• In Search of a Defense to Foreclosure: The Notice of Default, and HUD’s Face-to Face Meeting Requirement
  • February 12, 2013 | Author: Larry R. Rothenberg
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • An Ohio Court of Appeals decision issued on February 6, 2013, in BAC Home Loans Servicing, LP. v. Taylor is a good reminder that if a mortgage holder fails to comply with any prerequisite contained in the note or mortgage, or required by applicable law, that failure can be used by the mortgagor as a defense in a foreclosure action. The most common example is the notice of default, if required by statute or by contract. A less well-known prerequisite, which was the subject of the Taylor case, is HUD's regulation requiring a face-to-face meeting, or a reasonable effort to arrange such a meeting with the mortgagor.

    The Notice of Default
    Some states, such as Pennsylvania, have a statutory requirement for a special notice to be given to the borrower in advance of a foreclosure. Other states, such as Ohio, which do not have such a statutory requirement, nevertheless require the mortgage holder to fulfill any condition precedent contained in its note or mortgage. Many mortgage forms, such as the FNMA/FHLMC uniform instrument, contain a requirement that the mortgage holder give notice to the borrower prior to acceleration of the debt, specifying: (a) the default, (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to the borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by the mortgage, foreclosure by judicial proceeding and sale of the property. If the mortgage contains this condition precedent and the mortgage holder fails to fulfill it, the borrower may raise that failure as a defense and can prevail in the foreclosure case.

    In a state like Ohio, where there is no statutory requirement for sending such a notice, the mortgage holder only needs to send the notice if it is required by the provisions of the note or mortgage. If the notice is not required the mortgage holder may, nevertheless, choose to provide a notice but the lack of a notice would not be an available defense to the borrower. A word of caution is that even if the notice is not required but one is sent anyway, the mortgage holder should not take any action inconsistent with the information being provided in the notice.

    HUD's Requirement for a Face-to Face Meeting
    HUD's regulation contained in Title 24 Section 203.604 (b) of the Code of Federal Regulations, states: "The mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 30 days before foreclosure is commenced.”

    Are there any Exceptions to the HUD’s Requirement?
    Section 203.604(c) of HUD's regulation provides the following exceptions to the requirement for a face-to-face meeting:

    1. The mortgagor does not reside in the mortgaged property,

    2. The mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either,

    3. The mortgagor has clearly indicated that he will not cooperate in the interview,

    4. A repayment plan consistent with the mortgagor's circumstances is entered into to bring the mortgagor's account current thus making a meeting unnecessary, and payments thereunder are current, or

    5. A reasonable effort to arrange a meeting is unsuccessful.

    What Qualifies as a Reasonable Effort to Arrange a Meeting?
    Section 203.604 (d) of the regulation defines a reasonable effort to arrange a meeting as including a minimum of both of the following:

    1. A letter sent by certified mail and

    2. At least one trip to see the mortgagor at the mortgaged property, unless the mortgaged property is more than 200 miles from the mortgagee, its servicer, or a branch office of either, or it is known that the mortgagor is not residing in the mortgaged property.

    Does the HUD Regulation Contain any Additional Requirements?
    Section 203.604(e) contains the following additional requirements for mortgages insured pursuant to section 248 of the National Housing Act:

    1. A reasonable effort to arrange such a meeting shall include at least one trip to see the mortgagor at the mortgaged property, notwithstanding that such property is more than 200 miles from the mortgagee, its servicer, or a branch office of either. In addition, the mortgagee must document that it has made at least one telephone call to the mortgagor for the purpose of trying to arrange a face-to-face interview. The mortgagee may appoint an agent to perform its responsibilities under this paragraph.

    2. The mortgagee must also:

    (i) Inform the mortgagor that HUD will make information regarding the status and payment history of the mortgagor's loan available to local credit bureaus and prospective creditors;
    (ii) Inform the mortgagor of other available assistance, if any;
    (iii) Inform the mortgagor of the names and addresses of HUD officials to whom further communications may be addressed.

    Ohio Cases applying the HUD Regulations
    In Ohio, the HUD requirement was applied in a 2003 Court of Appeals decision in Washington Mut. Bank v. Mahaffey, and reemphasized in the Taylor case. In both cases, the mortgagors expressly raised the mortgage holders’ failures to make a reasonable effort to arrange a face-to-face interview with the mortgagor, and the courts of appeals reversed the trial courts’ orders granting the mortgage holders' motions for summary judgment.

    In the Mahaffey case, the mortgage holder argued that the HUD regulation requires that the mortgage holder make a reasonable effort to arrange a meeting before three full monthly installments due on the mortgage are unpaid, and that because the three-month period has passed, the requirement became moot. The court was not persuaded, as it stated, "If the obligation to have, or to arrange, a face-to-face interview can be avoided simply by waiting three months before bringing a foreclosure action, the regulation has no practical force."

    At least the court did not hold that the failure to make a reasonable effort to arrange a face-to-face interview within the first three months of default would result in a permanent loss of the entitlement to foreclose, as the court stated, "Conversely, if a lender's failure to either have a face-to-face interview, or to make a reasonable effort to arrange the interview, within the first three months of default is deemed to preclude the lender from ever bringing a foreclosure action, the regulation would have to much force. A commonsense construction of the regulation is that it requires, subject to the exceptions contained in division (c) (2), that a lender either have a face-to-face interview or make a reasonable effort to arrange the interview before bringing a foreclosure action, and that the mortgagee is urged, by the regulation, to have the interview, or to make a reasonable effort to arrange the interview, within the three-month default period.”

    In the Taylor case, the HUD regulations were incorporated into the note and therefore, were deemed part of the contract. The note stated: "[i] Borrower defaults by failing to pay in full any monthly payment, then Lender may, except as limited by regulations of the Secretary in the case of payment defaults, require immediate payment in full of the principal balance remaining due and all accrued interest..." The mortgage contained similar provisions, including "[i]n many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary."

    Based on this wording contained in the note and the mortgage, the court held that the mortgage holder and the mortgagor had agreed in the contract that the mortgagee’s rights to accelerate and foreclose were limited by the applicable HUD regulations. Therefore, the court rejected the mortgage holder’s argument that even if HUD's regulation is an obligation that the mortgage holder has to HUD, it should not give rise to a defense for the borrower.

    Although the court in the Taylor case, did not take a position as to whether a failure by the mortgage holder to adhere to the HUD’s regulations may be used by the borrower as a private right of action against the government or a loan servicer, the court cited a recent federal court decision (Wells Fargo Bank, N.A. v. Favino), in explaining that that failure may be used defensively by the borrower as an affirmative defense to foreclosure. In addition, the court held that even though the parties had engaged in unsuccessful mediation while the foreclosure was pending, it did not excuse the failure to make a reasonable effort to arrange for a meeting within three months after the loan had become delinquent, as required by the HUD regulation.

    The court also found it unnecessary for it to determine whether every federally insured loan is subject to this HUD regulation, because the contract between the parties to the case expressly incorporated HUD's regulation.

    Conclusion
    More than ever, borrowers’ attorneys, in search of any possible defense that can be raised in the foreclosure case, are using a fine-toothed comb to investigate all details contained in the loan documents and the loan servicing records. In order to ensure a clean case, loan servicers should proactively review and fulfill any conditions that are required prior to acceleration of the debt or foreclosure.