MD CSA revives borrower's breach of contract action over HUD

Daily Record, The (Baltimore), Jun 2, 2006 by Cynthia Di Pasquale

A borrower who defaulted on his home mortgage may have the right to sue his lender for not following federal mortgage servicing regulations prior to initiating foreclosure proceedings, the Court of Special Appeals held.

Alan Neal concedes he has no private cause of action to enforce the U.S. Department of Housing and Urban Development's regulations on his lender, Wells Fargo Home Mortgage Inc. However, he convinced the appellate court to let him pursue his claim of a violation because those regulations were incorporated into his form contract with the lender.

We agree with Neal that remand is necessary for the court to consider whether the parties actually agreed, as a term of the Deed [of Trust], that Wells Fargo would comply with the applicable HUD mortgage servicing regulations before initiating foreclosure proceedings or taking any other action against Neal, the court held in vacating a ruling by the Frederick County Circuit Court.

Wells Fargo argued that such a holding would permit a backdoor method of suing for damages to enforce HUD loan servicing regulations, according to last week's opinion. But Neal claims his deed of trust incorporated HUD's requirements for foreclosure, thus making them a part of the contract.

He sought to prevent Wells Fargo from initiating foreclosure proceedings or charging and collecting foreclosure-related fees.

The circuit judge granted Wells Fargo's motion for summary judgment in September 2004, basing his ruling on the fact that Neal had no private cause of action to enforce compliance with HUD regulations.

The Court of Special Appeals, however, was more sympathetic to Neal's contract argument.

Notwithstanding the lack of a private right of action to enforce the HUD mortgage servicing regulations, Neal is not foreclosed from basing his cause of action for breach of contract and injunctive relief on the claim that Wells Fargo contracted with Neal to comply with those regulations, Judge Mary Ellen Barbera wrote for the court.

The court didn't rule on the merits of Neal's claim. Instead, it remanded the case for a decision on whether the parties actually incorporated HUD mortgage servicing requirements in the contract and if there was, indeed, a breach of contract.

Wells Fargo maintains that HUD requirements are not a part of the deed of trust, according to attorney Mark D. Maneche. There are regulations governing transactions such as those involved in the Neal case, but they are strictly between HUD and the lender, he said.

The company argued to the court that construction of the Deed to create a breach of contract action would permit a 'backdoor method of suing for damages to enforce HUD loan servicing regulations,' according to the opinion.

Maneche would not comment on the implications of this decision for other federally-backed loan contracts as there are too many open questions at the moment.

Wells Fargo has not decided whether to file a petition for certiorari, he said.

Neal's attorney could not be reached for comment.

BARBERA: AGREEMENT?

WHAT THE COURT HELD

Case:

Alan Neal v. Wells Fargo Home Mortgage Inc., CSA No. 1751, Sept. Term 2004. Reported. Opinion by Barbera, J. Filed May 26, 2005.

Issue:

Can a borrower bring a breach of contract claim against his mortgage lender for not complying with HUD mortgage servicing requirements?

Holding:

Yes; judgment vacated. If HUD regulations are incorporated into the deed of trust, the borrower may have a legitimate breach of contract claim notwithstanding the lack of a private right of action to enforce HUD regulations.

Counsel:

Scott Borison for appellant; Mark D. Maneche for appellee.