Lenders foreclosing FHA-insured mortgages in Ohio often face challenges that contest the lender’s compliance with relevant regulations from the U.S. Department of Housing and Urban Development (HUD). Like most courts throughout the nation, Ohio courts treat HUD regulations as contractual terms incorporated into FHA-insured mortgage loan documents. As Ohio case law on this issue continues to evolve, confusion—and sometimes shock—can arise for out-of-state lenders unfamiliar with the state-specific intricacies of litigating contested foreclosures involving FHA-insured mortgage loans in Ohio.
This article answers some of the questions that most commonly arise, beginning with more basic questions relating to what the relevant HUD regulations are and when the face-to-face meeting is required. The article then moves on to more challenging issues, such as whether compliance is a condition precedent or affirmative defense and why that matters, whether HUD deadlines are mandatory or aspirational, and how lenders should correct compliance errors if discovered after they already started a judicial foreclosure.
What Are the Relevant HUD Regulations?
Most lenders are familiar with the notice provisions governing acceleration in standard mortgages and notes. These provisions typically require lenders to send borrowers notice of their default and the action required to cure the default, provide a deadline not less than 30 days from the notice for the borrower to cure the default, and advise the borrower that failing to cure the default could result in acceleration and foreclosure.
Most mortgages and notes for FHA-insured loans do not expressly include these provisions. Instead, the loan documents allow lenders to accelerate delinquent loans but also acknowledge that HUD regulations will limit the lender’s ability to require immediate payment in the case of payment defaults. The standard FHA-insured mortgage and note both specify that they do not authorize acceleration or foreclosure if not permitted by HUD regulations. Ohio courts interpret these provisions to incorporate HUD regulations into the mortgage and note as additional contract terms. See, e.g., BAC Home Loans Servicing v. Taylor, 2013-Ohio-355, ¶ 14 (9th Dist.).
HUD codified its mortgage servicing regulations at 24 C.F.R. Subpart C. According to the regulations, “no [lender] shall commence foreclosure or acquire title to a property until the requirements . . . have been followed.” 24 C.F.R. § 203.500. “Before initiating foreclosure, the [lender] must ensure that all servicing requirements . . . have been met.” 24 C.F.R. § 203.606(a).
The regulations require lenders to notify borrowers in default “no later than the second month of any delinquency in payments under the mortgage.” 24 C.F.R. § 203.602. Lenders cannot foreclose until the borrower misses three monthly payments, and lenders must “make a reasonable effort to arrange” a face-to-face meeting with the borrower before the borrower misses three monthly payments, unless certain exceptions apply. 24 C.F.R. §§ 203.604, 203.606(a).
The lender must also evaluate the borrower’s account for appropriate loss mitigation actions before the borrower misses four monthly payments. 24 C.F.R. § 203.605(a). Before moving forward with foreclosure, the lender must notify the borrower that he or she is in default and that it intends to foreclose unless he or she cures the default. 24 C.F.R. § 203.606(a).
Lenders typically comply with most of the regulations governing FHA-insured mortgage loans when following the same procedures developed for non-FHA-insured mortgage loans because most of the requirements substantively parallel other federal regulations and standard mortgage and note obligations. The primary difference is the face-to-face meeting requirement.
When Is the Face-to-Face Meeting Required (and When Is It Not)?
The most often overlooked—and therefore most commonly litigated—HUD regulation is the face-to-face meeting requirement, which is not required by most traditional mortgages for non-FHA-insured loans. According to the applicable rule, lenders “must have a face-to-face interview with the [borrower], or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid.” 24 C.F.R. § 203.604(b). A “reasonable effort” must include both a certified letter to the borrower attempting to arrange a meeting and at least one trip to see the borrower at the property. 24 C.F.R. § 203.604(d). The trip is not required if the property is more than 200 miles from the lender.
The lender is not required to conduct a face-to-face meeting if the borrower does not reside on the property, has clearly indicated that he or she will not cooperate in the interview, or is making payments on a repayment plan that bring the loan current. 24 C.F.R. §§ 203.604(c)(1), (3), (4). The lender is also relieved of the face-to-face meeting requirement if its reasonable efforts to arrange the meeting were unsuccessful or if the property is more than 200 miles from the lender. 24 C.F.R. §§ 203.604(c)(2), (5).
Is Compliance a Condition Precedent or an Affirmative Defense?
Ohio courts are split over whether HUD regulations constitute conditions precedent or affirmative defenses to the foreclosure. The majority rule is that they are conditions precedent; however, two appellate districts in the state treat them as affirmative defenses. See, e.g., U.S. Bank Nat’l Ass’n v. Cavanaugh, 2018-Ohio-5365, ¶¶ 15, 20–21 (10th Dist.); see also Wells Fargo Bank v. Goebel, 2014-Ohio-472, ¶ 20 (2d Dist.).
Ohio’s Second District, which includes the city of Dayton, holds that HUD’s face-to-face meeting requirement “creates an affirmative defense” for borrowers challenging foreclosure. Goebel, 2014-Ohio-472, ¶ 20. In Goebel, the lender failed to provide evidence showing it complied with the face-to-face meeting requirement despite the borrower having specifically denied the lender’s compliance in his answer. Nevertheless, the Second District affirmed the trial court’s summary judgment award, finding that the borrower did not present sufficient evidence to create an issue of fact as to whether the lender complied.
Ohio’s Tenth District, which includes the state’s capitol and largest city, also considers HUD regulations affirmative defenses. See GMAC Mortg. of Penn. v. Gray, No. 91AP-650, 1991 Ohio App. LEXIS 6004, 1991 WL 268742 (10th Dist. Dec. 10, 1991). In Gray, a borrower appealed the trial court’s summary judgment entry in a foreclosure action despite the borrower’s contention that the lender failed to comply with various HUD regulations. The appellate court reversed.
Although the parties in Gray do not appear to have raised the condition precedent/affirmative defense distinction, and the court did not specifically address the issue, the court found that “the failure of a mortgagee to adhere to the HUD servicing requirements . . . constitutes an affirmative defense to foreclosure.” The court determined that material facts remained in dispute about the lender’s HUD compliance, and it therefore overruled the trial court’s summary judgment order.
The Tenth District recently reaffirmed that Gray “remains good law,” and it confirmed its holding that HUD regulations constitute an affirmative defense as opposed to a condition precedent. Cavanaugh, 2018-Ohio-5365, ¶ 20. However, the court also recognized that multiple opinions from other Ohio courts “have dramatically changed the legal landscape,” and it advised that “the time may have arrived to revisit [the court’s] holding in Gray.” Nevertheless, the court declined to change course for the time being.
Why Does the Condition Precedent or Affirmative Defense Distinction Matter?
Realistically, the distinction between a condition precedent and an affirmative defense only matters to save situations where either the lender or the borrower failed to raise the issue or present any evidence at the trial level and the issue arises on appeal. If the borrower properly brings the issue before the trial court, and both parties submit evidentiary quality material at the summary judgment stage, the affirmative defense/condition precedent distinction impacts only the timing of the parties’ submissions. See, e.g., PNC Mortg. v. Garland, 2014-Ohio-1173, ¶¶ 23–24 (7th Dist.).
For example, whether the borrower raises HUD regulations by specifically denying the face-to-face meeting as a condition precedent or challenging HUD compliance as an affirmative defense, he or she will likely submit an affidavit swearing that he or she did not receive the required notice and has no knowledge of any attempts to visit the property. The lender will then provide business records showing that it sent the notice and that a representative visited the property or that it was otherwise excused. The condition precedent/affirmative defense question simply changes who must present their materials first. See, e.g., Cavanaugh, 2018-Ohio-5365, ¶ 17–19; Goebel, 2014-Ohio-472, ¶¶ 18–19.
More specifically, if compliance is a condition precedent, the lender must submit its evidence of compliance with its motion for summary judgment. See, e.g., Garland, 2014-Ohio-1173, ¶ 23. However, if noncompliance is an affirmative defense, then the lender need not disprove its noncompliance (i.e., the lender does not need to prove its compliance). Instead, the borrower must submit his or her evidence when responding to the lender’s motion for summary judgment or filing his or her own motion. The lender must then refute the borrower’s evidence with the appropriate materials. See Ohio Civ. R. 56(E).
Notably, in either scenario, the lender’s business records should trump the borrower’s unsubstantiated allegations, even at the summary judgment stage. See, e.g., A.J.R. v. Bd. of Educ., 2019-Ohio-3402, ¶ 17 (6th Dist.) (parties “cannot avoid summary judgment by submitting an unsupported, self-serving affidavit”) (internal quotations omitted). This is especially true where the regulation in question requires the lender to prove only that it sent the required notice or made the required visit, not that the borrower received the notice or that its representative actually made contact during the visit. See Goebel, 2014-Ohio-472, ¶ 19 (affidavit that borrower did not recall having a face-to-face meeting would not create fact issue to defeat summary judgment).
Thus, prudent Ohio lenders should submit evidence that they complied with the relevant HUD regulations with their motion for summary judgment regardless of whether the controlling jurisdiction considers it a condition precedent or affirmative defense—at least as to any regulations the borrower alleges the lender failed to follow in its pleadings. Only two appellate districts in the state consider compliance an affirmative defense, and one of those districts specifically advised litigants that it may revisit its ruling if necessary. See Cavanaugh, 2018-Ohio-5365, ¶ 21; Goebel, 2014-Ohio-472, ¶ 20.
Moreover, Ohio’s civil rules do not require defendants to plead affirmative defenses with the same specificity or particularity required when denying conditions precedent, meaning that if the trial court treats compliance as an affirmative defense, then borrowers technically do not need to raise the issue in detail at the pleading stage. Compare Ohio Civ. R. 8(B) with Ohio Civ. R. 9(C). Relatedly, some Ohio courts allow borrowers to raise issues they did not plead when responding to summary judgment motions, at least in some instances. See, e.g., Hillman v. Edwards, 2011-Ohio-2677, ¶¶ 14–18 (10th Dist). But see Nationstar Mortg. v. Young, 2016-Ohio-8287, ¶ 17 (9th Dist.) (assembling cases and discussing contrary rulings).
Thus, if noncompliance is an affirmative defense, borrowers can potentially spring the issue on the lender at a later, more inconvenient stage of the litigation. For example, if the borrower presents a sworn statement that the lender failed to comply with HUD regulations for the first time when responding to the lender’s summary judgment motion, or if the borrower generally alleges noncompliance as an affirmative defense and then specifically raises an issue the lender did not expect during summary judgment, the lender may find itself scrambling to develop evidence of its own compliance within the ordinarily truncated time period for a reply brief. See Ohio Civ. R. 6(C)(1) (providing only seven days for reply briefs unless otherwise ordered).
In contrast, presenting the evidence upfront even in affirmative defense jurisdictions would demonstrate that the borrower cannot prove an essential element of his or her affirmative defense (noncompliance) because the lender complied. See Dresher v. Burt, 75 Ohio St.3d 280, 293 (1996) (explaining summary judgment procedure when the movant does not bear the burden of proof). It would also guard against late-raised arguments from the borrower and problems presented if the appellate court shifted the legal landscape under the lender’s feet.
Are the HUD Deadlines Mandatory or Aspirational?
Until somewhat recently, the timing requirements in HUD regulations caused the biggest headache for lenders foreclosing FHA-insured mortgage loans. For example, HUD regulations require that the face-to-face meeting occur “before three full monthly installments due on the mortgage are unpaid.” 24 C.F.R. § 203.604(b). The regulation’s timing component necessarily begs the question, “what happens if the lender—or, more often, a prior lender—fails to conduct or attempt to arrange the face-to-face meeting within three months of the borrower’s default?” Does the lender forever lose its right to foreclose?
All Ohio courts to have considered this issue now answer that question in the negative. See, e.g., Wilmington Savings Fund Society v. West, 2019-Ohio-1249, ¶¶ 18–31 (5th Dist.) (compiling and discussing cases). See also Cavanaugh, 2018-Ohio-5365, ¶ 32 (clarifying the Tenth District’s prior ruling in Wells Fargo v. Burd, 2016-Ohio-7706). As Ohio’s Fifth District recently explained, “the obligation to conduct a face to face meeting, or a reasonable attempt to do so is mandatory, but the requirement that the meeting or attempt occur before three full monthly payments are due is aspirational.” West, 2019-Ohio-1249, ¶ 23.
Notably, Ohio’s universal recognition that the timing components for HUD regulations are aspirational in the foreclosure context accords with the state’s standard principles of contract interpretation. The Ohio Supreme Court confirms that “[w]here possible, a court must construe [contracts] to give effect to every provision in the agreement.” In re All Kelly & Ferraro Asbestos Cases, 2014-Ohio-7104, ¶ 29. Courts therefore must “avoid [contract] interpretations that render portions [of the contract] meaningless or unnecessary.” Wohl v. Sweeney, 2008-Ohio-2334, ¶ 22.
Thus, because courts deem HUD regulations incorporated into the mortgage and note as contract terms, they must construe the regulations in a way that avoids nullifying the parties’ rights and obligations whenever possible. See Asbestos Cases, 2014-Ohio-7104, ¶ 29; Wohl, 2008-Ohio-2334, ¶ 22. Reading a prohibition against correcting loan servicing timing errors into the mortgage and note would necessarily render other portions of those documents meaningless—including the lender’s overall right to payment and to foreclose the security given with the loan if the borrower defaults, which together constitute the entire purpose of the mortgage contract.
Moreover, neither the standard mortgage nor the standard note for FHA-insured loans specifically incorporates all HUD regulations into the agreement’s terms. Instead, the mortgage indicates that the instrument “does not authorize acceleration or foreclosure if not permitted by [HUD] regulations,” and the note specifies that it “does not authorize acceleration when not permitted by [HUD] regulations.” As discussed, courts must construe these provisions to avoid nullifying other contract terms if possible, and nothing in HUD’s regulations suggests that the agency intended to forever prohibit acceleration or foreclosure after the described timelines passed.
In fact, the regulations’ plain language seems to oppose the idea that mistakenly missing a deadline forever bars a lender from foreclosing on FHA-insured mortgages. The relevant regulations all speak in terms of barring foreclosure until the lender complies, not forever barring foreclosure if a lender temporarily fails to comply. See, e.g., 24 C.F.R. §§ 203.500 (No lender “shall commence foreclosure or acquire title to a property until the requirements of this subpart have been followed.”) (emphasis added), 203.606(a) (“Before initiating foreclosure, the [lender] must ensure that all servicing requirements of this subpart have been met.”). This language suggests that lenders need only comply before starting foreclosure proceedings.
Similarly, the regulations specifically outline the consequences of failing to comply. See 24 C.F.R. § 203.500. Those consequences include imposing “a civil money penalty” on the lender or withdrawing “HUD’s approval of a [lender].” They do not include prohibiting the lender from foreclosing the security for an FHA-insured loan. Indeed, “[t]he overall purpose of the FHA mortgage insurance program is to encourage lenders, in exchange for a government guarantee of the loan, to extend mortgages to those carrying higher credit risks.” Goebel, 2014-Ohio-472, ¶ 20 n.3 (quoting Wells Fargo v. Neal, 922 A.2d 538, 546 (Md. App. 2007)). Effectively wiping out mortgage liens for servicing errors hardly furthers that purpose.
How Should Lenders Correct Compliance Errors?
The last remaining—and likely most pressing—question is what a lender should do if it finds itself embroiled in a contested foreclosure without having complied with the relevant HUD regulations before filing its complaint. At least one Ohio appellate court holds that a face-to-face meeting conducted after commencing a failed foreclosure does “not comply with 24 C.F.R. 203.604(b) when the lender based its subsequent action on the same default as the first action.” Cavanaugh, 2018-Ohio-5365, ¶ 31 (discussing Burd, 2016-Ohio-7706). Some attorneys worry that this holding could require lenders to advance the loan’s due date before proceeding with a new foreclosure. However, lenders facing this situation should first consider options for distinguishing their circumstances from these rulings before choosing to credit payments on the loan.
In Burd, a borrower successfully challenged a lender’s foreclosure complaint on the grounds that the lender failed to comply with HUD’s face-to-face meeting requirements. The lender then filed another foreclosure alleging the same default date and contending that it complied with the face-to-face meeting requirement by participating in a court-sponsored mediation during the initial foreclosure. The trial court ruled that the lender again failed to comply with HUD’s face-to-face meeting requirement, and Ohio’s Tenth District affirmed.
The Tenth District rejected the lender’s position that it complied with the face-to-face meeting requirement despite not conducting or attempting a meeting within the first three months of the borrower’s default because the requirement’s specific timing component is aspirational, and it engaged in a court-sponsored mediation during the initial foreclosure. Burd, 2016-Ohio-7706, ¶ 13. The court acknowledged other Ohio courts’ determinations that the timing components are aspirational, but it found that the decisions did not bind its own review. It also distinguished those decisions from the facts at hand.
Noting that the court-sponsored mediation in the first foreclosure necessarily did not occur until after the lender had already filed at least one foreclosure based on the same alleged default in the current foreclosure, the court held that the lender “failed to comply with either the letter or the spirit of the regulation” because the borrower “had no opportunity to avoid foreclosure arising from that alleged default.” The court therefore upheld the trial court’s summary judgment ruling against the lender. It also expressly reserved a question about whether the lender “could demonstrate compliance with the regulatory requirements in another foreclosure action, perhaps based on a different default date.”
In Cavanaugh, the Tenth District later clarified that Burd “did not hold that a lender is barred from seeking foreclosure if it fails to appropriately act within the time period specified in 24 C.F.C. 203.604(b).” Cavanaugh, 2018-Ohio-5365, ¶ 32. Instead, the court confirmed “that a lender complies with 24 C.F.R. 203.604(b) if it conducts a face-to-face meeting, or if it makes reasonable efforts to arrange a force-to-face meeting, before filing its foreclosure.” However, the court reaffirmed its holding that a face-to-face meeting conducted after a failed foreclosure “did not comply with 24 C.F.R. 203.604(b) when the lender based its subsequent action for foreclosure on the same default as the first action.”
Importantly, the Tenth District in Burd indicated the ruling’s fact-specific nature several times. See Burd, 2016-Ohio-7706, ¶ 14 (“[u]nder the circumstances of this case . . .”, “[t[his is not a case where . . .”, “[r]ather, in this case . . .”). The court’s later clarification in Cavanaugh further supports this point. See Cavanaugh, 2018-Ohio-5365, ¶¶ 30–32 (reiterating the facts it found specific to its ruling in Burd). Thus, taken together, the opinions suggest that situations exist when lenders foreclosing in the Tenth District do not need to advance the loan to comply with the face-to-face meeting requirement after a failed foreclosure. However, the question remains exactly what facts the Tenth District would find sufficient to allow foreclosure without adjusting the loan’s due date.
First, once the lender confirms that it cannot demonstrate HUD compliance, it should voluntarily dismiss the foreclosure without prejudice. Proceeding through summary judgment risks an adverse ruling that may implicate res judicata concerns for later foreclosures. Relatedly, if the lender—or a prior lender—has voluntarily dismissed any earlier foreclosures, then it should avoid Ohio’s double dismissal rule by moving to dismiss under Rule 41(A)(2) rather than filing a notice of voluntary dismissal under Rule 41(A)(1)(a). See Olynyk v. Scoles, 2007-Ohio-2878, ¶ 23.
Next, the lender should take—and document—whatever steps are needed to fully comply with the applicable HUD regulations. The appellate court in Burd specifically noted with disapproval that the lender “made no other attempt” to arrange the face-to-face meeting beyond the court-sponsored mediation in its original foreclosure. Burd, 2016-Ohio-7706, ¶ 14 (emphasis added). It also expressly distinguished the case from a situation where a lender “holds a face-to-face meeting a few months after a third payment is missed but prior to filing foreclosure.”
These clarifications suggest that the Burd court may have viewed the situation more favorably had the lender made an effort to comply with the regulation apart from its court-mandated activity during the first failed foreclosure. Thus, taking steps to rectify previous oversights after dismissing the foreclosure may sufficiently comply with the “spirit of the regulation” by allowing the borrower an “opportunity to avoid foreclosure arising from that alleged default,” about which the court in Burd expressed concerns.
Moreover, dismissing the complaint without prejudice returns the parties to their pre-filing positions under long-standing Ohio law. See Denham v. City of New Carlisle, 86 Ohio St. 3d 594, 596 (1999) (“[a] dismissal without prejudice leaves the parties as if no action had been brought at all”) (quoting Deville Photography, Inc. v. Bowers, 169 Ohio St. 267, 272 (1959)). Accordingly, once the lender dismisses its prior complaint without prejudice, the earlier filing should no longer impact its options with respect to complying with conditions precedent for future foreclosures.
Finally, even if a lender chooses to take the conservative approach of advancing the loan’s due date before filing a new foreclosure, crediting the account for a single month—rather than bringing the account current or to within three months of a meeting attempt—should suffice. In Burd, the court posited without ruling that a lender could potentially “demonstrate compliance with the regulatory requirements in another foreclosure action, perhaps based on a different default date.” Burd, 2016-Ohio-7706, ¶ 14 n.2. Later, in Cavanaugh, the court confirmed that HUD’s specific timelines are aspirational, not mandatory. Cavanaugh, 2018-Ohio-5365, ¶ 32.
Reading the two opinions together, even if Burd precludes lenders from suing on the same default for inadvertently filing their complaint before fully complying with HUD—a position not mandated by a careful review of the opinion—moving the borrower’s due date up one month would allow the lender to sue on a different default. The lender could then take the necessary actions before filing its new complaint, thereby meeting its HUD obligations notwithstanding the passing of any aspirational deadlines. See Cavanaugh, 2018-Ohio-5365.
FHA-insured mortgages incorporate HUD regulations as contract terms in the loan documents. Although the specific deadlines are aspirational, lenders must comply with the regulations before foreclosing. When litigating a contested foreclosure where the borrower alleges failure to comply with applicable HUD regulations, lenders should determine as early as possible whether they can demonstrate full compliance. If they cannot, then they should voluntarily dismiss their action without prejudice and take all reasonable steps to comply with the spirit and the letter of the regulations.