Facing the (Bad) Facts: Do Lenders Need to Strictly Comply With HUD’s Face-to-Face Interview Requirement?

Since 2010, borrowers have asserted that mortgagees haven’t complied with various Department of Housing and Urban Development (HUD) regulations as defenses to foreclosure. In a recent decision, the Indiana Court of Appeals seemingly concluded that mortgagees must strictly comply with all aspects of the HUD regulations or face having their foreclosure actions dismissed.

Was the court’s decision a result of “bad facts” or did it establish the new standard by which future cases will be decided?

‍Historical Context

‍As background, certain mandatory servicing responsibilities are among the HUD regulations for HUD-insured mortgages. They include requiring mortgagees to initiate face-to-face contact with borrowers before foreclosure. 24 C.F.R. § 203.604(b) provides that 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.” * Additionally, the regulations provide that HUD’s intention is that no mortgagee can start a foreclosure action until the servicing requirements are met.

Almost a decade ago, the Indiana Court of Appeals determined that non-compliance with HUD regulations could be raised as an affirmative defense in a mortgage foreclosure action, even though the regulations didn’t provide a private right of action. The Court of Appeals further clarified that non-compliance wasn’t merely an equitable defense, which would allow the court to weigh the various equities, but rather a condition precedent to foreclosure such that a foreclosure action can’t proceed if there’s mortgagee non-compliance.

‍The Gaeta Case

‍More recently, in the Gaeta case, the Indiana Court of Appeals was faced with the question of whether a mortgagee must strictly comply with the requirement to hold a face-to-face meeting before three full monthly installments become due. In Gaeta, the loan originated in September 2008, and by the end of June 2009, the borrower was three months behind in payments. Despite that, the lender didn’t seek a face-to-face meeting.

Instead, the lender and borrower discussed a possible repayment plan. Under that, the borrower made one payment, but no others. The borrower then joined the military and leased the property to a third party while he served, until August 2014. Although the borrower continued to make periodic payments while enlisted, the account was never current.

Finally, on November 30, 2015, the lender filed a foreclosure action against the borrower. On February 9, 2016 the lender sent the borrower a letter offering a face-to-face meeting. After multiple unsuccessful attempts to meet with the borrower at his home, the lender dismissed the foreclosure action without prejudice. On March 1, 2016, the borrower contacted the lender to request a face-to-face meeting, but didn’t visit a branch location or complete a loss mitigation application as instructed. On April 8, 2016, the lender filed a second foreclosure action. Following a bench trial, the trial court entered judgment and a decree of foreclosure in favor of the lender.

On appeal, the borrower again asserted that the foreclosure action was improper because the lender had failed to comply with the face-to-face requirement. In opposition, the lender argued that it had substantially complied with the intent of the regulation. In rejecting that argument, the Court of Appeals determined it was undisputed that the lender had failed to comply with the HUD regulation and the trial court didn’t make any findings concerning substantial compliance. However, the appellate court went on to state that “even assuming that substantial compliance would be sufficient, we are unable to agree with (the lender) that it did, in fact, substantially comply with the requirements of 24 C.F.R. § 203.604.”

In essence, the Court of Appeals concluded that the lender’s six-year delay in offering the face-to-face meeting could not be construed as substantial compliance according to the regulation’s purpose.

‍Going Forward

‍While this most recent case suggests that a mortgagee’s failure to strictly adhere to all HUD regulations means it can’t proceed in a foreclosure action, the court’s opinion in Gaeta actually leaves open some arguments to avoid a strict application. For instance, even though the court was presented with bad facts and no record from the trial court on the issue, it still reviewed the lender’s substantial compliance argument.

This would suggest that a more developed argument at the trial court level, along with better facts, may lead to a different outcome on the issue of substantial compliance. Additionally, the court made a point to include a footnote in its opinion discussing the possibility that a party can waive a condition precedent. The lender didn’t present this argument to either the trial or appellate court, so the court didn’t consider the issue. However, the court went out of its way to include the information in its opinion, suggesting that it is a legitimate argument for mortgagees to raise.

Only time will tell whether this decision will be limited to this specific set of facts or whether it will have a broader effect on future foreclosure actions.

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* In March 2020, FHA issued a partial waiver to the face-to-face requirement as a result of the COVID-19 pandemic. The partial waiver allows mortgagees to utilize alternative means to satisfy the requirement, such as telephone interviews, emails, video calling services, and other conferencing technology. The partial waiver was recently extended through December 31, 2023. A permanent change to the rule has been formally proposed and is currently pending public comment.