Executive Summary: The Virginia Supreme Court voids a foreclosure sale because the lender did not hold a face-to-face meeting with the borrower.
Banks and other mortgage lenders should be aware of a recent Virginia Supreme Court decision requiring that a lender hold a face-to-face meeting with the borrower before foreclosure in FHA/HUD cases. In Mathews v. PHH Mortgage Corp., the Court held that a foreclosure sale was void because the bank had not held the face-to-face meeting required by the HUD regulations (24 CFR § 203.604).
Beyond the issue of the face-to-face meeting, the opinion is important in the way the Court approached the issue. The Court held that:
- The pre-existing breach by the borrower (i.e. the default) did not preclude the borrower from enforcing the conditions precedent to foreclosure in the deed of trust;
- The reference to the regulations in the Deed of Trust incorporated these requirements by reference into the Deed of Trust as conditions precedent to foreclosure; and
- The “exception” to this requirement (i.e. that the meeting is not required if the mortgagee, its servicer, or a branch office of either is not located within 200 miles of the mortgaged property) did not apply because any branch office of either the mortgagee or its servicer was sufficient, regardless of whether that office was the “servicing” office.
Courts have long held that HUD regulations do not create a private right of action for breaches of HUD mortgage servicing policies. Nevertheless, the homeowner plaintiffs in Mathews v. PHH Mortgage Corp. sought to circumvent the lack of a private action remedy under HUD regulations by framing their suit as one for breach of contract, not wrongful disclosure.The homeowners asserted that the HUD regulations had been incorporated by reference into a form Deed of Trust through a clause stating that:
In many circumstances regulations issued by the Secretary will limit [the] lender’s rights, in the case of payment defaults, to require immediate payment in full and foreclosure if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by the regulations of the Secretary.
The Virginia Supreme Court agreed with the homeowners that this clause incorporated the applicable HUD regulations into the Deed of Trust and rendered them conditions precedent to any foreclosure proceeding. Of particular importance is the incorporation of 24 C.F.R. § 203.606 which states that, “[b]efore initiating foreclosure, the mortgagee must ensure that all servicing requirements of this subpart have been met.” As one of these servicing requirements, “[t]he mortgagee must have a face to face interview with the mortgagor, or make a reasonable effort to arrange such a meeting before three full monthly installments due on the mortgage are unpaid.”
The Court stated that the above-quoted language clearly and unambiguously incorporated the HUD regulations into the Deed of Trust and “express[ed] the intent of the parties that the rights of acceleration and foreclosure do not accrue under the Deed of Trust unless permitted by those regulations that prevent a lender from accelerating or foreclosing are incorporated by the cited language in the Deed of Trust.” The Court held that this incorporation renders the face-to-face meeting requirement a condition precedent to the accrual of the rights of acceleration and foreclosure under the Deed of Trust.
The Virginia Supreme Court now joins several other courts that have recently addressed the incorporation of HUD regulations into mortgage contracts, after this issue had lain dormant since it was first addressed about 30-35 years ago. With this decision, Virginia becomes one of a handful of states to have explicitly held that HUD regulations regarding mortgage-servicing obligations are incorporated into Deeds of Trust as conditions precedent to a mortgagee’s acceleration and foreclosure of the underlying property.
Because this is an unusually detailed opinion by a state Supreme Court on foreclosure-related issues, we can expect to see this claim occur regularly for these kinds of loans not only in Virginia, but also in other states as this case becomes more widely publicized. Similarly, borrowers may well make related claims regarding the incorporation of other regulations/procedures into the Deed of Trust.
In light of the revived importance of the HUD mortgage servicing requirements, lenders are encouraged to review the applicable regulations, include all such requirements in foreclosure checklists, and otherwise ensure that their foreclosure processes for FHA-backed loans conform to the HUD regulations. In particular, lenders should resolve the face-to-face meeting requirement prior to going into foreclosure status. Such meetings should be documented, in case they are called into question at a later date.
Lenders also are encouraged to review any loans over which there is pending litigation in order to determine if a change in litigation strategy should be considered in light of these newly-highlighted requirements.