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HUD Regulation Requiring Face-to-Face Meeting Presents Compliance Challenge for Lenders Seeking Mortgage Foreclosure

In Dan-Harry v. PNC Bank, the Rhode Island federal court concluded that a mortgagor may bring a claim for damages and other remedies against a mortgagee on allegations of failure to conduct a pre-foreclosure face-to-face meeting required for breach of an FHA-insured mortgage. Dawari Dan-Harry obtained an FHA-insured mortgage loan to purchase property in Providence, Rhode Island, which included in Paragraph 9(d) the following provisions: "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 of the Secretary." PNC Bank foreclosed on the mortgage and sold the property at auction to a third-party in January 2017. While continuing to occupy the property, Dan-Harry sued PNC for damages and to void the foreclosure sale on allegations that PNC failed to comply with HUD regulation 24 C.F.R. § 203.604(b), which requires a mortgagee to have a face-to-face meeting with the mortgagor or make a reasonable effort to arrange such a meeting before the mortgage becomes three months delinquent in payments.

The federal court denied PNC's motion to dismiss plaintiff's state law causes of action for breach of contract claim and demand for punitive and emotional distress damages. To do so, the court concluded that Paragraph 9(d) unambiguously creates a contractual obligation to comply with 24 C.F.R. §203.604(b) as a condition precedent to foreclosure. Because Rhode Island law requires strictly compliance with conditions precedent to foreclosure, and failure to comply renders a foreclosure sale void, the court held that Dan-Harry sufficiently alleged non-compliance with HUD regulations and stated a claim for punitive and emotional distress damages. Whether Dan-Harry will ultimately prevail is to be determined after development of the factual record.

This decision is significant because there is no private right of action under 24 C.F.R. § 203.604(b) and because Rhode Island law does not recognize a cause of action for breach of good faith and reasonable diligence in foreclosure. Nevertheless, Rhode Island federal courts effectively allow these claims through breach of contract claims and, in doing so, confirm an expanding demand for strict compliance with the terms of a mortgage in foreclosure.

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