Locke Lord QuickStudy: HUD Face-to-Face Meeting Requirement: Fourth Circuit Holds That a Bank Office That ‎Conducts No Mortgage-related Business Does Not Qualify as a “Branch Office” of a ‎‎“Mortgagee”

Locke Lord LLP
April 22, 2020

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.