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Issue  300  Article  455
Published:  2/1/2024

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In re: Jones (23-594) 2/20/2024
Questioned Credit-Counseling Can't Halt Reverse Mortgage Foreclosure

Chris Burti, Vice President and Senior Legal Counsel

This unanimous opinion of the Court of Appeals confirms that a foreclosure cannot be challenged directly in the foreclosure proceeding on equitable grounds and that a challenge arising from the debtor's responses to questions in statutorily mandated debt counseling is equitable in nature rather than going to the validity of the debt. American Advisors Group ("AAG") appealed from the superior court's order denying its N.C.G.S. Chapter 45 power of sale foreclosure of its reverse mortgage on the ground that it failed to comply with statutorily required credit counseling provisions with the result that its Note was not a valid debt.

Qualified reverse mortgages are regulated in North Carolina under Article 21 of N.C.G.S. Chapter 53, the Reverse Mortgage Act, in order to protect older homeowners from abusive practices associated with reverse mortgages. These loans are marketed to people 62 years of age and over and are secured by a first deed of trust on the mortgagor's principal residence. They do not require payments of principle or interest during the term of the loan. They generally become payable upon death of the debtor or when the encumbered property is no longer occupied as the homeowner's primary residence. One of the statutory limitations of the Act is that approved lenders may not close a reverse mortgage loan "without receiving certification from a person who is certified as a reverse mortgage counselor by the State that the borrower has received counseling on the advisability of a reverse mortgage loan and the various types of reverse mortgage loans and the availability of other financial options and resources for the borrower, as well as potential tax consequences." N.C.G.S. Section 53-270(6)

The 83-year-old borrower in this case qualified for a reverse mortgage and received the required loan counseling:

...that was "conducted by a third-party unrelated to the lender and approved by HUD." The court found that the loan counseling "took place via telephone and lasted 75 minutes." When the counseling was completed, the counselor input the following to the HUD database: "Certificate issued. Client appeared to understand reverse mortgage concepts and responded appropriately to most questions."

The loan closed and subsequently after the borrower died, the entire debt immediately became due pursuant to the terms of the Note and AAG notified the administrator of his estate, that the "death was an event of default under the Deed of Trust" and "that the loan balance of $105,393.23 was due and owing."

A foreclosure hearing was held before the assistant clerk, who entered an order "denying authorization to sell real property" under the power-of-sale provision in the Deed of Trust and AAG appealed to superior court. There, the court denied AAG's right to proceed with the nonjudicial foreclosure, concluding that the requirements for foreclosure had been met with the exception that the court concluded that the loan counseling that the borrower received prior to the loan closing:

...failed to "satisfy the requirements of N.C. Gen. Stat. §[§] 53-269 and 270 because the notes input by the counselor to the electronic HUD system indicated [that Jones] responded appropriately to "most" questions, and the lender did not follow up on this note." According to the trial court, "This note required further inquiry on the part of the lender [AAG]. Therefore, the Note is not a valid debt."

On appeal, AAG argued that "'the trial court erred in concluding that [AAG] could not proceed with foreclosure, because [AAG] presented evidence to satisfy all elements of N.C. Gen. Stat. § 45-21.16[,]' including the validity of the debt." The Court of Appeals agreed.

Citing, In re Goforth Props. Inc., 334 N.C. 369 (1993), the opinion states that it is well settled law in North Carolina that only legal defenses to any of the clerk's findings may be raised and considered at a nonjudicial foreclosure hearing and equitable defenses may not be heard, but rather must be raised in a separate action to enjoin the foreclosure sale. Here, it was undisputed that AAG satisfied each of the requirements for foreclosure except for the existence of a valid debt which the parties contested. The opinion is reasonably succinct here:

Generally, "introduction of a promissory note along with evidence of execution and delivery . . . , in the absence of probative evidence to the contrary, will support the finding of a valid debt in a proceeding to foreclose under a power of sale." In re Cooke, 37 N.C. App. 575, 579, 246 S.E.2d 801, 804 (1978). Here, although AAG possessed the Note, endorsed in blank, the court found that "the notes input by the [loan] counselor to the electronic HUD system indicated [that Jones] responded appropriately to 'most' questions, and [AAG] did not follow up on this note." Thus, the trial court concluded that the debt was not a "valid debt" subject to foreclosure under Chapter 45 because the loan counseling "did not satisfy the requirements of N.C. Gen. Stat. § [§] 53-269 and 270." During the foreclosure hearing, the court expressed its concern regarding Jones's mental capacity, stating, "I believe [Jones] signed it. . . . [T]he sole issue in my mind has to do with the fact that the counseling session . . . raised a question which should have halted the [loan] process; and it goes to the . . . capacity of [Jones]."

This issue is similarly raised on appeal by Respondents, who maintain that "[t]here is substantial evidence that Mr. Jones, who was 83 years old at the time, lacked the mental capacity to understand what he was doing when he spoke with the credit counselor, or later, when he signed the mortgage documents." Thus, they agree with the trial court that the reverse mortgage agreement violated the counseling provisions of the Reverse Mortgage Act and is unenforceable. Because it is unenforceable, Respondents contend that there is no valid debt and AAG may not foreclose on the Property.

Here, it is undisputed that Jones received loan counseling, which the court found "took place via telephone and lasted 75 minutes[,]" and that the counselor certified the counseling prior to the loan closing. Thus, AAG complied with the statutory counseling provision.

Hence, the crux of the matter presented is whether a borrower's possible diminished mental capacity, as evinced in a loan counselor's notes, may be properly raised as a defense in a nonjudicial power-of-sale foreclosure. Indeed, "[a] deed executed by an incompetent grantor may be set aside by a suit in equity[.]" In re Godwin, 121 N.C. App. 703, 705, 468 S.E.2d 811, 813 (1996). Nonetheless, it is well settled that "the incompetency of a mortgagor is an equitable rather than a legal defense to a foreclosure and may not be raised in a hearing under" N.C. Gen. Stat. §45-21.16. Id.

Accordingly, the trial court erred in concluding that there was no valid debt. "[B]ecause the foreclosure by power[-]of[-]sale statute is designed to provide a less timely and expensive procedure than foreclosure by action, it does not resolve all matters in controversy between mortgagor and mortgagee." In re Gray, 225 N.C. App. 46, 49, 741 S.E.2d 888, 890 (2013) (cleaned up). Thus, "equitable defenses to the foreclosure . . . should be asserted in an action to enjoin the foreclosure sale under" N.C. Gen. Stat. § 45-21.34. Id. (citation omitted).

For the reasons stated herein, we reverse the trial court's order denying AAG's right to proceed under Chapter 45 with a nonjudicial power-of-sale foreclosure, and remand for further proceedings.

It would seem that the repeated emphasis by the Court of Appeals' of the fact that the statutorily mandated counseling had been provided, suggests that had competent evidence disclosed that the required counseling had not been provided, that fact might have resulted in a proper finding that there was not a valid debt. When title devolves from a relatively recent foreclosure proceeding, the necessity for a careful review of the foreclosure file by the title examiner cannot be over-emphasized.

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