Update: On September 27 2018, the Supreme Court of Ohio dismissed this appeal as improvidently accepted.  Read more about that here.

Read an analysis of the oral argument here.

On April 24, 2018, the Supreme Court of Ohio will hear oral argument in Wells Fargo Bank, N.A. v. A. Christopher M. Burd f.k.a. Christopher M. Burd et al., 2017-0279.  The issue in this case is whether a lender’s failure to satisfy the timing requirements of 24 C.F.R. 203.604, which requires it to have a face-to-face meeting with a delinquent borrower or make reasonable efforts to do so before “three full monthly installments” are unpaid, bars an action to foreclose the mortgage if the lender has the meeting after the three month time period, but prior to filing the foreclosure action.  Justices O’Donnell and DeGenaro have recused themselves from the case.  Sitting for them respectively are Judge Robin N. Piper III of the Twelfth District Court of Appeals and Judge Charles Miller of the First District Court of Appeals.

Case Background

In September 2006, Appellee A. Christopher Burd obtained an FHA insured mortgage loan from Centennial Home Mortgage to buy a house in Columbus. He signed a note secured by the mortgage, and Centennial later endorsed that note and assigned the mortgage to Appellant Wells Fargo Bank. The mortgage contained a provision stating that foreclosure on such a loan is not authorized unless also authorized by Housing and Urban Development (“HUD”) mandatory regulations governing FHA loans. Both the note and the mortgage contain a statement that the lender’s right to foreclose is conditioned on compliance with the HUD regulations.

Burd missed payments under the loan, and on April 22, 2009, Wells Fargo filed its first complaint against Burd, seeking judgment on the note and foreclosure on the mortgage. On December 1, 2010, the parties entered a loan modification agreement, and Wells Fargo dismissed the initial complaint.

On February 10, 2012, Wells Fargo filed a second complaint, seeking  judgment on the note and foreclosure on the mortgage, and interest from September 1, 2011. As part of the second lawsuit, on August 1, 2012, the parties participated in court-sponsored mediation but were unable to resolve the case. Franklin County Common Pleas Court Judge Colleen O’Donnell (daughter of Justice O’Donnell, which is why he recused himself from the case) then granted summary judgment in favor of Burd on the second foreclosure claim, holding Wells Fargo had failed to comply with 24 C.F.R. 203.604 because it had not conducted or attempted to conduct a face-to-face meeting with Burd within three months of Burd’s first missed payment.

On August 18, 2014, Wells Fargo filed a third complaint, again seeking judgment on the note, foreclosure on the mortgage, and interest from September 1, 2011. Wells Fargo argued that the mediation from the second litigation counted as the “face-to-face” meeting for purposes of 24 C.F.R. 203.604, despite the fact that the meeting fell outside the three month requirement of the statute. Judge O’Donnell again granted summary judgment to Burd, holding the failure of Wells Fargo to timely comply with the face-to-face meeting requirement of the regulation resulted in a complete bar to recovery under the note and the mortgage. Wells Fargo appealed.

Court of Appeals Decision

The Tenth Appellate District unanimously affirmed the decision of the trial court as to the mortgage, but not the note, on the third foreclosure complaint, both in an original decision, and in a  decision upon reconsideration, finding that the mediation had taken place after the second foreclosure action had been filed, was based on the same default as alleged in the second complaint, and failed to comply with the face-to-face meeting requirement in the regulation (Both the trial court and the appeals court assumed, without deciding, that the court-ordered mediation could count as a face-to-face meeting). The appeals court held that, in essence, Wells Fargo attempted to revive the second complaint in the third one by using the unsuccessful mediation as compliance with 24 C.F.R. 203.604 and, in doing so failed to comply with “the letter or the spirit of the regulation.” The appeals court noted that, because the third case arose from the same default date as the second, Burd had no opportunity to avoid foreclosure, which is the main purpose of the HUD face-to-face meeting requirement.

Votes to Accept the Case

Yes: Justices O’Neill, Kennedy, French, and DeWine

No: Chief Justice O’Connor and Justice Fischer

Not Participating: Justice O’Donnell.

Key Precedent

24 C.F.R. 203.500 (“It is the intent of the Department that no mortgagee shall commence foreclosure or acquire title to a property until the requirements of this subpart have been followed.”)

24 C.F.R. 203.604(b) (“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…”)

12 U.S.C. 1715 u(a) (Loss Mitigation)(“Upon default or imminent default…mortgagees shall engage in loss  mitigation actions for the purpose of providing an alternative to foreclosure…as provided in regulations by the Secretary.”)

Wash. Mut. Bank v. Mahaffey, 2003-Ohio-4422 (2^nd Dist.) (lender’s failure to meet the timelines in 24 CFR 203.604 mandates dismissal of foreclosure without prejudice until the lender complies.)

Freedom Mtge. Corp. v. Vitale, 2014-Ohio-1549 (5^th Dist.)(Lender permitted to proceed with foreclosure despite not attempting to hold face-to-face meeting until two years after first missed payment, since lender held the meeting prior to foreclosure.)

(7^th Dist.) (requirement of face to face meeting is not mandatory, but is merely “aspirational.”)

Bank of Am. v. Bobovyik 2014-Ohio-5499 (7^th Dist.) (Timing of the letter offering the face-to-face meeting in relation to the timing of the notice of intent to accelerate is immaterial, since Bank of America attempted to hold the meeting prior to filing for foreclosure and therefore complied with the condition precedent to foreclosure. Thus, the meeting itself, but not the timing requirement, is a condition precedent to foreclosure.)

Wells Fargo Bank v. Isaacs, 2010-Ohio-5811 (1^st Dist.); Washington Mutual Bank v. Mahaffy, 2003-Ohio-4422 (2^nd Dist.) Huntington Natl. Bank v. Filippi, 2015-Ohio-3096, (3d Dist.) (all holding borrower can raise non-compliance with FHA regulations as a means of preventing judgment of foreclosure.)

Wells Fargo Bank v. Awadallah, 2015-Ohio-3753 (9^th Dist.) (lender must satisfy both requirements of “reasonable effort” to meet face-to-face, both the invitation by mail and sending person to the borrower’s house.)

Lakeview Loan Servicing, LLC v. Dancy, 2016-Ohio-7106 (9^th Dist.) (Ohio courts require specific, not general, compliance with HUD regulations; held a lender cannot rely on notice that did not meet HUD specifications.)

Wells Fargo’s Argument

Noncompliance with 24 C.F.R. 203.604 does not bar foreclosure so long as the mortgagee meets with the borrower some time prior to initiating a foreclosure action. The obligation to hold the meeting or attempt to hold the meeting is mandatory, but the timing is “aspirational,” as held by the Second, Fifth, and Seventh Districts. Here, because Wells Fargo complied with the face-to-face requirement prior to filing the third foreclosure action, it should be allowed to proceed with mortgage foreclosure.

The Tenth District rewrote 24 C.F.R. 203.604 by reading into the regulation penalties for non-compliance with the timeline (forfeiture of the foreclosure action) which are not contained in the regulation itself. Although the regulation at issue requires a face-to-face meeting, it, unlike other portions of the regulation, is silent on the penalty for failing to meet the specified timeline. In keeping with other portions of the regulatory scheme, the penalty for non-compliance with the timeline is that the lender must cure the error (and hold the meeting) before foreclosure, and may suffer a monetary penalty, to be assessed by HUD. This reading is consistent with the common law, which holds that failure to comply with a condition precedent is grounds for dismissal without prejudice, and allows for the offending party to re-file once the condition has been satisfied. If HUD intended a forfeiture of the foreclosure action, a result abhorred at common law, it would have said so.

Burd’s “interest curtailment” theory is not supported by the regulations, as it is not contained in the law or in case law addressing the regulations. No court has held that if a lender fails to have a meeting within 90 days, it must forfeit all interest. Further, under other sections of the regulations, a mortgagee is only required to “self-curtail” in applying for insurance reimbursement from HUD, after the occurrence of certain events. This indicates that HUD would specifically require curtailment in this situation, if that was its intent. Finally, HUD already has regulations which detail the express consequence for a mortgagee’s failure to comply with the timing provisions of 24 C.F.R. 203.604, and these are potential administrative penalties.

The “interest curtailment” argument also ignores Burd’s liability under the note, as “curtailing interest” would excuse Burd’s liability. If the court were to adopt Burd’s interest curtailment theory, a mortgagee would be precluded from collecting monies under a note for not holding a face-to-face meeting, even though nothing in 24 C.F.R. 203.604 (or any other regulation) provides for that result.

Finally, as to Burd’s contention that the mediation meeting was “not proper,” he did not raise the issue below and this court should not address a question not ruled on below. Furthermore, both the lower court and the appeals court assumed without deciding that the face-to-face mediation meeting met the regulatory requirement.

Burd’s Argument

24 C.F.R.203.604’s three month timing regulation is mandatory, as evidenced by the directive “must,” and Wells Fargo failed to comply with it by failing to hold or make a reasonable effort to hold a face-to-face meeting with Burd within three months of Burd’s first missed payment. Wells Fargo’s interpretation of the timeline as “aspirational” strips the clause of meaning and asks the court to rewrite the unambiguous, mandatory provision. The unambiguous consequence of missing the three-month deadline is that the lender cannot initiate the foreclosure action.

Further, Wells Fargo’s interpretation is inconsistent with the meaning and spirit of the HUD regulations, which are designed to benefit both homeowners and lenders, because its interpretation would give lenders the benefits of the risk sharing insurance plan without requiring them to abide by the features that differentiate the program from traditional mortgages.

Contrary to Wells Fargo’s interpretation, just because the three month requirement is mandatory, does not mean Wells Fargo will be forever barred from foreclosing on the mortgage. Instead, Wells Fargo can bring the case within the timeline by declaring the loan current or curtailing interest, holding the meeting, and then suing for foreclosure.

Wells Fargo failed to hold a face-to-face meeting with Burd at any point. The mediation session participated in as part of the second litigation does not count for purposes of the regulation, which is designed to allow the borrower to evaluate the options the borrower has in order to try to avoid foreclosure. In the litigation context, after the suit has progressed and parties are required to mediate, that purpose becomes impossible to achieve.

Wells Fargo’s Proposed  Proposition of Law No. 1

In interpreting an administrative regulation, a court should adopt an interpretation that is consistent with the overall regulatory scheme in which the individual regulation is included.

Wells Fargo’s Proposed  Proposition of Law No. 2

A mortgagee’s failure to comply with the timelines provided in 24 C.F.R. § 203.604 does not bar an action to foreclose a mortgage insured by the Federal Housing Administration as long as the mortgagee holds or makes a reasonable effort to hold a face-to-face meeting prior to initiating foreclosure.

Amici in Support of Burd

The following organizations jointly filed an amicus brief in support of Burd: Legal Aid Society of Southwest Ohio, LLC, The Legal Aid Society of Cleveland, Advocates for Basic Legal Equality, Inc. Community Legal Aid Services, Inc. and Pro Seniors, Inc.

The organizations that contributed to this amicus curiae provide low-income clients with legal services and work to secure justice and resolve problems for the low income and vulnerable. They argue that the HUD/FHA (the FHA is now a subdivision of HUD) regulatory framework is designed to get at early loss mitigation and is aimed at minimizing defaults and lenders’ claims on the insurance fund. The brief sets forth in detail the HUD/FHA regulatory scheme.

The amici argue that the regulation’s use of the word “must” applies both to the face-to-face meeting itself and to the three month deadline to have the meeting, and calling the timeline “aspirational” contradicts basic statutory interpretation, as “aspirational” applies only to terms with no clear meaning.  They argue that Wells Fargo was noncompliant with the mandatory deadline of the regulation, and that the court should affirm the decision of the Tenth District. Further, they argue that the rulings below do not preclude Wells Fargo from ever bringing a foreclosure action. Wells Fargo can cure the noncompliance through interest curtailment, by resetting the loan before three missed payments and conducting the meeting prior to filing another action.

The amici submit this proposed proposition of law:

An FHA-insured lender cannot initiate foreclosure without complying with the plain language of 24 C.F.R. § 203.604(b) and that includes the three-month deadline contained within the regulation.

Student Contributor: Kristen Elia