Mediation requirement stalls in the Legislature

Twice in the past two years, Hawaii lawmakers passed bills aimed at letting homeowners use mediation to resolve foreclosure cases — only to see the mortgage lending industry sidestep the new laws.

This year another bill representing a third attempt was introduced but failed to pass.

Senate Bill 1370 had strong support from the state Department of Commerce and Consumer Affairs, and passed four legislative committees — two in the Senate and two in the House. But the House Finance Committee, chaired by Rep. Sylvia Luke, did not hold a hearing on the bill.

The bill would have required lenders to engage in mediation, at the request of homeowners, before filing foreclosure lawsuits in state court. The requirement was to apply only to cases in which borrowers live in their homes, and not investors or vacation-home owners.

Lending industry representatives opposed the bill, arguing that mediation would only extend Hawaii’s already lengthy foreclosure process, which can last 12 to 18 months or more, and that borrowers would see little difference in case outcomes because lenders are required to explore loan modifications with delinquent borrowers.

Consumer advocates contended that lenders don’t always make good-faith efforts at loan modifications and that in some cases loan servicers have financial incentives to foreclose instead of restructuring a loan.

Bruce Kim, executive director of the state Office of Consumer Protection, said in written testimony that 70 percent of Hawaii foreclosure cases should benefit from mediation in conjunction with certified housing counselors and that such a program would reduce the number of foreclosure cases caught up in state courts.

Hawaii’s mediation program, established two years ago, was started with a state appropriation of $400,000 but has gone unused. The program was modeled on a similar program in Nevada, though mediation has also been held up as a successful way to resolve foreclosure cases in other states.

A 2010 federal report by the Justice Department and Department of Housing and Urban Development that referenced more than 25 foreclosure mediation programs in at least 14 states said the most impressive programs had settlement rates resulting in about 60 percent of homeowners remaining in their homes.

"For millions of homeowners at risk of foreclosure, mediation programs offer an opportunity to evaluate their options and appraise possible alternatives to losing their homes," the report said.

SB 1370 was seen by some as addressing an unexpected consequence of Act 48, the law enacted in 2011 that established a mediation program to benefit homeowners who consumer advocates said were being abused in an out-of-court foreclosure process with little oversight. But lenders sidestepped this key provision in Act 48 by filing all foreclosure cases in court.

A new law passed last year attempted to make the nonjudicial foreclosure law and mediation program more palatable, but lenders still balked at its use.