November 19, 2010
Today, the Indiana Court of Appeals followed the decisions of various other states and held that a lender cannot foreclose on a HUD-insured mortgage without first satisfying all applicable HUD regulations in
Lacy-McKinney v. Taylor, Bean & Whitaker Mortgage Corp., 937 N.E.2d 853 (Ind. Ct. App. 2010), Case No. 71A03-0912-CV-587. The Court concluded that the lack of compliance with these HUD regulations were an affirmative defense that could preclude foreclosure.
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In this case, a homeowner purchased her home with an an FHA-insured loan subject to federal statutes and HUD regulations. Those regulations included that the lender meet face-to-face with the mortgagor prior to filing a complaint for foreclosure (with certain exceptions) and that the lender accept partial payment (with certain exceptions). The homeowner fell behind on her mortgage and the lender never met with her face-to-face and refused partial payment. The lender then filed a complaint seeking to foreclose on the home. The homeowner answered and asserted counterclaims, including the lender's failure to comply with the HUD regulations addressed above. The lender moved for summary judgment and the trial court granted that motion and issued a decree of foreclosure. The homeowner appealed.
On appeal, the Court noted that the issue of whether HUD regulations could be an affirmative defense to a foreclosure action on an FHA-insured mortgage was an issue of first impression in Indiana. It, therefore, relied heavily upon decisions from other states and determined that these regulations should be affirmative defenses. The Court relied most heavily upon
Bankers Life Co. v. Denton, 458 N.E.2d 203 (Ill. App. Ct. 1983), quoting the following from that case:
It is evident from the language of the servicing regulations that the mortgagee must comply with these provisions prior to the commencement of a foreclosure proceeding. Therefore, ... we believe that the failure to comply with these servicing regulations which are mandatory and have the force and effect of law can be raised in a foreclosure proceeding as an affirmative defense.
While it is true that 24 C.F.R. 203.500 provides that a pattern of refusal or failure to comply with the servicing requirements will be cause for withdrawal of a mortgagee's approval to participate in the federal mortgage insurance program, we do not believe this to be an adequate remedy for the individual mortgagor. T he legislative purpose of the National Housing Act ... is to assist in providing a decent home and a suitable living environment for every American family. Thus, the primary beneficiaries of the act and its implementing regulations are those receiving assistance through its various housing programs. This would include the defendant as mortgagors of a H.U.D. insured mortgage.
Therefore, in order to effectively insure that the interests of the primary beneficiaries of the H.U.D. mortgage servicing requirements are being protected, mortgagors must be allowed to raise noncompliance with the servicing requirements as a defense to a foreclosure action. H.U.D.'s withdrawal of a mortgagee's approval to participate in the mortgage insurance program after repeated violations of the servicing requirements is a useless remedy for the individual faced with the immediate problem of the foreclosure action; an action which could possibly be avoided by ... further efforts to arrange a revised payment plan.
The Court then explicitly held that a mortgagee's noncompliance with HUD regulations is an affirmative defense, rather than an equitable defense (such as unclean hands or failure to do equity).
We find it problematic to treat such noncompliance merely as an equitable remedy. If noncompliance with HUD regulations is merely "unclean hands," a court may be precluded from requiring compliance in cases where the mortgagor is also deemed to have unclean hands. Hence, the equitable approach is limited in its ability to promote a mortgagee's compliance with HUD regulations. Instead, we agree with the reasoning of Denton and view the affirmative defense of noncompliance with HUD regulations as the failure of the mortgagee to satisfy a HUD-imposed condition precedent to foreclosure.
The Court then concluded that there was a genuine issue of material fact regarding whether the lender had satisfied the face-to-face meeting and partial payment requirements, which precluded foreclosure.
Given the current mortgage issues, homeowners and their attorneys are likely to welcome this decision with open arms.
Lessons:
- A mortgagee's compliance with HUD regulations is a condition precedent to foreclosing against an FHA-insured mortgage.
- Homeowners may raise mortgagee's failure to comply with HUD regulations as an affirmative defense to a foreclosure action against an FHA-insured home.
- HUD regulations currently include a requirement (with exceptions) that the lender meet face-to-face with the borrower before foreclosing and that the lender accept partial payments (with exceptions).
