Hawaii State Legislature Change Foreclosure Laws

by Nicole Legere, Esq.
Senior Counsel  

CHANGES TO THE HAWAII FORECLOSURE PROCESS

The Hawaii state legislature has recently passed HB 1875, which is intended to implement the recommendations of the mortgage foreclosure taskforce. This taskforce was created specifically to recommend ways to improve the methods by which foreclosures are conducted in Hawaii. The recommendations include creating a permanent mortgage foreclosure dispute resolution program, as well as a process for converting non-judicial foreclosures of residential property into judicial foreclosures. Also, the bill requires any lender attorney responsible for filing a judicial foreclosure on residential property to affirm that he has verified the lender’s legal standing, and confirmed the accuracy of the documents submitted to the court.

CONVERTING FORECLOSURES

There are two ways to foreclose upon a property in the state of Hawaii 1) judicial and 2) non judicial, and changes in law now give property owners the right to transform a non-judicial foreclosure into a judicial one.

In a judicial foreclosure the mortgagee files a lawsuit against the homeowner in an effort to obtain a judgment which declares the homeowner is required to pay the balance of the loan. This judgment also gives the mortgagee the right to sell the property. In a judicial foreclosure the mortgaged property is sold with the supervision of the court, and any sale must be approved by the court before it can be completed.

In a non-judicial foreclosure the mortgagee is able to foreclose on and sell the property identified in the mortgage without filing a lawsuit, and without court supervision. This procedure is called a power of sale foreclosure, and it begins with a written notice of default and intent to sell the property. After which, the mortgagor will be sent a notice of non-judicial foreclosure which will include the date and location for public sale of the property. At this point, the owner-occupant can elect to participate in the mortgage foreclosure dispute resolution program discussed below.

One key difference between the two types of foreclose is the mortgagee’s ability to obtain a deficiency judgment. In a judicial foreclosure, the mortgagee has the right to ask the court for a deficiency judgment if the sale price of the property is not high enough to pay off the balance of the loan. However, in a non-judicial foreclosure a deficiency judgment is prohibited unless the debt is secured by other collateral.

Hawaii has recently amended its laws to give an owner-occupant of a residential property subject to a non-judicial foreclosure the right to convert the action to a judicial foreclosure. It is now required that when a foreclosure notice is served, it includes a statement which informs the owner-occupant that he has a right to convert to a judicial foreclosure where claims and defenses may be considered by a court of law.

In order to convert the foreclosure, the owner-occupant must file a petition stating his intention to convert to a judicial foreclosure within 30 days after the foreclosure notice is served upon him. Any other individual with an ownership interest in the property, including co-obligors and guarantors, must file a petition submitting themselves to the jurisdiction of the court within 45 days of the initial owner-occupant’s petition being filed. Lastly, the owner-occupant who first files the petition to convert has an affirmative duty to promptly notify the attorney who is handling the non-judicial foreclosure that a petition for conversion has been filed.  

MORTGAGE FORECLOSURE DISPUTE RESOLUTION PROGRAM

The recent amendments have now made the mortgage foreclosure dispute resolution program permanently available to the owner-occupant in a non-judicial foreclosure. Before being allowed to conduct the sale of an owner occupied residential property, the foreclosing mortgagee may be required to participate in the mortgage foreclosure dispute resolution program. When the owner-occupant chooses to participate in this program then the mortgagee must also take part prior to being allowed to foreclose. The aim of the program is to negotiate an agreement that “avoids foreclosure or mitigates the damages in cases where foreclosure is unavoidable.”

  
When a foreclosure notice is served it is required that the following information is included in at least 14 point font:          
  • The name and contact information of the mortgagor and mortgagee
  • The subject property address and legal description
  • The name and contact information of a person or entity authorized to negotiate a loan modification on behalf of the mortgagee
  • A statement that the mortgagor shall consult with an approved housing counselor or approved budget counselor at least 30 days prior to the first scheduled dispute resolution session
  • Contact information for all approved housing counselors
  • Contact information for all budget counselors
  • A statement that the mortgagor electing to participate in the program shall provide a certification, under penalty of perjury, that the mortgagor is the owner-occupant
  • A general description of information required to participate in the program
  • A statement that the owner-occupant must elect to participate in the program no later than 30 days after receiving the notice or the right will be waived.
Furthermore, within 10 days of the mortgagee’s filing of an intention to foreclose the Department of Commerce and Consumer Affairs is also required to notify the mortgagor of the right for the owner-occupant to participate in the mortgage foreclosure dispute resolution program.
  
If the owner-occupant chooses to participate in the program he must 1) return an election form to the department, 2) certify that he is the owner-occupant, and 3) pay a program fee of 300 dollars. If the owner-occupant does not choose to participate, the department shall notify the mortgagee within 10 day of receiving the election form which rejects the option for dispute resolution, or after the mortgagor’s 30 day right to elect participation expires. At this point, the mortgagee may proceed with foreclosure. 
  
When the owner-occupant does elect to participate in the program a case shall be opened within 20 days of receipt of the election form, and notification shall be sent to the parties. The notification shall include:
  • The date, time, and location of the dispute resolution session
  • An explanation of the dispute resolution process
  • Information about the program requirements
  • Consequences and penalties for non-compliance.
The dispute resolution session shall be scheduled for no less than 40 and no more than 70 days from the date the case opened, unless mutually agreed upon.
  
In the event that the parties cannot reach an agreement, a closing report shall be filed and the foreclosure process shall resume. If the parties are able to reach an agreement it shall be put into writing and signed by the parties and/or their authorized representatives. This agreement is considered a private contract and as such is enforceable in court, by either party, in the event of a breach.
  
In either event, the neutral party responsible for conducting the dispute resolution is required to file a closing report. This report shall indicate whether either party failed to comply with requirements of the dispute resolution program. Failure to comply for the owner-occupant shall include not providing required information or documents, and refusal to cooperate. Failure to comply for the mortgagee shall include participating without the authorization to negotiate a loan modification, failure to provide documents, refusal to cooperate, and refusal to pay program fees.
  
By implementing this program the state hopes to reduce foreclosures and simplify the process for all parties involved.
  
REQUIREMENTS FOR FORECLOSING ATTORNEYS
  
Hawaii, not unlike many other states, has been faced with the problem of numerous and widespread insufficiencies in foreclosure filings. The failure to review documents and establish legal standing prior to filing a judicial foreclosure action is a major contributor to this problem. In response, Hawaii has created a requirement for any attorney who files a complaint in a judicial foreclosure action.
  
The attorney is required to affirm, in writing and under penalty of perjury, that to the best of the attorney’s knowledge, information, and belief the allegations in the complaint are warranted by law and have evidentiary support. This requirement is similar to the one passed in New York which was intended to keep attorneys from “robo-signing” foreclosure documents, and flooding the courts with fraudulent claims. It is important to note, that this requirement applies only to judicial foreclosures.
  
HAWAII CONSUMER PROTECTION
  
Finally, in order to better protect homeowners the state of Hawaii has also amended Chapter 480E by adding two new sections. First, it created the office of consumer protection which is responsible for educating consumers about fraudulent activities that may be committed against homeowners who face property foreclosures, liens, and encumbrances. Second, it created criminal penalties for any person who violates section 480E-10. This section prohibits, among other things, a distressed property consult from misrepresenting or concealing material fact. Under the new amendment, violators shall be guilty of a felony and may be fined up to 10,000 dollars.   These new sections became effective on July 1, 2012.
  
About the Author

Nicole is Senior Counsel at Bankers Advisory.  She received her Juris Doctor from Roger Williams School of Law and is admitted to the Bar Associations of the State of New York and Massachusetts. She can be reached at nicole@bankersadvisory.com  

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Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.

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