A mortgagee’s compliance with federal mortgage servicing responsibilities is a condition precedent that can be raised as an affirmative defense to the foreclosure of a Federal Housing Administration insured loan, the Indiana Court of Appeals ruled today for the first time.

Florence R. Lacy-McKinney bought a home in South Bend with an FHA-insured mortgage. She later refinanced her loan with Taylor Bean & Whitaker Mortgage Corp., which was still an FHA-insured loan subject to federal statutes and regulations of the U.S. Department of Housing and Urban Development.

Lacy-McKinney eventually fell three months behind on her payments and the mortgagee filed to foreclose on her home. Lacy-McKinney raised several affirmative defenses in her response, including that Taylor-Bean refused partial mortgage payments and did not have a face-to-face meeting with her before filing for foreclosure, both of which violate HUD regulations for FHA- and HUD-insured mortgages.

The parties were unable to reach a settlement, and the trial court granted Taylor-Bean’s motion for summary judgment.

Addressing the issue for the first time in Florence R. Lacy-McKinney v. Taylor Bean and Whitaker Mortgage Corp., No. 71A03-0912-CV-587, the Court of Appeals needed to determine of what legal significance are the HUD regulations as to the right of a mortgagee to foreclose on a HUD-insured mortgage. After delving into the background of HUD-insured mortgages and relying on rulings from other states, including Bankers Life Co. v. Denton, 458 N.E.2d 203 (Ill. App. Ct. 1983), the appellate court concluded that HUD servicing responsibilities may be raised as an affirmative defense in foreclosure actions even though the regulations don’t create a private right of action.

“To hold that compliance with these regulations is not an affirmative defense, as Taylor-Bean suggests, would circumvent the public policy of HUD,” wrote Judge James Kirsch.

Lacy-McKinney admitted she entered into the note and mortgage and had fallen behind on her payments but claimed there were issues that precluded summary judgment. The judges agreed that there were genuine issues of material fact as to whether Taylor-Bean complied with the requirement for a face-to-face meeting or made an effort to arrange a meeting before she was three months behind on her payments. They reversed summary judgment and remanded for further proceedings because the trial court erred in granting summary judgment without first determining that Taylor-Bean had complied with Subpart C of HUD servicing responsibilities, the conditions precedent to foreclosure.