Reform law could draw fresh scrutiny

SECOND OF 3 PARTS

The Legislature overhauled the state foreclosure law in 2011 and passed further changes during its latest session, but a main architect of the reform wants to revisit the legislation, specifically to address publishing requirements for foreclosure notices.

"I don’t think (Act 182) is a perfect solution. I think we have to go back and take another look," said state Rep. Bob Herkes (D, Puna), chairman of the House Consumer Protection Committee.

To be reconsidered: what should be the frequency and reach of a newspaper publishing public notices, what qualifies as a newspaper, and whether foreclosure notices should be printed in newspapers and/or posted on a state website. There is also a conflict-of-interest issue involving the mainland-based business that helped persuade lawmakers to change the law and now stands to profit from it.

Act 182, which went into effect last month, allows foreclosure ads to run in weekly newspapers as long as those papers feature general news, have been publishing for at least a year and have circulation of at least 3 percent of a county’s population. Previously, the ads had to run in the largest daily newspaper of general circulation in the county of the foreclosure to reach the broadest possible audience.

The 3 percent requirement, furthermore, is automatically eliminated in two years under the bill, opening up publication to any weekly newspaper featuring general news. The law also trims the publication requirement from three times to once in a qualified newspaper if it is also posted on a state website.

Proponents of the new requirements, including the legal firm RCO Hawaii, which has ties to one of the largest foreclosure mills in the Northwest, say the move will reduce a major expense for foreclosures by increasing competition for the advertisements. While the cost of running auction ads has long been a concern for governmental departments, foreclosure lawyers and lender representatives, the strongest written testimony in support of the bill was from RCO Hawaii. No weekly newspapers testified.

"This approach, which has been implemented in other states, ensures that a newspaper meets general circulation requirements, and that there is an opportunity for more than one paper to compete to publish nonjudicial foreclosure notices," RCO Hawaii’s Mike Wong testified.

It also opens the door for RCO Hawaii to direct auction ads to an Oahu startup publication called The Island Sun Weekly, which shares common ownership and an office with FEI, a foreclosure services vendor.

Dennis Francis, Star-Advertiser publisher, and publishers of other Hawaii newspapers say there will not be competition among publications because Act 182 allows attorneys with financial incentives to direct auction ads to an affiliated company. That would let The Island Sun Weekly get a monopoly on foreclosure auction publishing since its owners also own Northwest Trustee Services and Foreclosure Expeditors/Initiators LLC, which services most of Hawaii’s nonjudicial foreclosures, Francis said.

"It’s really not competition at all," he said. "They’ll just be feeding from their own trough."

State Sen. Rosalyn Baker (D, West Maui-South Maui), who was one of the primary architects of the new legislation, declined several Star-Advertiser interview requests for this article. But in an earlier interview she said requiring lenders to advertise auctions in the largest daily newspapers has led to inflated ad rates. "The entities in charge of the foreclosure sale should have other options," Baker said. "Our concern was not to give a monopoly in statute."

But critics say the law creates a potential monopoly favoring one-stop foreclosure trustee businesses, such as Northwest Trustee and FEI, while also raising conflict-of-interest issues and limiting residents’ access to public notices.

Giving one party too much control over the foreclosure process is dangerous, said Daren Blomquist, vice president of RealtyTrac, an online foreclosure marketplace that collects and aggregates data for real estate companies and media.

"The more difficult it is to get your hands on the publication of foreclosure sale notices for each state, the worse off it is for the market because there is less transparency and a small pool of potential buyers of these properties," Blomquist said.

Joe Bradley, publisher of The Maui News, called the law a "big mistake" that will diminish the exposure of the last public notice before someone loses their home to foreclosure.

Paring notice requirements also could catch renters unaware when their rentals are at risk, said Tristia Bauman, a housing attorney with the National Law Center on Homelessness & Poverty, which is based in Washington, D.C.

"The most recent data suggests that 40 percent of all families facing eviction due to foreclosure are renters, and there are millions of children who will be affected and millions that have been affected," Bauman said.

Local attorney Gary Dubin, who represents homeowners facing foreclosure, said Act 182 raises red flags.

"I don’t even have to look at whether it is good or bad for the borrower; it has the appearance of impropriety, " Dubin said.

If the Star-Advertiser certifies that it ran a foreclosure auction notice, Dubin said he would accept it at face value. "If it were RCO Hawaii, I’d have to spend some time checking them out because they are the opposition," he said. "That costs more."

Herkes, the Hawaii island Demo­crat, acknowledged that lawmakers should go back and add conflict-of-issue language to keep entities with a stake in the foreclosure process from profiting from the publication of auction notices. "We really struggled with this part of the bill," he said.

Overall, Herkes said the new law makes needed changes in the foreclosure law to protect consumers, but there are several concerns that should be addressed in the 2013 session.

He said the publication requirements should be rewritten to ensure that residents are able to read about foreclosures in the paper of central circulation where the action is taking place.

"In my case, I’ve got papers on both sides of the island, and we don’t want a West Hawaii foreclosure in the Tribune," he said. West Hawaii Today is based in Kailua-Kona, and the Hawaii Tribune Herald in Hilo.

Herkes said the foreclosure notice provisions of the new law were decided after hours of negotiations between the House and Senate, and that Baker was a driver of the changes. "At some point we had to agree with Sen. Baker," he said.

Herkes said lobbyists and lawyers spent an inordinate amount of time arguing publication changes in the isles.

In the end, Herkes said he’s not sure how legislators arrived at the frequency stipulation or the circulation required by Act 182. "We had so many things on the table, we just had to make some guesses," he said.

Francis said if the state’s largest newspapers lose the foreclosure auction ad revenue, 40 to 50 people at the Star-Advertiser could lose their jobs and 15 at neighbor island papers.

He said it is unfortunate that "our own Legislature is saving mainland banking costs at the sacrifice of local jobs," but added that he is "hopeful that legislators will take another look at this issue next session."

While Baker would not consent to an interview, she previously pointed to increased foreclosure ad rates of the Star-Advertiser to justify changing the law. Costs for such ads on Oahu have ranged in recent years from $800 to about $2,800, representing a big chunk of foreclosure- processing costs.

Francis noted, however, that Baker and other Act 182 backers compared foreclosure ad rates of the former Star-Bulletin with those of the merged Star-Advertiser, which has a circulation more than three times greater than its predecessor.

"Rates during the last decade were below market because the Star-Bulletin and Advertiser were engaged in a price war," he added.

Still, to address the legislators’ concerns, the Star-Advertiser lowered the rate for auction notices by half.