The Second District Appellate Court of Illinois affirmed the lower court’s dismissal of Freedom Mortgage Corporation’s (Freedom) foreclosure based on Freedom’s failure to comply with federal HUD regulations codified at 24 C.F.R. § 203.604(b)-(d). Freedom Mortgage Corp. v. Olivera, et al., 2021 Il. App. (2d) 190462, Case No. 2-19-0462 (Ill.App.2 Dist. August 5, 2021). Section 203.604(b)-(d) required mortgagees to “make certain reasonable attempts to meet with and communicate” with defaulting mortgagors “before three monthly payments on the mortgage went unpaid and before filing for foreclosure…”i
Michael Olivera, J. Rivkah Olivera and the estate of W.D. Michael Baez (referred to collectively as “the Owners”) owned mortgaged property in South Elgin, Illinois (the Property). Freedom held the mortgage. The Owners failed to make their September 2011 mortgage payment and all subsequent payments, so in 2012 Freedom initiated foreclosure proceedings. The Owners moved to dismiss the action based on Freedom’s failure to communicate with the Owners and failure to attempt to conduct a face-to-face meeting prior to the Owners missing three mortgage payments, as required by § 203.604(b)-(d). The court agreed and dismissed the case in December 2016. Notably, the order of dismissal noted dismissal was without prejudice and that Freedom could refile after complying with “any conditions precedent as required under the HUD regulations.”ii
The following month Freedom sent the Owners a certified letter regarding repayment options and also sent a representative to visit the property “for the purpose of arranging a face-to-face meeting.” Freedom alleged it was able to speak with one of the owners, Rivkah Olivera (Rivkah), in person on January 7, 2017 and at that time “attempted to arrange a face-to-face meeting to discuss repayment options.” Freedom claimed Rivkah was “unresponsive or unwilling” to arrange a meeting. In May 2017 Freedom filed a new foreclosure against the Owners which was “virtually identical” to the prior foreclosure complaint. The Owners again moved to dismiss the complaint based on non-compliance with HUD regulations.
Specifically, the Owners asserted Freedom failed to comply with § 203.604(b)-(d) “prior to accelerating the alleged debt” and there was “no authority” for Freedom to comply retroactively. The Owners reasoned that Freedom’s attempts to comply with the HUD requirements in January 2017, five years after the September 2011 default, the “guidelines and purpose of the housing program [would be rendered]…meaningless.”iii The Owners argued that the timing of compliance, i.e., “within a three-month period prior to the default” was a material aspect of the face-to-face meeting requirement.
In response Freedom argued it was not required to comply with the HUD regulations as to Rivkah “because she filed for bankruptcyiv and was discharged in 2015” or Michael Olivera “because he no longer livedv at the subject property.”vi Freedom further argued its actions in 2017 (sending a certified letter and visiting the property) constituted substantial compliance with the regulations which satisfied the HUD requirements. Lastly, Freedom argued that “rigid enforcement of the temporal requirements would result in an unwarranted windfall to borrowers and an unduly harsh penalty to lenders.” Since Freedom could never comply with the temporal requirements “the mortgage [would be] forever unenforceable.”
The Owners rebutted that the bankruptcy and Michael’s residency were not relevant since “both circumstances occurred after the alleged default and neither circumstance existed when plaintiff was required to attempt compliance with the regulations.”vii The Owners also filed affidavits “disputing any contact with [Freedom] [in January 2017] or receipt of letters” and Rivkah specifically denied speaking with a representative from Freedom. Finally, the Owners argued Freedom’s windfall argument lacked merit because Freedom’s financial loss resulting from dismissal with prejudice would pale “in comparison to the financial harm [the Owners] have already suffered” defending the “frivolous” action for over six years. The Owners also pointed out any “loss” incurred by Freedom would have been caused by Freedom’s own malfeasance in failing to timely comply with the HUD requirements so allocation of the loss to Freedom was proper.
The lower court granted the Owners’ motion to dismiss concluding there did not “appear to be any way to cure…[Freedom’s failure to conduct the face-to-face meeting] where the complaint for foreclosure [was] based on the September 2011 default.” Freedom appealed that order of dismissal. On appeal the Second District agreed with the lower court noting that there was no dispute the Owners’ mortgage was insured by HUD and subject to HUD’s servicing requirements.viii The Court elaborated that in Illinois “the failure to comply with HUD’s mortgage servicing requirements is a complete defense to a mortgage foreclosure action.”
The Court agreed with the Owners that Freedom’s failure to comply with the temporal requirements of § 203.604(b) was a material breach of the HUD requirements.ix To support this finding the Court referred to language in Freedom’s January 2017 letter to the Owners which indicated in pertinent part: “…Borrowers who receive counseling early in the default process are much more likely to bring their mortgages current and possibly within a shorter period of time.”
The Court elaborated that dismissal for failure to strictly comply with the temporal requirements of § 203.604(b) “incentivizes lenders to follow the [HUD] rules or quickly cure any violation…” while only penalizing the lender to the extent of their noncompliance.x The Court explained that non-complying lenders would still able to foreclose and that missed payments would not be “forgiven,” per se; rather, the missed payments would reduce the amount of the borrowers’ personal liability in any deficiency judgment. For example, here, Freedom could file a new lawsuit based on a default date that occurred after Freedom complied with § 203.604. Although the Court reached a harsh result, § 203.604 clearly lays out the requirements for servicing a HUD loan and compliance can easily be achieved with implementation of some simple protocols.
i Olivera, at *1. References to and quotations from this case are to this cite until indicated otherwise.
ii Olivera, at *2. References to and quotations from this case are to this cite until indicated otherwise.
iii Olivera, at *3. References to and quotations from this case are to this cite until indicated otherwise.
iv Rivkah did not redeem the Property or reaffirm the debt in the bankruptcy proceedings. Olivera, at *6. Ultimately, the Court agreed with Freedom on this point finding Rivkah’s bankruptcy discharge “nullified the [mortgage] contract” and prevented Rivkah from benefitting from “the protections bestowed under that contract.” Olivera, at *6.
v The appellate Court rejected this argument since it was undisputed Michael Olivera lived at the property at the time of the default when the face-to-face meeting was supposed to occur. Olivera, at *6.
vi Olivera, at *2. References to and quotations from this case are to this cite until indicated otherwise.
vii Olivera, at *3. References to and quotations from this case are to this cite until indicated otherwise.
viii Olivera, at *5. References to and quotations from this case are to this cite until indicated otherwise.
ix Olivera, at *10. References to and quotations from this case are to this cite until indicated otherwise.
x Olivera, at *9. References to and quotations from this case are to this cite until indicated otherwise.