The Florida Fifth District Court of Appeal issued an opinion last month which the servicing industry should take note of. The issue involved whether the HUD regulation requiring a “Face-to-Face” meeting creates a condition precedent to enforcement of a note and mortgage. The Court’s opinion did not provide a hard line directive, but certainly provides guidance.

Lenders are required to prove compliance with federal HUD regulations before they can obtain a foreclosure judgment. Palma v. JPMorgan Chase Bank, 2016 Fla. App. LEXIS 17882, 41 Fla. L. Weekly D 2694 (Fla. 5th DCA Dec. 2, 2016). However, HUD regulations do not apply to every loan, nor does failure to prove compliance with the HUD requirements always prevent foreclosure. This article is limited to 24 C.F.R. § 203.604 of the HUD regulations which requires the bank to meet (or at least attempt to meet) face-to-face with a borrower before initiating a foreclosure action. 24 C.F.R. § 203.604(b).

Lenders and servicers of FHA loans are undoubtedly familiar with the requirements of § 203.604(b), but from a legal perspective, there are several things that need to happen before HUD provisions become “an issue” in a foreclosure proceeding. The first, maybe most obvious requirement, is that the loan is in fact secured by an FHA mortgage and that the loan documents specifically incorporate federal HUD regulations. For example, in Palma, the note allowed the lender to accelerate after default, “except as limited by regulations of the Secretary[1].” The note also prohibited acceleration “when not permitted by HUD regulations.”

Where the applicability of HUD provisions is not noted on the face of the note or mortgage, the borrower has the initial burden to show HUD regulations apply to the subject loan.[2] In Diaz, decided last April by the same Court that heard Palma, the Court affirmed the bank’s final judgment of foreclosure finding “where…it is unclear whether alleged conditions precedent apply [i.e., the face-to-face meeting], the burden is on the party asserting the existence of the conditions precedent to establish their applicability.”[3] There, the Court concluded the borrowers failed to establish their loan was an FHA loan subject to HUD regulations.

Secondly, assuming the loan is subject to federal HUD regulations, the bank is only required to present proof of compliance with a particular HUD regulation if the borrower specifically denies compliance and explains how the bank failed to comply.[4] This is seen where a defendant files an answer with a “specific denial” as to conditions precedent or asserting an “affirmative defense” as to conditions precedent. In Palma, the borrower “specifically denied” conditions precedent in her answer to the complaint by asserting: “Plaintiff failed to comply with the regulations of the Secretary of Housing and Urban Development including but not limited to the obligation to provide face-to-face counseling in 24 CFR 203.604(b).” This allegation in Palma’s answer was sufficient to put the bank on notice of its alleged failure to conduct a face-to-face meeting. However, at trial the bank failed to offer any evidence it complied with § 203.604 so the Fifth DCA concluded the bank was not entitled to a foreclosure judgment. Notably, if a borrower fails to specifically plead failure of conditions precedent, the bank has no obligation to offer proof of compliance.[5]

Lastly, assuming you have an FHA loan which incorporated HUD regulations and the borrower sufficiently pled failure to comply with §203.604(b), the bank can overcome the allegation by proving any one of the following:

  • The mortgagor does not reside in the mortgaged property,
  • The mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either,
  • The mortgagor has clearly indicated that he will not cooperate in the interview,
  • A repayment plan consistent with the mortgagor’s circumstances is entered into to bring the mortgagor’s account current thus making a meeting unnecessary, and payments thereunder are current, or
  • A reasonable effort[6] to arrange a meeting is unsuccessful.

Importantly, if sufficient evidence of compliance is not proffered at trial, the result is dismissal.[7] Generally, the Court will not give two bites at the apple. In the case of FHA loans, be prepared to provide proof of compliance with one or more of the above provisions.

[1] This provision defined ‘Secretary’ to mean “the Secretary of Housing and Urban Development or his or her designee.” Palma, 2016 Fla. App. LEXIS 17882, *2.

[2] Diaz v. Wells Fargo Bank, 189 So. 3d 279, 284-85 (Fla. 5th DCA 2016).

[3] Diaz, 189 So. 3d at 285.

[4] Palma, 2016 Fla. App. LEXIS 17882, *2-3.

[5] Palma, 2016 Fla. App. LEXIS 17882, *4.

[6] The HUD provision defines “a reasonable effort” as sending at least one certified letter to the borrower and taking at least “one trip to see the mortgagor at the mortgaged property” if the property is not more than 200 miles from the mortgagee, its servicer, or a branch office of either. 24 CFR §203.604(d).

[7] Palma, 2016 Fla. App. LEXIS 17882, *8

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