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Pennsylvania Supreme Court Rules that Exception for Foreclosure Proceedings is Not Unconscionable

Saturday, December, 22, 2012


Foreclosure arbitration often works in the best interest of the homeowner who is facing the imminent loss of his or her home, and usually provides additional time and resources for the homeowner to catch up on payments and stay in the home.  However, due to these same benefits, many lending companies are reluctant to use arbitration as a way to deal with foreclosure proceedings, and prefer using the judicial system to speed the process of foreclosure. 

In foreclosure arbitration, the homeowner and his or her legal representatives provide evidence and testimony to a neutral, third-party arbitrator.  Company and legal representatives from the lending institution or mortgage holder are also present, and present their “side” and evidence, as well.  The arbitrator then makes a legally binding decision regarding the outcome of the dispute.  Since many homeowners are losing their ability to pay for their homes due to job loss, poor health, or other extenuating circumstances, often these proceedings work in their favor to buy more time for them to pull their finances together in order to keep their homes.  

However, since this delays the foreclosure process for many lenders and mortgage holders, many will include a foreclosure exemption to the mandatory arbitration clauses included in many mortgage contracts.  While arbitration is the preferred course of dispute resolution for other matters relating to their lending business, foreclosure isn’t one of those matters.  Therefore, some homeowners are now questioning the foreclosure exemption and attempting to by-pass it through claims that it is unconscionable.

The Pennsylvania Supreme Court recently ruled on a case involving the question of the unconscionability of a foreclosure exemption in an arbitration agreement.  The ruling came on the heels of a case in which a struggling, low-income homeowner facing foreclosure attempted to sue her sub-prime mortgage lender, Option One, in federal court for fraud, breach of contract and violation of the Truth in Lending Act.  She did so under the appeal that the foreclosure exemption in the arbitration clause within her mortgage contract was unconscionable.  However, the court did not rule in her favor, forcing her back into arbitration. 

This decision reflects the one made by the New Jersey Supreme Court, in which it was determined that an arbitration exception for foreclosure proceedings does not make the arbitration agreement unconscionable, due to the fact that “the foreclosure of mortgages is a uniquely judicial process.” While foreclosure arbitration is an action some lending companies are willing to take, it is within their rights to exempt foreclosure in the arbitration clauses of their mortgage contracts.