Recently, in Wells Fargo Bank, N.A. v. Lorson, et al., the Connecticut Supreme Court held that compliance with applicable federal Department of Housing and Urban Development (HUD) regulatory requirements is a condition precedent to the acceleration of a debt, enforcement of a note, and foreclosure of a mortgage loan guaranteed or insured by the Federal Housing Administration (FHA). As a result, pursuant to Connecticut case law, mortgagees for FHA guaranteed or insured mortgages are now required to plead and prove their compliance with HUD regulations or open their foreclosure to possible motion practice.
In Lorson, the defendants executed a mortgage note and deed, which were guaranteed and/or insured by the FHA and which specifically and repeatedly referred to HUD regulations as a limitation on acceleration, enforcement and foreclosure. Relying on the text of the note and mortgage, the language of the HUD regulations, the public policy reasonings behind the HUD regulations, and case law from other jurisdictions, the Connecticut Supreme Court held that the compliance provisions of the “note and mortgage clearly were intended to constrain the ability of lenders to accelerate the debt payment or to foreclose without first providing the homeowners with every opportunity to take informed steps to retain their homes, as provided in the regulations.” According to the Court, it followed that the HUD regulations are conditions precedent and that the rights to accelerate and foreclose do not exist until those conditions are met.
Given Connecticut case law, which requires conditions precedent to a foreclosure to be plead and proved by the plaintiff, the Court established a burden shifting procedure for all foreclosure actions of FHA guaranteed or insured mortgages:
- First, a plaintiff-lender must generally plead compliance with HUD regulations, without needing to specifically plead compliance with each individual regulation.
- Once the plaintiff-lender has generally plead compliance, the defendant-borrower will have access to discovery to determine whether there was, in fact, compliance. Should the defendant discover that the plaintiff failed to comply with any specific HUD regulation, they may move to dismiss the action on that account.
New England Trends
While the holding of Lorson is specific to Connecticut, it is a part of a larger trend of state courts holding that for mortgage loans guaranteed or insured by the FHA, compliance with HUD regulations is a condition precedent to the foreclosure process. With this decision, Connecticut joins New York and Massachusetts, among many others, to hold that compliance with HUD regulations are conditions precedent. However, the implications of such a holding vary by state. For example, New York does not necessarily require a plaintiff to plead compliance, but instead holds that failure to comply with HUD servicing requirements is a complete defense to a mortgage foreclosure action. While Pennsylvania does not hold HUD regulations to be conditions precedent to a foreclosure action, a lender’s deviation from the same may be raised as an equitable defense to foreclosure.
Given the diversity of state law surrounding HUD regulations in foreclosure actions, it is important to have counsel with an intimate knowledge of state and federal requirements for foreclosure actions.
For more information about this case or the obligations and responsibilities of servicers for FHA insured or guaranteed mortgages, please contact Vincent J. Averaimo, Thomas A. Costello, or your Barton Gilman foreclosure attorney.