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i
IN THE SUPREME COURT OF OHIO
)
WELLS FARGO BANK, N.A., )
) CASE NO. 2017-0279
Plaintiff-Appellant, )
) On appeal from the
vs. ) Franklin County Court
) of Appeals, Tenth
A. CHRISTOPHER BURD, ) Appellate District
)
Defendant-Appellee, ) Court of Appeals
) Case No. 15AP-1044
MERIT BRIEF OF AMICI CURIAE LEGAL AID SOCIETY OF SOUTHWEST OHIO, LLC,
THE LEGAL AID SOCIETY OF CLEVELAND, ADVOCATES FOR BASIC LEGAL
EQUALITY, INC., COMMUNITY LEGAL AID SERVICES, INC., AND PRO SENIORS,
INC. IN SUPPORT OF APPELLEE A. CHRISTOPHER BURD
Steven Sharpe (#0083408) (Counsel of
Record)
Noel Morgan (#0066904)
Alpha Taylor (#0096496)
John Schrider (#0014967)
Legal Aid Society of Southwest
Ohio, LLC
215 East Ninth Street, Suite 500
Cincinnati, OH 45202
(513) 241-9400
(513) 241-7871 (fax)
Counsel for Amicus Curiae
Legal Aid Society of Southwest Ohio, LLC
Katherine B. Hollingsworth (0087579)
Thomas Mlakar (0059703)
The Legal Aid Society of Cleveland
1223 West Sixth Street
Cleveland, OH 44113
(216) 861-5500
(216) 861-0704 (fax)
Counsel for Amicus Curiae
The Legal Aid Society of Cleveland
Supreme Court of Ohio Clerk of Court - Filed February 16, 2018 - Case No. 2017-0279
ii
Stanley A. Hirtle (#0025205)
Advocates for Basic Legal Equality, Inc.
130 West Second St., Suite 700 East
Dayton, OH 45042
(937) 535-4410
(419) 259-2880 (fax)
Counsel for Amicus Curiae
Advocates for Basic Legal Equality, Inc.
John M. Petit (#0063833)
Gregory R. Sain (#0023674)
Community Legal Aid Services, Inc.
Akron Centre Plaza
50 South Main St, Suite 800
Akron, OH 44308-1828
(330) 535-4191
(330) 535-0728 (fax)
Counsel for Amicus Curiae
Community Legal Aid Services, Inc
Rosemary E. Scollard (#0040927)
Pro Seniors, Inc.
7162 Reading Road, Suite 1150
Cincinnati, OH 45237
(513) 345-4150
(513) 621-5613 (fax)
Counsel for Amicus Curiae
Pro Seniors, Inc.
Scott A. King (0037582) (Counsel of Record)
Terry W. Posey, Jr. (0078292)
Thompson Hine LLP
10050 Innovation Drive, Suite 400
Miamisburg, OH 45342
(937) 443-6560. (937) 443-6635 (fax)
Counsel for Plaintiff-Appellant
Scott E. Torguson (0078647) (Counsel of
Record)
The Legal Aid Society of Columbus
1108 City Park Avenue
Columbus, OH 43206
(614) 737-0140
(614) 224-4514 (fax)
Counsel for Defendant-Appellee
Peggy P. Lee (0067912)
Southeasthern Ohio Legal Services
964 E. State Street
Athens, OH 45701
(740) 594-3558
(740) 594-3791 (fax)
Counsel for Defendant-Appellee
Mathias D. Manner (0083136)
The Manner Law Firm, LLC
2121 Bethel Road, Suite E
Columbus, OH 43220
(614) 339-3339
Counsel for Defendant-Appellee
iii
TABLE OF CONTENTS
TABLE OF AUTHORITIES ......................................................................................................... iv
STATEMENT OF INTEREST OF AMICI CURIAE .................................................................... 1
INTRODUCTION .......................................................................................................................... 1
STATEMENT OF FACTS ............................................................................................................. 4
PROPOSITION OF LAW .............................................................................................................. 4
ARGUMENT IN SUPPORT OF PROPOSITION OF LAW ......................................................... 4
1. Early Loss Mitigation is an Essential Element of the FHA Regulatory Scheme ................ 4
2. Face-to-Face Meeting ......................................................................................................... 6
3. Re-setting the Defaulted Account and Interest Curtailment ............................................. 10
4. Retaining the Plain Language Meaning of 24 C.F.R. 203.604(b) is Consistent With and
Promotes HUD’s Regulatory Scheme .............................................................................. 11
CONCLUSION ............................................................................................................................. 13
CERTIFICATE OF SERVICE ..................................................................................................... 14
iv
TABLE OF AUTHORITIES
Cases
BAC Home Loans Servicing, LP v. Taylor
2013-Ohio-355, 986 N.E.2d 1028 (9th Dist.) ............................................................................. 7
HSBC Bank USA, Natl. Trust Co. v. Teagarden
2013-Ohio-5816, 6 N.E.3d 678 (11th Dist.) ............................................................................ 6-7
PNC Mtge. v. Garland
7th Dist. Mahoning No. 12 MA 222, 2014-Ohio-1173 ........................................................... 8, 9
State v. Jackson
102 Ohio St. 3d 380, 2004-Ohio-3206, 811 N.E.2d 68............................................................... 9
State ex rel. Baroni v. Colletti
130 Ohio St. 3d 208, 2011-Ohio-5351, 957 N.E.2d 13............................................................... 9
State v. Lowe
112 Ohio St. 3d 507, 2007-Ohio-606, 861 N.E.2d 512............................................................... 9
U.S. Bank, N.A. v. Detweiler
191 Ohio App. 3d 464, 2010-Ohio-6408, 946 N.E.2d 777 (5th Dist.)........................................ 7
Washington Mut. Bank v. Mahaffey
154 Ohio App. 3d 44, 2003-Ohio-4422, 796 N.E.2d 39 (2d Dist.) ......................................... 7, 8
Wells Fargo Bank, N.A. v. Aey
7th Dist. Mahoning No. 12 MA 178, 2013-Ohio-5381 ............................................................... 7
Wells Fargo Bank v. Isaacs
1st Dist Hamilton No. C–100111, 2010-Ohio-5811 ....................................................... 7, 11, 12
Wells Fargo Bank v. Isaacs
No. 2011-0075 (decision denying cert) ..................................................................................... 12
Wells Fargo v. Phillabaum
192 Ohio App. 3d 712, 2011-Ohio-1311, 950 N.E.2d 245 (4th Dist.) ....................................... 7
v
Statutes
12 U.S.C. § 1708 ............................................................................................................................. 4
12 U.S.C. § 1708(a)(7) .................................................................................................................... 5
12 U.S.C. § 1715u(a) ...................................................................................................................... 5
Regulations
24 C.F.R. Part 203, Subpart C .................................................................................................... 2, 7
24 C.F.R. § 203.368 ........................................................................................................................ 3
24 C.F.R. §§ 203.400-403 ............................................................................................................ 4-5
24 C.F.R. § 203.500 ................................................................................................................ 2, 6, 7
24 C.F.R. § 203.500 et seq. ............................................................................................................. 5
24 C.F.R. § 203.604 ..................................................................................................................... 2,4
24 C.F.R. § 203.604(b) ................................................................................. 2, 4, 6, 7, 9, 10, 11, 13
24 C.F.R. § 203.606(a)................................................................................................................ 2, 7
41 Fed.Reg. 49736 (enacted Nov. 10, 1976) .................................................................................. 6
Other Authorities
U.S. Department of Housing & Urban Development, Administration of Insured Home
Mortgages, Handbook 4330.1 Rev 5 (September 29, 1994),
https://www.hud.gov/sites/documents/43301C7HSGH.PDF (accessed Feb. 16, 2018) ............. 6
U.S. Department of Housing & Urban Development, Annual Report to Congress Regarding the
Financial Status of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2017, at 5 (Nov.
15, 2017), https://www.hud.gov/sites/dfiles/CFO/images/2017fhaannualreport.pdf (accessed
Feb. 16, 2018)............................................................................................................................ 12
U.S. Department of Housing & Urban Development, FHA Single Family Market Share 2017 Q3,
https://www.hud.gov/sites/dfiles/Housing/documents/FHA_SF_MarketShare_2017Q3.pdf
(accessed Feb. 14, 2018) ........................................................................................................... 12
U.S. Department of Housing & Urban Development, FHA Single Family Housing Policy
Handbook, Handbook, 4000.1, at 610-11 (Dec. 30, 2016),
https://www.hud.gov/sites/documents/40001HSGH.PDF (accessed Feb. 16, 2018) ............... 11
U.S. Department of Housing & Urban Development, Mortgagee Letter 2016-03, Single Family
Foreclosure Policy and Procedural Changes for HUD Title II Forward Mortgages and
Reverse Mortgages, https://www.hud.gov/sites/documents/16-03ML.PDF (accessed Feb. 16,
2018)...................................................................................................................................... 3, 10
1
STATEMENT OF INTEREST OF AMICI CURIAE
The undersigned legal services programs serve low income clients across Ohio and file
this brief in support of Defendant-Appellee A. Christopher Burd (hereinafter, “Mr. Burd”). The
Legal Aid Society of Southwest Ohio LLC (an affiliate of the Legal Aid Society of Greater
Cincinnati), The Legal Aid Society of Cleveland, Advocates for Basic Legal Equality, Inc.,
Community Legal Aid Services, Inc., and Pro Seniors, Inc. share the goal of securing justice and
resolving fundamental problems for those who are low income and vulnerable. To that end, the
Ohio legal services community assists clients in addressing a number of important legal issues,
including mortgage foreclosure. In connection with their missions, the undersigned organizations
file amicus curiae briefs in cases, such as the instant appeal, where outcomes may affect
important rights or obligations of Ohioans, providing input to jurists and government officials
who are addressing decisions of great public interest that affect the economic security of the
vulnerable and the poor.
INTRODUCTION
Ohio Courts have consistently required lenders foreclosing on loans insured by the
Federal Housing Administration (FHA) to comply with mandatory regulations governing
alternatives to foreclosure. In exchange for insurance coverage, lenders must take specific steps
to evaluate borrowers for FHA-approved assistance, referred to as “loss mitigation.” Loss
mitigation, if successful, prevents foreclosure while protecting lenders and the FHA fund.
Wells Fargo raises a very narrow issue in this case: does the three month deadline
contained in one loss mitigation regulation result in such dire consequences to the lender and the
FHA insurance program that courts should not enforce the regulation? The specific regulation
language at issue is:
2
The 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.
24 C.F.R. § 203.604(b). Wells Fargo claims that a mediation session between the parties held
during a previous foreclosure case qualifies as a sufficient face-to-face interview for the purpose
of this case, but Wells Fargo admits that the mediation was long after the three month deadline.
Appellant’s Br. at 3.
As explained in Mr. Burd’s merit brief, the Court does not need to reach the legal issue
regarding the three-month deadline that Wells Fargo has raised because a mediation session in a
dismissed foreclosure case does not help Wells Fargo satisfy any part of 24 C.F.R. § 203.604. As
the Tenth District stated on reconsideration, “appellant’s third foreclosure action was effectively
an attempt to revive its second foreclosure action, which had been dismissed due to failure to
comply with the regulatory requirement, by relying on a mediation session that had occurred in
the context of the second foreclosure action. . . .” Wells Fargo Bank, N.A. v. Burd, 10th Dist.
Franklin No. 15-AP-1044, ¶16 (“Reconsideration Order”). Because of this non-compliance, the
Court should affirm the Tenth District’s decision in line with the consensus of the Ohio appellate
courts that have prevented non-compliant lenders from obtaining foreclosure judgments.
Notwithstanding this basic non-compliance, Wells Fargo also misreads the timing
requirement of 24 C.F.R. § 203.604, and this amicus brief will focus on the narrow issue Wells
Fargo has presented. The three month deadline of 24 C.F.R. § 203.604(b) is a mandatory
requirement within 24 C.F.R. Part 203, Subpart C, and both 24 C.F.R. § 203.500 and 24 C.F.R. §
203.606(a) limit initiating foreclosure until “requirements of this subpart [Subpart C]” are
satisfied. Wells Fargo contends that giving all parts of 24 C.F.R. § 203.604(b) their plain
meaning will unfairly penalize non-compliant lenders by forcing them to forfeit their entire
3
security interest in the property. Wells Fargo thus asks the Court to ignore the mandatory
deadline in the regulation and attempts to justify this request with a tortured reading of the FHA
regulatory scheme.
Wells Fargo’s argument is based on a false hypothetical premise. Courts can give
meaning to the plain language of the three-month deadline without causing forfeiture. In fact, in
the 40-year history of this regulation, to our knowledge there is no appellate decision, including
the Tenth District in the instant case, that has mandated such forfeiture in the event of lender
non-compliance. To avoid forfeiture, Wells Fargo can reset the loan account to bring it within
the permitted post-default three-month window by removing from the borrower’s account all
interest that had accrued beyond the first three missed payments. This approach is consistent
with “interest curtailment,” which is a device provided for in the FHA-insured mortgage system.
When an FHA lender suffers a loss as the result of a borrower’s default, the lender
submits an insurance claim for reimbursement from the FHA insurance fund. 24 C.F.R. §
203.368. When some part of the lender’s loss relates to specified non-compliance, the lender
must on its own “curtail” its claim by removing any interest related to the non-compliance before
submitting the claim.1 While curtailment does, indeed, affect the lender, the effect is limited to
losing the disallowed interest charges. In the present case, the regulation required Wells Fargo to
initiate a “face-to-face” meeting before the borrower had missed three payments. Exercising
interest curtailment, Wells Fargo can come back into regulatory compliance by removing the
excessive accrued interest from Mr. Burd’s account.
1 The process of interest curtailment is explained in U.S. Department of Housing & Urban
Development, Mortgagee Letter 2016-03, Single Family Foreclosure Policy and Procedural
Changes for HUD Title II Forward Mortgages and Reverse Mortgages,
https://www.hud.gov/sites/documents/16-03ML.PDF (accessed Feb. 16, 2018).
4
The Court should require Wells Fargo to comply with the plain language of 24 C.F.R. §
203.604. Claims from Wells Fargo regarding the excessive negative consequences of the Tenth
District’s decision have no merit. Such claims are based on the false premise that the Tenth
District’s decision leads to forfeiture and deprivation of the lender’s mortgage. Moreover, as
described below, Wells Fargo has previously made similar doomsday predictions to this Court
that have not come to fruition. Rather than adopt Wells Fargo’s claims, this Court should simply
uphold regulatory compliance and affirm the decision of the Tenth District.2
STATEMENT OF FACTS
The amicus brief hereby adopts the Statement of Facts included in Mr. Burd’s merits
brief and in the Tenth District’s November 10, 2016 decision, Wells Fargo Bank, N.A. v. Burd,
10th Dist. Franklin No. 15-AP-1044, 2016-Ohio-7706, ¶¶ 2-5 (“Opinion”).
PROPOSITION OF LAW
PROPOSITION OF LAW NO. 1:
An FHA-insured lender cannot initiate foreclosure without complying with the plain
language of 24 C.F.R. § 203.604(b) and that includes the three month deadline contained
within the regulation.
ARGUMENT IN SUPPORT OF PROPOSITION OF LAW
1. Early Loss Mitigation is an Essential Element of the FHA Regulatory Scheme
Congress created the FHA-insured loan program to encourage mortgage lending to low-
and moderate-income borrowers.3 Lenders make claims for indemnity from the insurance fund
that FHA operates when they face loss from a defaulted loan. 12 U.S.C. § 1708; 24 C.F.R. §§
2 The amici curiae disagree with the Tenth District’s conclusion regarding the promissory note;
however, this issue is not on appeal and will not be addressed here. 3 FHA is now a subdivision of the United States Department of Housing and Urban Development
(HUD). For the sake of this brief, we will refer to the agency as FHA.
5
203.400-403. In operating the program, FHA must act in a manner that “meet[s] the housing
needs of the borrowers that the single family mortgage insurance program under this subchapter
is designed to serve.” 12 U.S.C. § 1708(a)(7).
In exchange for the ability to be reimbursed for losses, lenders must follow statutory and
regulatory directives, including requirements for helping borrowers who fall behind on their
loans. In enacting the National Housing Act, Congress recognized that FHA’s target population,
people with low- to moderate-incomes, might have payment difficulties at some time in the life
of a 30-year loan. The Act imposes a specific requirement on lenders to evaluate borrowers in
default for their eligibility for options to avoid foreclosure. The statute states: “Upon default or
imminent default . . . mortgagees shall engage in loss mitigation actions for the purpose of
providing an alternative to foreclosure . . . as provided in regulations by the Secretary.” 12
U.S.C. § 1715u(a). “Loss mitigation” protects the government’s insurance fund against
unnecessary losses as well as the program’s interest in allowing borrowers to complete the
purchase of their homes.
Pursuant to the statute, FHA has promulgated regulations that impose specific
requirements on lenders to help borrowers who have fallen behind on mortgage payments with
the aim of minimizing defaults and avoiding foreclosure. 24 C.F.R §§ 203.500 et seq. The
regulations do not guarantee loss mitigation will succeed, but they do mandate steps that lenders
must take to ensure that borrowers’ loss mitigation options are fully evaluated.
Borrowers can raise lender non-compliance with FHA regulations to defend against
foreclosure. All Ohio Court of Appeals that have reviewed the issue have allowed defensive use
of the loss mitigation regulations.4 These cases have most often involved lenders’ failure to
4 See infra 7.
6
comply with the face-to-face meeting requirement at issue in this case found at 24 C.F.R. §
203.604(b).
2. Face-to-Face Meeting
As directed by the statute, FHA implemented regulations to detail loss mitigation
measures intended to address and curtail defaults in their early stages. These steps include
mandatory default notices, a monthly obligation to review foreclosure alternatives, and the face-
to-face meeting requirement at issue here:
The 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.
24 C.F.R. § 203.604(b). FHA promulgated this regulation in 1976, and the face-to-face meeting
mandate—including the three payment deadline—has remained intact for more than four
decades. 41 Fed.Reg. 49736 (enacted Nov. 10, 1976). In addressing the importance of the face-
to-face meeting requirement, FHA has stated:
[t]his requirement is intended to emphasize the importance of face-to-face visits
in reducing the incidence of foreclosure. A meeting with the mortgagor by a
mortgagee employee can often determine the cause of the default, obtain financial
information; establish a repayment schedule and prevent foreclosure by
influencing the payment habits of mortgagors.5
FHA’s regulatory intent is clearly set out at 24 C.F.R. § 203.500, which states that “[i]t is the
intent of the Department that no mortgagee shall commence foreclosure or acquire title to a
property until the requirements of this subpart have been followed.”
Ohio Courts have consistently ruled that non-compliance with 24 C.F.R. 203.604(b) bars
a lender from obtaining a foreclosure judgment. See HSBC Bank USA, Natl. Trust Co. v.
5 U.S. Department of Housing & Urban Development, Administration of Insured Home
Mortgages, Handbook 4330.1 Rev 5, at 7-7 (September 29, 1994),
https://www.hud.gov/sites/documents/43301C7HSGH.PDF (accessed Feb. 16, 2018).
7
Teagarden, 2013-Ohio-5816, 6 N.E.3d 678 (11th Dist.); Wells Fargo Bank, N.A. v. Aey, 7th Dist.
Mahoning No. 12 MA 178, 2013-Ohio-5381; BAC Home Loans Servicing, LP v. Taylor, 2013-
Ohio-355, 986 N.E.2d 1028 (9th Dist.); Wells Fargo v. Phillabaum, 192 Ohio App. 3d 712,
2011-Ohio-1311, 950 N.E.2d 245 (4th Dist.); Wells Fargo Bank v. Isaacs, 1st Dist Hamilton No.
C–100111, 2010-Ohio-5811; U.S. Bank, N.A. v. Detweiler, 191 Ohio App. 3d 464, 2010-Ohio-
6408, 946 N.E.2d 777 (5th Dist.); Washington Mut. Bank v. Mahaffey, 154 Ohio App. 3d 44,
2003-Ohio-4422, 796 N.E.2d 39 (2d Dist.). While Wells Fargo acknowledges that it “must” at
least try to arrange the meeting, it argues that the same “must” does not apply to the deadline—
“before three monthly installments are unpaid”—and that its failure to meet that deadline does
not, therefore, bar acceleration and foreclosure.
Contrary to Wells Fargo’s description, a lender that fails to satisfy the three month
deadline does not have the right to foreclose under the regulatory scheme. Both 24 C.F.R. §
203.500 and 24 C.F.R. § 203.606(a) limit initiating foreclosure until the “requirements of this
subpart” have been satisfied. The applicable subpart is 24 C.F.R. Part 203, Subpart C. The three
month deadline of 24 C.F.R. § 203.604(b) is a requirement that is included within Subpart C, and
as a result, the plain language of the regulations mandate that lenders meet this deadline before
they can proceed to foreclosure. The deadline is as mandatory as any other part of Subpart C.
Essentially, Wells Fargo claims that honoring the plain language of the regulation would
lead to total forfeiture of mortgage interests for lenders that fail to meet the deadline. Appellant’s
Br. at 2 &15-16. The core of Wells Fargo’s argument is that strict enforcement against a lender
of the 24 C.F.R. § 203.604(b) deadline bars foreclosure forever—effectively stripping the
security—and rewards the defaulting borrower with a free house.
8
The claim regarding forfeiture is based Wells Fargo’s failure to consider possible options
for non-compliant lenders to come back within the deadline and its misinterpretation of the Tenth
District’s decision. The Tenth District in its decision on Wells Fargo’s Application for
Reconsideration and Motion rejected Wells Fargo’s “broad construction” of its opinion and
stated that its original decision left it open “as to whether appellant could demonstrate
compliance with the regulatory requirements in another foreclosure action, perhaps based on a
different default date.” Reconsideration Order at ¶ 16 (internal citations omitted). By leaving
open the possibility of foreclosure based on a different default date, the Tenth District anticipates
that Wells Fargo could come back into compliance by the removal of interest that will be
discussed in detail below.
Wells Fargo’s cite to the Second District’s decision in Washington Mut. Bank v.
Mahaffey does not support its argument that strict enforcement of the three-payment deadline
would result in forfeiture. The Second District observed only that the regulation would have too
much force “if a lender’s failure . . . is deemed to preclude the lender from ever bringing a
foreclosure action” Mahaffey, 154 Ohio App. 3d 44, 2003-Ohio-4422, 796 N.E.2d 39 at ¶ 22
(emphasis added). The court’s observation was clearly conditional. As set out here, that is a
condition that the regulation does not mandate and that lenders have the means to avoid. In its
concern over forfeiture, the Second District did not evaluate how a non-compliant lender can
come back to compliance. Id. at ¶ 24.
The concept that the three month deadline is “aspirational,” as described by the Seventh
District Court of Appeals in PNC Mtge. v. Garland, 7th Dist. Mahoning No. 12 MA 222, 2014-
Ohio-1173, violates principles of statutory interpretation. Garland held that the “before three full
monthly installments due on the mortgage are unpaid” language is merely an “aspirational”
9
statement. Id. at ¶ 30. However, the Seventh District provided no definition of “aspirational,” nor
did it provide any foundation or analysis supporting that holding. Rather, the court simply stated
that “[u]nder our reading of the regulations, the specific time deadlines referenced by the court
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.” Id.
This Court has found language to be “aspirational” when it lacks specific details or
precision. See State v. Jackson, 102 Ohio St. 3d 380, 2004-Ohio-3206, 811 N.E.2d 68, ¶ 23. The
Seventh District’s “aspirational” label is unwarranted. There is no absence of detail in 24 C.F.R.
§ 203.604(b). FHA unequivocally used “must” to condition both the meeting and its timing. The
requirements leave nothing to the imagination or interpretation. Rather, the regulation provides a
specific action and a specific deadline by which the lender must accomplish that action. Labeling
the three month mandate as “aspirational” not only violates principles of statutory interpretation
by ignoring the plain language of the statute, but it also fails to imagine any means by which
Wells Fargo can come back into compliance. State ex rel. Baroni v. Colletti, 130 Ohio St. 3d
208, 2011-Ohio-5351, 957 N.E.2d 13, 17, ¶ 18 (“[t]he interpretation of statutes and
administrative rules should follow the principle that neither is to be construed in any way other
than as the words demand.”); State v. Lowe, 112 Ohio St. 3d 507, 2007-Ohio-606, 861 N.E.2d
512, ¶ 9 (“[a]n unambiguous statute must be applied in a manner consistent with the plain
meaning of the statutory language”). To our knowledge, no appellate court has required
forfeiture, and forfeiture is easily avoided because lenders have the ability to bring loans back
into compliance to avoid forfeiture. Lenders can turn back the clock, so to speak, using a concept
that is already in the FHA mortgage lending scheme: “interest curtailment.”
10
3. Re-setting the Defaulted Account and Interest Curtailment
An FHA lender that fails to satisfy specific regulatory obligations must account for the
violation when it makes a reimbursement claim. In those cases, the lender must curtail, or give
up, interest associated with the violation. Mortgage Letter 2016-3 describes this process:
Mortgagees are responsible for self-curtailment of interest and property expenses
on single-family claims when Reasonable Diligence timeframes or reporting
requirements are not met. Mortgagees must identify the Interest Curtailment
Date on form HUD-27011, Item 31. Attachment 2 includes examples for
calculating the Interest Curtailment Date.6
FHA imposes interest curtailment on a non-compliant lender, but it does not prevent a claim in
total. Rather, the agency simply imposes a financial penalty for the lender’s misconduct. The
availability of interest curtailment enables a non-compliant lender to avoid the forfeiture while
also preserving the clear meaning of 24 C.F.R. § 203.604(b). In the present case, Wells Fargo,
having waited until the loan was behind a significant number of payments, need not forfeit its
security interest. Instead, Wells Fargo can re-set the loan back to where it was before Mr. Burd
had missed three monthly payments and then initiate the face-to-face overtures. This approach
was anticipated by the Tenth District. In rejecting the claim that its decision causes Wells Fargo
to lose its security interest, it noted that Wells Fargo could possibly foreclose “based on a
different default date.” Reconsideration Order at ¶ 16. Should the loss mitigation process prove
unsuccessful, Wells Fargo would not be barred from foreclosure.
6 U.S. Department of Housing & Urban Development, Mortgagee Letter 2016-03, Single Family
Foreclosure Policy and Procedural Changes for HUD Title II Forward Mortgages and Reverse
Mortgages, https://www.hud.gov/sites/documents/16-03ML.PDF (accessed Feb. 16, 2018)
(internal footnote deleted).
11
Recognizing the availability of interest curtailment, this Court should have no hesitation
in retaining the plain language meaning of 24 C.F.R. § 203.604(b). Lenders can come back into
compliance and foreclose, if necessary, once they have met the applicable requirements.
4. Retaining the Plain Language Meaning of 24 C.F.R. 203.604(b) is Consistent With
and Promotes HUD’s Regulatory Scheme
Honoring the plain language of the regulation will have important benefits for loss
mitigation. The options for FHA-insured mortgages include tools such as modifying the terms of
a loan to bring it back into performing status.7 Under the loss mitigation system that FHA has
implemented, the potential terms of a modification become less effective in reaching a
reasonable payment plan as the accrued interest increases.8 HUD’s loss mitigation system,
therefore, requires lenders to focus their activity on early intervention into default, including the
arrangement of the face-to-face meeting.9 When the arrearage has grown beyond three months
due to lender non-compliance, it is harder for the borrower and the lender to reach the target
modification payment that HUD’s modification system seeks to achieve. Interest curtailment,
especially early in the process, facilitates successful loss mitigation outcomes benefiting both
lenders and borrowers.
Wells Fargo’s hyperbole regarding the negative consequences of the Tenth District’s
decision must be rejected. As explained above, Wells Fargo has claimed that the decision will
lead to deprivation of collateral; however, this reading vastly overstates that impact that the
decision will have. Wells Fargo has previously sounded such alarms regarding the dire
consequences of appellate decisions to this Court. In 2011, it asked this Court to reverse the First
7 U.S. Department of Housing & Urban Development, FHA Single Family Housing Policy
Handbook, Handbook, 4000.1, at 610-11 (Dec. 30, 2016),
https://www.hud.gov/sites/documents/40001HSGH.PDF (accessed Feb. 16, 2018). 8 Id.
9 Id. at 586-87 (providing a chart of steps for lenders to take before the loan is 90 days past due).
12
District’s decision in Wells Fargo v. Isaacs, which required lenders to comply with the plain
language of the face-to-face meeting requirement. Isaacs, 2010-Ohio-5811, ¶ 10. In its
memorandum in support of jurisdiction in that case, Wells Fargo claimed that the First District’s
decision “creates chaos for borrowers, lenders and our courts” and warned this Court that the
decision “throws borrowers and lenders in this state into dilemma.”10
This Court did not accept
the case and rejected Wells Fargo’s doomsday prophesy, and the Isaacs decision and numerous
other decisions in Ohio and other states have remained good law. Wells Fargo Bank v. Isaacs,
No. 2011-0075 (decision denying cert). Despite this and cases that have followed, FHA lending
is alive and well across the country and in Ohio. The Mutual Mortgage Insurance fund is healthy
with its capital ratio above the Congressional required minimum. 11
FHA-insured lending is
happening across the country and in Ohio, where the state’s share of the total number of FHA
loans in 2017 roughly corresponds to the state’s share of the national population.12
FHA’s
current share in the mortgage market is strong, especially relative to the period prior to the
financial crisis.13
Wells Fargo overstated the negative consequences of upholding the Isaacs
decision just as it has overstated any harm from the Tenth District’s decision in this case.
10
Appellant’s Mem. in Supp. of Jurisdiction at 1, 11, Wells Fargo Bank v. Isaacs, 1st Dist
Hamilton No. C–100111, 2010-Ohio-5811 (No. 11-0075). 11
U.S. Department of Housing & Urban Development, Annual Report to Congress Regarding
the Financial Status of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2017, at 5 (Nov.
15, 2017), https://www.hud.gov/sites/dfiles/CFO/images/2017fhaannualreport.pdf (accessed Feb.
16, 2018). 12
Id. at 29. 13
U.S. Department of Housing & Urban Development, FHA Single Family Market Share 2017
Q3, at 2, 4,
https://www.hud.gov/sites/dfiles/Housing/documents/FHA_SF_MarketShare_2017Q3.pdf
(accessed Feb. 16, 2018).
13
CONCLUSION
Judicial revision of FHA’s regulatory system would be inappropriate, and the Tenth
District’s decision followed the regulations. If the Court decides to address the three month
deadline for a face-to-face meeting, which is not necessary given Wells Fargo’s clear non-
compliance, the Court can give meaning to every clause in 24 C.F.R. § 203.604(b) without
forcing non-compliant lenders to forfeit their security interest. Wells Fargo can bring Mr. Burd’s
loan within the three-month window and take the steps needed to comply with the rule. This
Court should affirm the decision of the Tenth District.
Respectfully submitted,
/s Steven Sharpe________________________
Steven Sharpe (#0083408) (Counsel of Record)
Noel Morgan (#0066904)
Alpha Taylor (#0096496)
John Schrider (#0014967)
Legal Aid Society of Southwest
Ohio, LLC
215 East Ninth Street, Suite 500
Cincinnati, OH 45202
(513) 241-9400
(513) 241-7871 (fax)
Counsel of Record Amici Curiae Legal Aid Society of
Southwest Ohio, LLC, The Legal Aid Society of Cleveland,
Advocates for Basic Legal Equality, Inc., Community Legal
Aid Service, Inc., and Pro Seniors, Inc.
14
CERTIFICATE OF SERVICE
I hereby certify that on February 16, 2018, a copy of this Brief was served by ordinary
U.S. Mail, postage prepaid, upon the following:
Scott A. King (0037582) (Counsel of Record)
Terry W. Posey, Jr. (0078292)
Thompson Hine LLP
10050 Innovation Drive, Suite 400
Miamisburg, OH 45342
(937) 443-6560
(937) 443-6635
Counsel for Plaintiff-Appellant
Mathias D. Manner (0083136)
The Manner Law Firm, LLC
2121 Bethel Road, Suite E
Columbus, OH 43220
(614) 339-3339
Counsel for Defendant-Appellee
Scott E. Torguson (0078647) (Counsel of
Record)
The Legal Aid Society of Columbus
1108 City Park Avenue
Columbus, OH 43206
(614) 737-0140
(614) 224-4514 (fax)
Counsel for Defendant-Appellee
Peggy P. Lee (0067912)
Southeasthern Ohio Legal Services
964 E. State Street
Athens, OH 45701
(740) 594-3558
(740) 594-3791 (fax)
Counsel for Defendant-Appellee
/s Steven Sharpe________________________
Steven Sharpe (#0083408) (Counsel of Record)