By Rick DeBlasis, Lerner, Sampson & Rothfuss
The FHA promissory note and mortgage widely in use today limit a lender’s right to accelerate by first requiring compliance with HUD regulations. The FHA Note provides, “In many circumstances regulations issued by the Secretary will limit Lender’s rights to require immediate payment in full in the case of payment defaults. This Note does not authorize acceleration when not permitted by HUD regulations.” FHA Multistate Fixed Rate Note, ¶ 6(B). Correspondingly, the FHA Mortgage provides, “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[.]” FHA Open-End Mortgage with MERS-OH, ¶ 9(A). Courts routinely find that that where a note and mortgage mandate compliance with HUD regulations, such compliance is a condition precedent to bringing a foreclosure action. See, e.g., Bank of Am., N.A. v. Wiggins, 9th Dist. Wayne No. 14AP0033, 2015-Ohio-4012, ¶ 12.
Over the last several years, lenders have become familiar with the HUD “Face-to-Face” regulations set forth in 24 CFR 203.604. Those provisions require a lender, with certain exceptions, to invite the borrower to a face-to-face interview to discuss default resolution options before three full monthly payments are due and unpaid and at least 30 days before foreclosure is commenced. The lender’s requirements under this regulation are exacting and often the source of contested foreclosure litigation and a significant evidentiary burden.
Recently, an Ohio court of appeals provided borrowers with another avenue for contesting foreclosures and added a whole new layer of proof for lenders. In Lakeview Loan Servicing, LLC v. Dancy, 9th Dt. Summit No. 27889, 2016-Ohio-7106, the lender alleged in its 2014 foreclosure complaint that the borrower’s loan was in default, that the lender had fulfilled all conditions precedent to foreclosure, and that it now was entitled to a judgment and decree in foreclosure. The borrower, among other allegations, denied that the lender had fulfilled all conditions precedent, alleging that the lender “failed to give the proper and requisite notice prior to acceleration” required by HUD regulation 24 CFR 203.602. The lender filed a motion for summary judgment supported by an affidavit, which attested that a proper notice of the borrower’s default was sent to the borrower in accordance with the terms of the note and mortgage. A copy of the lender’s notice of default was attached to the affidavit. Over the borrower’s objection, the trial court granted the lender’s motion and issued a judgment and decree in foreclosure. The borrower appealed.
The court of appeals, apparently without prompting by the borrower, at least in the briefs, focused on the first sentence of 24 CFR 203.602, which provides, “The mortgagee shall give notice to each mortgagor in default on a form supplied by the Secretary or, if the mortgagee wishes to use its own form, on a form approved by the Secretary, no later than the end of the second month of any delinquency in payments under the mortgage.” The court found that the lender’s affidavit did not attest that its form was either “supplied by the Secretary” or “approved by the Secretary.” The court thus found that the borrower’s vague challenge to the propriety of the lender’s notice was sufficient to establish that a genuine issue of material fact existed. The court remanded the case to the trial court to determine whether the lender’s form complied with the regulation.
FHA loans are in wide use in the residential lending industry today. The ever-increasing court scrutiny of the lender’s compliance with every aspect of the HUD regulatory scheme as a condition precedent to foreclosure, notwithstanding the lender’s good faith attempt to comply, continually raises the bar for lenders and their counsel. This author has seen the lender’s affidavit requirements grow, even where the borrower has not come forward to contest the foreclosure, from a one-page attestation of the borrower’s loan, its default, and the amount due, to an inch-thick tome of technical legal jargon, regulatory compliance warranties, and voluminous exhibits. Even then, a court of appeals may send a 2014 foreclosure back to the trial court for a 2017 trial upon a technicality neither the lender nor the borrower could have foreseen.
In any event, lenders seeking to accelerate FHA loans are now on notice that their form affidavits should provide, among other things, that the Notice of Default mailed to the borrowers was “on a form supplied by the Secretary” or, if the lender uses its own form, “on a form approved by the Secretary.”