Wells Fargo Home Mortgage, Inc. v. Neal

ORDER The Court having considered the motion for reconsideration and the answer filed thereto in the above-captioned case, it is this 7th day of May, 2007, ORDERED, by the Court of Appeals of Maryland, that the motion be, and it is hereby, granted, and it is further ORDERED that the reported opinion filed on March 13, 2007, be, and it is hereby, withdrawn, and the revised opinion attached hereto is filed today in place of the previously filed opinion. HARRELL, J. We issued a writ of certiorari in this matter, 394 Md. 479 , 906 A.2d 942 (2006), to review a judgment of the Court of Special Appeals that was grounded on a holding that a mortgagor under a Fair Housing Administration (FHA) insured ⁷¹¹ loan may be able to maintain a breach of contract claim under State law against a mortgagee for an alleged breach of certain federal regulations alluded to in the parties’ FHA-prescribed form deed of trust. Wells Fargo Home Mortgage, Inc. (Wells Fargo), the mortgagee by assignment, argues here that the Court of Special Appeals erred in vacating the summary judgment granted it by the Circuit Court for Frederick County. The Circuit Court concluded that no private cause of action may be asserted by a mortgagor under the mortgage servicing regulations promulgated by the U.S. Department of Housing and Urban Development (HUD) pursuant to the National Housing Act of 1934(NHA). 1 We hold that Alan Neal, the mortgagor and plaintiff in the Circuit Court, may not advance, as an affirmative cause of action, a State law contract claim based on an asserted breach of the HUD regulations alluded to in his FHA form deed of trust, but may raise a violation of the regulations in pursuit of an injunction blocking foreclosure.

Accordingly, we shall reverse the judgment of the Court of Special Appeals. I. FACTS AND PROCEDURAL HISTORY On 20 June 1991, Alan and Sheri Neal 2 executed a “Maryland FHA Deed of Trust” with Margaretten & Company, Inc., to secure the purchase money loan for a dwelling located in Walkersville, Maryland. The mortgage was insured by the FHA pursuant to the provisions of § 203(b) of the NHA. 3 The deed of trust was assigned by Margaretten for servicing to Wells Fargo. Sometime in 2002 or 2003, Neal fell behind in ⁷¹² making the monthly mortgage payments when due.

Wells Fargo initiated foreclosure proceedings in the Circuit Court, which proceedings were stayed when Neal filed a Complaint on 27 August 2003 that commenced the action that is the subject of this case. Neal posited in his Complaint, and maintains in this Court, that Wells Fargo breached the terms of paragraph 9(d) of the deed of trust by failing to observe the various preforeclosure loss mitigation procedures set out in the HUD mortgage servicing regulations. Paragraph 9(d) of the deed of trust provides: 9. Grounds for Acceleration of the Debt (d) Regulations of HUD Secretary.

In many circumstances regulations issued by the Secretary will limit Lender’s rights in the case of payment defaults to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations o f the Secretary. Based on Wells Fargo’s purported failure to follow the HUD regulations before accelerating the mortgage debt and instituting foreclosure, Neal advanced two causes of action. First, Neal claimed that the regulatory violations constituted a breach of contract, entitling him to monetary damages.

Second, he petitioned for declaratory relief 4 to prevent Wells ⁷¹³ Fargo from pursuing foreclosure under the deed of trust. Wells Fargo responded with a motion for summary judgment, arguing that the HUD regulations relied on by Neal do not afford a borrower a private cause of action such as the one pleaded in Neal’s Complaint. Neal opposed Wells Fargo’s motion and filed a cross-motion for summary judgment advancing the same contentions asserted in his Complaint. After a motions hearing, the court entered summary judgment in favor of Wells Fargo based on the premise that the HUD regulations were intended for the benefit of HUD enforcement of the FHA mortgage insurance program and did not grant a private cause of action for a borrower such as Neal.

Neal appealed to the Court of Special Appeals, which vacated the summary judgment granted by the Circuit Court and remanded the matter for further proceedings on the contract claim asserted by Neal. Neal v. Wells Fargo Home Mortgage, Inc., 168 Md.App. 747, 750-51 , 899 A.2d 208, 210 (2006). Although the intermediate appellate court acquiesced in the notion that the HUD regulations did not afford a private right of action for their violation, it found fault with the Circuit Court’s grant of summary judgment for its failure to consider whether Neal could rely on the regulations referred to in the deed of trust to support a State law breach of contract action. Neal, 168 Md.App. at 752-53 , 899 A.2d at 211-12 .

The Court of Special Appeals found support for its holding in Wells v. Chevy Chase Bank, F.S.B., 377 Md. 197 , 832 A.2d 812 (2003), ⁷¹⁴ cert. denied, 541 U.S. 983 , 124 S.Ct. 1875 , 158 L.Ed.2d 485 (2004), and College Loan Corp. v. SLM Corp., 396 F.3d 588 (4th Cir.2005). The appellate court panel construed those cases to stand for the general proposition that private parties are bound by and may be liable, each to the other, under state and federal statutory or regulatory standards specifically incorporated into contracts executed between them. Therefore, the Court of Special Appeals remanded the case to the Circuit Court to determine whether Neal and Wells Fargo bargained for the provision referring to the HUD loss mitigation regulations.

II

ANALYSIS A. Standard of Review for the Grant of Summary Judgment “In reviewing a grant of summary judgment under Md. Rule 2-501, we independently review the record to determine whether the parties properly generated a dispute of material fact and, if not, whether the moving party is entitled to judgment as a matter of law.” Livesay v. Baltimore, 384 Md. 1, 9-10 , 862 A.2d 33, 38 (2004). Because we perceive no genuine dispute of material fact in the instant controversy, 5 we review the Circuit Court’s grant of summary judgment de novo to determine if the court’s decision was legally correct. Myers v. Kayhoe, 391 Md. 188, 203 , 892 A.2d 520, 529 (2006) (citing Livesay, 384 Md. at 9 , 862 A.2d at 38 ); Dual Inc. v. Lockheed Martin Corp., 383 Md. 151, 162 , 857 A.2d 1095, 1101 (2004). ⁷¹⁵ B. A Private Right of Action? At the outset, we note a distinction between Neal’s theory of this case and the more ubiquitous argument that violation of the NHA or the companion HUD regulations may support a private cause of action for individuals harmed by those violations.

The parties agree that the weight of authority around the country roundly rejects the notion that either the NHA or associated HUD regulations support either direct or implied private causes of action for their violation. See, e.g., Krell v. Nat’l Mortgage Corp., 214 Ga.App. 503 , 448 S.E.2d 248, 249 (1994) (holding that a defaulting FHA mortgagor had no private right of action to pursue under the NHA); Prudential Ins. Co. of Am. v. Jackson, 270 N.J.Super. 510 , 637 A.2d 573, 576 (1994) (reiterating that no private cause of action is derived from the provisions of the HUD regulations concerning foreclosure avoidance); Perry v. Hous. Auth., 664 F,2d 1210, 1215-17 (4th Cir.1981) (rejecting the argument that a private right of action can be implied from the NHA); Shivers v. Landrieu, 674 F.2d 906, 910-12 (D.C.Cir.1981) (finding that the NHA does not provide for an implied private right of action under its accompanying HUD regulations); Falzarano v. United States, 607 F.2d 506, 509-11 (1st Cir.1979) (stating that the NHA does not provide expressly for a private cause of action and concluding that no implied private right of action exists based on the factors set forth in Cort v. Ash, 422 U.S. 66 , 95 S.Ct. 2080 , 45 L.Ed.2d 26 (1975), and the presence of a regulatory enforcement scheme controlled by the Secretary of HUD); Cedar-Riverside Assocs., Inc. v. City of Minneapolis, 606 F.2d 254, 258-59 (8th Cir.1979) (holding that no private cause of action is created in the NHA for a violation of its competitive bidding provisions); City of Rohnert Park v. Harris, 601 F.2d 1040, 1045-47 (9th Cir.1979) (holding that the “Housing Act does not expressly provide that private persons may sue to enforce its terms,” and reasoning that “[a]ll four criteria [of Cort v. Ash ] militate against implying a cause of action”), cert. denied, 445 U.S. 961 , 100 S.Ct. 1647 , 64 L.Ed.2d 236 (1980); Roberts v. Cameron-Brown Co., 556 F.2d 356, 360 (5th Cir.1977) (concluding that because the NHA and its ⁷¹⁶ accompanying regulations do not provide for a private right of action, the HUD Handbook distributed by the Department to mortgagees as a reference guide similarly could not support a private right of action); M.B. Guran Co. v. City of Akron, 546 F.2d 201, 204 (6th Cir.1976); see also In re Miller, 124 Fed.App’x. 152, 154-56 (4th Cir.2005) (unpublished) (determining that no private right of action arises from violation of NHA loss mitigation provisions); see generally Burroughs v. Hills, 741 F.2d 1525, 1531-32 (7th Cir.1984) (“Efforts to enforce implied causes of action under the National Housing Legislation or the HUD Handbook, have frequently come under consideration of appellate courts, and have always failed.”), cert. denied, 471 U.S. 1099 , 105 S.Ct. 2321 , 85 L.Ed.2d 840 (1985).

In the instant case, Neal does not plead a private action derived directly or impliedly from the NHA or its implementing regulations. At issue here, rather, is whether a paragraph in an FHA-approved form deed of trust alluding to a particular sub-set of HUD regulations is a bargained-for term between the mortgagor and mortgagee such that an alleged violation of the regulations may give rise to a private action maintainable by the mortgagor against the mortgagee for breach of contract under Maryland law. As principal support for this theory, Neal and the Court of Special Appeals rely on our decision in Wells v. Chevy Chase Bank, F.S.B., 377 Md. 197 , 832 A.2d 812 (2003), and the opinion of the U.S. Court of Appeals for the Fourth Circuit in College Loan Corp. v. SLM Corp., 396 F.3d 588 (4th Cir.2005). Both cases involved private parties entering into contracts which contained voluntarily incorporated references to state or federal statutes or regulations as binding terms governing the parties’ performance.

Neal contends that because Wells Fargo voluntarily chose to participate as a lender in the FHA mortgage insurance program, it necessarily elected to accede to FHA-approved and required forms and comply with the regulations and procedures of the program, which Neal claims the mortgage servicer violated. Having violated the regulations, which were incorporated into the parties’ contract by mutual assent, ⁷¹⁷ Wells Fargo, as the theory goes, is liable in damages to Neal for breach of contract. We conclude that Wells and College Loan Corp. are distinguishable from the case at hand. Wells involved a contract dispute between Chevy Chase Bank and certain of its credit card holders arising from the bank’s amendment of its cardholder agreement.

The cardholders alleged that the amendment was ineffective because it was made contrary to the notice requirements prescribed by certain provisions of the Commercial Law Article of the Maryland Code, which were referred to expressly in the cardholder agreement. Wells, 377 Md. at 202-03 , 832 A.2d at 815 . In concluding that the cardholders were entitled to pursue their contract claim to enforce the Commercial Law Article provisions, notwithstanding the fact that those provisions otherwise would have been preempted by federal law, we specifically noted that the statutory notice standards were the product of “undertakings voluntarily assumed and reflected in private contracts and agreements.... ” Wells, 377 Md. at 221 , 832 A.2d at 826 . To that point, the cardholder agreement “was prepared by Chevy Chase; it was not imposed on Chevy Chase as a matter of law.” Wells, 377 Md. at 231 , 832 A.2d at 832 .

Chevy Chase Bank’s voluntary election, as the drafter of the cardholder agreement, to incorporate the provisions of the Commercial Law Article as the law governing the contract stands in contrast to the situation presented here where Wells Fargo was required to use a form deed of trust created by the FHA, 6 an agency of HUD, which form alluded, by way of notice, to certain of its regulations that might affect whether debt acceleration was proper. Wells Fargo and Margaretten & Company, Inc., unlike Chevy Chase Bank in Wells , did not author this provision of the contract entered into with the ⁷¹⁸ mortgagor. Thus, the inclusion of paragraph 9(d) alluding to the HUD regulations regarding mortgage acceleration and foreclosure options was not an “undertaking [ ] voluntarily-assumed” by Wells Fargo such that it may be invoked by Neal in an offensive thrust, such as a private cause of action for damages. Given the primary purpose of these regulations, discussed infra, and the lack of language in paragraph 9(d) to support a conclusion that the parties expressly adopted the standards of the federal regulations as between them, Wells does not support Neal’s contentions or the Court of Special Appeals’s conclusion.

College Loan Corp. similarly is distinguishable from the present controversy. In that case a student loan lender, College Loan Corporation, pursued, inter alia, a state law contract claim against a company, Sallie Mae, with which it contracted to service certain of College Loan Corporation’s loans. College Loan Corp., 396 F.3d at 593 . In their agreement, the parties “voluntarily included federal standards (the HEA [or Higher Education Act]) in their bargained-for private contractual arrangement,” on which College Loan Corporation based its suit against Sallie Mae for violations thereof.

College Loan Corp., 396 F.3d at 598 . The Fourth Circuit reasoned that because the parties were free to draft their servicing agreement as they liked and “[b]oth expressly agreed to comply with the HEA,” Sallie Mae could not defend against College Loan Corporation’s claim by arguing later that the state contract action was preempted by the HEA. Id. Just as in Wells , the lynchpin of the College Loan Corp. court’s analysis was that the contractual term binding the parties privately to an otherwise statutory standard of conduct was the product of a negotiation yielding a freely-entered contract.

In the matter before us, Wells Fargo did not participate in negotiations for or drafting of the deed of trust to which it became assignee. 7 Therefore, it could not have ⁷¹⁹ bargained, in any sense that we are prepared to accept, for paragraph 9(d) with the Neals at the time the deed was executed. This is not to say that Wells Fargo is not bound otherwise to Neal at all by the other terms of the deed of trust to which it is now a party. Rather, the question here is whether the mortgagor may recover damages for breach of a certain provision of the deed in a private cause of action. The answer to that question lies within the HUD regulations themselves.

Section 203.500 of Title 24 of the Code of Federal Regulations provides that noncompliance with the FHA mortgage servicing regulations empowers the Secretary of HUD to impose a “civil money penalty, including a penalty under § 30.35(c)(2), or withdrawal of HUD’s approval of a mortgagee.” This enforcement scheme comports with the notion that the regulations enacted pursuant to the NHA were intended to govern the relationship between the mortgagee and the government rather than, as Neal would have it, the mortgagee and the mortgagor. The overall purpose of the FHA mortgage insurance program is to encourage leading lenders, in exchange for a government guarantee of the loan, to extend mortgages to those carrying higher credit risks. The regulations setting forth the rules and procedures for the program, including the loss mitigation regulations pointed to by Neal and alluded to in paragraph 9(d) of the deed, address how participating lenders are to conduct their activities. Thus, the regulations do not control directly the relationship between the mortgagor and mortgagee and may not be invoked by the mortgagor as a sword in an offensive cause of action against the mortgagee.

See Fed. Nat’l Mortgage Ass’n v. Prior, 128 Wis.2d 182 , 381 N.W.2d 558 , 560 (1985); Roberts, 556 F.2d at 360 . ⁷²⁰ The language of the regulations bear this out. With respect to mitigating losses, “[mjortgagees must consider the comparative effects of their elective servicing actions, and must take those appropriate actions which can reasonably be expected to generate the smallest financial loss to the Department.” 24 C.F.R. § 203.501 . The emphasis on reducing the possible losses to HUD, rather than the mortgagor, demonstrates that the regulations exist primarily to govern the relationship between the government and the mortgagee. This is logical in light of the fact that HUD, by guaranteeing the mortgages under the program, has a considerable stake in the administration of the insured mortgages.

Therefore, it uses the regulations to protect its interests and manage the program. Section 203.502(a) of Title 24 of the Code of Federal Regulations also illustrates this point by declaring that mortgagees and servicers are “fully responsible to the Secretary for proper servicing.” Notably, the regulation does not address that the mortgagees’ and servicers’ are responsible to the mortgagors. Although the HUD regulations provide for formidable consequences for lenders’ noncompliance, the fact that the HUD Secretary is the sole entity empowered to enforce affirmatively the regulations presents some unfortunate, but pragmatic, challenges to uniform and consistent enforcement. As amici here, Civil Justice, Inc., the Public Justice Center, and the National Consumer Law Center, point out that HUD’s limited resources, as a practical matter, prohibit it from prosecuting every potential violation of its mortgage servicing regulations.

In an effort to enforce most effectively the regulations and prosecute the worst cases of noncompliance, HUD ranks mortgagees according to their loss mitigation strategies and foreclosure rates into different tiers ranging from one to four, with four representing mortgagees with the worst loss mitigation records. U.S. Dep’t of Housing & Urban Development, HUD NSC Tier Ranking System, at http://www.hud.gov/ojfices/hsg/ sfh/nsc/trsovrvw.cfm (last modified 4 January 2007). HUD has indicated that, while no mortgagee is exempt, it “will focus on Tier 4 mortgagees for review purposes,” and “primarily ⁷²¹ concentrate on those mortgagees that engage in little or no loss mitigation.” Treble Damages for Failure To Engage in Loss Mitigation, 70 Fed.Reg. 21,573 (April 26, 2005). Considering this unfortunate reality, we are invited to examine alternative means of enforcement of the HUD regulations in light of one of the NHA’s prime objectives: to preserve home ownership and avoid the devastating financial consequences of foreclosure.

See Topa Equities, Ltd. v. City of Los Angeles, 342 F.3d 1065, 1072 (9th Cir.2003) (quoting 12 U.S.C. § 1701t (1994)); Pozzie v. U.S. Dep’t of Hous. & Urban Dev., 48 F.3d 1026 , 1028 (7th Cir.1995) (same); Conille v. Sec’y of Hous. and Urban Dev., 840 F.2d 105, 116 (1st Cir.1988) (same); Fleet Real Estate Funding Corp. v. Smith, 366 Pa.Super. 116 , 530 A.2d 919, 923-24 (1987); U.S. Dep’t Of Hous. & Urban Dev., Loss Mitigation Program—Comprehensive Clarification Of Policy And Notice Of Procedural Changes, Mortgagee Letter 00-05 at 1 (Jan. 19, 2000) (hereinafter HUD Mortgagee Letter 00-05). C. Asserting a Defense to Foreclosure via Injunction Although we conclude that a mortgagor may not wield as a sword the HUD regulations alluded to in a mandatory FHA form deed of trust, there is ample support that aggrieved mortgagors may assert an allegation of regulatory noncompliance as a shield against unauthorized foreclosure actions. The statutory law is clear on the mortgagee’s duty to pursue loss mitigation efforts. The NHA requires that, in the event of a mortgagor default, 8 a mortgagee “shall engage in loss mitigation actions for the purpose of providing an alternative to foreclosure.” 12 U.S.C. § 1715u(a) (2000).

The HUD regulation effectuating this mandate states that [mjortgagees must consider the comparative effects of their elective servicing actions, and must take those appropriate actions which can reasonably be expected to generate the ⁷²² smallest financial loss to the Department. Such actions include, but are not limited to, deeds in lieu of foreclosure under § 203.357, pre-foreclosure sales under § 203.370, partial claims under § 203.414, assumptions under § 203.512, special forbearance under §§ 203.471 and 203.614, and recasting of mortgages under § 203.616.[ 9 ] 24 C.F.R. § 203.501 . The statutory and regulatory language frames participation in loss mitigation activities as a mandatory endeavor by the use of the terms “shall” and “must,” respectively. State v. Green, 367 Md. 61, 82 , 785 A.2d 1275, 1287 (2001) (“When the Legislature commands that something be done, using words such as ‘shall’ or ‘must’ rather than ‘may* or ‘should,’ the obligation to comply -with the statute or rule is mandatory.”); accord Alabama v. Bozeman, 533 U.S. 146, 153 , 121 S.Ct. 2079, 2085 , 150 L.Ed.2d 188 (2001) (“The word ‘shall’ is ordinarily ‘the language of command.’ ”) (quoting Anderson v. Yungkau, 329 U.S. 482, 485 , 67 S.Ct. 428 , 91 L.Ed. 436 (1947), in turn quoting Escoe v. Zerbst, 295 U.S. 490, 493 , 55 S.Ct. 818 , 79 L.Ed. 1566 (1935)).

A letter from HUD to the mortgagees participating in the FHA mortgage insurance program, in no uncertain terms, reiterates the compulsory nature of engaging in loss mitigation activities: “Though lenders have great latitude in selecting the loss mitigation strategy appropriate for each borrower, it is critical to understand that PARTICIPATION IN THE LOSS MITIGATION PROGRAM IS NOT OPTIONAL.” HUD Mortgagee Letter 00-05 at 6 (emphasis in original). In fact, echoing the NHA’s command, the letter states that “[l]enders may not initiate foreclosure until all loss mitigation options have been considered.” HUD Mortgagee Letter 00-05 at 12. Against this backdrop, we consider the viability of mounting as a defense an allegation of a violation of these regulations. ⁷²³ Neal directs our attention to certain recent HUD policy initiatives with respect to the loss mitigation requirements in the FHA-insured loan program as support for his theory that HUD contemplated that individual borrowers be empowered to initiate private lawsuits against noncompliant lenders. Not only has HUD taken positions in other litigation contrary to Neal’s theory, 10 language contained in the sources cited by Neal further convince us that HUD envisioned that borrowers might invoke only defensively the NHA and associated HUD regulations.

Neal cites first to language contained in a “Notice of Policy” statement published by HUD in the Federal Register addressing the creation of mortgage instruments for use in the FHA mortgage insurance program. We reproduce the relevant portion of the Notice with emphasis on the language Neal believes to be an indication that