PJC In The News

Court Rules Borrower Can Use Mortgage Regulations as a Shield, But Not as a Sword

Borrower can use regs as a shield, not a sword CARYN TAMBER Daily Record Legal Affairs Writer March 22, 2007 A mortgagor cannot sue a lender for violating the federal mortgage-servicing rules included in the deed of trust, the state’s top court has said. The borrower may, however, raise the alleged violations in seeking to enjoin foreclosure, a unanimous Court of Appeals held in a decision one consumer advocate characterized as “awesome.” The decision reverses a holding by the Court of Special Appeals, which decided last year that Alan Neal could sue Wells Fargo Home Mortgage Inc. for initiating foreclosure without first taking loss-mitigation measures, as required by the government form deed used in the Fair Housing Administration-backed loan. “The overall purpose of the FHA mortgage insurance program is to encourage leading lenders, in exchange for a government guarantee of the loan, to extend mortgages to those carrying higher credit risks,” Judge Glenn T. Harrell Jr. wrote. “The regulations setting forth the rules and procedures for the program, including the loss mitigation regulations pointed to by Neal … address how participating lenders are to conduct their activities. “Thus, the regulations do not control directly the relationship between the mortgagor and mortgagee and may not be invoked by the mortgagor as a sword in an offensive cause of action against the mortgagee,” he wrote. Lawyer Scott C. Borison of the Legg Law Firm, who represents the Walkersville homeowner, cast the decision as helpful for borrowers. “It is good news for homeowners,” Borison, who was out of the office Wednesday, said in a statement issued by an assistant. “Lenders who fail to act properly can be held accountable and face repercussions. With the projected tidal wave of foreclosures, lenders who have failed to act properly may find they are not entitled to the equitable remedy of foreclosure against homeowners.” The court held that in cases where the borrower has been allowed to sue over violations of federal rules in the deed of trust, the lender put the language in the deed voluntarily. In this case, Wells Fargo was required to use an FHA form deed of trust, so it could not have negotiated the requirement that it engage in loss mitigation, Harrell wrote. The loss-mitigation requirement mandates that the lender consider deeds in lieu of foreclosure, pre-foreclosure sales, partial claims, assumptions, special forbearance or mortgage assumption, according to the opinion. According to a U.S. Department of Housing and Urban Development report cited in the opinion, “[b]ecause HUD requires participating lenders to employ loss mitigation techniques, over 59 percent of families who defaulted on FHA-insured mortgages in FY 2005 were able to work out their delinquencies and remain in their homes.” Ramifications Phillip Robinson of Civil Justice Inc., which filed an amicus brief in the case, predicts broad ramifications from that part of the opinion, which he called “awesome” for consumers. Under the court’s logic, a consumer cannot be held accountable for a contractual item he did not bargain for, such as a mandatory arbitration decision, he said. Robinson also praised the second part of the decision, which he said gives borrowers the right to fight foreclosure by showing that the lender did not act in good faith. “Although we conclude that a mortgagor may not wield as a sword the HUD regulations alluded to in a mandatory FHA form deed of trust, there is ample support that aggrieved mortgagors may assert an allegation of regulatory noncompliance as a shield against unauthorized foreclosure actions,” Harrell wrote. He cited language in the regulations stating that if a lender violates them, the violation can be used as a “defense,” presumably against foreclosure. Although mortgagors wanting to enjoin foreclosure are usually required by Maryland law to pay into the court all that is owed, that may not be the case if the lender violated the mortgage servicing rules, the court held. “This is because, under principles of equity, a mortgagee’s commencement of a foreclosure proceeding on an FHA-insured mortgage, without first having adhered to the mandatory HUD loss mitigation regulations, may invalidate the mortgagee’s declaration of default,” Harrell wrote. The holding may impact even those borrowers whose loans are not federally insured, Robinson said. “If [lenders are] not following the law in some other respect, the borrower can raise that in a foreclosure proceeding,” he said. “Equity would say the sale should be set aside if the lender doesn’t have clean hands.” In a footnote, Harrell wrote that Neal alleges that Wells Fargo did not consider alternatives to foreclosure, and Wells Fargo disputes that argument. On remand, the trial court should decide whether Neal has made his case, the court said — and Neal bears the burden of proof. Mark D. Maneche, who argued the case for Wells Fargo, said he is currently trying to figure out exactly what must happen on remand. The opinion is unclear about “what actually is being remanded and what remains of this case at this point,” said Maneche, who practices with Venable LLP. Injunction sought According to the opinion, Wells Fargo started foreclosure proceedings in Frederick County Circuit Court in 2003. Neal filed a complaint for breach of contract and injunctive relief. The circuit court granted summary judgment to Wells Fargo, ruling that the mortgage-service requirements are subject to government enforcement and not to a private cause of action. On appeal, the Court of Special Appeals held that federal regulations incorporated into a contract may be the subject of a breach of contract action.

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