In the recent case Stepp v. U.S. Bank Trust, N.A., the United States Court of Appeals for the Fourth Circuit narrowed the applicability of 24 C.F.R. § 203.604, a federal regulation that requires a face-to-face meeting prior to foreclosure for certain mortgage loans insured by the Fair Housing Act.

The contested regulation, issued by the Secretary of Housing and Urban Development in 1976 and last amended in 1996, requires a lender (or its servicer) to have a face-to-face meeting with a mortgagor, or make a reasonable effort to solicit such a meeting before accelerating the loan and foreclosing. However, there is an exception: the face-to-face meeting is not required if “the mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.”

For years, lenders and servicers relied on this 200-mile exception because a Frequently Asked Questions section on the HUD website narrowly construed the term “branch office” to mean a loan servicing office, not an office that originated mortgage loans or engaged in other lines of business.

However, in 2012, the Supreme Court of Virginia surprised many by rejecting HUD’s informal interpretation of its own regulation in Mathews v. PHH Mortgage Corp. Instead, the Court broadly held that the term “branch office” included “every type of business and service supplied by the mortgagee” within its scope, including, for example, an office that originated mortgage loans. Since Mathews, contending that a lender failed to satisfy the face-to-face meeting requirement has become an increasingly popular way to contest foreclosure sales of FHA mortgages in Virginia and elsewhere.

Jacqueline Dawn Stepp, the mortgagor in the instant case, was no exception. After the mortgaged property was sold at foreclosure, Stepp sued her lender contending that the foreclosure was unlawful and should be rescinded because 24 C.F.R. § 203.604’s face-to-face meeting (or an effort to arrange the meeting) did not occur prior to foreclosure.

In its motion to dismiss, the lender argued that no face-to-face meeting was ever required because the lender had no “branch office” within 200 miles of the mortgaged property. The lender did have an office within 200 miles of the mortgaged property but maintained that it was not a “branch office” within the meaning of 24 C.F.R. § 203.604 because it was not open to the public and engaged in no mortgage-related business.

The district court agreed with the lender and granted the motion to dismiss. On appeal, the Fourth Circuit affirmed the dismissal, explaining that, in describing it as a “branch office” of the mortgagee, 24 C.F.R. § 203.604 contemplated that a “branch office” must be an office that conducted mortgage-related business.

The Fourth Circuit also explained that its reading was consistent with the purpose of the regulatory scheme, which was to “make in-person meetings available, where reasonably feasible, to facilitate the discussion of loss mitigation options.” It recognized that someone from an office which did not conduct any mortgage-related activities would be “poorly positioned” to discuss foreclosure alternatives with a mortgagor.

The future of 24 C.F.R. § 203.604’s face-to-face meeting requirement – arguably, an obsolete requirement left over from a time when mortgage loan servicing was far different, and far more local, than it is now – remains uncertain. For example, advances in communication technology and in the (legally required) increased accessibility of mortgage servicers call into question what value the requirement truly has in this day and age. Indeed, HUD itself, in response to the coronavirus (COVID-19) pandemic, recently granted a partial waiver of the face-to-face meeting requirement for a year, all but confirming that forms of communication like phone interviews, emails, and videoconferences are reasonable alternatives for the goals of the regulation.