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Fla. App. Court (5th DCA) Holds Noncompliance with FHA Requirement Need Not Be Pleaded as Affirmative Defense in Foreclosure

The District Court of Appeal of Florida, Fifth District, recently ruled that a specific denial that a mortgagee complied with HUD’s pre-foreclosure regulations that were incorporated into the mortgage was a denial of a condition precedent to foreclosure that shifted the burden to the mortgagee to prove compliance.

A copy of the opinion is available at:  Link to Opinion.

A borrower obtained a Federal Housing Administration (FHA) mortgage loan.  The note specifically incorporated federal HUD regulations, including 24 C.F.R. § 203.604(b).  That section requires, among other things, that a lender have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, prior to commencing foreclosure.

The mortgagee filed a complaint to foreclose on the FHA mortgage loan.  In her answer, the borrower denied the mortgagee’s allegation that it performed all conditions precedent to foreclosure, specifically the obligation to provide face-to-face counseling under 24 C.F.R § 203.604(b).

At trial, the mortgagee called one witness, a research officer for the mortgagee.  Through the testimony, the mortgagee introduced and the trial court admitted into evidence the original note, the original mortgage, and the loan payment history.

After the mortgagee rested, the borrower moved for involuntary dismissal, arguing that the mortgagee failed to comply with 24 C.F.R. § 203.604 before filing the complaint.  The mortgagee argued that the borrower had to establish the mortgagee’s alleged noncompliance with section 203.604 as an affirmative defense.  The trial court agreed with the mortgagee.

The borrower recalled the mortgagee’s witness who testified that she did not know whether the borrower refused to participate in a face-to-face interview.  The witness testified that she did not have information on the interview.  However, she testified that it was the mortgagee’s practice to have face-to-face interviews on these loans.

The borrower testified that she would have participated in an interview, but the mortgagee never offered her that opportunity.  After the borrower rested, she renewed her motion for involuntary dismissal.  The trial court denied the involuntary dismissal and granted judgment of foreclosure for the mortgagee.  The borrower appealed.

On appeal, the Fifth District noted that a plaintiff may plead a general satisfaction of all conditions precedent, but Florida Rule Civil Procedure 1.120(c) requires a defendant’s corresponding denial of performance or occurrence to be made specifically and with particularity.  Moreover, the Court noted that under Florida law a specific denial of a general allegation of the performance or occurrence of a condition precedent shifts the burden to the plaintiff to prove the allegations concerning the subject matter of the specific denial.

The Court determined that a denial as to a condition precedent is not an affirmative defense, which relates only to matters of avoidance.  Rather, a denial as to a condition precedent is a special form of denial that must be pleaded with specificity.  The Court explained that the most common condition precedent in the mortgage foreclosure context is paragraph 22, which requires the lender to send a default letter to the borrower before foreclosure.

The Fifth District acknowledged that no Florida court had held that 24 C.F.R. § 203.604 constitutes a condition precedent to foreclosure.  However, the Fifth District considered the issue in Diaz v. Wells Fargo Bank, N.A., 180 So. 3d 279 (Fla. 5th DCA 2016).  There, the defendants specifically denied in their answer that the lender complied with all conditions precedent to foreclosure, including section 203.604.  However, the mortgage in Diaz did not specifically incorporate the HUD regulations.  Consequently, the Diaz court held that when it is unclear whether alleged condition precedent applies, the burden is on the party asserting the existence of the condition precedent to establish their applicability.

The Fifth District explained that, unlike Diaz, the borrower’s note and mortgage specifically incorporated HUD regulations, including the face-to-face interview requirement as a condition precedent to commencing foreclosure.

The Court found no meaningful reason to treat compliance with 24 C.F.R. § 203.604 in connection with an FHA mortgage differently than compliance with paragraph 22 in a standard mortgage, which the Florida courts had determined is a condition precedent.

The Fifth District was satisfied that the borrower specifically denied in her answer that the mortgagee complied with all conditions precedent, stating that the mortgagee did not engage in a face-to-face interview as mandated by 24 C.F.R. § 203.604.  This, the Court held, shifted the burden back to the mortgagee to prove at trial that it complied with the section.

The Fifth District determined that the mortgagee wholly failed to meet its burden, providing no evidence that it engaged in a face-to-face interview before filing its foreclosure complaint.  The Court also noted that the mortgagee additionally failed to demonstrate that any of the enumerated exceptions to the face-to-face interview requirement applied.

Accordingly, the Fifth District reversed and remanded with instructions to enter an involuntary dismissal.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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