Loan Dispute Mediation

December 2nd, 2011 Posted in Mediation

Article by Joffrey Long

While opinions differ on the percentage of loan workouts that wind up in default, there’s no question that a large number of them do. Foreclosure often leads to disputes, which lead us to mediation. Mediation, which should not be confused with arbitration, (FN1) is simply a formalized attempt by the parties to resolve differences, with the assistance of a skilled third party negotiator. Mediation can be brought about by a contractual agreement (that originated prior to the dispute) or by mutual agreement when a dispute arises.

First, why mediation? There are some key benefits aside from the obvious avoidance ofcostly and time consuming litigation. Mediation is privileged by statute in California. Therefore, the parties can speak freely in mediation, without risk that their statements can be held against them in potential later litigation.

You may not be able to go to trial in some courts before there has been a mediation or other alternative dispute resolution (ADR) procedure. More often than not, the ADR process doesn’t occur until the eve of trial. A better strategy is to take the initiative and have mediation or other ADR procedure at the beginning of the conflict, rather than on the eve of a trial.To maximize your ability to avail yourself of mediation, consider placing a clause in your loan agreements that requires the parties to mediate in the event of a dispute. Some pre-printed forms in related industries contain mediation clauses (FN2).

With an existing loan where there is no provision for mandatory mediation, it will only occur through a mutual agreement of the parties. Consider having a discussion with the borrower or borrower’s counsel suggesting mediation, and pointing out that a court may require mediation as a condition of ultimately proceeding to trial. The cost of mediation is customarily split between the parties. Where the borrower is unable or unwilling to advance their share of the mediation cost, consider advancing their share of the cost and adding it to the loan balance, or simply paying their share of the cost, in the interest of avoiding higher litigation costs later on.

As with clearly defined “protocol” arrangements, mediation may benefit you by avoiding or reducing the high cost of litigation, and in actually resolving certain problems or differences between you and the borrower. A huge additional benefit in today’s pro-borrower, pro-modification, anti-lender environment, exists in your showing that you went to further efforts to attempt to help the borrower retain their property.

FN1: Mediation is an formalized attempt to resolve disputes, in the presence of a trained negotiater/mediator. There are no resolutions or decisions imposed by third parties, as in arbitration proceedings. With arbitration, the parties are bound to accept the findings of the arbitrator.

FN2: The California Association of Realtor’s (CAR) pre-printed purchase contract form contains a mediation clause..

Joffrey Long provides mortgage lending and real estate advice and insight for homebuyers, real estate investors and investors in mortgage loans. He’s a mortgage lender and real estate investor himself, and has been in the industry for 34 years. He’s also called upon to testify as an expert witness in mortgage related litigation matters.

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