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State's top lawyer says changes needed to catch 'bad faith' banks

Some big banks are failing to negotiate in good faith with homeowners facing foreclosure.
Washington’s Foreclosure Fairness Act, passed in 2011, is designed to give struggling homeowners a fair shot at keeping their houses.

They're big, sophisticated institutions. But some banks are having a hard time following Washington state's three-year-old Foreclosure Fairness Act. And a KING 5 Investigation shows there are few consequences for banks that fail to comply with it.

The 2011 law is intended to force mortgage lenders to meet with borrowers who are having a hard time making their house payment. The law stipulates that a state-approved mediator be present at the meeting.

If either party isn't forthright, the mediator can issue a "bad faith" certificate indicating that the mediation failed because that party didn't follow the rules.

Through a public records request, the KING 5 Investigators received mediation documents from the Washington State Department of Commerce. Those records show that mediators have ruled in 223 cases that banks acted in bad faith.

Consumer debt attorney Nadia Kourehdar says bad faith is "any type of behavior where it's clear the lender is not trying to help the homeowner."

[Tips and resources for Washington homeowners.]

Most often that behavior consists of delays in a homeowner's request to modify the terms of their home loans, usually to lower monthly payments.

The Foreclosure Fairness Act was designed as a tool to get banks to engage with homeowners who are unable to meet their mortgage obligations. Department of Commerce statistics show that 6,765 homeowners have sought mediation since the law went into effect. Of that number, 1,505 mediations failed to result in an agreement.

The statistics show that in 12 percent of those failed negotiations the mediator ruled the bank acted in bad faith, compared with the 8 percent of instances where the borrower was found in bad faith.

Bank of America has been issued 51 bad faith certificates by mediators, the most of any lender. Wells Fargo Home Mortgage is second on the list with 40 bad faith certificates.

Washington's Attorney General says his office was not aware of those numbers until the KING 5 Investigators presented them to him.

"When it comes to bad faith mediation, we do not get those reports. They do not come to our office. I think they probably should," AG Bob Ferguson said in an interview.

Under the law, a bad faith finding is a violation of the Consumer Protection Act. It's the job of the Attorney General's Office to enforce that act by filing suit against violators. But that has never happened with a bank found to be negotiating in bad faith with a homeowner.

The Department of Commerce collects the reports on bad faith findings, but it does not pass that information on to the state's lawyers. Ferguson says he's been in contact with state Rep. Tina Orwall (D-Des Moines), the legislative sponsor of the Foreclosure Fairness Act, to change that when lawmakers re-convene in next year.

"We've exchanged messages on, 'Hey, maybe the law should change. Hey, the mediator's got to send a copy of that to our office as well so we know and we know in a specific manner.' We don't get that information right now," Ferguson said.

Dionne King of Arlington is one of the homeowners whose mediation resulted in a bad faith certificate against Bank of America.

"Quite frankly, they've been underhanded about the whole thing," King said of her negotiations with BofA. She says the bank continued to request documents she had already provided during three meetings with the mediator.

"She verbally reprimanded them and said, 'I told you to be prepared,'" King said of the mediator in that third and final meeting in March of this year. "She found that Bank of America was not operating in good faith."

King's case illustrates a glaring problem with the law -- a lack of punishment for lenders that break the rules.

The bad faith certificate allows her to sue the bank for violating the Washington Consumer Protection Act. But that would cost money to hire an attorney.

"(It) puts you back to square one, except that you have this document that really doesn't hold water," said King.

Attorney Nadia Kourehdar of the Ark Law Group in Bellevue says the Foreclosure Fairness Act needs more teeth to punish lenders that don't negotiate fully or fairly in mediation.

"A lender doesn't have to comply because the only remedy available is for a borrower to sue their lender," said Kourehdar.
She says financially strapped homeowners can't afford that, so "most of the borrowers who get a bad faith certificate (against their bank) give up."

In King's case, Bank of America walked without any consequences. She says BofA sold her loan to another lender and she's back to square one negotiating with a new lender.

"They got off Scot free, without even a slap on the hand," said King.

Statement from Bank of America:

Since the beginning of the housing crisis, Bank of America has modified the mortgages of nearly 30,000 customers in Washington who were facing financial difficulty. We have participated in nearly 700 mediation hearings since 2011, and today, we have a management team dedicated to the Washington mediation process. We continue to work hard with our customers after mediation to prevent foreclosure.

Following up on the 51 loans that have been subjects of bad faith certificates, 24 were in servicing pools that were transferred to other servicers before, during or after the close of mediation as the bank reduced the size of the servicing portfolio. Of the remaining 27 loans in our servicing portfolio following a mediator's determination of bad faith, 15 (63%) of customers have been provided with foreclosure avoidance solutions; and only one has completed foreclosure. When possible, we will continue to work with the remaining borrowers until all foreclosure avoidance remedies have been exhausted.

Bank of America's mediation activity reflects the size of the delinquent portfolio serviced by the bank, primarily as the result of taking over the Countrywide and other lender's originations. By acquiring these companies at the start of the economic crisis, Bank of America has provided support and foreclosure prevention assistance to more than 2 million customers nationally, 1.4 million through modifications, including nearly 30,000 in Washington. The vast majority of this work was accomplished outside of the mediation process.

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