JURISDICTIONAL INCONSISTENCY IN APPLICATION OF FHA’s FACE-TO-FACE RULE

Despite their national application, servicing regulations regarding FHA loans are not applied consistently among all State jurisdictions. Notably, in the event of a mortgagor’s payment default, HUD regulations require mortgagees of HUD-insured mortgages to “have a face-to-face interview the mortgagor or make a reasonable effort to arrange such a meeting, before three full monthly installments are unpaid.” 24 C.F.R. § 203.604(b).

Differing interpretations of the standard for the foregoing rule can lead to dramatically different enforcement outcomes. A recent case from the Second District Appellate Court of Illinois brings a notable example of a strict compliance standard of the rule.

On August 5, 2021, the Second District Appellate Court of Illinois affirmed a lower court’s dismissal of a Lender’s second foreclosure action based on its failure to comply with the “face-to-face” meeting regulation.  The borrowers in the case, Freedom Mortgage Corp. v. Olivera, 2021 Il. App. (2d) 190462, were alleged to have failed to make their monthly mortgage payments on a HUD-insured mortgage beginning in September 2011. After the mortgagee commenced foreclosure in 2012, the borrowers moved to dismiss the case, arguing that their lender had failed to “make certain reasonable attempts to meet with and communicate with [them] in the time frame required by the federal regulations.” The defendants further argued that no exception to the regulation applied. The trial court agreed, but “gave plaintiff leave to refile, stating that the dismissal was ‘without prejudice for the purpose of the plaintiff complying with any conditions precedent as required under the HUD regulations.’”

Shortly after dismissal, the Lender sent the Borrowers 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” in accordance with the HUD regulations.   Thereafter, the Lender commenced a new foreclosure action in 2017, using the same default date of September 2011 as the due and owing date in its Complaint to Foreclose.  In response to the new foreclosure complaint, the Borrowers alleged that the Lender had still not complied with the face-to-face requirements because compliance could only occur “before three full monthly installments due on the mortgage are unpaid.” The trial court agreed and dismissed the lender’s case, this time with prejudice. The Court ultimately held that the Lender, regardless of the good faith steps it took, could never comply with the Face-to-Face requirements once the time to do so had lapsed and added that failure to comply with the temporal requirements of §203.604(b) was a material breach of the HUD requirements.

Although the text of the regulation applies uniformly throughout the United States, courts have not uniformly found that the regulation requires strict compliance. For example, a New York Court rejected strict interpretation of the HUD regulations, stating that HUD has not gone so far as to clearly and affirmatively prohibit a lender from commencing a foreclosure action where there has not been full and literal compliance with each and every pre-foreclosure requirement set forth in Part 203. US Bank Nat. Ass’n v McMullin, 55 Misc 3d 1053, 1062 [Sup Ct 2017]. Similarly, an Ohio Court opined that the time-frame described in CFR 203.604 is “aspirational, not mandatory.” (Emphasis added.) Wilmington Savings Fund Soc., FSB v. West, 5th Dist. No. 18CA20, 2019-Ohio-1249.

Once the window for regulatory compliance has passed, servicers may find it challenging to remedy the problem without significant adjustment in jurisdictions where the regulations are interpreted to require strict compliance. The Illinois court agreed with the lender’s suggestion that it could forgive enough delinquent payments to bring the loan less than three months past due and then attempt to comply with the regulation. In that case, the lender would need to forgive nine years’ worth of missed payments, given the 2012 default. The court rejected the lender’s argument that the “solution” is too harsh, finding that it would be “consistent with the purpose of the regulations; the requirement to meet with the borrowers before three monthly installments due on the mortgage go unpaid is to try to quickly fashion an arrangement or repayment plan that can avoid a default and, ultimately, a foreclosure.”

Despite their best efforts to comply with all applicable regulations, servicers may nevertheless occasionally discover that a loan within their servicing portfolio does not meet the strict compliance standard of the FHA Face-to-Face rule. In that event, it is recommended that the matter be reviewed with retained counsel to determine whether the jurisdiction requires strict compliance vs. substantial compliance.

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