A Rhode Island superior court recently ruled that, pursuant to R.I. Gen. Laws § 34-27-3.2, foreclosing lenders are required to send mediation notices in any foreclosure initiated after the effective date (October 2014) regardless of when the mortgage account first went into default. The court enjoined foreclosures in each of the consolidated cases governed by this decision until the defendant lenders or servicers comply with the statute. Fontaine v. US Bank National Association, C.A. No. PC 2015-0216, 2015 R.I. Super LEXIS 67 (R.I. Super. Ct. May 15, 2015)
Background on Passage of R.I. Gen. Laws § 34-27-3.2 and Subsequent Amendment
Section 34-27-3.2 first became effective on September 13, 2013. Under the original statute, certain mortgagees were required to send a written notice to mortgagors of the right to mortgage mediation** prior to the initiation of foreclosure proceedings. Moreover, the “[f]ailure of the mortgagee to comply with the requirements of this section render[ed] the foreclosure void . . . .” R.I. Gen. Laws § 34-27-3.2(g),(m) (2013). Significantly, however, the original statute only applied “[w]hen a mortgage is not more than one hundred twenty (120) days delinquent,” id., thus exempting a large number of mortgages that had presumably been in default.
The Rhode Island General Assembly amended the statute on July 8, 2014 and removed the 120-day delinquency limitation. R.I. Gen. Laws § 34-27-3.2(d). The amended statute also imposed new penalties of $1,000 per month for the lender’s failure to send the required notices, but those penalties are capped at $125,000 for any such failure during the period from September 13, 2013, through October 6, 2014.
**The mediation itself is governed by R.I. Gen. Laws 1956 § 34-27-3.2(f)-(j). In sum, the “mediation conference shall take place in person, or over the phone, at a time and place deemed mutually convenient for the parties by an individual employed by a HUD-approved, independent counseling agency selected by the mortgagee to serve as a mediation coordinator.” Further, [i]f the mediation coordinator determines that after a good-faith effort made by the mortgagee at the mediation conference, the parties cannot come to an agreement to renegotiate the terms of the loan in an effort to avoid foreclosure, such good faith effort by the mortgagee shall be deemed to satisfy the requirements of this section.” Id.
Issues Before the Court
The bulk of the court’s decision analyzed the plaintiffs’ likelihood of success in the context of their claims for preliminary injunctive relief to stop their respective foreclosures. The mortgagee defendants offered three main arguments in support of their contention that the amended statute’s notice of mediation requirements did not apply to them. First, they argued that imposing the amended statute’s mediation notice requirement to mortgages that had been delinquent for more than 120 days, and therefore exempted from the original statute, would result in the retroactive application of the amendment and a violation of their substantive due process rights. Second, the defendants argued that Section 34-27-3.2, when read as a whole, demonstrated that the General Assembly did not intend for the mediation requirement to apply to mortgages in default prior to May 2013. Finally, the defendants argued that the court should defer to regulations promulgated by the Department of Business Regulation which left undisturbed the 120-day-delinquency exemption.
Due Process Argument
The court was not persuaded by the defendants’ due process argument because, in its view, there had, in fact, been no retroactive application of the amended statute. The court rejected the defendants’ contention that the subject mortgages were in foreclosure simply because notices of default had been sent to the mortgagors prior to October 6, 2014 (such notices being a prerequisite to foreclosure). Instead, the court determined that a foreclosure proceeding is initiated by sending a notice of sale pursuant to R.I. Gen. Laws § 34-27-4(b). Accordingly, the court found that the amended statute was only being applied prospectively to any foreclosure proceeding initiated after October 6, 2014 and that it did not “unreasonably impair substantive rights, or impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.” R.I. Depositors Econ. Prot. Corp. v. Brown, 659 A.2d 95, 102 (R.I. 1995).
Interpretation of 2014 Amendment
The court also rejected the defendants’ contention that the amended statute could not be construed to apply to mortgages that were in default before May 2013 because that would make such mortgagees liable for statutory damages for failure to provide the mediation notice during the period from September 13, 2013 through October 6, 2014. The defendants argued that such an interpretation would impose a retroactive penalty which the General Assembly could not have intended. The court disagreed that the statute must be interpreted in this manner and, instead, read the penalty provisions of the amended statute to attach only after the duty to mediate arose. Accordingly, the duty to mediate for mortgages that were previously exempt under the original statute only arose on October 6, 2014, the amended statute’s effective date. The court buttressed its interpretation by noting that the initial June 2014 version of the amended statute limited the applicability of the mediation requirement to those mortgages with a default date on or after May 2013, but that this language was removed from the final legislation. Thus, the court found that the General Assembly clearly intended the statute to apply to all mortgages where foreclosure had not yet been initiated, regardless of whether the mortgages had been exempt under the original statute.
Striking Down of Regulation 5 Exemption
The court also rejected the defendants’ contention that the state regulation favoring their interpretation of the amended statute should control. Subsequent to the enactment of the amended statute, the Rhode Island Department of Business Regulation Division of Banking amended Banking Regulation 5, but continued to exempt from mandatory participation in the foreclosure mediation conference mortgages on which the mortgagor was, before September 12, 2013, 120 days or more delinquent. R.I. Code R. 11-2-5:5. The court, in summary fashion, found that this provision of the regulation plainly conflicted with R.I. Gen. Laws § 34-27-3.2. Quoting Clarke v. Morsilli, 714 A.2d 597, 600 (R.I. 1998) (agency “is bound by the acts of the General Assembly that empower[s] it”) and DeAngelis v. R.I. Ethics Comm’n, 656 A.2d 967, 970 (R.I. 1995) (agency is “subject to enacted statutory law which is presumed to be valid.”), the court found that the mortgagees could not “rely on Regulation 5 to defeat Plaintiffs’ motion in light of the statute’s clear mandate.” Fontaine, 2015 R.I. Super. LEXIS 67, at *27.
Impact on Foreclosure and Litigation Activity in Rhode Island
The court’s thorough and well-reasoned decision is likely to have a dramatic impact on Rhode Island foreclosure activity. It is likely to require the re-initiation of many foreclosure proceedings which do not comply with the mediation notice requirement under R.I. Gen. Laws § 34-27-3.2 because the borrower had been in default before May 2013. While this failure may have been reasonable in light of the Division of Banking’s regulations, servicers should bring foreclosure proceedings into conformity with Fontaine as there are no obvious grounds for the Rhode Island Supreme Court to reverse it, and it is unlikely that a federal court will interpret the statute differently now that there is a Rhode Island state court decision on the matter.
Further, the decision could lead to the imposition of significant fines ($1,000 per month per loan for which the statute is not followed). The threat of such fines is likely to increase borrowers’ leverage to extract an agreement not to bring the delinquency to the attention of a state-sanctioned mediator in exchange for cash considerations directly to the borrower or borrower’s counsel as a settlement mechanism. It could also lead to disagreements, not between servicers and borrowers, but between servicers and zealous mediators who disagree about whether the “good faith” negotiating standard has been met.
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