Eleventh Circuit Rules that Failure to Comply with HUD Regulations in Foreclosing on FHA-Insured Mortgage – Including the Requirement of Having a Face-to-Face Meeting With the Debtor – Can Constitute a Breach of Contract.

In Bates v. JPMorgan Chase Bank, N.A., a published decision issued on September 30, the U.S. Court of Appeals for the Eleventh Circuit held that under its reading of Georgia law, a bank’s failure to strictly comply with the regulations promulgated by the Department of Housing and Urban Development (HUD) for foreclosing on an FHA-insured mortgage could constitute a breach of contract. Although the court affirmed summary judgment in the bank’s favor on the facts of the case, the decision opens the door to defenses to foreclosure cases and counterclaims for damages if banks fail to comply with requirements under HUD regulations, such as the face-to-face meeting requirement, the requirement of notifying borrowers of defaults before sending acceleration letters, and the requirement that loss mitigation techniques be considered.

Bates had purchased a home in Georgia in 2008 that she financed with an FHA-insured loan. Chase Bank later acquired the loan and became the holder of the promissory note. The Security Deed that accompanied the note provided: “This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary [of the Department of Housing and Urban Development].” The Note similarly provided: “This Note does not authorize acceleration when not permitted by HUD regulations.”

Bates defaulted on her loan payments around April of 2011; in response, Chase sent notices of its intent to foreclose on the property. After several months of communications between Chase and Bates (and Bates’s unsuccessful efforts to tender some payments on her loan), Bates filed a complaint against Chase in the United States District Court for the Middle District of Georgia. Among her seven counts, Bates claimed that Chase had breached its contract with her by failing to comply with 24 C.F.R. § 203.604(b) by arranging to have a face-to-face meeting with her before commencing its foreclosure efforts. Bates claimed that this action violated the terms of both the Security Deed and Note because Chase had attempted to accelerate the debt and foreclose in violation of applicable HUD regulations.

The district court granted summary judgment to Chase on the breach-of-contract claim. Following the reasoning of several other courts, the district court held that the failure to comply with a HUD regulation does not give rise to a cause of action for damages against the bank.

On appeal, the Eleventh Circuit affirmed summary judgment, but used slightly different reasoning. Rather than resting upon the fact that violation of HUD regulations does not give rise to a private right of action on its own, which Bates conceded in her appellate brief, the court focused on whether such a violation would support a claim for breach of contract, when the contract expressly stated that the bank would comply with HUD regulations. In predicting Georgia law, the court held “that HUD regulations clearly referenced in a deed as conditions precedent to the power to accelerate and the power of sale could form the basis of a breach of contract action.” The court rejected Chase’s suggestion that such a claim was barred by the preexisting duty rule, holding that any duty Chase had to follow HUD regulations was owed to the government, not to Bates. However, the court noted that Bates had not shown any way that she had been damaged by Chase’s conduct—since the foreclosure had not gone through, and she had not requested injunctive relief. Relying on her lack of damages, the court affirmed the grant of summary judgment on the claim.

The Eleventh Circuit’s published opinion in Bates should give pause to mortgage lenders in Georgia and other states with similar laws. The court’s reasoning clearly anticipates that a borrower with an FHA-insured mortgage whose property is foreclosed upon may have a cause of action for damages if he can show that the lender failed to comply with all applicable HUD regulations, including the face-to-face meeting requirement. Lenders doing business in Georgia—and Alabama and Florida, the other states in the Court’s jurisdiction, which appear to have similar laws about the interpretation of powers of sale—should ensure that they comply with all applicable HUD regulations before foreclosing on any FHA-insured loan.