Opinion ID: 1865635
Heading Depth: 1
Heading Rank: 3

Heading: administrative forbearance

Text: A Farm Credit Administration regulation, which applies to both federal land banks and production credit associations, 12 C.F.R. § 614.4510(d), provides: In the development of the bank and association loan servicing policies and procedures, the following criteria shall be included: (1) Term loans. The objective shall be to provide borrowers with prompt and efficient service with respect to justifiable actions in such areas as personal liability, partial release of security, insurance requirements or adjustments, loan division or transfers, conditional payments, extensions, deferments or reamortizations. Procedures shall provide for adequate inspections, reanalysis, reappraisal, controls on payment of insurance and taxes (and for payment when necessary), and prompt exercise of legal options to preserve the lender's collateral position or guard against loss. The policy shall provide a means of forbearance for cases when the borrower is cooperative, making an honest effort to meet the conditions of the loan contract, and is capable of working out of the debt burden. Loan servicing policies for rural home loans shall recognize the inherent differences between agricultural and rural home lending. (emphasis added.) Halversons claim that this regulation compelled the Bank to provide a means of forbearance through conditional payments, extensions, deferments or reamortizations for loans in default, that the Bank did not do so, and that, at least, there were material issues of fact about Halversons qualifying for the forbearance contemplated by the regulation. The Bank counters that Halversons were not cooperative, were not making an honest effort, were not capable of working out the debt burden, and therefore were not qualified for forbearance beyond that given when Halversons were permitted to make monthly payments during 1984 on the past due annual installment. Only a few reported decisions have considered the effect of this regulation telling federal land banks to develop a policy which shall provide a means of forbearance for cases when the borrower is cooperative and otherwise qualified. DeLaigle v. Federal Land Bank of Columbia, 568 F.Supp. 1432 (S.D.Ga.1983) is the root decision. It declared that the provisions of this regulation are substantive rules that federal land banks must follow when they service farm loans and affect individual obligations. Id. at 1437. The DeLaigle court, however, declined to issue a federal court injunction to halt nonjudicial foreclosure proceedings against the borrower's real property because the foreclosing federal land bank was not a governmental agency. Since DeLaigle, one branch of federal decisions has unanimously concluded that borrowers do not have any private cause of action against federal land banks and production credit associations for either damages or injunctive relief in federal courts under the Farm Credit Act and regulations. Bowling v. Block, 785 F.2d 556, 557 (6th Cir.1986); Smith v. Russellville Production Credit Ass'n., 777 F.2d 1544, 1548 (11th Cir.1985); Aberdeen Production Credit Association v. Jarrett Ranches, Inc., 638 F.Supp. 534 (D.S.D.1986); Spring Water Dairy, Inc. v. Federal Intermediate Credit Bank of St. Paul, 625 F.Supp. 713, 719 (D.Minn.1986); Apple v. Miami Valley Production Credit Ass'n., 614 F.Supp. 119, 122 (S.D.Ohio 1985); Hartman v. Farmers Production Credit Ass'n. of Scottsburg, 628 F.Supp. 218 (S.D.Ind.1983). In so holding, one of the decisions took a decidedly different view of the administrative forbearance regulation than DeLaigle. Smith v. Russellville Production Credit Ass'n., 777 F.2d at 1548 said: ... the `means of forbearance' regulation in the present case is not a substantive rule but, rather, is a general statement of agency policy. The regulation states that, when banks and associations develop their loan servicing policies and procedures, ` the policy shall provide a means of forbearance' for borrowers meeting certain criteria. 12 C.F.R. § 614.4510(d)(1) (emphasis added). Although the term `shall' indicates the mandatory nature of this policy, the regulation is nevertheless directed at agency policy, and is not a substantive rule. Accordingly, we hold that 12 C.F.R. § 614.4510(d)(1) does not have the force and effect of law, and does not provide the basis for an implied private right of action on behalf of borrowers such as the Smiths. Id. at 1548. And, Smith added a footnote: We disapprove of DeLaigle v. Federal Land Bank of Columbia, supra , to the extent that it may be inconsistent with this opinion. But, we do not think that this strand of decisions bears directly on the different issue of whether a qualified borrower may resist a foreclosure upon the grounds that he did not receive the forbearance called for by the regulation. This different issue has only been addressed in three reported decisions by state courts. The Appellate Division of the Supreme Court of New York affirmed a judgment of foreclosure in favor of a federal land bank, where it found that the bank has complied with its statutory [sic] mandate by formulating a policy of alternatives to foreclosure and had forbore for over three years prior to commencing foreclosure action. Federal Land Bank of Springfield v. Saunders, 108 A.D.2d 838, 485 N.Y.S.2d 342 (1985). That court said, [T]his policy, as set forth in respondent's internal guidelines, does not have the force and effect of law but is designed to guide respondent's discretion in rendering individual decisions, and concluded the bank acted within its governing regulations, and we will not substitute our judgment for that of [the bank]. Id. at 343-344. In Federal Land Bank of Wichita v. Read, 237 Kan. 751, 703 P.2d 777 (1985), the Supreme Court of Kansas concluded: A policy of forbearance is required by the regulation. Id. 703 P.2d at 779. But the Supreme Court of Kansas affirmed a judgment of foreclosure, holding that the only evidence before the trial court is that the land bank did consider forbearance, but found one of the three essential elements ability to work out of the debt burden lacking. Id. It also reasoned that there was no statutory authority for court review of ... a determination by a federal land bank that no further forbearance was appropriate. Id. Very recently, the Supreme Court of Ohio divided on this issue. In Farmers Production Credit Association of Ashland v. Johnson, 24 Ohio St.3d 69, 493 N.E.2d 946 (1986), four members of the court concurred in holding that a trial court did not abuse its discretion, after summary judgment, in denying leave to a borrower to amend his answer to a foreclosure suit by a production credit association to raise the administrative forbearance regulation as a defense. The same decision also held the trial court did not abuse its discretion in refusing to reopen a summary judgment of foreclosure in favor of a federal land bank against the same borrower on a real estate mortgage to permit the same defense. The Johnson majority expressly agreed with the Russellville view of the regulation, and held that the regulation does not provide a valid defense to a foreclosure action. 493 N.E.2d at 950. The Johnson majority reinforced their decision by also adopting the view of the Kansas Supreme Court that the lender is the one best able to make the determination as to whether the conditions have been met, especially with regard to the borrowers' ability to pay the debt, as well as by holding that PCA did provide a means of forbearance. Id. at 950. Three justices of the Supreme Court of Ohio dissented. Justice Brown, with another justice concurring, declared that a breach of the federal regulation requirement for administrative forbearance rises to an actionable, potentially meritorious defense to a foreclosure action, and necessarily presents an issue of fact which must be determined by the trial court. Id. at 951-952. In his dissent, Justice Douglas adopted the DeLaigle view that `these regulations ... were issued by the appropriate agency pursuant to statutory authority' and therefore should have the `force and effect of law,' and went on to assert that where there was a failure to comply with the administrative forbearance regulation a valid defense to the bank's foreclosure action may exist. Id. at 953-954. Justice Douglas also recognized: If it can be shown that the criteria outlined in Section 614.4510(d) were not met by the appellants [borrowers], foreclosure is warranted and should be upheld. Id. at 954. The diverse views expressed in these few cases suggest that, to decide this issue of federal law as to the effect of the administrative forbearance regulation in foreclosure, a better exposition of the facts is needed about the development of a forbearance policy by the Bank, as well as about Halversons' qualifying for forbearance and about the Bank's actions in extending forbearance to Halversons. Further factual development should aid the legal analysis of this closely balanced issue. Generally, interpretation of a regulation to ascertain its purpose is a question of law, but the determination of whether conduct complies with a regulation is a question of fact. Smith v. State, 389 N.W.2d 808 (N.D.1986). The limited affidavit record in this case to date simply does not develop the facts sufficiently either to consider compliance with this regulation or to interpret the application of it. On this limited record, we cannot assess the potential seriousness of the Bank's deviation, nor are we in a position to prescribe a remedy for any dereliction. Halversons emphasize that the Bank has not shown that it did have a written policy to implement forbearance procedures. Halverson's affidavit stated that the Bank did not notify them of a forbearance policy, and denied that Halversons received the forbearance contemplated by the regulation. The Bank did not directly respond to those claims. Rather, the Bank seeks to avoid the potential effect of the regulation by claiming that Halversons did not qualify for administrative forbearance. The Bank points to evidence that Halversons sued it and that, when requested to do so, Halversons did not sell beans on hand to make mortgage payments, as showing that Halversons were not cooperative and not making an honest effort. On the other hand, Halverson's affidavit outlined efforts to work with the Bank which arguably disputed the Bank's claims about cooperativeness and honest effort. Thus, there were evident issues of material fact on the first two criteria for administrative forbearance by the Bank. The Bank points to Bullinger's assertion that Halversons were borrowing from the production credit association to make payments to the Bank, as showing that Halversons were not capable of working out the debt burden. Halverson's affidavit denies this and swears that the value of the land exceeded the debt. Thus, there were issues of material fact on the third criterion for administrative forbearance by the Bank, as well. Thus, we conclude that there were material issues of fact about Halversons' qualifying for administrative forbearance. Only if it is factually determined that Halversons were qualified for, but did not receive, forbearance does it become necessary to further consider the effect of the regulation. We also believe that full development of the facts about the Bank's policy and its application to Halversons will help divine the essential effect of the regulation: was it intended to extend a procedural benefit to the class of borrowers which includes Halversons, or was it only intended to be a mere aid to guide the exercise of discretion by the Bank? In American Farm Lines v. Black Ball Freight Service, 397 U.S. 532, 538-539, 90 S.Ct. 1288, 1292-93, 25 L.Ed.2d 547, 552-53 (1970), the United States Supreme Court undertook to analyze when a federal agency is required to strictly comply with its own rules. That decision concluded that certain rules of the Interstate Commerce Commission were mere aids to the exercise of the agency's independent discretion, rather than intended primarily to confer important procedural benefits upon individuals in the face of otherwise unfettered discretion.... 397 U.S. at 538-539, 90 S.Ct. at 1292. Unfortunately, neither that opinion nor later opinions of the United States Supreme Court have set out any sure framework to determine what federal regulations confer procedural benefits, rather than serve as mere aids. Compare Morton v. Ruiz, 415 U.S. 199, 235, 94 S.Ct. 1055, 1070, 39 L.Ed.2d 270, 294 (1974) (Where the rights of individuals are affected, it is incumbent upon agencies to follow their own procedures .... even where the internal procedures are possibly more rigorous than otherwise would be required.) with United States v. Caceres, 440 U.S. 741, 754, 99 S.Ct. 1465, 1472, 59 L.Ed.2d 733, 745 n. 18 (1979) (... agencies are not required, at the risk of invalidation of their action, to follow all of their rules, even those properly classified as `internal.'). Also, interpretation of this regulation may be affected by further Congressional action. On December 23, 1985, Congress amended the Farm Credit Act of 1971, effective thirty days after enactment; Farm Credit Amendments Act of 1985, Pub.L. No. 99-205, § 401, 99 Stat. 1678 (1985). Section 301(b) of the Amendments inserts a new § 4.13(b) into the Farm Credit Act: In accordance with regulations of the Farm Credit Administration, System institutions shall develop a policy governing forbearance. Each System institution shall provide borrowers with a copy of the institution's policy regarding forbearance at such time or times as the Farm Credit Administration shall prescribe in such regulations. One fragment of legislative history of this Farm Credit Amendments Act of 1985 suggests that the rights of applicants and member-borrowers as set forth in this Act and in the regulations of the Farm Credit Administration shall be enforceable in courts of law. 131 Cong.Rec. H11519 (daily ed. Dec. 10, 1985). While this federal statutory amendment cannot apply to this case, which arose before its enactment, the close correspondence of the amendment's language with that of the regulation suggests a bearing on interpretation of the regulation. The Bank also points to the language of the regulation that calls for procedures for prompt exercise of legal options to preserve the lender's collateral position or guard against loss, and argues that it complied with the regulation when it charged off part of the loan and commenced foreclosure to preserve its collateral position and guard against loss. But, like the issues about Halversons' qualifying for forbearance, this argument can best be considered upon full development of the facts and the inferences to be drawn from them. Finally, the Bank suggests that this regulation is not a binding contract giving the borrower any rights since it was not included in the mortgage. The Bank cites Manufacturers Hanover Mortgage Corporation v. Snell, 142 Mich.App. 548, 370 N.W.2d 401 (1985), which, in a proceeding after foreclosure by advertisement, rejected a mortgage servicing defense based upon both HUD regulations and a handbook because they must somehow be implicit terms of a mortgage contract between plaintiff and defendants. 370 N.W.2d at 404. But, here, it is clear that this Farm Credit Administration regulation applies to the Bank. The essential issue remains: does the regulation accord enforceable procedural rights to borrowers like Halversons, or is the regulation a mere aid to guide discretionary actions of the Bank. When the affidavits are viewed in the light most favorable to the Halversons, as they must be at this stage, there are material issues of fact about the application of the administrative forbearance policy to the Halversons and about the Bank's compliance with the regulation. Like the undecided issues on judicial forbearance, a decision on the full reach of this federal forbearance regulation should await development of an adequate record in the trial court.