The servicer community recently scored an important victory in an opinion issued by the en banc Washington Supreme Court. The decision—Brown v. Wash. State Dep’t. of Commerce, —clarifies the scope of the small lender exemption to the Washington Foreclosure Fairness Act (FFA) mandatory mediation program (codified at RCW 61.24.166). Further supplementing the victory, the Court also opined upon the nature and extent of proof a beneficiary must interpose in order to avail itself of the exemption.
Among other things, the FFA created a requirement that, with regard to residential foreclosures, deed of trust (DOT) beneficiaries enter into mandatory mediation with borrowers. The goal of the mediation program—which is similar to programs in other states—is that through a collaborative, negotiated process, beneficiaries and borrowers agree upon loan modification strategies allowing borrowers to keep their houses.
In its enactment of the FFA, however, the legislature created an exemption that allowed certain small volume lenders to forego the mandatory mediation program. The relevant statutory section states:
The provisions of RCW 61.24.163 [the mediation program requirements] do not apply to any federally insured depository institution, as defined in 12 U.S.C. Sec. 461(b)(1)(A), that certifies to the department under penalty of perjury that it was not a beneficiary of deeds of trust in more than two hundred fifty trustee sales of owner-occupied residential real property that occurred in this state during the preceding calendar year. A federally insured depository institution certifying that RCW 61.24.163 does not apply must do so annually, beginning no later than thirty days after July 22, 2011, and no later than January 31st of each year thereafter.
Left unclear by the statutory language was how to apply the exemption in instances where the holder and owner of the note were different entities. In other words, the statute failed to expressly account for the loan sub-servicing relationship that is typical in today’s industry. It was into this interpretive “gap” that the Brown Court stepped to bring much needed clarity.
Brown involved a note held by M&T Bank and owned by the Federal Home Loan Mortgage Corp (Freddie Mac). Precise application of the FFA mediation exemption was significant in this instance because the holder (M&T Bank) qualified for the exemption, while the owner (Freddie Mac) did not. In an opinion that also includes a general discussion of the role of Freddie Mac in the residential mortgage market as well as an amusing, but not inaccurate, citation to It’s a Wonderful Life, the Court unequivocally held that the holder, rather than the owner, is the entity that must be evaluated for purposes of the FFA mediation exemption. The Court’s opinion contained a cogent discussion of basic principles of negotiable instruments and clarified the proper use of terms such as “owner” and “holder,” which statutes and opinions often conflate. Looking to the Uniform Commercial Code for guiding principles, the Court opined: “By enacting a program designed to promote the modification of notes, the legislature necessarily intended the party with the authority to negotiate and modify the note to be present in the FFA mediation session.” Accordingly, the proper party for mediation purposes was M&T Bank and, as an exempt entity under RCW 61.24.166, M&T Bank was not required to participate in Washington’s mandatory mediation program. Particularly for smaller servicers holding loans owned by larger entities, this is a notable victory.
One final note, a second issue considered briefly by the Court was the proof necessary to satisfy the FFA mediation exemption. Looking to the statutory language and the underlying legislative purposes, the Court held “that a party’s undisputed declaration submitted under penalty of perjury that it is the holder of the note satisfies RCW 61.24.030(7)(a)’s requisite to a trustee sale and RCW 61.24.163(5)(c)’s proof of beneficiary provision for FFA mediation.” This aspect of the opinion is helpful because the Court refrained from imposing some form of additional proof that might be more difficult or burdensome for servicers to meet. The holding was particularly welcome given the statute’s loose use of language requiring “proof that the beneficiary is the owner,” which might have supported an alternative interpretation. RCW 61.24.030(7)(a). In sum, Brown provides much needed clarity and also paves the way for smaller servicers in the ever-evolving secondary mortgage market to effectively utilize the statutory exemption without the fear that institutional loan purchasers will compel them to participate in Washington’s FFA mediation program.