Update: On September 27 2018, the Supreme Court of Ohio dismissed this appeal as improvidently accepted. Read more about that here.
“It seems so messy to be fighting about whether a mediation in a prior iteration of the complaint counts.”
Justice DeWine to counsel for Wells Fargo
“Where does it clearly say that you can’t do a foreclosure if you haven’t had a face-to-face?”
Judge Piper (sitting for Justice O’Donnell) to counsel for the homeowner.
On April 24, 2018, the Supreme Court of Ohio heard 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. 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. The trial court 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. The trial judge 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. Wells Fargo appealed the decision as to the mortgage. There was no cross-appeal over the note.
Read the oral argument preview of the case here.
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…”)
24 CRF 203.606 Pre Foreclosure Review
(a) “Before initiating foreclosure, the mortgagee must ensure that all servicing requirements of this subpart have been met. The mortgagee may not commence foreclosure for a monetary default unless at least three full monthly installments due under the mortgage are unpaid after application of any partial payments that may have been accepted but not yet applied to the mortgage account. In addition, prior to initiating any action required by law to foreclose the mortgage, the mortgagee shall notify the mortgagor in a format prescribed by the Secretary that the mortgagor is in default and the mortgagee intends to foreclose unless the mortgagor cures the default.”
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 (2nd 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 (5th 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.)
PNC Mtge.v. Garland 2014-Ohio-1173, 2014-Ohio-1173 (7th Dist.) (requirement of face to face meeting is not mandatory, but is merely “aspirational.”)
Bank of Am. v. Bobovyik 2014-Ohio-5499 (7th 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 (1st Dist.); Washington Mutual Bank v. Mahaffy, 2003-Ohio-4422 (2nd 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 (9th Dist.) (lender must satisfy both requirements of “reasonable effort” to meet face-to-face, both the invitation by mail and by sending person to the borrower’s house.)
Lakeview Loan Servicing, LLC v. Dancy, 2016-Ohio-7106 (9th Dist.) (Ohio courts require specific, not general, compliance with HUD regulations; held a lender cannot rely on notice that did not meet HUD specifications.)
At Oral Argument
Arguing Counsel
Scott A. King, Thompson Hine, Miamisburg, for Appellant Wells Fargo
Scott E. Torguson, The Legal Aid Society of Columbus, for Appellee A. Christopher Burd
Wells Fargo’s Argument
This case presents the question of what the consequences are for a lender under an FHA-insured loan who fails to meet the timelines within HUD regulations. There are three possible answers. The first is that if the lender fails to comply with the timelines, its claim for foreclosure is barred. That is what the lower courts held, and that is incorrect. The second answer, which is suggested by Mr. Burd, is that if the lender fails to comply with the timelines, the lender is to self-curtail interest, reinstate the loan, and start the process over. While that is a better solution that the first, it is also not the proper solution. The third answer, that which is proposed by Wells Fargo, is that the lender is permitted to proceed with foreclosure, as long as the lender complies with the substantive requirements of the regulations before initiating foreclosure.
Regulation 604 (for short) says that the face-to-face meeting is to take place before the loan is three months in default, but doesn’t specify the consequences of what happens if the lender doesn’t meet that 91 day timeline. This regulation has been in existence for more than 40 years, but does not specify what happens in the event of noncompliance.
The lower courts in this case are the first two courts that have ever held that a lender that actually had a face-to-face meeting was precluded from foreclosure. But in order for a lender to apply for the insurance benefits that are at the heart of this program allowing low income families to become homeowners, HUD requires the lender to foreclose and convey title. So what the lower courts did, by precluding foreclosure, even on the assumption that the face-to-face meeting did take place, has effectively denied Wells Fargo the ability to apply for insurance benefits, which is the opposite of what the regulations provide. There are still teeth in these regulations, because they provide for substantial administrative penalties if the timelines are not met.
Self-curtailment of interest is not the proper solution either. There is no regulation that requires a lender to self-curtail interest for failing to have a face-to-face meeting. It still results in a partial forfeiture. And finally, self-curtailment of interest affects the balance due on the note. This proposed solution amounts to substantial judicial re-writing of the regulations.
Wells Fargo’s position is that as long as the lender complies with the regulations prior to the commencement of the foreclosure, the failure to comply with the timelines is a matter for an administrative penalty. This position is consistent with the regulations, while the others are not.
This case was dismissed because of the failure to hold the face-to-face meeting. Filing a complaint on a new default would result in the self-curtailment of interest, which is not provided for in the regulations. Wells Fargo complied with the substance of the regulations prior to the initiation of this action. It complied with the regulations, and therefore requests the court to reverse and remand with instructions to enter judgement on the foreclosure claim.
Burd’s Argument
HUD regulations require that the bank have a meeting within a certain time period prior to foreclosure. There is no question that did not happen here. It is not even in dispute. And it was central to the appellate decision.
The FHA started a loan program to make loans available to low income families. Lenders were induced to make these loans by the promise of federal insurance. If the loan defaults, the federal government must reimburse the lender, so these are low risk loans for lenders. Wells Fargo chose to be part of this program, knowing what the rules are. In exchange for this insurance, lenders must perform certain servicing requirements as spelled out in the regulations.
The regulation at issue here is 604, which requires a face-to-face meeting before 3 monthly installments due on the mortgage are unpaid. The reason for that timing is that loan reinstatement or modification is more likely if the default has not gotten too far out. The regulations simply require that certain things must be done prior to foreclosure. In addition to the regulations, both the note and the mortgage say there must be compliance with the rules of the Secretary.
The purpose of having a face-to-face meeting is to help low income homeowners stay in their houses. That’s a policy decision that was made within the regulations. HUD is saving money by keeping someone in his house.
In this case Wells Fargo simply did not comply with the regulations. There is a wide body of case law that holds that compliance with FHA regulations is a condition precedent to a lender moving forward with a foreclosure act. Wells Fargo is asking the court to re-write the regulations, saying only the substance rather than the letter must be complied with.
What Was On Their Minds
Should This Case Even Be Here?
A substantial part of Wells Fargo’s time was a back and forth between Mr. King and Justice DeWine about whether the case should be dismissed as improvidently allowed. DeWine commented that the gist of the appellate opinion was that no face-to-face meeting was held before the foreclosure was filed, quoting at length from the court of appeals’ decision. He went on to say that the problem here for the court seemed to be the timing of the foreclosure, that it was not done after the face-to-face meeting, and asked why the court shouldn’t just dismiss the case until the issue was properly before it. Later he asked whether, even if the court ruled in favor of the lender, the case would have to be remanded to decide whether the mediation counted as the face-to-face meeting.
Given the unusual facts of this case, with three separate complaints and certain assumptions being made by both lower courts, is it worthwhile for the court even to speak to the issues accepted, asked Justice French?
The Face-to-Face Meeting Requirement
In reaching the conclusion barring foreclosure, didn’t the lower court assume that there had been a face-to-face meeting, asked Justice French? Should this court make the same assumption? Justice DeWine immediately then asked if that assumption had been challenged below, and really pushed back when Mr. King argued it had not been (the parties disagreed on this point).
If the face-to-face meeting that occurred during the mediation would not qualify, is the bank saying it would not be permitted to foreclose, asked Judge Miller? (yes, that is what it was saying). Are there other substantive requirements that are not outlined in 604 that indicate what should happen in this face-to-face meeting so we would know that something would be substantively flawed here other than the timing of the meeting? Was the impropriety based on the timing of the meeting in connection with the filing of the foreclosure action? Or was it in connection with the timing of the meeting vis a vis the first default? Is being less than three months in default what is key, and if the borrower is not in that status, then it is not a proper meeting under this regulation?
Will one face-to-face, even if it is in the context of a mediation, cover all bases, going forward, no matter how many default actions are filed, asked Chief Justice O’Connor? In this particular case, did Wells Fargo rely on the same original date of default for every complaint that was filed? And how many was that?
Didn’t the court of appeals say the face-to-face meeting was a satisfactory attempt at mitigation, asked Judge Piper? Didn’t they assume it was a valid meeting? Isn’t this requirement just part of the loss mitigation to minimize the loss to HUD, so the agency can continue to fund lenders who then in turn can provide loans to high risk people so they can have affordable housing? Judge Piper got into a lengthy back and forth with Mr. Torguson on this subject, saying he invited pushback, but showing some apparent animosity to Burd’s position.
Necessary Steps to Foreclosure
If the lender does not have to comply with the regulations in order to foreclose, are there other regulations that would actually prohibit foreclosure, asked Judge Miller?
Couldn’t the bank just file a new foreclosure case and hold a face-to- face meeting, asked Justice DeWine? A complaint on a new default? Couldn’t all of this have been avoided if the meeting had been before the filing of the third complaint?
Judge Piper stated that according to the pertinent regulations, foreclosure was not allowed to happen in three circumstances: for costs, unless there are three full months in default, and if the borrower is not told by letter that he is in default and it must be cured in a certain amount of time. But where, he asked, does it specifically say that unless you do regulation x, y, or z, you can’t do foreclosure? And he challenged Mr. Torguson’s reading of regulation 500, commenting that it doesn’t say a foreclosure shall not be commenced until all of these servicing requirements are met. Nor do the note and mortgage say that each and every one of these servicing practices actually have to occur before a foreclosure can take place. Where exactly does it say that you can’t do a foreclosure if you haven’t met the regulations, he asked, commenting that the regulations themselves provide for consequences but say nothing about not being able to foreclose.
The Regulatory Scheme as a Whole
Aren’t the regulations between the agency and the lender, asked Judge Piper?
Penalties for Failure to Follow the Regulations
Where do the penalty provisions come in, asked Justice French?
Isn’t the only penalty specifically stated in the regulations a fine payable to the agency, asked Judge Miller? Isn’t what we have here a mortgage provision and a note provision that says you can only foreclose if authorized by the program? Isn’t one way of looking at it that it was authorized, but it may be subject to a penalty if the lender knowingly and materially violated that provision? In a key question of the day, he asked, if that is the remedy afforded by the regulation, why should the court impose an additional remedy and penalty?
How It Looks From The Bleachers
To Professor Emerita Bettman
Like an improv is a serious possibility. Justices DeWine and French seemed clearly there, and the case is really messy, especially the “assuming without deciding” aspect of the mediation meeting. The two subbing appellate judges were very active questioners, with Judge Piper seeming clearly to favor Wells Fargo, believing the appropriate remedy here was the administrative penalties set forth in the regulatory scheme. I suspect there may be more than one justice leaning that way. While both lawyers were given a hard time by different justices, Mr. Torguson did not seem to have any real champion on his side, despite what to me was a very reasonable argument, apparently backed by case law.
To Student Contributor Kristen Elia
Overall, the court seemed frustrated by this factually-messy case, and appeared somewhat inclined to drop it in order to wait for a case where the issues are more squarely presented. Both Justice French and Justice DeWine focused heavily on the fact that Wells Fargo filed multiple foreclosure actions and based its face-to-face meeting on a mediation session conducted during the pendency of one of the actions, and expressed concern that the facts of this case are not typical. Justice DeWine noted that lower courts are still grappling with the question presented and suggested the court should allow them to continue to do so.
Similarly, both Justice French and Justice DeWine focused less on the main issue presented—whether or not a lender is barred from foreclosure based on failure to meet the 3 month deadline, and instead focused on whether or not the lower courts ruled on (and if Burd adequately raised the issue) of whether the meeting held in the context of mediation could serve as a valid face-to-face meeting for purposes of the regulation. Judge Piper and Judge Miller echoed the same concern.
Judge Piper in particular seemed to lean towards ruling in favor of Wells Fargo, as he seemed convinced that the 500 regulation’s penalty provisions are broad enough to provide for HUD-assessed monetary penalties in the case where a lender failed to hold a face-to-face meeting prior to initiating foreclosure.