This alert will discuss the Mediation Law and some of its unanticipated consequences, as well as the latest amendments to Banking Regulation 5. The latest amendments contain helpful clarification and guidance for implementation of the Mediation Law, and many of the changes in the Regulation are the result of the work of an informal working group made up of representatives from the DBR, the Attorney General’s Office, consumer advocates, foreclosure attorneys, banking and lending trade organizations and real estate title insurers. The informal working group identified some unintended consequences of the Mediation Law that cannot be fully remedied by regulation, and to that end I believe there should be a revision of the Mediation Law in 2014.
To recap: Changes to Rhode Island foreclosure law became effective for certain mortgage foreclosures on September 14, 2013. New Section 34-27-3.2 entitled “Mediation Conference” was added to Rhode Island General Laws, amending Chapter 34-27 entitled “Mortgage Foreclosure and Sale” (referred to as the “Mediation Law”). The statute was effective on September 14, 2013, and it will expire on 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, (the “DBR”) released proposed changes to Rhode Island Banking Regulation 5 as an emergency provision (the “First Amended Regulation”) discussed in our Client Alert of September 9, 2013 titled "Changes to Rhode Island Foreclosure Statute Require Mediation for Certain Foreclosures".1
Introduced on August 14, 2013, the First Amended Regulation was followed by amendments on August 21, 2013 (the “Second Amended Regulation”), September 12, 2013 (the “Third Amended Regulation”) and most recently on November 14, 2013 (the “Fourth Amended Regulation"). The Third Amended Regulation, released on September 12, 2013, is currently in effect, and it will continue to be in effect until March 11, 2014. The public is invited to submit comments on the Fourth Amended Regulation until December 17, 2013, and a public hearing will be held on December 17, 2013 at the DBR offices in Cranston, Rhode Island.2
The policy behind the statewide Mediation Law seeks to address increasing residential mortgage foreclosure problems. One of the benefits of having a statewide Mediation Law was supposed to resolve the confusion for Mortgagees in complying with local mediation ordinances enacted in Cranston, East Providence, Providence, Warren and Warwick, although that goal has not been fully accomplished. While the Mediation Law seems to preempt any existing or future municipal foreclosure mediation or conciliation ordinances, it was expected that the cities and towns with local foreclosure mediation ordinances would not seek to enforce those ordinances once the Mediation Law became effective; the Fourth Amended Regulation identifies a set of mortgages in cities and towns that have previously adopted foreclosure mediation ordinances where those Mortgagors will still be entitled to the benefits of the local ordinances.
Mortgages on Non-Residential Property and Non-Owner-Occupied, Residential, 1- to 4-Family Properties are Not Entitled to Mediation
First, lets review the mortgages that are exempt from 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 which 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 is required for a foreclosure where the collateral is purely commercial-purpose and where the rental income is not generated by 1- to 4-family residential units. For those mortgage loans that encumber residential income-producing property, the Mortgagee must have evidence that the property is NOT owner-occupied, residential 1- to 4-family property. The Fourth Amended Regulation does not include a form of affidavit that can be utilized for attesting to the fact that the mortgaged property is not eligible for mediation (except for loans that are seriously delinquent described below); and it is recommended that a statement asserting the property and mortgage are not eligible for mediation and an explanation as to why be included in the standard affidavit that is recorded with the foreclosure deed.
The Mediation Law provides that no foreclosure deed may be submitted to a land evidence recorder unless its provisions have been met, and failure to comply with the requirements of the Mediation Law renders a foreclosure “void”.
It is for this reason that we express concern about mortgage loans where the loan purpose was purely commercial and/or as an investment. In instances where the mortgage loan is a commercial purpose or investment loan but where the property is owned by an individual who could be living at the property, Mortgagees should anticipate push-back from land evidence recorders and/or from title insurers who will be looking for compliance with the Mediation Law.
Exemptions for Mortgages that are 120 Days or More Delinquent on September 12, 2013
The Mediation Law contains two exemptions that remove additional sets 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, Mortgagees are exempt from complying with the Mediation Law. Mortgagees may complete and submit the form in Appendix D 2 of the Fourth Amended Regulation, which includes a statement that the mortgage loan is more than 120 days delinquent, when recording the foreclosure deed.
While it is our opinion that the Mediation Law was not intended to support the continuation of required mediation/conciliation activities under the local foreclosure mediation/conciliation ordinances, Mortgagees should be cautious about believing that seriously delinquent mortgages in Providence, Cranston, Warwick, East Providence and Warren are not entitled to mediation. This provision of the Fourth Amended Regulation directed to compliance with local ordinances is important because it was not found in the prior versions of the Amended Regulation. Specifically, in the Fourth Amended Regulation, Section 4, Paragraph C(i) has been amended to provide that mortgages that are 120 days or more delinquent as of September 12, 2013 are not entitled to mediation under the Mediation Law. However, where those mortgages encumber property in the cities and towns that have local foreclosure ordinances, the local ordinances must be followed.
This inclusion in the Fourth Amended Regulation of a requirement that local ordinances be followed can be a trap for some Mortgagees who fail to comply with local foreclosure ordinances and believe that the only consequence would be a monetary fine (the local ordinances do not include provisions for “void” foreclosures). Will title insurers who previously did not require compliance with local mediation/conciliation ordinances now take the position that non-compliance results in a “void” foreclosure?
Exemption for Mortgagees that Qualify as “Locally-Based Mortgagees”
The second exemption exists for entities that qualify as “Locally-based Mortgagees” which are defined in the Fourth Amended Regulation, 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 the Fourth Amended Regulation 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 of compliance.
The Fourth Amended Regulation provides a procedure for mortgagees seeking confirmation of their status as a “Locally-based Mortgagee”. Those entities should provide the DBR with a detailed description of operations, locations of headquarters and mortgage operations, including loan servicing and loss mitigation operations and staff.
There is also a new exemption from the mediation process for situations where a “Workout Agreement” has been finalized, and the Mortgagor defaults within 12 months. See the section below entitled “Certificate of Eligible Workout Agreement (Newly Added) Mediation Notice and Procedures” for a discussion of Workout Agreements.
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 must take steps to comply with the Mediation Law.
The 120-Day Delinquency Deadline Dilemma
In our prior Alert, we discussed the conflict between the Mediation Law and the First Amended Regulation that set forth the timing where the Mediation Law stated that the Mediation Notice must be sent before the mortgage becomes 120 days delinquent. However, the First Amended Regulation stated the Notice had to be sent before the mortgage becomes 90 days delinquent. The confusion was resolved by the Third Amended Regulation which tracks the timing in the Mediation Law, and because the Third Amended Regulation is now in effect as an Emergency Regulation, there is no conflict between the Law and the Regulation. Accordingly, the Mediation Notice must be sent out “When a mortgage is not more than 120 days delinquent ...”3
Another issue that is not addressed in the Mediation Law or in the Fourth Amended Regulation is what happens if a mortgage has become more than 120 days delinquent and a Mediation Notice was not timely sent. Can a Mediation Notice be sent when a mortgage is 130 days delinquent, and what effect would a late Notice have on the validity of the foreclosure? Is a Mortgagee able to conduct a valid foreclosure sale that is not “void” for failure to comply with the Mediation Law? Unfortunately, it has become clear that this issue is a real problem for Mortgagees, foreclosure attorneys and title insurers. The title insurers that we talked to have indicated their companies will be unable to issue title insurance where a mortgage loan is eligible for mediation, and a Mediation Notice was not mailed prior to the loan becoming 120 days delinquent. Seeking a court approved foreclosure may be the only option in these situations.
First, consider some common situations where a loan is allowed to become more than 120 days delinquent prior to a Mediation Notice being sent. A loan could be in a pool being sold, and the buyer takes title to mortgages that have not had timely Notices of Mediation. A Mortgagee could be in the process of evaluating a Mortgagor under the HAMP Program or under the Mortgagee’s own loan modification program. The Mortgagor could be in a bankruptcy proceeding, and sending a Notice of Mediation would violate the automatic stay. The mortgage entitled to mediation could be just one mortgage that is collateral for a commercial loan in default where the Mortgagee is either engaging in a workout, the loan is in forbearance or where the Mortgagee is liquidating other mortgages and security interests given as collateral before it forecloses on the residential mortgage. In all of these instances, a loan modification may not be reached, the Mortgagor could default under the workout or forbearance agreement, or the mortgagor could see his bankruptcy case dismissed or closed. At that point, the mortgage will inevitably be more than 120 days delinquent, and no Mediation Notice would have been sent, leaving an entire group of mortgages forever prohibited from being foreclosed under the current Mediation Law.
The Fourth Amended Regulation includes two provisions that attempt to aid the dilemma, but even those fixes are not certain resolution, and I believe that an amendment to the Mediation Law is needed to remedy these situations where it appears that a Mortgagee is prohibited from foreclosing without obtaining a court order. Section 4, Paragraph B(v) of the Regulation provides that if a Mortgagee fails to send a Mediation Notice prior to the loan becoming 120 days delinquent, “the Mortgagee may still proceed to foreclosure under the Rhode Island judicial foreclosure process set forth in R.I. Gen. Laws § 34-27-1 et seq.”. The problem with this is that (a) there is not a specific procedure for judicial foreclosure set forth in § 34-27-1 et seq.; (b) it is not clear whether a Notice of Mediation sent out after the 120-day deadline will ever result in a valid foreclosure because of the wording of the Mediation Law, and (c) title insurers may refuse to issue title insurance even where a court order has been obtained because of the uncertainty about the procedure followed by the court.
One way to handle such a situation would be for the Mortgagee to send out the Notice of Mediation even though the 120-day deadline has passed. The Mortgagee would then commence mediation and at the same time, the Mortgagee would file a complaint for judicial foreclosure in Superior Court, seeking the authority to conduct a power of sale foreclosure with notices and legal advertising. The Mortgagee would then report to the Superior Court on the status of the mediation, and if the mediation results in the Mediator issuing a Certificate Authorizing Foreclosure, the Court can issue an order allowing the foreclosure to proceed. If mediation results in a loan modification, the Mortgagee and Mortgagor would memorialize the modification agreement and record it. There would be no need for further foreclosure proceedings unless the Mortgagor defaults under the agreement. Even if a Mortgagee gives the opportunity for a Mortgagor to have mediation, however, we cannot say whether or not mortgages where the Notice was not sent prior to the 120-day delinquency deadline can ever result in a valid foreclosure. It is speculation on my part as to whether or not going forward with mediation while seeking a court order to foreclose will be acceptable to title insurers.
In our September 9, 2013 Alert, we discussed the possibility of Mortgagees taking the position that where a mortgage loan is more than 120 days delinquent, Mortgagees do not have to send a Mediation Notice. These Mortgagees may conclude that they can delay commencing foreclosure until the delinquency is more than 120 days, and thus avoid mediation altogether. We do not believe that the General Assembly and the DBR intended to provide for a mechanism to avoid mediation, and we would not advise that Mortgagees 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.
Limited Exemptions From Mediation Requirement Where the 120-Day Deadline for Delinquency May Pass Before a Notice of Mediation is Provided
The Fourth Amended Regulation contains a new provision in Section 4, Paragraph B(vi) which seeks to address certain situations where the 120-day delinquency deadline will likely be passed with no Notice of Mediation. In these instances, the Notice of Mediation would not be sent before the 120-day delinquency deadline for good reason.
For example, for commercial loans which include a personal guaranty secured by a mortgage on a residential property that is owned by an individual and where the property is otherwise eligible for mediation, the Mortgagee may be in loan modification and/or forbearance negotiations with borrowers and the Mortgagor/guarantor. The Mortgagee may also be allowing the business/commercial collateral to be sold or the Mortgagee may be foreclosing on the business/commercial collateral first, leaving the residence collateral of the individual Mortgagor or guarantor alone until the Mortgagee can liquidate other collateral for the loan. The Mediation Law with its requirement that a Notice of Mediation be sent out before the 120-day delinquency deadline could have the effect of prematurely forcing the Mortgagee to commence foreclosure against a residential property that may be secondary collateral, when in reality, the Mortgagee may never seek to foreclose the mortgage that is on the residential property as the debt may be fully satisfied from the liquidation of other collateral.
Another scenario where a Mortgagee may miss the 120-day deadline for sending out a Notice of Mediation arises when a Mortgagor is in a bankruptcy proceeding. The automatic stay of the bankruptcy prohibits the Mortgagee from sending out Notices of Mediation.
The remedy for both of these scenarios in Section 4, Paragraph B(vi) only works in situations where a Workout Agreement is achieved during workout negotiations for a commercial loan or during a bankruptcy4. In those situations where a Workout Agreement is achieved, the Mortgagee may record the resulting Workout Agreement, and if there is a later default within 12 months of the Agreement, the Mortgagee is not required to comply with the Mediation Law. Although the Fourth Amended Regulation does not state this 12-month limitation in Section 4, Paragraph B(vi), Mortgagees who record Workout Agreements where a default occurs later should be careful of the limitation in Section 4, Paragraph B(iv) which states the 12-month limitation.
These remedies for commercial loan situations where one piece of collateral may be residential property or where a Mortgagor is in bankruptcy will provide relief in narrow and limited situations where an actual written Workout Agreement is reached. What about the numerous situations where no Workout Agreement is ever reached? Unfortunately, there are Mortgagors who only file bankruptcy and then choose loss mitigation as a means of delaying the inevitable. In those instances, no Workout Agreement will be reached, and the Mortgagee is faced with having to bear the expense of going to Rhode Island Superior Court and seeking approval to conduct a judicial foreclosure. An amendment to the Mediation Law is needed that allows lenders in certain situations to proceed with foreclosure by engaging in the mediation process without having to become engaged in a court proceeding.
The Mediation Process
As found in the Mediation Law, the Fourth Amended Regulation expands the definition of “Mortgagee” in the Regulation to include not only the mortgage lender and mortgage holder, but the loan servicer and agents of the mortgage holder. This means the Notice of Mediation can be sent by the servicer or even the foreclosure attorney, although we estimate that the majority of Mediation Notices will be sent by loan servicers. 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 the Fourth Amended Regulation, Appendix B in English, Spanish and Portuguese. 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).5 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. The Notice also contains a statement directed at the mortgagor: “You will be contacted by a foreclosure Mediation Coordinator to schedule that mediation conference”. The Fourth Amended Regulation states that the Notice of Mediation must be sent to the Mediation Coordinator at the same time that the Mediation Notice is mailed.
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. As of the date of this Alert, the DBR has identified Rhode Island Housing as a 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.6
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, but 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 the mediation. 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 then 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 the Third Amended Regulation, and the exact same form (no changes) is found in Appendix C to the Fourth Amended Regulation. Attachment 1 (described below) must be completed and attached to the Certificate of Compliance by the Mediation Coordinator.
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 Appendix C Certificate of Compliance together with Attachment 1 which sets forth the factors of “good faith”. As before, the form in Appendix C is the exact same form as found in the Fourth Amended Regulation. “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. For example, in situations where the Mortgagor fails to respond or otherwise participate in mediation, the Mediation Coordinator will provide the Mortgagee with a Certificate of Compliance with the good faith Attachment 1, and only three of the good faith factors will apply.7
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 so that another mediation session is not required. In our September 13, 2013 Alert, we told you that 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. The Fourth Amended Regulation contains a Certificate of Eligible Workout Agreement which replaces the requirement that the factors in this paragraph must be set forth in the foreclosure affidavit that is typically recorded with the foreclosure deed.
Certificate of Eligible Workout Agreement (Newly Added)
The Certificate of Eligible Workout Agreement is a newly added form found in Appendix E to the Fourth Amended Regulation. Section 4, Paragraph B(iv) of the Regulation provides that if the Mortgagee and Mortgagor agree to a “Workout Agreement”, a written agreement must be drafted, dated and signed by both the Mortgagor and the Mortgagee and a copy provided to the Mediation Coordinator who will determine if the agreement meets the definition of Workout Agreement. If the Mortgagor defaults on the Workout Agreement within 12 months of entering into the Workout Agreement, the Mortgagee may proceed to foreclosure without participating in another mediation.
A copy of the Mediation Law is included as a link to this document, along with a copy the Fourth Amended Regulation – remember that the Fourth version is in the comment phase, and that a public hearing will be held by the DBR on December 17, 2013. A link to the Third Amended Regulation is also included below as the Third version of the Regulation and is in effect now until March 11, 2014 as an emergency Regulation. The forms that are needed for issuing Mediation Notices and completing the necessary certificates and affidavits of exemption are the same forms in both the Third Amended Regulation and the Fourth Amended Regulation, with the exception of the newly added Certificate of Eligible Workout Agreement which can be found in the attached link to the Fourth Amended Regulation as Appendix E.
Link to RI Foreclosure Mediation Law
Link to Third Amended Regulation and Forms (Emergency Banking Regulation 5 Released September 12, 2013)
Link to proposed Fourth Amended Regulation and Forms (Banking Regulation 5 Released November 14, 2013)
Link to Notice of Proposed Rulemaking
1Banking Regulation 5 was originally introduced on January 29, 2010 to implement the provisions of Rhode Island Gen. Laws § 34-27-3.1, a section that requires a 45-day preforeclosure disclosure be given to borrowers of HUD-approved counseling agencies in Rhode Island.
2Click on Public Notice above for information on address for submission of written comments and date, time and location of public hearing.
3The First Amended Regulation (released on August 12, 2013) provided that the Notice of Mediation must be sent out “when a mortgage is not more than 90 days delinquent”, a time period which directly conflicted with the 120-day time period in the Mediation Law.
4The United States Bankruptcy Court for the District of Rhode Island issued General Order 13-002, amending its Loss Mitigation Program and Procedures, effective June 3, 2013, providing for mandatory loss mitigation and mediation for individual debtors. The Seventh Amended Loss Mitigation Program and Procedures can be found under the “Programs & Services” tab on the Court’s website homepage.
5It would be prudent for all Mortgagees to maintain copies of the documentation associated with any Rhode Island mediation even if the Mortgagee is not subject to regulation by the DBR.
6See Section 5 of the Fourth Amended Regulation for qualifications of Mediation Coordinators.
7In situations where the Mortgagor fails to participate in mediation, the Mediation Coordinator will ascertain whether the Mortgagee sent out a Notice of Mediation, that the Mortgagee designated an agent and that the Mortgagee made efforts to respond to the Mediation Coordinator. In this instance, Attachment 1 to the Certificate of Compliance will only have three factors checked off.