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Mortgage Creditors Confront Five Year Extension of Mandatory Pre-Foreclosure Mediation Process in Rhode Island

The Rhode Island Senate recently approved a five-year extension of R.I. Gen. Laws § 34-27-3.2, which had established a mandatory mediation program any out-of-state mortgagee must follow before initiating foreclosure on owner-occupied, residential property. The current law is set to expire on July 1, 2018. If approved by the House, Senate Bill 2270 will extend the expiration date to July 1, 2023. Companion legislation, House Bill 7385, which sought to repeal the sunset clause thereby removing rather than extending the expiration date, has stalled. Rhode Island Banking Regulation 5, which clarifies mortgagees' duties under § 34-27-3.2 and the consequences of a mortgagee's failure to comply with the law and regulation, would likewise cease if the law expires.

Under the law and regulation, prior to initiating foreclosure, a mortgagee must mail the mortgagor written notice confirming that the mortgagee may not foreclose without first participating in a mediation conference with a counseling agency approved by the U.S. Department of Housing and Urban Development (HUD). A mortgagee must pay a $1,000 per month penalty if it fails to mail the notice within 120 days after the date of default or within 60 days after the loan is no longer protected by a bankruptcy stay or other laws or orders. To start the 60-day timeline for scheduling a mediation conference, the mortgagee must provide the HUD approved mediation coordinator with a copy of the notice, a single point of contact for the mortgagee, and payment for initiating the mediation process.

The current law requires the mortgagee to compensate the HUD-approved agency at a rate not to exceed $500 per "engagement." Senate Bill 2270 proposes to amend the law to provide that the mortgagee shall pay the HUD-approved agency a filing fee not to exceed $100 per mediation engagement and shall compensate the agency at a rate not to exceed $500 per mediation. The mediation process does not charge the mortgagor.

The mortgagee may not proceed with foreclosure until the mediation coordinator issues a Certificate of Compliance with Mediation Requirement, and failure to comply with § 34-27-3.2 renders a foreclosure voidable. Where a mortgagor responds and participates in mediation, a certificate may not be issued unless the mediation coordinator determines that after a good faith effort by the mortgagee, the parties cannot come to an agreement to renegotiate the terms of the loan to avoid foreclosure.

Hinshaw will continue to monitor this legislation as it progresses through the Rhode Island state legislature.

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