What May Lie Ahead With Nevada’s FMP

[u]REQUIRED READING[/u][/i][/b][b]: The state of Nevada has finally unveiled new rules for its Foreclosure Mediation Program (FMP).[/b] Under this relatively new program, homeowners and lenders will physically come to the table with the assistance of a mediator to negotiate a loan modification or other graceful exit options from an owner-occupied residence. Banks have responded by creating entire departments dedicated to servicing the needs of these mediations, but they are often falling short of complete compliance. Unfortunately, even the slightest noncompliance with the rules carries severely disproportionate penalties for the banks as compared to meager or nonexistent penalties for the borrowers. Banks fail to fully comply for a number of reasons, all made increasingly more difficult by the new amended foreclosure mediation rules. First, the document requirements are not germane to the purpose of the mediation program, and are difficult to meet even for the most prepared lenders. Second, there is a growing concern over confidentiality within the mediations due to a suspected lack of mediator neutrality. Together, these issues may prove ever more vexing in light of Nevada's newest rules that give homeowners more opportunities for appeal to the district court in the event the mediation goes sour. [b][i]Issue No. 1: How many trees have to die for a client to be in compliance with Nevada's foreclosure mediation rules?[/i][/b] Nevada's FMP rules require the parties to exchange documents 10 days prior to the scheduled mediation. However, in practice, because the exchange almost never happens, the parties usually arrive at the mediation with all or some of the documents required by the rules. The burden of production on the bank requires the representative to arrive with the following list of documents: [list] a certified copy of the deed of trust;*a certified copy of the mortgage note;*a certified copies of each assignment of the deed of trust and mortgage note;*a statement under oath by the custodian of records authenticating each item listed in the above three bullet points;*an appraisal (or broker's price opinion (BPO), if allowed by the individual mediator), done no more than 60 days before the mediation;*an estimate of the "short sale value" of the residence; and*a confidential, nonbinding proposal for resolving the foreclosure.[/list] Many times, these documentation packages end up being more than 200 pages long, because a copy must be presented to both the mediator and the borrower. By contrast, a homeowner is only required to fill out three pieces of paper: a financial statement; a housing affordability worksheet; and a confidential, nonbinding proposal for resolving the foreclosure. Although the forms may request that the borrower bring bank statements and pay stubs to the mediation, the rules do not require it, and therefore, the borrowers probably won't be punished for failure to comply. The heavy burden of production on the lenders practically sets them up for failure, considering that they are already beyond inundated with thousands of phone calls, letters and faxes from struggling homeowners every day. First, the prohibitive expense of doing a formal appraisal on each and every property that submits to mediation has left some lenders relying on cheaper websites with potentially outdated information. Although Nevada's new rules attempt to offer a compromise by allowing a mediator to accept a BPO, the detailed requirements for a valid BPO under Nevada law make that compromise moot. Second, the generation of a confidential settlement proposal prior to the mediation is almost ludicrous. Banks rarely have financial documents in hand prior to the mediation, and if they do, the documents are unlikely to be input into the system in time. This makes the generation of a confidential settlement statement for production 10 days before the mediation nearly impossible, forcing the banks into a state of noncompliance before the mediation has even begun. The FMP rules could have addressed these problems if they were drafted in accordance with the Federal Rules of Evidence. In a formal court setting, all evidence used to prove a case must be admissible, which means it must be both relevant and authentic. Relevant evidence includes anything that has "any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Basically, anything that helps your case is relevant. However, evidence in court must also be authentic. Under the rules, authentic evidence means that it is sufficient to support a finding that the matter in question is what its proponent claims. As drafted, the FMP rules require borrowers to bring stated financial information – which is always going to be considered "relevant" evidence – but does not officially require authentication of that information through tax returns, bank statements or pay stubs. The financial statement may currently contain a recommendation to bring financial statements, but without a corresponding rule, the borrower could rightfully attend a mediation with nothing more than stated financials. A simple fix would be to create an official rule requiring the same information that the bank will request before offering a final modification under the federally funded Home Affordable Modification Program (HAMP). Because a majority of lenders will attempt to fit homeowners into this brand of loan modification before testing them for internal programs, HAMP provides an easy list of necessary documents that must be produced by the homeowner, and could likely reduce the number of errors in calculation that may be present in the fill-in-the-blank financial statement currently required. Requiring all documents up front eliminates the issue of failed trial programs and, in the long run, is beneficial to all parties. [b][i]Issue No. 2: How neutral is the mediator?[/i][/b] Reports are beginning to emerge regarding mediators who either have homes of their own in foreclosure, or have a regular law practice dedicated to representing borrowers against lenders. At a recent roundtable discussion between trustees and mediators, one mediator proudly stated that he acted in his capacity as a foreclosure mediator in addition to his role as a representative to borrowers in the same or similar circumstances as these foreclosures. Quite obviously, this aroused a significant amount of discussion regarding the role of the mediators in this program and the importance of their having a neutral perspective while participating in the program. In particular, lenders and their representatives were concerned that some of the confidential disclosures required by the program might be used for purposes outside the mediation. Under the amended rules, the lender (or beneficiary) must produce "the evaluative methodology used in determining the eligibility or non-eligibility of the grantor or the person who holds the title of record for a loan modification." In this instance, the grantor is the homeowner, because the borrower originally granted the bank a security interest as security for his or her promise to pay the money back used to purchase the home. Essentially, the rules state that the bank must "show its cards," but only to the mediator. Herein lies the problem with confidentiality and the "neutral" mediator. Imagine the hypothetical Mr. Young attends the mediation of Homeowner A against Big Bank during which Mr. Young acts in his role as a mediator. During the mediation, Big Bank reveals the evaluative method allowing Homeowner A to modify his loan. The next week, Mr. Young attends the mediation of Homeowner B, which is also against Big Bank. But this time, Mr. Young is Homeowner B's attorney, not the mediator. Mr. Young knows the confidential evaluative method that Big Bank uses in modifying loans due to his participation in the mediation of Homeowner A's loan. In addition, Mr. Young has had the opportunity, whether he takes it or not, to advise his client, Homeowner B, of the methods used by Big Bank. The evaluative method, within this mediation, is now not confidential information, and the bank has essentially revealed a road map for Mr. Young to use in tailoring Homeowner B's financial documents to achieve a loan modification for which he may otherwise not qualify. Consider also the same situation, but that Mr. Young is in foreclosure himself. How can he then keep the bank's evaluative method confidential from himself? One solution would be to tighten controls on who is appointed as a mediator in Nevada. Currently, in order to become a foreclosure mediator in Nevada, candidates must fill out an application and be appointed by the Supreme Court of Nevada. Qualifications include a training program of at least four hours and license to practice law in the state of Nevada, or 40 hours of classroom training and at least 10 mediations as an experienced mediator. The FMP administrator then randomly selects and assigns a mediator to preside over a particular mediation. Once appointed, mediators must follow certain judicial canons adopted by the state's Supreme Court. These canons basically require a mediator to be impartial, avoid the appearance of impropriety, and uphold the integrity and independence of the program. For starters, no mediator whose own home is going through foreclosure should be allowed to participate as a mediator in this program. There is no way to avoid the appearance of impropriety, and reasonable minds could absolutely conclude that a mediator in such a predicament may not act impartially. In addition, anyone that represents borrowers as a part of their general practice should be precluded from appointment as a mediator. These two criteria could easily weed out the mediators who should not have attempted to participate, as a matter of ethics, from the start. Unfortunately, there is no authorized mechanism to challenge the appointment of a mediator once it has become apparent that the mediator is not impartial, or does not intend to participate as a neutral party. In fact, the amended rules only contain a curious admonition to appointed foreclosure mediators. The rule states in part that "Mediators serve at the pleasure of the Court." Additionally, the program administrator can recommend to the court that a mediator's appointment can be revoked or suspended at any time, and the FMP manager – designee for the administrator – "has the authority to take any action necessary to accommodate the parties affected by such action(s)." A commonsense reading of this rule makes it clear that the only recourse anyone has against a mediator is to tattle and hope for the best. Unlike the right to a preemptory challenge of a judge in a real court proceeding, the FMP rules leave program participants with a more elementary "he said, she said" procedure. [b][i]Issue No. 3: Why does my client have to pay $60,000 for someone else to live in a house for free?[/i][/b] The lender's struggles to comply with the documentation and other rules, as well as the lender's lack of options in the face of a biased mediator, may start to hit the banks even harder where it hurts. The newest rule hitting Nevada June 1, and quite possibly the rule that could push the limits of lenders' patience, addresses temporary modification agreements and expiration dates on those agreements. According to a bank representative at a recent foreclosure mediation roundtable discussion, about 50% of all trial programs will fail. This is caused by a number of circumstances, but is also due, in part, to the borrower's inability to produce authentic proof that they earn what they stated they did at the time the bank considered them for a trial modification. Nevada has decided to combat the rising rate of failed trial programs by requiring that temporary modification agreements be in writing, have an expiration date and be signed by both parties. The new rule raises two brand-new issues for lenders. First, the "expiration date," is only defined as "a date certain, and upon which the parties shall have complied with their obligations under the agreement." It is unclear from this language who is responsible for setting, or who is allowed to set, the expiration date, and whether it must be concretely agreed to at the mediation. Second, it is implied that both parties have to sign the written temporary modification and expiration date at the mediation. Currently, the mediation agreements are nonbinding and are only signed to memorialize what occurred during the mediation. However, with this new rule, those agreements could become more binding on both parties. What is even more frustrating are the enormous penalties to banks if they do not comply with this new rule. In addition to an indirect fine of $60,000 or more to re-foreclose on a home, failure to comply with the expiration date could force the bank to spend more money in attorneys' fees to defend the matter in a real court of law. Either party can file a petition for judicial review by the district court within 15 days of the expiration date of the temporary modification, regardless of whether the mediation has even been concluded. Essentially, this gives borrowers a way to sue the bank if HAMP and other trial modifications aren't finalized, even if no mediation ever occurred. Furthermore, because most trial modifications require three months of payments but, in reality, end up taking four or five months to evaluate for a final modification, petitions for judicial review could be granted before the bank even approves or denies the modification request. The Nevada FMP, although imperfect, has yet to produce any bona-fide calamities that have upset anyone enough to bring a class-action lawsuit or constitutional challenge. That being said, without addressing these difficult issues, more and more lenders may find themselves spending millions of dollars foreclosing the same homes over and over again, and spending extraordinary amount in attorneys' fees. The question remains then, if the purpose of the program is to dig out of this mess, why does only one party have a shovel? Nevertheless, all parties involved would be well advised to hope for the best, but be prepared for the worst. [i]Juliana Hofsommer is an associate attorney with Las Vegas-based Cooper Castle LLP, a member of the Castle Law Firm. The multi-jurisdictional firm provides legal representation in finance-, foreclosure-, bankruptcy- and mortgage-related litigation in both state and federal courts. Hofsommer can be reached at (702) 435-4175, ext. 4156 or jhofsommer@ccfirm.c


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