By David N. Anthony, John C. Lynch, Ethan G. Ostroff and Maryia Y. Jones
On April 20, 2012, in a surprising decision, the Supreme Court of Virginia revived borrowers' claims against defendant loan holder and servicer, concluding that the borrowers' non-payment under a home loan did not constitute the first material breach of the loan agreement and, consequently, did not preclude the borrowers from bringing an action to require a lender to comply with the conditions precedent to foreclosure that are contained in a deed of trust.
Also, the Supreme Court held that the Housing and Urban Development (HUD) regulations required defendant to have a face-to-face meeting with borrowers, who defaulted under the original note, at least 30 days before foreclosure. This contradicts the express language of the HUD regulation, which imposes this requirement only if a default occurs on "a repayment plan arranged other than during a personal interview."
Finally, the Court refused to defer to the HUD interpretation of the term "branch office" to mean "servicing office." Instead, the Court held that the face-to-face interview requirement applies to any mortgagee or servicer that has any branch office within 200 miles from the property.
Plaintiffs alleged that they took out a Federal Housing Authority (FHA) loan, which is subject to HUD regulations. Plaintiffs defaulted on the loan and defendant initiated foreclosure proceedings. In their Complaint, plaintiffs asked the court to declare that the foreclosure would be void because defendant did not comply with the conditions precedent to foreclosure set forth in the deed of trust, i.e., the HUD regulation requiring that defendant must conduct a face-to-face meeting with borrowers before foreclosure. The trial court dismissed plaintiffs' Complaint, holding that the first material breach doctrine prevented plaintiffs from enforcing conditions precedent under the Deed of Trust. Plaintiffs appealed.
The Supreme Court of Virginia reversed. The Court held that a lender must comply with all conditions precedent to foreclosure in a deed of trust even if the borrowers are in arrears. The Court reasoned that, by its nature, the deed of trust contemplates the possibility of non-payment.
It is "a contract in which the parties have agreed that material breach of the note by nonpayment will not deprive borrowers of their rights to enforce the conditions precedent. Accordingly, non-payment of a note is not a material breach of a deed of trust." Therefore, borrowers were entitled to contest the impending foreclosure based on the allegation that the lender failed to satisfy an express condition precedent to foreclosure - a face-to-face meeting with a borrower at least 30 days before foreclosure.
Next, the Court rejected defendant's argument that the language in the Deed of Trust should not be construed to incorporate the HUD regulation because the language was not bargained for by the parties; rather, it was imposed by HUD, which requires the use of a standardized form deed of trust. The Court held that HUD clearly expressed its intent that foreclosure proceedings are not permitted unless the lender has complied with the regulations and, therefore, such compliance was required prior to the right to accelerate and foreclose.
Finally, Defendant argued that the HUD regulation could not apply because Defendant did not have a servicing office within 200 miles from the property. HUD previously interpreted the term "branch" office, as used in the HUD regulation, to refer to "servicing" offices and not those branch offices that conduct origination activities only. The Court disagreed and held that the term "branch office" meant any office of the holder.
The Court refused to defer to the HUD interpretation of the term because it was not reasonable, in the Court's opinion. The Court went so far as to state that "[i]f an originating office within the 200-mile radius lacks staff with the appropriate training, appropriately-trained staff could participate in a face-to-face meeting between the borrower and the staff of the originating office by tele- or video-conference."
This decision is surprising in light of the Court's precedent that non-payment constitutes a material breach. Also, this is the first decision by any state's highest court to hold that a face-to-face meeting at least 30 days before the commencement of foreclosure is required if default occurs under the note, rather than in the repayment plan.
Further, this decision broadens the reach of the face-to-face pre-foreclosure interview requirement to apply to all holders and servicers that have any branch office within 200 miles of the mortgaged property. Lenders and servicers should promptly consider taking steps to comply with this ruling regarding HUD regulations on FHA-backed loans. It is expected that this opinion will cause a new wave of foreclosure litigation in Virginia and likely elsewhere.A copy of the court's opinion is attached here. Mathews v. PHH Mortgage Corp., No. 110967, 2012 Va. LEXIS 90 (Va. Apr. 20, 2012).Troutman Sanders' Financial Services Litigation and Regulatory Compliance TeamTroutman Sanders' Financial Services Litigation and Regulatory Compliance team is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. The team is comprised of a dedicated group of trial and regulatory lawyers who focus on resolving the array of issues that confront financial institutions. Its lawyers have years of hands-on successful experience in all areas of the trial process, coupled with in-depth banking industry and regulatory knowledge. Please do not hesitate to contact David Anthony, John Lynch, Ethan Ostroff, or Maryia Jones if you have questions or would like additional information.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.
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