By Mike Wiery, Esq. and

Darryl Gormley, Esq.

ReimerLaw Co. *

USFN Member (KY, OH, WV)

For some time, homeowners with mortgages insured by the U.S. Department of Housing and Urban Development (“HUD”) have been utilizing HUD regulations as a defense to foreclosure proceedings. While versions of the HUD model promissory note and mortgage may differ slightly, many versions contain language imposing HUD regulation exceptions to the lender’s remedies upon default.

Limiting Language in HUD Notes and Mortgages:

Certain versions of the HUD model note provide that "[i]f Borrower defaults by failing to pay in full any monthly payment, then Lender may, except as limited by regulations of the Secretary [of HUD] in the case of payment defaults, require immediate payment in full of the principal balance remaining due and all accrued interest.”  These versions of the HUD note typically state: “[i]n many circumstances regulations issued by the Secretary will limit Lender's rights to require immediate payment in full in the case of payment defaults” and that; “[t]his Note does not authorize acceleration when not permitted by HUD regulations…”

A common provision in HUD model mortgages, captioned "Grounds for Acceleration of Debt[,]" often contains similar language to the model note:  "Lender may, except as limited by regulations issued by the Secretary, in the case of payment defaults, require immediate payment in full . . . " and that "[i]n many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclosure if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary."

Defenses Provided by Contract:

The HUD regulations do not provide an independent private right of action to a borrower. However, Ohio courts have held that HUD regulations do provide a defense to foreclosure when incorporated into the default sections of the note and mortgage and a lender fails to comply with these sections.[1] These cases have found that it makes no difference whether HUD regulations are meant to govern only the relationship between HUD and mortgagees.[2] Rather, the focus is that  the mortgagee and the mortgagor agreed to limit the mortgagee's rights to accelerate and foreclose based on applicable HUD regulations.[3] Thus, by contract, the lender is required to comply with the HUD regulations governing acceleration and foreclosure, and borrowers are entitled to use any failure to do so as a shield in a subsequent foreclosure case.[4]

Commonly Litigated HUD Regulations and Their Requirements:

Some Ohio courts consider failure to comply with HUD regulations to be an affirmative defense to foreclosure, though the majority of Ohio appellate districts consider HUD regulatory compliance to be a condition precedent to the foreclosure action.[5] The HUD regulations most commonly litigated in Ohio are the HUD face-to-face interview requirement under 24 C.F.R. § 203.604 and the HUD delinquency notice requirement under 24 C.F.R. § 203.602.[6]

Section 203.604 requires that a lender conduct a face-to-face interview with a borrower before three full monthly payments are due and unpaid. This interview is required unless one of the following exemptions applies:

1. The mortgagor does not reside in the mortgaged 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 that they will not cooperate with an interview.
4. A repayment plan is entered into consistent with the mortgagor’s circumstances.
5. A “reasonable effort” to arrange a meeting is unsuccessful.

A “reasonable effort” is defined as:

1. Minimum of one letter sent to the mortgagor certified by the postal service as having been dispatched.
2. At least one trip to see the mortgagor at the mortgaged property.

Section 203.602 requires a mortgagee give notice to each mortgagor in default. This notice must be on a form supplied by HUD or approved by HUD and be sent by the second month of any delinquency in payments. If an account is reinstated and again becomes delinquent, this notice must be sent to the mortgagor again, except that the mortgagee is not required to send a second delinquency notice to the same mortgagor more often than once each six months. The HUD 4000.1 Handbook currently sets forth what information a HUD delinquency notice is required to provide, along with what Informational Brochure must be enclosed. Currently, the mortgagee must send a HUD “Save Your Home: Tips to Avoid Foreclosure”[7] brochure with a cover letter that includes information concerning:

• Availability of language access services for borrowers with limited English proficiency.
• In regard to the delinquent mortgage: the number of late payments, total amount of any late charges incurred, the month of each late payment, and the original due date of each late payment.
• The mortgagee’s mailing address and toll-free telephone numbers for borrowers needing to contact the mortgagee’s assigned loss mitigation and/or customer assistance personnel.
• A request for current borrower financial information necessary for loss mitigation analysis.
• Toll-free telephone numbers for borrowers needing to contact the mortgagee’s loss mitigation and/or customer assistance personnel; and
• Toll-free telephone numbers for borrowers seeking information on HUD-approved housing counseling agencies, toll-free Federal Information Relay Service number for borrowers who may need to utilize a Telecommunication Device for the Deaf (TDD) to call the housing counseling line.

Consequences of Non-Compliance:

Failure to comply with a condition precedent prior to filing a foreclosure complaint warrants dismissal of the foreclosure case under Ohio law. Following a dismissal for failure to satisfy conditions precedent, a lender may fulfill the HUD regulations and re-file the foreclosure action.  While §203.604 requires that a lender conduct the face-to-face interview or make a reasonable effort to arrange such a meeting “before three full monthly payments are due and unpaid,” Ohio courts have not strictly enforced this requirement against lenders. The courts have held that, under their reading of the regulations, the specific time deadlines of §203.604 are aspirational, whereas the obligation to perform those conditions (i.e., the requirement to actually have a face-to-face meeting, absent one of the stated exceptions), is mandatory.[8]

HUD’s Changes to their Notes and Mortgages Likely to Bring Different Results:

In September 2014, HUD removed from the default provisions of its model mortgage all language which limited a lender’s right to accelerate or foreclose in the case of payment defaults.  In January 2015, HUD also removed this language from the default provisions of its model note. While these changes to the HUD model note and mortgage occurred several years ago, they are “recent” in that case law has not been developed on these changes. Additionally, little public information is available concerning the intent of HUD in making these changes.  It is possible that HUD made these changes because it was never HUD’s intention that they be used by borrowers as a defense to foreclosure. HUD went so far as to add an additional section to its model mortgage wherein borrowers agree they are “not entitled to enforce any agreement between Lender and the Secretary, unless explicitly authorized to do so by Applicable Law.”  The model mortgage defines “Applicable Law” to include all applicable, final, non-appealable judicial opinions.  In Ohio, as explained herein, a borrower’s ability to use HUD regulations in defense of foreclosure is based on the express language of the HUD note and mortgage. Therefore, as HUD has removed the contract language that once served as the platform for HUD regulation defenses, it follows that courts should decide future cases involving these defenses differently.

COVID-19 Partial Waiver of HUD’s Face-to-Face Requirement:

Temporary changes to HUD’s requirement that lenders comply with §203.604 went into effect on March 13, 2020.  On that date, the Federal Housing Administration (“FHA”) published partial waivers of the HUD face-to-face interview requirement in response to public health concerns due to the COVID-19 pandemic. The FHA face-to-face interview waiver allowed mortgagees to utilize alternative methods such as phone interviews, email, and video conferencing services in lieu of conducting actual face-to-face interviews with borrowers. The partial waivers were extended and currently remain effective through December 31, 2022. The waivers provide a counter argument to any borrower defenses alleging the lender failed to comply with a face-to-face interview during the applicable period.

With the passage of time, the number of HUD notes and mortgages containing language limiting a lender by the HUD regulations will decrease. Conversely, loans with the current model note and mortgage will increase, and most likely change the litigation landscape regarding foreclosure of HUD loans. As HUD has changed language in their notes and mortgages in the past, so are they likely to change it in the future. Accordingly, lenders (and their counsel) who remain alert to the specific language contained in the default provisions of HUD notes and mortgages will be well prepared to address future HUD regulation defenses.

[1] BAC Home Loans Servicing v. Taylor, 2013-Ohio-355, 986 N.E.2d 1028, ¶ 19 (9th Dist.)

[2] Id.

[3] Id.

[4] Id.

[5] U. S. Bank, N.A. v. Detweiler, 191 Ohio App.3d 464, 2010-Ohio-6408, 946 N.E.2d 777, ¶ 53 (5th Dist.)

[6] Id..

[7] HUD-2008-5-FHA

[8] PNC Mtge. v. Garland, 7th Dist. Mahoning No. 12 MA 222, 2014-Ohio-1173, ¶ 30

Copyright @2022

USFN Summer Report

by Joshua J. Epling, Esq.

ReimerLaw Co. *

USFN Member (KY, OH, WV)

At the outset of a foreclosure case, one of the most important first steps is to ensure that the lender has standing to file the complaint. However, in foreclosure cases, lenders often do not have all the documents relating to the subject property properly recorded at the time it is necessary to file suit.  Accordingly, it is crucial to examine how a lender can establish standing, while also complying with first legal filing deadlines. One of the most effective strategies for achieving standing, without sacrificing compliance with first legal deadlines, is the demonstration of an equitable assignment of mortgage.

Generally, in order to have standing to file a lawsuit in a court of common pleas, the plaintiff must have a personal interest in the outcome of the dispute, and have suffered an injury that is capable of resolution by the court.[1] Notably, if a lender lacks standing at the commencement of a foreclosure action, the complaint must be dismissed.[2] In fact, the Ohio Supreme Court has specifically held that a lender does not have standing when it fails to establish an interest in the note or mortgage at the time it files suit.[3] Ideally, lenders should cause the note to be properly endorsed and negotiated, and obtain a valid, recorded, assignment of mortgage before initiating a foreclosure action. However, this is not always possible before the expiration of first legal deadlines. In this case, one of the lender’s best strategies, if available, is to establish standing by asserting that there is an equitable assignment of mortgage.

The law in Ohio is clear that, when a promissory note is secured by a mortgage, the promissory note constitutes the evidence of the debt and the mortgage is a mere incident to the obligation.[4] Therefore, the negotiation of a promissory note operates as an equitable assignment of the mortgage, even when the mortgage itself is not assigned or delivered.[5]  Further, “the physical transfer of the note endorsed in blank, which the mortgage secures, constitutes an equitable assignment of the mortgage, regardless of whether the mortgage is actually (or validly) assigned or delivered.”[6] In sum, the lender can assert that, because it is in possession of the original promissory note, and the mortgage follows the note as an incident to the borrower’s obligation under the promissory note, a valid assignment of mortgage is not necessary in order to proceed. Rather, courts in Ohio have held that a lender has standing to foreclose by virtue of being the holder of the promissory note.

In order to raise the issue of an equitable assignment of mortgage effectively, the lender must be in possession of the original note which has been properly endorsed (either specifically or in blank) and negotiated prior to filing the complaint.  The lender must also set forth the argument in its complaint, as well as any additional required pleadings. Specifically, the complaint, as well as any affidavit in support of judgment and motion for summary judgment, must clearly establish that the lender was in possession of the original note, which had been properly endorsed and negotiated, at the time the complaint was filed. This is the only way to establish standing through an equitable assignment of mortgage. Notably, this argument, as with any legal argument, is not without risk. There are certain appellate districts in Ohio that tend to rule frequently in favor of borrowers, and may not be as receptive to the assertion that the lender is a real party in interest to a suit where the recorded assignment of mortgage is not obtained prior to the commencement of the lawsuit. However, these risks should not discourage lenders from asserting an equitable assignment of mortgage in order to meet first legal deadlines where the opportunity properly presents itself.

In sum, it is not always possible for lenders to possess both the promissory note, as well as a valid, recorded assignment of mortgage, at the time they are filing a complaint in foreclosure. However, because the law in Ohio is clear that the mortgage follows the promissory note and is incidental to the obligation under the promissory note, lenders have a strong argument that they have standing to pursue a claim based on an equitable assignment of mortgage.  Accordingly, when set forth properly, the assertion of an equitable assignment of mortgage is one of the most effective strategies for establishing standing, meeting first legal filing deadlines, and potentially avoiding dismissal of the case.