The United States District Court for the District of Rhode Island continues to render decisions concerning the face-to-face meeting requirement. In two recent decisions, the Court found that holding a face-to-face meeting with the mortgagor concerning an FHA-insured mortgage loan is a condition precedent to acceleration/foreclosure. The Court also analyzed the possibility of constructive compliance where the three-month regulatory window in which such a meeting should have occurred has passed. Dan-Harry v. PNC Bank, N.A., No. CV 17-136 WES, 2018 WL 1083581, at *7-8 (D.R.I. Feb. 27, 2018); Grimaldi v. U.S. Bank N.A., CV 16-519 WES, 2018 WL 1997277 (D.R.I. Apr. 27, 2018); see also 24 C.F.R. § 203.604(b). These two cases demonstrate the challenges mortgagees face when foreclosing on FHA-insured mortgages and also provide lessons for ensuring a legally valid foreclosure.
1. Dan-Harry Holds the Face-to-Face Requirement to be a Condition Precedent to Foreclosure under Paragraph 9(d) of the Mortgage as a Matter of Rhode Island Contract Law
In Dan-Harry, the Court held that failure to hold a face-to-face meeting with the mortgagor before acceleration/foreclosure where the mortgage incorporates HUD regulations renders any resultant foreclosure void and, in addition, entitles the mortgagor to contractual damages.
In Dan-Harry, the borrower purchased a home in December 2005 using an FHA-insured mortgage. The borrower defaulted, and in January 2017, the mortgagee sold the property to a third-party bidder at foreclosure auction. The borrower sued, alleging that the foreclosure was void because the mortgagee did not hold a face-to-face meeting before foreclosing. The mortgagee moved to dismiss, arguing that borrowers do not have a private cause of action for damages for a violation of HUD regulations, including the face-to-face requirement of 24 C.F.R. § 203.604(b), after a completed foreclosure. The mortgagee argued that the majority of cases permit borrowers to use 24 C.F.R. § 203.604(b) as a “shield” pre-foreclosure where the face-to-face requirement was not met but not as a “sword” to pursue damages after a foreclosure has occurred.
The Court denied the mortgagee’s motion to dismiss the borrower’s claim for breach of paragraph 9(d) of the mortgage, noting that Rhode Island courts have already adopted a standard of strict compliance with contractual conditions precedent to foreclosure and held that a failure to comply renders the foreclosure sale void. Dan-Harry, supra, 2018 WL 1083581, at *7. Based on this existing precedent, the Court found that the “plain language in paragraph 9(d) [of the mortgage] … supplies powerful support for a prediction that Rhode Island would … treat such a claim as a breach of contract that gives rise to appropriate remedies as contemplated by state contract law.” The Court quoted paragraph 9(d) of the standard FHA mortgage, which provides that “[t]his Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the HUD Secretary.” The Court found that this paragraph incorporates HUD regulations into the language of the mortgage and requires compliance with HUD regulations, including the face-to-face requirement of 24 C.F.R. § 203.604(b), as a condition precedent to foreclosure. Id. at *7-8.
2. Grimaldi Allows Constructive Compliance with the Face-to-Face Requirement by a Trip to the Property During Litigation
On April 27, 2018, two months after issuing the Dan-Harry decision, Chief Judge William E. Smith granted summary judgment to the mortgagee and its servicer in Grimaldi, holding that they had complied with the face-to-face meeting requirement where a face-to-face meeting was attempted during the litigation, approximately five years after such a meeting was required under the regulation.
The borrower initially defaulted in November 2012. The prior mortgagee sent letters in the initial three-month time period informing the borrower that he had options to pay the past-due amount and indicating that a representative would visit his home within twenty days to discuss a repayment plan. However, no representative ever visited the borrower at his home.
A foreclosure auction was scheduled for August 2016, and the borrower filed a complaint in Rhode Island state court seeking injunctive relief to stop the sale. The mortgagee removed the case to federal court and shortly thereafter moved for summary judgment, arguing that it was exempt from the face-to-face requirement because “a reasonable effort to arrange a meeting is unsuccessful.” See 24 C.F.R. § 203.604(c)(5). The mortgagee referred to the three letters timely sent by the prior mortgagee and argued that the three offers to hold a face-to-face meeting were sufficient to comply with the regulation, even though a representative had not actually visited the borrower’s home to try to meet with the borrower.
The Court initially denied summary judgment to the mortgagee, finding that “reasonable effort to arrange a meeting” requires not only letters offering a face-to-face meeting, but also “at least one trip to see the mortgagor at the mortgaged property….” See 24 C.F.R. § 203.604(d). However, the Court ordered that the mortgagee could file a renewed motion for summary judgment if it made “one trip to see” the property. Grimaldi, 2018 WL 1997277, at *2.
In October 2017, during the pendency of the litigation, a default servicing officer from the servicer went in person to the borrower’s home, knocked on the door, rang the doorbell, left his business card, and left a letter offering a second face-to-face meeting. The mortgagee filed a renewed motion for summary judgment, including an affidavit concerning the attempt to have a face-to-face meeting. The Court granted the renewed motion for summary judgment. The Court held that the Defendants complied with 24 § C.F.R. 203.604 because they sent letters during the initial three-month time period offering a face-to-face meeting and made a personal visit to the property in October 2017, albeit five years later than the regulation required. Grimaldi, 2018 WL 1997277, at *3.
If a mortgagee has not sent letters offering a face-to-face meeting to the borrower and made at least one trip to see the property before the borrower is three months delinquent, it may be technically impossible to comply with the face-to-face meeting requirement. In a jurisdiction like Rhode Island or Massachusetts that requires strict compliance with the conditions precedent in a mortgage, failure to fulfill the face-to-face requirement during the relevant period could conceivably bar foreclosure. However, these two cases show that when a court requires compliance with the regulation as a condition precedent to foreclosure, constructive compliance with the regulation may support a valid foreclosure, even where technical compliance with the regulation may not be possible.
Issues remain as to whether constructive compliance can be made after the foreclosure sale has occurred, whether mediation in court would satisfy the face-to-face meeting requirement, or whether loss mitigation solicitation letters would be acceptable if they did not specifically offer a face-to-face meeting. The purpose of the face-to-face meeting – to discuss possible alternatives to foreclosure – could be fulfilled by offering loss mitigation options to the borrower in writing or by phone, or by engaging in mediation in court, even where the regulation was not technically complied with.
Mortgage servicers should take care to accurately and timely document communications with borrowers about loss mitigation efforts, as such efforts could become key evidence that the face-to-face meeting requirement was satisfied.
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