This article is about an insured FHA lender’s current responsibility to have a face-to-face meeting with the borrower before beginning a foreclosure action. An attorney representing a party in an Illinois foreclosure action of an FHA insured mortgage should review the regulation and the case law as to this face-to- face meeting.1
President Bush’s Proposal. On Friday August 31, 3007 President Bush proposed that the Federal Housing Administration ("FHA") help homeowners threatened by foreclosures by increasing the types of mortgages, which FHA will insure.2 Then, after the Labor Day Weekend, on Tuesday, September 4, 2007 the Federal Reserve issued a Joint Press Release with other financial regulators.3
The Federal Reserve Board requested that federally regulated financial institutions and state-supervised entities which service securitized residential mortgages determine the full extent of their authority under a pooling and servicing agreement. It requested that such lenders identify borrowers at risk of default and purse appropriate loss mitigation strategies FHA Contact Requirement. Since at least 1983, in Illinois, there has been a requirement that an insured FHA lender have face-to- face meeting with the borrower before the third monthly installment is delinquent. If the lender does not do this, the borrower can raise this lack of contact as an affirmative defense that will defeat the lender’s right to maintain the foreclosure proceeding.4
If there has been not a face-to-face meeting, the lender must show a justification for this. This could mean showing that the lender made sufficient reasonable efforts to arrange such a meeting. With possible exceptions, not the subject of this article, the mortgagee’s reasonable efforts to have such a meeting must include, at a minimum, making at least one trip to the mortgaged residence and also sending a letter, certified mail with return receipt requesting such a meeting.5
Legislative Purpose. In Bankers Life v Denton, the Court found that the legislative purpose of the National Housing Act as set forth in 12 USC §170 is to provide a decent home and a suitable living environment for every American family. Thus, the primary beneficiaries of the Act and its implementing regulations are those receiving assistance through the various housing programs. This would include the mortgagors of a HUD insured mortgage.
In the Court’s acknowledgment in Denton, of this lack of contact by the mortgagee as being an affirmative defense, it found that HUD’s withdrawal of the approval of a mortgagee’s approval to participate in the mortgage insurance program, after repeated violations of the servicing requirements, is a useless remedy for the individual faced with the immediate problem of a home foreclosure.
Not a Private Cause of Action. The mortgagee asserted in Denton that considering the lack of contact as an affirmative defense was in essence an implied remedy and thus must meet the requirements of Cort v Ash, 422 US 66, 95 S. Ct. 2080, 45 LEd 2d 26 (1975), which concerned the implication of a private cause of action from statutory provisions which do not expressly provide for such an action. Rejecting the mortgagee’s claim that Cort was applicable, the court in Denton determined that procedural requirements presented by way of an affirmative defense were prerequisites to filing a foreclosure action involving a federal insured mortgage.
As to this affirmative defense, the Court found that the mortgagors were not requesting that the court fashion a remedy or award them money damages. Rather the court reasoned that mortgagors were requesting that the court recognize an affirmative defense that bars the foreclosure action so that the lender could comply with HUD mortgage servicing requirements. The Court in Denton also found that the U.S. Supreme Court ‘s analysis in Cort was not concerned with the issue of whether there was an affirmative defense
Handbook: Rule or Regulation? The Court in Denton also rejected the mortgagee’s reliance on another case, Roberts v Cameron- Brown Co., 556 F.2d 356 (5th Cir. 1997), which concerned what Roberts described as policy guidelines, published in the HUD Handbook. At that time, this contact requirement had not been published in the Federal Register and Code of Federal Regulations. The Court in Denton found that Roberts was no longer controlling because since then, having become a part of the regulations, the previous policy guidelines had acquired the force and effect of law.
What’s Adequate Notice? Contact with the children of the mortgagors will not substitute for contact with the mortgagors. Thus, in Federal National Mortgage Association v Moore, 609 F. Supp. 194 (N.D. Ill. 1985), both the written notice and the telephone notices were not adequate because they were not directed to the mortgagors. Additionally in Moore, there was a material issue as to whether there was a default. As to any default, the court stated that it was necessary to establish what was the date and amount of any default in order to give the notice under 24 CFR § 203.604. The court found in Moore that if a prior default had been cured, then the mortgagee’s notice must be given as to the subsequent default. In Moore there was no dispute that no notice had been given concerning the subsequent default Partial Payment. In Melon Mortgage v Larios, 1998 WL 292387 (N.D.Ill. 1998), the court ruled that HUD Regulations require that a mortgagee "ensure that all [HUD] servicing requirements" are met before beginning a foreclosure action. citing 24 CFR § 203.606(a)) One of those requirements instructed the mortgagee to accept partial payments from Mortgagors in default unless: (1) Payment aggregates less than 50 percent of the amount then due
(2) Payment is less than the amount agreed to in forbearance plan, whether or not reduce to writing; (3) Property is occupied by a tenant who is paying rent and the rentals are not being applied to the mortgage payments; (4) Foreclosure has been commenced (Foreclosure is commenced when the first action required for foreclosure under applicable law is taken).6
In Larios, the mortgagee claimed that it did not receive the Mortgagors’ payments until after the foreclosure had been commenced, and thus, it claimed that it asserted that it was entitled as a matter of law to return the payment to the defendants. The court disagreed and ruled that under § 203.556, foreclosure is commenced "when the first action required for foreclosure under applicable law is taken."7 Applying Illinois law, the court held that the applicable law, as to when a mortgage foreclosure action was commenced was the Illinois Mortgage Foreclosure Law.8 Additionally the federal court in Larios stated that, under the Illinois Code of Civil Procedure, either the filing a complaint or counterclaim commences an action.9 The court then pointed out that the lender filed its foreclosure complaint two weeks after the borrowers had tendered their payment to the lender. Accordingly, the court denied the lender’s motion to strike the borrowers’ affirmative defense based on the partial payment of a default.
Four Lender Objections To Contact Rule. In Larios, the lender made four unsuccessful arguments in support of its motion to strike the borrower face-to- face affirmative defense. The federal court ruled that none of these objections had any merit.
First the mortgagee claimed that it was excused from the face-to-face meeting requirement because its nearest branch office was more than 200 miles away from the Chicago mortgaged property. The court noted that lender was licensed at a Chicago address and had a Chicago address in its telephone listing.
The mortgagee’s second line of attack was equally unpersuasive. Even if the meeting requirement applied, the mortgagee claimed that the burden was on the borrowers to arrange the meeting. Rejecting this assertion, that court ruled that the plain language of the regulation required ‘[t]he mortgagee [to] have a face-to-face meeting, or make a reasonable effort to arrange [one]."10 By its very terms, the court stated that the regulation puts the onus on the servicing lender, not the borrower, to arrange the necessary meeting.
Third, the mortgagee contended that none of the servicing requirements of § 203.604, on which the mortgagors relied, were then currently in force allegedly because the requirements pertained solely to the Mortgage Assignment Program, which the mortgagee claimed, that HUD had previously terminated in April 1996. The court in Larios acknowledged that HUD had indeed terminated the Mortgage Assignment Plan in 1996.11 However the court stated that the face-to- face meeting requirement survived the amendments and remain in the regulation.12
Fourth and finally, the mortgagee claimed that its alleged violations of the servicing regulations did not provide the mortgagors with a defense to foreclosure. The court stated that once again the mortgagee was mistaken. The court confirmed that, in Illinois, a lender’s failure to comply with HUD servicing requirements can be raised as an affirmative defense in a foreclosure action.13
Other Illinois Contact Cases. Other Illinois cases that concern the face-to- face meeting requirement include Countrywide Home Loans v Wilkerson, 2004 WL 539983 (N.D. Ill. 2004), Mortgage Associates v Thomas J. Smith, 1986 WL 13730 ( N.D. Ill. 1986) and Mortgage Associates v Thomas J. Smith, 1986 WL 10384 ( N. D. Il. 1986). There is also Manufacturer’s Hanover Mortgage Corp. v. Chicago Title & Trust, 1985 WL 3617 ( N.D. Ill. 1985), in which the court stated that, even though there had been no face-to-face meeting, the mortgagee complied with the regulation. The mortgagee had: made two trips to the mortgagor’s condominium in an attempt to contact the mortgagor; contacted mortgagor by telephone; and documented at least eight unsuccessful and five successful attempts to contact the mortgagor by telephone during a three month time period. In addition, the mortgagee had sent the required letter, advising the mortgagor of: (1) the amount of the default; (2) the Mortgagor’s rights under then existing assignment program; (3) enclosed HUD Form 92068-F " Request for Financial Information" as required by 24 CFR § 203.651; and (4) in this letter notified the mortgagor that unless the mortgagor cured the default or contacted the mortgagee to work out a plan for repayment, the mortgagee intended to commence foreclosure of the mortgage. Based on these facts, the court ruled that the mortgagee had not only made the required effort to contact the mortgagor, but had a type of contact with the mortgagor receiving the mortgagor’s promise to bring the balance current, which the mortgagor failed to do.14n
1 In this article, the terms Lender and Mortgagee are used interchangeably and the terms borrower and mortgagor are used interchangeably.
2 The Federal Housing Administration (FHA) is a part of the United States Department of Housing and Urban Development ("HUD") and HUD’s servicing handbook can be assessed http//www.hudclips.org/cgi/index.cgi ( visited August 17, 2007).
3 The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit Union Administration and the Conference of Bank Supervisors. See www.federalreserve.gov/boarddocs/press/bcreg/2007/20070904/default.htm (visited September 5, 2007)
4 See Bankers Life v Denton, 120 Ill. App. 3d 576, 579-81, 458 N.E.2d 203, 205-06 (3rd Dist. 1983) (holding that 24 C.F. R. § 203.604’s requirement of a face-to-face meeting was mandatory).
5 24 C.F. R. § 203.604.
6 24 CFR § 203.556(d).
724 CFR 203.556(d)(4).
8 735 IlCS 5/15-1101, et seq.
9 735 IlCS 5/15-1203.
1024 CFR § 203.604(b).
11 Id., citing 61 Fed. Reg. 35, 014 and § 203.604 as amended.
12 Id, citing 24 CFR §203.604(b).
13 citing Bankers Life v Denton, 120 Ill App. 3d 576, 579, 458 N.E.2d 203, 205 (2nd Dist. 1983) and Federal Nat’l Mortgage Assoc v Moore, 609 F. Supp. 194, 196 ( N.D. Ill. 1985).
14 The FHA face-to-face meeting requirement does not apply to a mortgage that is not HUD insured. Federal National Mortgage Association v Schildgen, 252 Ill. App.3d 984, 625 N.E.2d 227 (1st Dist.1993).
Robert Brunn is an attorney admitted to the practice of law in Illinois. He is a Chair Arbitrator in the Mandatory Arbitration programs of the Circuit Courts of Cook, Dupage, Lake and McHenry counties. After law school he published an article in the Banking Law Journal on usury laws and federal policy. Years ago, he representd the Lomas and Nettleton Financial Corporation in the sale to an investor of a package of mortgages. At times he also represented this mortgage banker in mortgage foreclosures. He currently is the Co-Chair of the Consumer Law Committee of the Chicago Bar Association.