Banks sue Worcester over foreclosure mediation regs

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Seven banks that do business in Central Massachusetts are asking a federal court to halt efforts by city officials in Worcester and Lynn to impose a foreclosure-avoidance program.

The banks filed suit, Monday asking the U.S. District Court to declare the ordinances invalid and unconstitutional and forbid the cities from enforcing the rules until a similar case in Springfield is decided.

“The ordinances include provisions which conflict with existing state laws, improperly impose a tax on the plaintiffs, and/or substantially impair the rights of the plaintiffs,” Springfield-based lawyer Tani Sapirstein wrote in a 15-page complaint.

The banks involved in the suit are: Hudson-based Avidia Bank; Country Bank for Savings, which has six Central Massachusetts branches; Eastern Bank, which has a branch in Natick; Oxford-based Hometown Bank; North Brookfield Savings Bank; Fitchburg-based Rollstone Bank & Trust; and Southbridge Savings Bank.

In December, Worcester became the fourth Massachusetts community to require mortgage lenders to negotiate with homeowners through a mediated process in an effort to avoid foreclosures.

Under the program, each lender must receive a mediation certificate from a neutral arbitrator – which indicates it has conducted good-faith negotiations – before it’s allowed to foreclose.

Worcester also passed regulations several years ago requiring banks to post a $5,000 bond on properties under foreclosure to ensure the continued maintenance of the property throughout the foreclosure process.

The banks argue that Worcester’s mandatory mediation provision is preempted by state foreclosure statues, which don’t require such a program. They also contend the bond-posting requirement is like a tax, which violates laws saying that all new taxes must be approved by the state Legislature.

Mayor Joseph Petty argued the provisions were necessary since Worcester County leads the state in foreclosure petitions through the first five months of 2014.

“This is a problem that may have left the headlines, but has not left our community,” Petty said in a statement. “The City of Worcester is committed to taking whatever steps necessary to protect its citizens.”

City Manager Edward Augustus said the suit wasn’t unexpected given what has transpired in Springfield.

A suit filed by six Western Massachusetts banks – including Country Bank – against Springfield over its foreclosure rules is currently before the Massachusetts Supreme Judicial Court (SJC). The Federal Court of Appeals for the First Circuit has stayed implementation of Springfield’s ordinances until the SJC issues a ruling.

As of January, 49 financial institutions had active foreclosure petitions against 716 Worcester properties, according to the city’s treasurer’s office. None of the banks involved in the lawsuit had more than nine petitions in the city.

Updated at 4:50 p.m. with comments from Worcester city officials