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On April 20, 2020, the United States Court of Appeals for the Fourth Circuit became the first Circuit Court of Appeal in the United States to hold that a mortgage lender must have a “branch office” that conducts at least some kind of “mortgage-related business” within 200 miles of a borrower’s property before HUD’s requirement of a “face-to-face” meeting is triggered. In Stepp v. U.S. Bank Trust, National Association, ___ F.3d ___, No. 19-1067, 2020 WL 1907769 (4th Cir. Apr. 20, 2020), the Fourth Circuit held that this interpretation of the regulation was consistent with the text and common sense. This decision is very favorable precedent that resolves this issue for mortgage lenders across the Fourth Circuit.
Prior to initiating a foreclosure, Department of Housing and Urban Development regulations require lenders to “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,” and in any event, “at least 30 days before foreclosure is commenced.” Stepp, 2020 WL 1907769 at *2 (citing 24 C.F.R. § 203.604(b)). But there are exceptions, including when “[t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.” 24 C.F.R. § 203.604(c)(2).
Over the past several years, state and district courts have struggled with how to apply this exception in situations where a multi-faceted lender has an office that conducts some kind of non-mortgage-related business within 200 miles of the borrower’s property. The ostensible purpose of the rule is that an in person meeting is the most effective way to facilitate some kind of loss mitigation that might avoid a foreclosure. But, where it would be unreasonable to conduct such a meeting – e.g., the lender is more than 200 miles away from the borrower – the lender is excused from engaging in the face-to-face meeting. In effect, HUD determined that it would be unreasonable to require lenders to send personnel more than 200 miles to meet with a borrower to engage in such a face-to-face meeting.
The Fourth Circuit agreed that limiting a “branch office” to one that conducted at least some kind of “mortgage-related business” was appropriate. Stepp, 2020 WL 1907769 at *2. The borrower had argued that because U.S. Bank maintains an office in Richmond, Virginia (within 200 miles of the subject property), it was obligated to conduct a face-to-face meeting with her prior to initiating a foreclosure, even though that office is limited to the management of trusts and engages in no mortgage-related activity. The Court rejected the argument that an office that conducts no mortgage-related business counts as a “branch office” pursuant to the regulation. “[W]here – as here – the location’s business is completely unrelated to mortgaging functions and also where – as here – the office provides no public access, it defies common sense to conclude that it can constitute a ‘branch office’ for purposes of this regulation.” Id. The court further said:
Under § 203.604(c)(2), the question is whether U.S. Bank’s Richmond office, devoted exclusively to the management of constructive trusts, is a “branch office of” a “mortgagee,” 24 C.F.R. § 203.604(c)(2) (emphasis added), for purposes of a regulation governing face-to-face meetings between mortgage lenders and their borrowers. In that context, we think it clear that what is contemplated, at a minimum, is an office at which some business related to mortgages is done.
Id. at *2.
The court found no difficulty squaring this holding with the Virginia Supreme Court’s decision in Mathews v. PHH Mortgage Corp., 724 S.E.2d 196 (Va. 2012). In Mathews, the court held that the term “branch office” covered “every type of business and service supplied by the mortgagee.” Id. at 204. “Nothing about that holding,” the Fourth Circuit wrote in Stepp, “conflicts with our determination that an office that conducts no mortgage-related business does not qualify as a § 203.604(c)(2) ‘branch office.’” Stepp, 2020 WL 1907769 at *3.
The Stepp decision resolves an important issue for mortgage servicers who do business in the Fourth Circuit states of Maryland, North Carolina, South Carolina, Virginia, and West Virginia. Mortgage lenders and servicers who do not maintain offices that conduct at least some kind of “mortgage-related business” within 200 miles of a subject property will not need to conduct a face-to-face meeting with borrowers in default prior to initiating foreclosure proceedings.
As of the date of this writing, HUD has issued a partial waiver of 24 CFR 203.604 due to concerns over the spread of COVID-19. However, servicers must establish contact via alternate methods, such as phone interviews, email, or video conferencing technology. The partial waiver is limited to a 12-month period ending in March of 2021 and does not apply to face-to-face requirements in place for the Section 248 insurance program. More information about the temporary partial waiver of the requirement can be found here.