On December 13, 2012, the California Court of Appeal in Pfeifer v. Countrywide Home Loans, Case No. A133071, decided the issue of whether foreclosure is proper under a deed of trust insured by the Federal Housing Administration (“FHA”) if the lender has not complied with the pre-foreclosure face-to face meeting requirement mandated by the servicing regulations of the Department of Housing and Urban Development (“HUD”). The Court of Appeal held that a lender’s failing to comply with the HUD servicing requirements as set forth in the FHA deed of trust prevents a nonjudicial foreclosure until such regulations have been followed. The Court of Appeal further held that a tender of the full amount due on the note was not a prerequisite to plaintiffs’ asserting a wrongful foreclosure claim because the tender rule applies only in cases seeking to set aside a completed sale rather than actions seeking to prevent the sale in the first place.
In 2008, the Pfeifers borrowed $606,977 from Alameda Mortgage Corporation (“Alameda”). The mortgage was insured by the FHA. Alameda recorded a deed of trust against the Pfeifers’ residence to secure the debt. Countrywide Home Loans (“Countrywide”) purchased the loan made by Alameda, and Bank of America subsequently purchased Countrywide. In May 2009, the Pfeifers defaulted, and Countrywide recorded a notice of default.
In August 2009, the Pfeifers filed a complaint for wrongful foreclosure, breach of the implied covenant of good faith and fair dealing, breach of contract, and fraud and deceit. The trial court sustained Countrywide’s demurrer finding that the Pfeifers were not entitled to declaratory relief based on the lenders’ failure to conduct a face-to-face interview before instituting foreclosure proceedings. The Pfeifers timely appealed.
In reaching its holding, the Court of Appeal relied heavily on a sister jurisdiction’s holding in Mathews v. PHH Mortgage Corp. (2012) 724 S.E.2d 196. There, the Supreme Court of Virginia noted that HUD requires that a FHA deed of trust expressly state that it “does not authorize acceleration or foreclosure if not permitted by the regulations of the Secretary.” In so noting, the court held that HUD servicing regulations requiring lenders to hold face-to-face meetings with borrowers before initiating foreclosure were conditions precedent to the lenders’ right of foreclosure. The court reasoned that the lenders voluntarily agreed to purchase FHA loans in exchange for the government’s backing against default, and that as a result, the lenders voluntarily subjected themselves to the additional requirements designed to avoid the necessity for foreclosure. Finally, the court ruled that the Pfeifers’ failing to tender the full amount due on the note did not preclude their asserting a wrongful foreclosure claim because such a tender is required only if a plaintiff is seeking to set aside a completed sale.
In light of the revived importance of the HUD mortgage servicing requirements, lenders must ensure that their foreclosure processes for FHA-backed loans conform to the HUD regulations. In particular, lenders should resolve the face-to-face meeting requirement prior to going into foreclosure status. Such meetings should be documented in the event they are called into question after nonjudicial foreclosure proceedings have commenced. Lenders also are encouraged to review any loans over which there is pending litigation in order to determine if a change in litigation strategy should be considered in light of these requirements.
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