The U.S. Court of Appeals for the Fourth Circuit recently held that a mortgagee’s office that was located within 200 miles of the mortgaged property, but did not conduct any mortgage-related business, was not a “branch office” of a “mortgagee” under the HUD rule requiring a face-to-face meeting with mortgage borrowers before filing a mortgage foreclosure action unless the mortgagee does not have a branch office within 200 miles of the borrower’s home.
A copy of the opinion in Stepp v. U.S. Bank Trust National Association is available at: Link to Opinion.
The borrower purchased her home in Virginia and fell behind on her mortgage payments. The mortgagee’s trustee filed a mortgage foreclosure action.
The borrower sued the mortgage holder and the trustee in federal court “seeking damages and rescission of the foreclosure” because the mortgagee “improperly initiated foreclosure without first offering her a face-to-face meeting, as required by regulations promulgated by the Department of Housing and Urban Development (“HUD”) and incorporated into [the borrower’s] deed of trust.”
The mortgagee defendants moved to dismiss the complaint, arguing that the mortgagee “was exempt from the face-to-face meeting requirement under 24 C.F.R. § 203.604(c)(2), which excuses the meeting when the ‘mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either[,]’” because the mortgagee’s “Richmond office — the only one within 200 miles of [the borrower’s] home — conducted no mortgage-related business and was not open to the public, [and thus] did not qualify as a ‘branch office’ of a ‘mortgagee,’ and so the exception applied.”
The trial court dismissed the complaint, concluding that the “Richmond office was not a mortgagee’s ‘branch office’ within the meaning of 24 C.F.R. § 203.604(c)(2)[,]” reasoning that “the ‘proper interpretation of a mortgagee’s branch office is one where some business related to mortgages is conducted.’”
The borrower appealed the dismissal of her complaint.
On appeal, the Fourth Circuit addressed “only one question: Does a bank office qualify as a ‘branch office’ of a ‘mortgagee’ under 24 C.F.R. § 203.604(c)(2) if it does not conduct any mortgage-related business?”
The Court answered “no,” explaining that “the regulations generally require that a mortgagee ‘must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid,’ and in any event, ‘at least 30 days before foreclosure is commenced.’”
However, “there are exceptions, and the one that is relevant here applies when ‘[t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.’”
Although the mortgagee’s Richmond office was less than 200 miles from the borrower’s home, the Fourth Circuit reasoned that “[w]e do not think the text of § 203.604(c)(2) can be read to encompass an office at which no mortgage-related business is conducted.”
The Court explained that this is because the words “branch office” do not “stand alone” and must be read together with the words of a ‘mortgagee,’ … “for purposes of a regulation governing face-to-face meetings between mortgage lenders and their borrowers. In that context, we think it is clear that what is contemplated, at a minimum, is an office at which some business related to mortgages is done.”
The Fourth Circuit also noted that its “reading also is fully consistent with the purpose of the regulatory scheme” because “[t]he face-to-face meeting regulation was promulgated under 12 U.S.C. § 1715u(a), which requires mortgagees holding federally insured loans … to ‘engage in loss mitigation actions’ in order to ‘provid[e] an alternative to foreclosure.’ The regulation advances that statutory objective by making in-person meetings available, where reasonably feasible, to facilitate the discussion of loss-mitigation options. But an office that does no mortgage-related business at all, even if within 200 miles of a mortgagor’s home, will be poorly positioned to discuss the mortgage-specific loss-mitigation options by statute, such a special forbearance, loan modification, preforeclosure sale, support for borrower housing counseling, subordinate lien resolution, borrower incentives, and deeds in lieu of foreclosure.’”
The Court added in closing that “defining a mortgagee’s ‘branch office’ as one that conducts mortgage-related business is broadly consistent with the functional approach taken in other banking statutes to the ‘branch office’ question.” For example, “[i]n Cades v. H & R. Block, Inc. we considered 12 U.S.C. § 3, which governs ‘branch banks,’ and recognized that an office will not qualify unless it transacts ‘branch business by accepting deposits, paying checks, or lending money.’”
The Fourth Circuit concluded that even though the regulation at issue does define “branch office,” it agreed with the trial court “that applying the same functional analysis to § 203.604(c)(2) produces a ‘common sense’ definition of ‘branch office’ consistent with the regulatory text and purpose” and affirmed “the trial court’s judgment granting the defendants’ motions to dismiss.”