Illinois court holds that the failure to comply with face-to-face meeting requirement cannot be salvaged by late compliance

The Second District Illinois Appellate Court in Freedom Mortg. Corp. v. Olivera, 2021 IL App (2d) 190462 (Aug. 5, 2021) affirmed the rule that failing to comply with the HUD regulations requiring a face-to-face meeting prior to foreclosure is a complete defense to the action. The Court went further, however, and held that the failure cannot be corrected by dismissing the foreclosure and then arranging a face-to-face meeting. Compliance must occur before three monthly installments due on the mortgage are unpaid. To alleviate the harsh result of potentially barring a foreclosure altogether, the court recommended that the mortgagee could forgive payments and re-default to come within the rule.

In the trial court, the mortgagee’s second foreclosure was dismissed with prejudice because the mortgagee did not comply with the federal regulations requiring a face-to-face meeting prior to filing the foreclosure. The regulations require the face-to-face meeting, or a reasonable effort to arrange such a meeting, before three monthly installments due on the mortgage are unpaid. It is the alleged default date, which in this case was five years before the second foreclosure was filed, not the date when the complaint is filed, that is the benchmark for evaluating compliance with the regulations. “There would be little to no incentive to timely comply if a lender could simply sit on its hands until circumstances change and, then, seek damages back to the original default date, while claiming that compliance is now futile”.

The mortgagee argued that it substantially complied with regulations by making reasonable efforts to contact the mortgagors to discuss loss mitigation options after it dismissed the first foreclosure. This, it argued, cured its earlier failures and that reasonable efforts to comply outside of the designated time frame is permissible as long as they are made before filing for foreclosure. It would otherwise mean that, once a mortgagee fails to meet the initial three-month time requirement for a face-to-face meeting or a reasonable attempt to hold that meeting, foreclosure would never be allowed, because the mortgagee cannot ever go back to act before the initial three payments were missed.

The Court was not persuaded. While it conceded that other courts have agreed that substantial compliance can be met even where the mortgagee fails to meet the initial three-month time requirement, Illinois authority does not support that interpretation. But even if reasonableness and equity are the key touchstones, they were not present in this case where the mortgagee did not even attempt to comply with the regulations until five years after the default date. The mortgagors did not receive the opportunity to bring their accounts current early in the process. Rather, by the time mortgagee acted, five years had passed, the note had already been accelerated.

It also held that strictly holding the mortgagee to the regulation’s time frame does not result in an unduly harsh penalty that forever bars foreclosure. The mortgagee could, “theoretically, forgive missed payments to bring the loan less than three months past due (i.e., creating a scenario wherein defendants have, essentially, not been deemed to have missed any payments) and then, if missed payments occur going forward, properly solicit defendants for a meeting in compliance with [HUD regulations] …”. Even if the mortgagors had not previously expressed a desire to discuss repayment options, perhaps forgiving certain payments and starting afresh would make them more amenable to discussions. The court noted that under this scenario the payments would not exactly be “forgiven”; rather, the extent of personal liability resulting in a possible deficiency judgment would be reduced, according to the new default date alleged in the newly filed proceedings.
“Our holding simply incentivizes lenders to follow the rules or quickly cure any violation thereof, so that, in plaintiff’s proposed scenario, lenders could possibly limit the number of missed payments that they might need to ‘forgive.’ It is also consistent with the purpose of the regulations; the requirement to meet with the borrowers before three monthly installments due on the mortgage go unpaid is to try to quickly fashion an arrangement or repayment plan that can avoid a default and, ultimately, a foreclosure.”


  • James Noonan

    Jim is a founding partner of Noonan & Lieberman. Jim has more than 25 years of experience in civil litigation on behalf of creditors, servicers, business and real estate owners.

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