Indiana App Ct Holds Noncompliance with HUD/FHA Regs is a Valid Defense to FHA Foreclosure Action

"It’s not getting any easier for lenders seeking foreclosure on delinquent FHA home loans in Indiana. In a case of first impression, the Indiana Court of Appeals held that a servicer’s noncompliance with HUD servicing regulations is a valid affirmative defense to the foreclosure of an FHA-insured mortgage. Lacy-McKinney v. Taylor, Bean & Whitaker Mortg. Corp., 2010 Ind. App. LEXIS 2161 (Ind. Ct. App. Nov. 19, 2010).

"The Federal Housing Administration operates a mortgage insurance program for the purpose of encouraging lenders to issue loans at favorable interest rates to otherwise ineligible borrowers. Participating lenders must comply with rules imposed by the Department of Housing and Urban Development (HUD), including the servicing regulations contained at 24 CFR § 203.500 – § 203.681. These regulations include requirements that in certain default circumstances servicers may not immediately accelerate and foreclose, but must first meet face-to-face with borrowers prior to filing a foreclosure claim, accept partial payments, and engage in other timely loss mitigation efforts.

"The Indiana appellate court rejected the loan servicer’s argument that the HUD regulations apply only to the relationships between mortgagees and the government and that Congress did not intend for the regulations to be used by mortgagors as a private right of action or defense. Instead, the court found that public policy, the language of the regulations and precedents from other state courts supported its decision that a mortgagee’s satisfaction of HUD-imposed regulations is a binding condition precedent to its right to foreclose on an FHA-insured property. Finding that the servicer improperly refused the borrower’s partial payments and failed to conduct a face-to-face meeting prior to foreclosure, the appellate court reversed the trial court’s summary judgment in favor of the mortgagee and remanded the case for further proceedings. An appeal has not yet been filed.

"Although the Lacy-McKinney decision only allows the HUD regulations to be used by borrowers as a shield and not a sword, it is certain to attract attention from the growing number of attorneys specializing in the representation of borrowers facing foreclosure."