For the second time in as many years, a foreclosure mediation program has faced a constitutional challenge. This time, the 153,000-person city of Springfield, Massachusetts, will be allowed to move forward with a foreclosure mediation program for residents.
The first was a constitutional challenge from Wells Fargo against the Nevada Supreme Court Foreclosure Mediation Program. Wells Fargo claims the mediation program itself violates the due process clause. More specifically, Wells Fargo claims a provision that allows sanctions for non-compliance, violated the U.S. constitution. Nevada’s mediation program allows judges to issue sanctions if the lender does not participate in good faith. Sanctions may include an ordered write-down of the mortgage. Wells Fargo says this violates the contracts clause and the takings clause by interfering with a contract provision and appropriating private real and personal property for public use without compensation. The court has not yet heard arguments in this case.
The latest challenge was to the City of Springfield’s City Council ordinance 7.60, which requires lenders mediate before being able to foreclose. A group of smaller banks in Springfield requested the U.S. District Court for the District of Massachusetts a declaratory judgment that the foreclosure mediation program, which went into effect on December 13, 2011, was inconsistent with Massachusetts law. The program voluntarily halted operations pending resolution in the case.
The Springfield ordinance, “Facilitating Mediation of Mortgage Foreclosures of Owner Occupied Residential Properties,” mandates mediation prior to the lender being able to proceed with a foreclosure. The parties must mediate in good faith and try to come to a “commercially reasonable” foreclosure alternative. If the mediation is conducted this way, the mediator will issue a certificate allowing the foreclosure to proceed.
The banks mostly argued against a sister ordinance, one that charged the lenders for the maintenance of properties under their purview. But, they also challenged the foreclosure mediation ordinance, saying that the state, not the city, was the exclusive regulator of the foreclosure process and thus, the city could not create a program separate from state approval.
If true, this argument would render many other foreclosure mediation programs invalid: Providence, Rhode Island; the District of Columbia; and the City of Philadelphia, which funded, in part, the outreach for the Philadelphia Court of Common Pleas’ foreclosure diversion program. This argument might be extended as far as individual counties or court circuits that create programs, if the state itself doesn’t promote such programs. If so, foreclosure dispute resolution programs like Hawaii’s 1st Circuit, New Mexico’s 13th Circuit, and Illinois’ 3rd Circuit might be found to be overreaching their powers.
The court determined that the purpose for state laws about foreclosure would not be frustrated by the existence of a city-specific program. Specifically, the court said that the mediation program would not significantly alter either the foreclosure process or the relationship between borrower and lender. Mediation programs do not prohibit lenders from completing the foreclosure; the program just requires a “preliminary step” before doing so. Even the argument that mediation extends the foreclosure timeline and thus, interferes with the state-given right to foreclose, was not persuasive. To the court, a mediation program is a “modest effort to soften this crisis.”
As RSI predicted in its review of 2011 and forecast of 2012, litigation about mediation is on the rise.