State Bar’s ADR section tells lawmakers proposed mediation for home foreclosure raises issues     

By Alex De Grand, Legal Writer, State Bar of Wisconsin

Oct. 20, 2009 – A legislative proposal to give distressed homeowners a right to mediation in foreclosure has prompted the State Bar of Wisconsin’s Alternative Dispute Resolution Section to recently testify on the bill. The section identified several areas of concern with the proposed legislation.

Specifically, the section questions whether the legislation would compromise the mediator’s neutrality and conflict with other principles of alternative dispute resolution. However, the section did not explicitly oppose the bill in its testimony given during an Oct. 7 joint public hearing of Senate and Assembly committees considering the proposal.

‘Time for communication’

Senate Bill 255, referred to as “The Mortgage Mediation Act” by its sponsors, would require lenders undertaking a foreclosure action to inform the borrower of a right to request mediation.

Within 10 days of receiving this notice, the borrower may submit a request to the director of state courts for mediation. The bill requires the courts director to refer the borrower to a financial analyst for advice regarding the foreclosure and to provide both the borrower and lender the names of persons available to provide mediation services.

If mediation is requested, the foreclosure action is stayed until mediation is completed.

“The Mortgage Mediation Act is designed to interject an essential time for communication between all parties into the foreclosure process,” State Senator Lena Taylor (D-Milwaukee), a cosponsor of the bill, told members of the Assembly Committee on Housing and Senate Committee on Judiciary, Corrections, Insurance, Campaign Finance Reform and Housing gathered for the joint hearing.

“Lenders will assert today that one of the most destructive things that can happen in a financial crisis is for a borrower to stop communicating with the institution,” Taylor continued. “And borrowers often find harsh and demanding tactics and tone to not be a helpful method of communicating with institutions about their financial problems. Mediation is a structured method of communication designed to ease tensions where possible and promote civil, productive dispute resolution.”

Taylor pointed out that mediation is occurring “in a very similar program in Milwaukee.” The Milwaukee Foreclosure Mediation Program, administered by Marquette University Law School, began with seed money from the City of Milwaukee and funding contributed by the Wisconsin Attorney General.

Mediator’s role

Although the mediator may not compel a settlement between the parties, the bill requires the mediator to attempt to arrive at a fair agreement for adjustment, refinancing, or payment of the mortgage loan. Further, the mediator is charged under the bill with judging whether the parties mediated in good faith and reporting a determination of bad faith to the court.

“Good faith” is found when the parties attend the mediation sessions and do so possessing sufficient authority to reach a settlement. The parties are also expected to provide full financial information and to substantiate their reasons for declining debt restructuring options.

If the mediator determines that the lender did not engage in good faith, the court may supervise the mediation directly, freeze the foreclosure action for 180 days, or order the lender to pay the borrower’s court costs, including attorney fees. Conversely, if the borrower fails to mediate in good faith, the mortgagee may proceed immediately to foreclose on the residential property and the borrower must compensate the mediator and the financial analyst for all of their costs.

Taylor explained that that the bill “provides a mechanism for the court to leverage compliance into mediation.” But James Cole, a member of the State Bar ADR Section, warned lawmakers that this good faith requirement threatens the mediator’s neutrality.

“To answer the question, ‘is a party negotiating in bad faith?’ requires the mediator to make [a] judgment about what constitutes reasonable compromises,” the section stated in written testimony given to legislators. “For example, what if the mortgagee refuses to consider the homeowners’ counterclaims of unconscionability or deceptive trade practice. Is that bad faith? What if the homeowner fails to attend the mediation for unsubstantiated reasons? Is that bad faith? Once the mediator begins to formulate answers to those types of questions, neutrality will be affected.”

Similarly, the section said that the provision requiring the mediator to report bad faith forces the mediator “to break confidentiality by disclosing specifics about negotiations, proposals, parties’ behavior and conversations during mediation.” Aside from conflicting with the statutory confidentiality provided in Wis. Stat. section 904.085, the section cautioned this could have a “chilling effect” on mediating parties’ willingness to disclose their views and interests.

Another complication that the ADR section noted arises when a court disagrees with the mediator’s finding of bad faith and sends the case back to the same mediator to continue the mediation. “It is not likely that either party will have the requisite level of trust to engage in mediation with that particular mediator in a meaningful way after allegations of bad faith,” the ADR section wrote.

Complicated fees

“Mediators may not charge fees that may impair their impartiality,” the ADR section wrote. “For example, a mediator cannot enter into a fee agreement that is contingent upon the result of the mediation.” Yet, the section contended, the result of the mediation under the bill “directly influences the fee.”

“If there is no settlement, the case will proceed to confirmation, the lender will take ownership of the property, and there will be no periodic payments,” the section wrote. “Does that mean the lender, who cannot recover from the borrower, is not required to advance fees to the mediator? Mediators seeking to collect fees from participants will likely no longer be perceived as impartial and may need to remove themselves from the process.”

Additionally, the section noted, the mediator fees “are affected by that same mediator’s determination of whether a party has failed to mediate in good faith.” This at least gives the appearance that the mediator lacks impartiality, weakening the process, the section commented.

Due process concerns

The ADR section questioned whether the mediator’s finding of bad faith and the subsequent sanctions might only “spawn a completely new layer of litigation.”

“Would the finding involve a full evidentiary hearing so the party against whom bad faith is asserted has an opportunity to contest it with their own evidence?” the section wrote. “Is the mediator’s conclusion given greater deference? If that is the case, is there a due process concern? What is the standard of review of the mediator’s determination? Is the interim order by the court subject to appeal?”

In a related concern, the section sought clarification as to what exactly happens when the court supervises the mediation as a consequence of the lender’s bad faith. “Does the judge actually attend the mediation session?” the section wrote. “Does the judge require detailed reports of the session? In addition, do these ‘good faith’ enforcement provisions have the potential of increasing court caseloads in direct opposition to one of the policy goals of foreclosure mediation?”

Next steps

The ADR section has expressed a commitment to working with the authors and committee members to craft amendment language addressing the concerns and issues raised by the section in order to maintain the integrity of the mediation process in Wisconsin.

The State Bar of Wisconsin establishes and maintains sections for carrying on the work of the association, each within its proper field of study defined in its bylaws.  Each section consists of members who voluntarily enroll in the section because of a special interest in the particular field of law to which the section is dedicated.  Section positions are taken on behalf of the section only.

The views expressed on this issue have not been approved by the Board of Governors of the State Bar of Wisconsin and are not the views of the State Bar as a whole. These views are those of the section alone.

If you have questions about this memorandum, please contact Sandy Lonergan, Government Relations Coordinator, at slonergan@wisbar.orgor (608) 250-6045.