WASHINGTON — Sen. Sheldon Whitehouse pledged Wednesday to push legislation early next year that would let bankruptcy courts "compel good faith talks" between servicers and homeowners.
Whitehouse, a Rhode Island Democrat who is chairman of a Senate Judiciary subcommittee, said his proposal is based on a bankruptcy loss-mitigation court program in his state that forces servicers to at least give borrowers "the mere chance to speak directly with their mortgage company."
In testimony at a House Judiciary Committee hearing, Whitehouse said his bill would not give judges the power to reduce mortgage debt as a previous proposal rejected in the Senate would have done. Instead, just requiring communication can be enough to encourage alternatives to foreclosure, he said.
"I have proposed a legislative fix that would clarify that bankruptcy courts can run foreclosure loss mitigation programs and make the parties talk with each other before someone's home gets taken away. I hope this committee will help me to pass it into law early next year," Whitehouse told the panel. "Bankruptcy will not be the answer for every homeowner, but the loss mitigations can help homeowners … cut short a stalled application process and finally get an answer to their modification request."
Whitehouse has not formally introduced his proposal as a bill but said he hopes to have an opportunity to move it, perhaps as an amendment to other legislation, in the Senate next year.
In a brief interview outside the hearing room, Whitehouse said he was optimistic about his proposal's prospects despite a divided government next year in which the House will be controlled by Republicans.
"I think it should be pretty good," he said. "The principle here is that, before someone forecloses on a homeowner and takes their home away, they should have sat down with the homeowner first and tried to find out if there's a reasonable way, beneficial to both parties, to find a resolution. That does not seem like a very high challenge to expect our financial community to sign on to, so I'm hoping that we can get agreement on that."
Whitehouse said that he would also support bringing back the failed cramdown proposal from last year and further suggested that courts be given authority to clear title so that settlements short of foreclosure could proceed regardless of faulty documentation.
But there was little sign that Republicans were interested in Whitehouse's proposal. Instead, they focused on the failure of the administration's foreclosure programs, which they argued have squandered taxpayer dollars.
"Errors in the foreclosure process are inexcusable and undermine the rule of law and the due process rights of borrowers," said Rep. Lamar Smith, R-Texas, who will be chairman of the House Judiciary Committee next year. "However, there does not appear to be any evidence of fraud or intent to mislead the courts," he said. "Rather, our indications are that the foreclosure documentation problems are unacceptable but curable documentation defects."
