The New Foreclosure Law

• Jurisdiction: Hawaii,United States
• Citation: Vol. 16 No. 10
• Publication year: 2012

The New Foreclosure Law

by Everett S. Kaneshige and Seth J. Corpuz-Lahne

Overview

This article contains a general description of the 2011 Hawaii Session Laws Act 48 and 2012 Haw. Sess. Laws Act 182, and the history of these measures. Because of the sheer number of items contained in these Acts, we focused on the following four major areas/issues: the moratorium and eventual repeal of Chapter 667, Part I; the applicability of Hawaii's Unfair and Deceptive Acts and Practices law; the new Mortgage Foreclosure Dispute Resolution Program; and the attorney affirmation requirement. Other areas of the law that were also significantly changed or revised include, but are not covered in this article, are: the process by which condominium and homeowner associations could utilize nonjudicial foreclosure to recover delinquent owner fees; a new electronic publication option for notices of sale in both judicial and nonjudicial foreclosures; and implementing owner safeguards such as requiring associations to accept owner payment plans and prohibiting nonjudicial foreclosures for late fees and fines. The intent of this article is to provide a summary of the events that led toward passage of the Acts.

History

Beginning in 2009, a wave of foreclosures began to sweep the country.¹By 2010, over 1,600 foreclosures were filed in Hawaii each month.² The vast majority were "nonjudicial" foreclo-sures³ under Part I of Chapter 667 of the Hawaii Revised Statutes, which at that time⁴ provided for a faster process than judicial foreclosures.

At the same time, complaints began to surface about lenders and mortgage servicers who refused to communicate with borrowers about the status of their loans. Horror stories were told about multiple instances of lenders losing payments and paperwork and assuring owners that a new payment plan had been accepted, then reneging on the deal and even telling owners to purposely miss payments so they could qualify for a "loan modification" and then promptly foreclosing on them once they fell behind. Some homeowners even complained that their homes were foreclosed upon without their knowledge.⁵

The complaints turned into a crescendo at the state legislature in 2010. Faced with the difficulty of ascertaining, let alone solving, a complex legal and social issue within the span of five months, the legislature instead created a mortgage foreclosure task force (the "Task Force") to conduct a comprehensive evaluation of Hawaii's mortgage foreclosure laws. The Task Force, the legislature believed, was necessary before meaningful legislation could be enacted that, on balance, addressed the concerns of both borrowers and lenders, without further overburdening the courts.⁶

Pursuant to its statutory mandate, the Task Force began meeting from July 27, 2010 and issued its first report to the legislature on January 31, 2011. The Task Force's report made various recommendations to improve nonjudicial foreclosures.⁷ The 2011 legislature adopted most of the Task Force's recommendations, but also added a number of provisions of its own that were enacted in the 2011 Haw. Sess. Laws Act 48.⁸ Thereafter, the Task Force recommenced meetings on August 2, 2011, and issued a final report to the legislature on January 18, 2012. The final report contained recommendations to address and to improve issues that had become apparent during the implementation of Act 48, plus additional recommendations (i.e. the use of nonjudicial foreclosures by condominium and homeowner associations) that were not addressed in Act 48. The 2012 legislature again accepted most of the Task Force's recommendations and added some additional provisions, all of which are contained in 2012 Haw. Sess. Laws Act 182.⁹

Part I Nonjudicial Foreclosures - Moratorium, then Repeal

Many believe that the most significant event with respect to the changes in Hawaii's foreclosure laws was the eventual elimination of nonjudicial foreclosures from Part I of Chapter 667 of the Hawaii Revised Statutes. The elimination of nonjudicial foreclosures appears to be the legislature's direct response to what it considered to be a flawed process that greatly contributed to Hawaii's foreclosure "crisis."

Haw. Rev. Stat. section 667-5 previously authorized lenders to pursue a "power of sale," or nonjudicial, foreclosure. This section was originally enacted in 1874 and has been recognized as a quick and inexpensive alternative to judicial foreclosure, but balanced with the mandate of compliance with minimal procedural requirements to protect mortgagors' interests in their property.¹⁰Nevertheless, as far back as 1998, it appears that concerns about the insurability of title pursuant to this section resulted in the legislature passing a new part to Chapter 667 entitled "Alternate Power of Sale Foreclosure Process." In doing so, the legislature stated that the purpose of this new part ("Part II") was to establish an alternate nonjudicial foreclosure process that reduced the time and cost of the current foreclosure process and provide additional safeguards not required in the current power of sale foreclosure law needed to protect the interests of consumers.¹¹Nevertheless, for various reasons,¹²lenders chose not to utilize the procedures in Part II and most, if not all, foreclosures were filed under Part I.¹³

Many foreclosure-related bills were introduced during the 2011 legislative session and several of them contained provisions that would slow down, if not stop, nonjudicial foreclosures under Part I. For example, one draft of S.B. 651 provided for a moratorium on both judicial and nonjudicial foreclosures for six months. Another draft repealed Part I altogether, leaving only Part II available to be used for nonjudicial foreclosures. Similar provisions were inserted and removed in drafts of H.B. 1411. Ultimately, both of these bills wound up in the same conference committee. The measure that emerged from that committee, S.B. 651 S.D. 2 H.D. 2 C.D.1, was enacted as Act 48, effective on July 1, 2011, and provided for a one-year moratorium on all new nonjudicial foreclosure actions under Part I.

Act 48 stopped short of repealing nonjudicial foreclosures completely. Mortgagees could still foreclose without going to court, under Part II. However, Act 48 amended Part II to require lenders who chose to pursue nonjudicial foreclosure against an owner-occupant to participate in a dispute resolution program administered by the Department of Commerce and Consumer Affairs ("DCCA"). Lenders did not commence any new nonjudicial foreclosures subsequent to the enactment of Act 48¹⁴ because of their many concerns.¹⁵

When the 2012 legislature opened the second session of the biennium in January, both chambers seemed to be in agreement on the need to repeal the remaining nonjudicial foreclosure provisions in Part I of Chapter 667. Provisions to this effect were in Senate and House bills incorporating the recommendations of the 2011 Task Force.¹⁶Committee reports from the Senate and House expressed concerns over the continued existence of "two discrete but overlapping nonjudicial foreclosure laws."¹⁷ Several organizations testified in favor of retaining the Part I nonjudicial provisions to enable out-of-court foreclosures of commercial, industrial and investor-owned properties.¹⁸Nevertheless, what emerged from the Conference Committee was a bill that did indeed repeal the remaining power of sale portions of Haw. Rev. Stat. Chapter 667, Part I. Signed by Governor Abercrombie as Act 182, the law took effect, in part, on June 28, 2012.

With the enactment of Act 182, the old Chapter 667, which consisted of two separate nonjudicial foreclosure paths, has been replaced with a single process. The new process provides for dispute resolution and conversion to judicial foreclosure if an owner-occupant is involved. If the property owner is not an owner—occupant, then nonjudicial foreclosure is still available, albeit via a process that takes longer because of additional notice requirements.

Mortgage Foreclosure Dispute Resolution Program

After creating the Task Force in 2010, legislators heard from constituents with concerns about the high rate of foreclosures and their negative experiences with lenders.¹⁹ The majority of nonjudicial foreclosures were performed by out-of-state lenders,²⁰ and common themes among the testifiers were how difficult it was to talk to lender representatives authorized to decide their loan modification applications. Constituents also said it was difficult to submit documents to process the loan modification applications.

Legislators looked to other states for possible solutions that might apply to Hawaii. One of these was a mediation program administered by the Nevada Supreme Court that required counseling from HUD-certified counselors, document exchange, and good faith participation from both parties in the mediation process. Using avoidance of foreclosure as a measure of success, even if a mortgagor ultimately relinquished the home, from July 2009 till June 2010, the Nevada Foreclosure Mediation Program participants avoided foreclosure in an impressive 89% of mediations.²¹

Hawaii's Mortgage Foreclosure Dispute Resolution ("MFDR") Program, shares many features with Nevada's program. Mortgagees, who choose to foreclose nonjudicially, must participate in the MFDR Program if the mortgagor elects it.²² Owner-occupants who elect to participate must receive counseling before the dispute resolution session,²³ and document exchange between mortgagee and the owner-occupant is mandatory. Noncompliance with program requirements²⁴ subjects parties to penalties.²⁵

The MFDR Process (provided that the owner-occupant elects participation), step-by-step, is as follows:

1. Mortgagee serves Foreclosure Notice

2. Mortgagee files Foreclosure Notice with DCCA, pays filing fee

3. DCCA notifies owner-occupant of filing, and Dispute Resolution eligibility

4. Owner-occupant elects participation, certifies eligibility...