The U.S. Court of Appeals for the Fifth Circuit recently held that HUD reverse mortgage regulations and guidelines do not give the borrower a private cause of action unless the regulations are expressly incorporated into the loan agreement.

A copy of the opinion in Johnson v. World Alliance Financial Corp. et al is available at: Link to Opinion.

A male borrower entered into a Home Equity Conversion Mortgage (HECM) with the defendant, lender. The loan was secured by the male borrower’s home, which already had two liens on it. One of the liens was held by the male borrower’s ex-wife.

Later, the plaintiff and the male borrower were married. While the newlyweds were honeymooning, the ex-wife lienholder foreclosed on the property and allegedly destroyed personal items of the plaintiff’s. Two years after the ex-wife lienholder’s foreclosure, the plaintiff’s husband passed away.

The defendant mortgagee had sued the ex-wife lienholder in state court, challenging her right to foreclose. After two years of litigation, the state trial court granted summary judgment in favor of the defendant mortgagee. The ex-wife lienholder appealed but the matter was settled for $15,000. The title of the property was put back in the deceased husband’s name and the plaintiff’s homestead rights were revived.

The plaintiff sued the defendant mortgagee for breach of contract, fraudulent inducement, violations of the Texas Debt Collections Act, and promissory estoppel. The plaintiff essentially alleged that the property’s foreclosure by the ex-wife lienholder could have been avoided if the defendant mortgagee did not issue the HECM in violation of HUD guidelines.

The magistrate judge issued his report and recommendation to grant summary judgment in favor of the defendant mortgagee. The trial court granted judgment against the plaintiff because the asserted HUD regulations were not expressly incorporated into the parties’ agreements and therefore could not form the basis of her claim and under the terms of the note and deed of trust, it was the plaintiff’s burden to maintain lien priority. The plaintiff appealed her breach of contract and fraudulent inducement claims.

On appeal, the plaintiff argued that the defendant mortgagee violated the HUD regulations in the HECM loan agreement by failing to establish and maintain the priority of the HECM lien. Rejecting this argument, the Fifth Circuit noted that HUD regulations govern the relationship between the reverse mortgage lender and HUD as insurer of the loan. The Court also noted HUD regulations do not give the borrower a private cause of action unless the regulations are expressly incorporated into the lender-borrower agreement.

Accordingly, the Fifth Circuit held, because there was no evidence that the parties intended to incorporate the HUD regulations at issue into the HECM loan agreement, the plaintiff had no claim relating to any alleged violation of HUD regulations or guidelines.

Secondly, the plaintiff argued that the defendant mortgagee was responsible for ensuring the priority of the HECM lien. However, the Fifth Circuit found that the HECM does not contain an implied promise that the lender will assure first lien position at the outset of the loan. The Court noted that the HECM held the position of a first lien at its inception.

If the other liens on the property threatened to become prior to some portion of the HECM, the Fifth Circuit held it was the plaintiff’s responsibility under the contract to settle any liens that would be senior to the HECM. The Court noted that the plaintiff never pursued any action against the lien-holder.

The Fifth Circuit also found that any damages allegedly suffered by the plaintiff were due to the ex-wife lienholder’s wrongful foreclosure and plaintiff’s inaction to protect her property, and not a result of the defendant’s alleged breach of the HECM. The Court noted that the defendant mortgagee could not have reasonably foreseen that a lienholder without authority to foreclose would wrongfully do so. Thus, the Fifth Circuit held that the trial court properly dismissed the plaintiff’s breach of contract claim.

The Fifth Circuit then noted that the plaintiff’s fraudulent concealment claims were arguably moot, as there was no evidence that the HECM was invalid or that the defendant breached any of the HECMs terms.

As you may recall, “[u]nder Texas law, the elements of fraud are (1) that a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury.” See In re VNA Inc., 403 S.W.3d 483, 487 (Tex. App.—El Paso 2013, no pet).

The plaintiff argued that the lender sent an email stating the ex-wife’s lien did not seem to be an issue, but two years later it was an issue. The plaintiff also argued that the defendant mortgagee admitted the HECM should not have been issued without settling the lien. The plaintiff argued that, because the defendant mortgagee was aware of the lien and the problem it created, but declined to disclose the issue to the plaintiff, the plaintiff was allegedly fraudulently induced into the HECM.

Again, the Fifth Circuit found that the defendant mortgagee could not have reasonably foreseen that a lienholder without authority to foreclose would wrongfully do so. Second, the Court held that statements that the defendant mortgagee should not have entered into the HECM without settling the lien were found to be irrelevant. Therefore, the Appellate Court held that the trial court properly dismissed the plaintiff’s fraudulent inducement claim.

Accordingly, the trial court’s judgment dismissing the plaintiff’s claims was affirmed.