Archive for June 4th, 2014

Face to Face Counseling in an FHA Mortgage

I won a trial today because the bank couldn’t prove it complied with the face-to-face counseling requirements in 24 CFR 203.604.  I’ve gotten numerous foreclosure lawsuits dismissed on this argument, and it’s past time I share the argument on this blog.

Most mortgages I encounter in foreclosure-world are Fannie Mae mortgages which include the standard, paragraph 22 language.  For all such mortgages, this argument does *not* apply.  Unfortunately, there is no obligation to provide face-to-face counseling or to satisfy the requirements of 24 CFR 203.604 unless we’re dealing with an FHA Mortgage.

Of the 10% or so of mortgages that aren’t Fannie Mae mortgages, most are FHA mortgages.  Hence, this argument applies, by my estimate, to less than 10% of all mortgage foreclosure cases in Florida.  That might not seem like a lot, but if you think about the many thousands of cases pending, countless homeowner can benefit by understanding this argument.  (I’m only licensed to practice law in Florida, but it certainly seems to me like this argument would work just as well in other states, particularly when you look at the out-of-state cases I’ve cited, below.)

So how do you know if you have an FHA Mortgage?  Easy.  Most FHA Mortgages will plainly say ”FHA” on the bottom of each page.  Also, if it’s an FHA Mortgage, it will likely refer to the Regulations of the Secretary of Housing and Urban Development in paragraph 9 of the Mortgage and paragraph 6 of the Note.  In particular, paragraph 9 of that Mortgage will look something like this …

9.  Grounds for Acceleration of Debt.

(a)  Default.  Lender may, except as limited by regulations issued by the Secretary in the case of payment defaults, require immediate payment in full of all sums secured by this Security Instrument …

(d)  Regulations of HUD Secretary.  In many circumstances Regulations issued by the Secretary will limit lender’s rights, in case of payment defaults, to require immediate payment in full and foreclose if not paid.  This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary.

Meanwhile, if your Mortgage is an FHA Mortgage, paragraph 6 of the Note that secures that Mortgage will likely look something like this …


(b)  Default.    If Borrower defaults by failing to pay in full any monthly payment, then lender may, except as limited by Regulations of the Secretary in the case of payment defaults, require immediate payment in full of the principal balance remaining due and all accrued interest.  … In many circumstances regulations issued by the Secretary will limit lender’s right to require immediate payment in full in the case of payment defaults.  This Note does not authorize acceleration when not permitted by HUD Regulations.  As used in this Note, “Secretary” means the Secretary of Housing and Urban Development and his or her designee.


That language might sound like Greek to you.  Who is the Secretary?  And what are the Regulations of the Secretary of Housing and Urban Development?  Well, those regulations are hundreds of pages long.  One regulation, however, is very simple – barely one page.  24 CFR 203.604 requires the lender provide face-to-face counseling before accelerating and before filing suit.  (You don’t need to be a lawyer to find that regulation – just google it.  24 CFR 203.604.)  In my experience, the face-to-face counseling required by this regulation almost never happens.  It’s supposed to, but it doesn’t.  (I know, it’s shocking that banks don’t do what they’re supposed to do.)  As a result, this gives homeowners with an FHA mortgage an excellent defense in a foreclosure case, i.e. the lender did not comply with a condition precedent to suit – the face-to-face counseling requirements of 24 CFR 203.604.

Like any other defense in foreclosure-world, this is hardly foolproof.  I believe it requires competent counsel to raise the argument properly.  That said, I’ll try to take you through the argument so you can understand it.

Like most defenses, raising this issue starts at the pleading stage.  When a bank alleges in its Complaint that it complied with all conditions precedent, the homeowner must specifically deny this condition precedent in his answer to preserve the issue.  Once the homeowner does so, it becomes the bank’s burden at trial to prove compliance with this condition precedent, i.e. prove it provided the counseling.  See Sheriff of Orange County v. Boultbee, 595 So. 2d 985 (Fla. 5th DCA 1992).

There are five exceptions to the bank’s obligation to provide this counseling, and they’re set forth right in the regulation.  The face-to-face counseling is not required if: (1) the mortgagor does not reside in the property; (2) the mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either; (3) the mortgagor has clearly indicated he will not cooperate in the interview; (4) a repayment plan consistent with the mortgagor’s circumstances is entered into to bring the mortgagor’s account current thus making a meeting unnecessary, and payments thereunder are current; or (5) a reasonable effort to arrange such a meeting is unsuccessful.

Exceptions 3 and 4 rarely come up, and, in my experience, they’re difficult for the bank to prove.  Exception 2, the bank not having an office within 200 miles, never comes up if the Plaintiff is Bank of America or Wells Fargo – those banks have offices virtually everywhere.  It sometimes comes up if the Plaintiff is US Bank, though.  That said, note that the language in the regulation is broad – within 200 miles of the mortgagee, its servicer, or a branch office of either.  As a result, most foreclosure plaintiffs won’t be able to avail themselves of this exception.

Exception 1 will preclude investors from using this as a defense, but the timing here is important.  It doesn’t matter if the homeowner still lives in the property at the time of trial or at the time the case was filed – the key question is whether the homeowner lived in the property within 30 days after default or within 30 days of suit being filed.  See 24 CFR 203.604(b).  If so, then this exception won’t save the bank, either.

Most often, if the bank did not perform the required counseling, it will try to argue it made a “reasonable effort” to do so.  However, a “reasonable effort” is defined in subsection (d) as requiring both a letter be sent by certified mail offering the counseling and that the bank make a trip to see the mortgagor at the mortgaged property.  In my experience, the banks sometimes send a letter offering the counseling, but the letter is often not sent by certified mail, and the trip to see the mortgagor almost never happens.  As a result, this exception often won’t save the bank, either.

In many cases – the vast majority of cases, in my experience – the bank can’t show that any of the five exceptions apply.  As a result, that leaves the parties arguing only a legal issue, i.e. whether face-to-face counseling is actually a condition precedent or operates as a defense to a mortgage foreclosure lawsuit in the first place.

Unfortunately, there are no Florida appellate court decisions on this point (though I’m confident that will change in the coming months).  That said, I think the law is relatively clear in this regard.  Since the parties’ contract – the Note and the Mortgage – require compliance with HUD regulations, the bank can’t just ignore that contract term before filing suit.  To rule otherwise would fly in the face of basic contract law.  That’s why a few cases from other states which have ruled on the issue explained how face-to-face counseling is a valid defense for homeowners with an FHA mortgage.  See Lacy-McKinney v. Taylor, Bean & Whitaker Mortg. Corp., 937 N.E. 2d 853 (Ind. 2010); Pfeifer v. Countrywide Home Loans, Inc., 211 Cal. App. 4th 1250 (Cal. 2012).

Lacy and Pfeifer aren’t the only two decisions to rule this way, but they’re my favorites.  In each case, the court explains why face-to-face counseling is (and must be) a valid defense for homeowners facing foreclosure.  The analysis starts with understanding the very nature of FHA mortgages.  You see, FHA mortgages are insured by the U.S. Government.  That’s you and me.  As such, these loans were essentially risk-free loans for the bank.  If the homeowner paid, then the bank got a performing loan.  If the homeowner defaulted, then the government would pay the bank in full upon foreclosure.  Risk free.  As these courts explained, if the government is going to foot the bill to these banks, in full, then it’s only fair that the government can impose regulations requiring these banks to do certain things in order to avail themselves of that full payment.  One such regulation is, yes, the face-to-face counseling requirement of 24 CFR 203.604.

These decisions also eliminate many of the arguments the bank lawyers like to make in opposition.  For instance, I often encounter bank lawyers who try to say that the HUD regulations are between the banks and the government and homeowners can’t raise them as a defense.  Sorry, but that’s wrong – particularly where the bank is required to comply with those regulations in the very contract (Note and Mortgage) it signed with the homeowner.

Likewise, the bank lawyers like to argue the HUD regulations don’t create a “private right of action,” i.e. don’t allow a homeowner to sue.  There are cases supporting this position, but they are a red herring.  We aren’t asserting this HUD regulation as a plaintiff in a lawsuit.  We aren’t bringing a private right of action.  We are merely asserting this as a defense in a foreclosure case, and Lacy and Pfeifer both make clear homeowners are perfectly entitled to do so.

I have won foreclosure cases before about 12 different judges based on this argument.  It may seem novel/unique, and the judge before whom I argued it today had never heard it before.  But if you lay out the argument like this, and you have an FHA mortgage, I see no reason why you can’t prevail.  At its core, this is really a simple argument.  The parties’ own contract required compliance with HUD regulations.  Face-to-face counseling is required by one such regulation.  Where the bank didn’t provide the counseling, and none of the five exceptions apply, the bank can’t foreclose.

This might be my favorite defense in foreclosure cases, even moreso than paragraph 22.  I just wish I had more cases with an FHA mortgage!

Mark Stopa

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