amendment to the Washington Deed of Trust Act, RCW § 61.24, which provides statutory guidance for nonjudicial foreclosure in Washington State. Among other changes to the Deed of Trust Act, the FFA provides seriously delinquent borrowers the opportunity to opt-in to a state-supervised foreclosure mediation program with the beneficiary of their loan, so long as that loan was secured by the borrower’s principal residence. The Washington Department of Commerce (Commerce) was tasked with developing and administering the foreclosure mediation program (the Program).
Soon after implementation of the Program, it became clear that the FFA required further amendments to address ongoing concerns of mediators, borrower advocates, beneficiary advocates, and representatives from Commerce. In late 2011 and early 2012, these stakeholders attended several legislative working sessions to begin drafting the proposed amendments. The amendments to the FFA were enacted via House Bill 2614 on March 29, 2012, nearly one year after the enactment of the FFA.
Amendments to FFA — One important amendment to the FFA was to provide all foreclosure mediators immunity from suit in any civil action based on any proceeding or other official act performed in their capacity as a foreclosure mediator, except in cases of willful or wanton misconduct. Initially, the FFA only provided immunity to mediators who were employees of a dispute resolution center, which is a statewide network of non-profit centers dedicated to mediation activities. This left out a large class of private mediators and attorneys, who had been approved and trained by Commerce to serve as foreclosure mediators. This particular amendment to the FFA was of paramount concern to private mediators, as some beneficiaries and borrowers would not agree to sign separate mediation agreements providing mediator immunity since the same was not contemplated by the legislature when it enacted the FFA.
Another noteworthy amendment to the FFA was the alteration of mediation process timelines. The statute originally provided that the borrower and beneficiary were to mediate within 45 days of the mediation referral, each providing the statutorily outlined disclosures to the other just ten days prior to mediation. However, the beneficiary’s receipt of the borrower’s disclosures ten days before the mediation session proved to be problematic because loss mitigation reviews often take much longer. As a result, mediation sessions held within the 45-day benchmark were largely unproductive since the loss mitigation review was either in progress or the beneficiary had not received a complete financial package from the borrower.
The legislature further amended the statute to require that borrowers provide required disclosures to the beneficiary 23 days after the mediation referral. Then, 20 days after receipt of the borrower’s disclosures, the beneficiary provides its required disclosures to the mediation parties. The amendment also increased the mediation session date from 45 days from referral to 70 days from referral. In theory, the alteration to the disclosure exchange timeline was to ensure the beneficiary had sufficient time prior to the mediation session to review the borrower’s complete financial package for loss mitigation options.
Delays Observed — Amendments to the FFA became effective on June 7, 2012. Quickly thereafter it became apparent that the borrower’s 23-day deadline to produce a complete financial package to the beneficiary was rarely met. It was more likely for the beneficiary to receive borrower disclosures anywhere from 30 to 60 days from the date of the mediation referral. Although the FFA was amended to include a provision that mediators may cancel a scheduled mediation session if they reasonably believe a borrower will not attend a mediation session based on the borrower’s conduct, mediators rarely cancel a mediation session for lack of borrower disclosures. Typically, mediators will allow the borrower an extended period of time in which to produce the documents, much longer than the 23 days intended by the legislature.
The delay in borrower disclosures often causes mediation sessions to be scheduled later than 70 days from the date of referral. Because the beneficiary requires 30 to 45 days to review a complete borrower financial package, most mediation sessions are not held within the 70-day mark, but closer to 120 days. Contributing further to delay of the mediation session is the somewhat cumbersome financial documentation requirements for a loss mitigation review and a recent surge in service-transfers of loans. Preparation for mediation can become a long stream of beneficiary document requests and borrower’s production of additional documentation.
The statute originally required the borrower to produce minimal documentation showing the borrower’s current and future income, debts and obligations, and tax returns for the past two years. However, nearly all loss mitigation programs require a comprehensive financial package from a borrower in order for the beneficiary to review the borrower for applicable programs. The amendment expanded the borrower’s responsibility to provide a Home Affordable Modification Program application or equivalent financial worksheet, debts and obligations, assets, expenses, tax returns for the previous two years, hardship information, and other data commonly required by a federal mortgage relief program. This allows the beneficiary to receive a current and complete financial package for loss mitigation review.
Under the amendments to the FFA, mediators were also given the authority to unilaterally schedule a second mediation session, without agreement of the parties in the mediation. As a result, nearly all mediation referrals result in at least two mediation sessions. This amendment has further elongated the mediation process, and results in both borrowers and beneficiaries paying more fees to the mediator, as authorized by Commerce. The borrower and beneficiary evenly split a mediation fee of $400 for the first mediation session. A second session requires another $400 fee, evenly split. Moreover, a request for postponement of a scheduled mediation session comes at an additional cost to the parties, ranging anywhere from $50 to $100 and is largely borne by the requesting party. The statute only dictates that a mediator may charge “reasonable” fees authorized by the statute and Commerce. The initial fee cannot exceed $400; however, additional fees incurred from second sessions and postponement fees are inconsistent amongst mediators, but are allowable because these fees have been determined “reasonable” by Commerce.
The average foreclosure mediation referral costs the beneficiary $500 for mediation fees alone. Additionally, the beneficiary incurs attorneys’ fees for in-person mediation representation, nonjudicial foreclosure costs, and a “foreclosure tax” implemented by the legislature of $250 for each notice of default issued by the beneficiary. Thus, once the borrower opts-in to foreclosure mediation, the nonjudicial foreclosure process is no longer an economical and expeditious route for foreclosure in Washington. Judicial foreclosure remains an option and would allow beneficiaries to avoid mediation altogether; however, Washington’s one-year redemption period is seen as an obstacle to beneficiaries choosing this path.
Commerce’s Annual Report to the Legislature — The statute tasks Commerce with preparation of an annual report to the legislature on the performance of the Program, the results of the Program, and recommendations for changes to the Program. In December 2012, Commerce published the first of these reports, chronicling the performance of foreclosure mediation from July 2011 to June 2012. As of June 30, 2012, a reported 1,655 mediation referrals were received by Commerce; of those, 579 cases had been closed and certified by a mediator. The remainder of them was either still pending at the time the report was published or was found to be ineligible for mediation.
It is difficult to quantify the success of the foreclosure mediation program. In many instances, the beneficiary and borrower reach an agreement prior to mediation. Of the 579 mediated cases reported by Commerce:
- 113 resulted in agreements where the borrowers stayed in their home, through either modification of the loan, repayment of the arrears, or reinstatement of the loan;
- 78 resulted in agreements reached where the borrowers did not keep their home — such as a pre-foreclosure sale, deed-in-lieu of foreclosure, or cash for keys;
- 272 reached no agreement;
- 116 mediations did not occur. The primary reasons for this include the parties reaching agreement prior to the scheduled mediation, voluntary withdrawal by the borrower from the mediation, or failure of one of the mediation parties to participate in the mediation process.
The data presented by Commerce indicates that the Program has resulted in a significant number of agreements reached in mediation, although it remains unclear if the agreements were reached as a result of the Program, or if they would have come to fruition without it.
Good Faith and Risk of Litigation — Another requirement of the Program is that mediators certify the result of the mediation itself, forcing mediators to determine if the parties mediated in good faith. The statute provides that a violation of the duty to mediate in good faith may include failure to timely participate in mediation without good cause; failure to provide the required disclosures before mediation or pursuant to the mediator’s instructions; failure of a party to designate a representative with adequate authority to fully settle, compromise, or otherwise reach resolution in mediation; or a request by the beneficiary that the borrower waive future claims he may have in connection with the deed of trust as a condition of agreeing to a modification.
The statute enumerates specific reasons a mediator may find that a party failed to mediate in good faith. However, Commerce has provided guidance to the mediators that they have “reasonable discretion” to find a party failed to mediate in good faith and the enumerated reasons are not an exclusive basis for the mediator to find a party failed to mediate in good faith. Important to note is that borrowers are largely not found in bad faith for failing to provide their financial package on time as required by statute. Out of 579 mediated cases, beneficiaries were found to have failed to mediate in good faith in 28 cases and borrowers were found to have failed to mediate in good faith in 53 cases. There is no statutory legal consequence to a finding that the borrower failed to mediate in good faith. Conversely, the failure of a beneficiary to mediate in good faith constitutes a defense to the nonjudicial foreclosure action and is a per se violation of the Washington Consumer Protection Act (CPA), RCW § 19.86. A violation of the CPA subjects the beneficiary to treble damages of an unknown sum to be determined at trial. However, it remains to be seen how a court would quantify damages from a beneficiary’s failure to mediate in good faith, especially because the statute protects the mediator from being called as a witness in a court proceeding arising out of a foreclosure mediation.
Conclusion — As Washington approaches the end of the second year of the Program, and the conclusion of the first year since the statute was amended, it is clear that foreclosure mediation successfully brings parties together to try to reach a mutually acceptable alternative to foreclosure. However, the Program is also not without significant cost and delay to the beneficiary. Further, to the extent that mediated cases result in a higher than average rate of litigation, beneficiaries must evaluate whether participation in the Program continues to be viable.
©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.