On September 30, the United States Court of Appeals for the Eleventh Circuit issued a published decision that has potentially opened a new avenue for borrowers with FHA-backed mortgages to challenge foreclosure sales. In Bates v. JPMorgan Chase Bank, NA, ___ F.3d ____, No. 13-15340, 2014 WL 4815546 (11th Cir. Sept. 30, 2014), a borrower "claim[ed] that Chase breached the mortgage deed by failing to comply strictly with certain regulations promulgated by the Department of Housing and Urban Development ("HUD") as part of the Federal Housing Administration lending program." Security instruments for FHA-backed mortgages contain numerous provisions related to HUD regulations, including the provision that the declaration of a default is "limited by regulations issued by the Secretary . . . ."

There is a split of authority around the country as to whether the alleged failure to comply with HUD regulations can form the basis of a breach of contract claim, since all courts agree that there is no independent private right of action against a creditor for the breach of a HUD regulation. The district court in Bates dismissed the breach of contract claim because it held that "binding precedent in this Circuit, as well as authority from Georgia courts, establishes that a borrower has no private right of action for damages against her mortgage servicer for a violation of HUD regulations." No. 4:12-CV-43 (CDL), 2013 WL 5755585, at *5 (M.D. Ga. Oct. 23, 2013). On appeal, the Eleventh Circuit agreed that there is no independent cause of action for breach of a HUD regulation, but if HUD regulations operate as a condition precedent to certain provisions in the security instrument, a borrower can allege a breach of contract claim against the lender for noncompliance with HUD regulations.

As a result of the Bates opinion, we expect to see new lawsuits filed based on alleged noncompliance with HUD regulations. However, Bates is likely not the end of the issue because although it is a published decision, it is a decision on a state law issue (breach of contract) and Georgia state courts are not bound by the decision.  As such, this issue could eventually be addressed by Georgia appellate courts which could reach a decision contrary to Bates. 

As one of the basic steps in the Tennessee foreclosure process, the current beneficiary of a Deed of Trust is required to appoint a successor trustee by filing a Substitution of Trustee (commonly referred to as a "SOT").  Tennessee statute § 35-5-114 sets out the general requirements surrounding the SOT, including the timing of when it should be recorded in the county where the property is located.  However, there are two portions of this statute that appear to contradict one another regarding the specific timing of when the SOT is required to be recorded.

One subsection states that "[a] substitute of trustee shall be recorded prior to any sale".  T.C.A. § 35-5-114(c).  Yet, another subsection states that the SOT "shall be recorded prior to the deed evidencing sale".  T.C.A. § 35-5-114(b)(3)(A).  Not surprisingly, these two portions of the statute have created some confusion as to the latest acceptable point when the SOT must be recorded.

Given the contradictory language in the statute, we decided to conduct further research on this topic.  We contacted a local Tennessee underwriter at a major title insurance company to get their opinion on the two differing ways in which this statute can be interpreted for the timing of recording the SOT.  The underwriter was able to clarify that the language in the statute can be consistently read as meaning that the SOT has to be recorded prior to the recording of the deed evidencing the sale.  In Tennessee, this deed is called the Substitute Trustee's Deed or simply the foreclosure deed.  Therefore, the SOT can be recorded at any point, including after the sale has been held, as long as it is recorded before the foreclosure deed.

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Because of the voluntary nature and cost-efficiency of the deed in lieu foreclosure, this type of transaction is often a win-win situation for the borrower and lender.  When deciding whether to accept a deed in lieu of foreclosure, the first question that a lender typically asks is whether there are any subordinate liens attached to the secured real property.   Since a foreclosure generally extinguishes subordinate liens and a deed in lieu of foreclosure does not extinguish such interests, in a case where there are subordinate liens, a lender often faces the tough decision whether to accept a deed in lieu of foreclosure.   It must balance the costs and benefits between negotiating with the holders of the subordinate liens in order to proceed with a deed in lieu of foreclosure versus foregoing the deed in lieu of foreclosure in favor of a foreclosure proceeding.   While the existence of subordinate liens is an important consideration, there are other important factors that a lender should consider during the deed in lieu of foreclosure process.  There are circumstances where courts will set aside a deed in lieu conveyance, and the mere risk of such judicial scrutiny affects whether title to real property is insurable after a deed in lieu of foreclosure.       

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The first new form is the Loan Estimate, designed to provide consumers a better understanding of the mortgage loan for which they are applying.  The form contains loan terms, projected payments, costs at closing table, and a link for consumers to obtain more information.  Consumers can also use this form to compare the costs and features of different loans.  The Loan Estimate must be provided to consumers, either by hand or placed in the mail, no later than three business days after they submit a loan application. If circumstances have changed, a revised Loan Estimate must be delivered or placed in the mail within three business days of the lender's knowledge of a changed circumstance.  However, the revised form must be received by the borrower no later than four business days before consummation of the loan.

 The Closing Disclosure form provides a list of disclosures that will be helpful to consumers in understanding all of the costs of the transaction.  The Closing Disclosure must be provided to consumers three business days before they close on the loan.  If the creditor makes significant changes between the time the Closing Disclosure form is given and the closing, a new form and an additional three-business-day waiting period must be provided to the consumer. Less significant changes can be disclosed on a revised form which must be received by the consumer at or before closing, without delaying the closing.

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