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Fourth Circuit Court of Appeals Reviews HUD Face-to-Face Requirements

Posted By USFN, Wednesday, October 7, 2015
Updated: Wednesday, November 11, 2015

October 7, 2015


by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. – USFN Member (Virginia)

In Covarrubias v. CitiMortgage, Inc., No. 14-2420 (4th Cir. Va. Sept. 1, 2015)(unpublished), the U.S. Court of Appeals for the Fourth Circuit authored a chapter in the ongoing Virginia HUD face-to-face saga that began in 2012 with Mathews v. PHH Mortgage Corporation, 283 Va. 723, 724 S.E.2d 196 (2012). Mathews was a very favorable Virginia Supreme Court decision for borrowers seeking to challenge foreclosure sales based on allegations of failure to satisfy all conditions precedent to foreclosure. Indeed, the decision garnered national attention and has been cited in many jurisdictions outside of Virginia.

By way of background, the court in Mathews held that the right to foreclose does not accrue until all conditions precedent contained in the deed of trust have been satisfied. The relevant deed of trust specifically incorporated the HUD regulations, and indicated that foreclosure was not authorized if not permitted by the regulations. At issue was the face-to-face meeting requirement contained in 24 C.F.R. § 203.604. This regulation requires that prior to initiating foreclosure the servicer must have, or must make a reasonable attempt to arrange, a face-to-face meeting with the borrower before the loan is three months in default. The court in Mathews rejected the mortgage servicer’s defenses that the borrower’s default in payment excused performance, that the servicer was excused from performance because the term “branch office” (as it pertains to the 200-mile exception) only included loan servicing offices, and the deed of trust did not incorporate the HUD regulations. Accordingly, the lower court’s sustaining of the mortgage servicer’s demurrer (motion to dismiss) was reversed. In 2014, the Virginia Supreme Court reinforced the Mathews holding in Squire v. Virginia Housing Development Authority, 287 Va. 507, 758 S.E.2d 55 (2014).

Mathews and Squire concerned whether a borrower’s pleadings were sufficient to overcome initial demurrer. However, it remained to be seen whether the borrower might survive a motion for summary judgment, if discovery did not support the proposition that failure to conduct the face-to-face meeting caused the borrower’s alleged damages (particularly where the borrower was admittedly in default). The lower court’s decision in Covarrubias had given mortgage servicers hope for prevailing on summary judgment. [Covarrubias v. CitiMortgage, Inc., 2014 WL 6968035 (E.D. Va. 2014)]. Specifically, the U.S. District Court for the Eastern District of Virginia granted summary judgment in favor of the mortgage servicer, holding that “[t]he failure to follow the regulations, however, had no role in any losses suffered by the plaintiff. Rather, Covarrubias’s own actions caused the foreclosure and any resulting damages.” The District Court went on to opine that no reasonable jury could find that failure to satisfy the HUD regulations proximately caused the borrower’s damages. This victory was short-lived, as the Fourth Circuit Court of Appeals reversed the District Court’s decision and remanded the case for further proceedings.

In an unpublished opinion, the Fourth Circuit held that the record demonstrated that the mortgage servicer failed to hold, or reasonably attempted to arrange, a face-to-face meeting. Moreover, the plaintiff had produced prima facie evidence of causation and her ability to bring the loan current, had the meeting been arranged. Specifically, the appellate court held that “we conclude that a rational jury could reasonably conclude that a face-to-face meeting, as required, may have resulted in an outcome other than foreclosure and the consequent loss of Covarrubias’ equity.”

There has been significant litigation on this issue in the last few years at the Virginia Supreme Court level, and now in the U.S. Court of Appeals for the Fourth Circuit. While unpublished opinions are not binding authority in this circuit, Covarrubias — along with the other cases — seems to strongly indicate that breach of contract claims for failure to satisfy the HUD face-to-face requirements, where such regulations are specifically incorporated into the deed of trust, will likely go to trial. These cases also have implications for claims that other conditions precedent were not satisfied before proceeding to foreclosure. Accordingly, it would be prudent for the foreclosure trustee and mortgage servicer to both ensure that any conditions precedent expressly included, or incorporated by reference, in the deed of trust are satisfied before proceeding to foreclosure. More oversight on the front end of the file can likely eliminate costly and time-consuming litigation after the sale. This is particularly true in nonjudicial foreclosure states like Virginia, where there is no judicial sale ratification process requiring the borrower to raise such claims during a ratification period. As a result, in nonjudicial foreclosure states, these claims are often raised several months – if not well over a year – after the foreclosure sale.

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