Washington homeowners will have more opportunities to avoid foreclosure under the new Foreclosure Fairness Act (SHB 1362). The law aims to curb residential foreclosures.

Effective July 22, 2011, under the new law a lender must make additional efforts to contact the homeowner before issuing a notice of default, which is the technical “start” of the foreclosure process. These new lender contact requirements give the homeowner more time to negotiate foreclosure avoidance options with the lender. The homeowner may also obtain a “housing counselor” or attorney to help with the negotiations.

The “housing counselor,” a new feature under the law, is an individual specially approved by the Department of Housing and Urban Development or the Washington Housing Finance Commission who can interact with the lender on behalf of the homeowner to find ways to avoid foreclosure, such as a loan modification, short sale, deed in lieu, or other workout arrangement.

Under certain circumstances, the housing counselor (or attorney) may also make a formal referral for mandated mediation with the lender during which a third-party mediator evaluates the available options for avoiding foreclosure, looking at the potential for success based on factors such as the homeowner’s financial situation, the value of the home, and the loan terms. The lender must participate in good faith or face a violation of the Washington Consumer Protection Act under RCW 19.86. Mediation must be concluded within 45 days of referral, and a notice of trustee’s sale may not be recorded until conclusion of the mediation, thus giving a homeowner additional time to avoid foreclosure.

Another new feature of the Act is establishment of an account to pay for the services of housing counselors. The account, administered by the Washington Department of Commerce, will be funded by a $250 “fee” to be paid by lenders for each notice of default issued to homeowners. Lenders must account for notices of default on a quarterly basis and remit the fees to the Department of Commerce. An interesting unanswered question is whether lenders may add the $250 fee to the loan balance owed by homeowners as a cost of enforcing the terms of the loan.