Iowa Appellate Court rules that the failure to comply with contractually-incorporated HUD regulations could be raised by the borrower defensively, but not offensively

The defendants in ABN AMRO Mortg. Group, Inc. v. Tullar 06-0824 (Iowa App., Apr. 22, 2009), argued that the lender was not contractually authorized to accelerate the debt and foreclose upon the mortgage because the parties’ agreements expressly incorporated HUD regulations, which prohibited foreclosure unless at least three full monthly installments due under the mortgage are unpaid after application of any partial payments that may have been accepted but not yet applied to the mortgage account. 24 C.F.R. § 203.606(a). Defendant answered that the HUD regulations do not create a private right of action for a mortgagor, because they govern the relationship between the mortgagee and the federal government, not the relationship between the mortgagee and the mortgagor. The court found this answer too simplistic. The mortgagee, it reasoned, contracted with the mortgagor to be bound by those regulations. In other words, the parties agreed that HUD regulations would govern their conduct vis-à-vis each other. The Iowa Appellate Court adopted the reasoning in used in _Wells Fargo Home Mortgage, Inc. v. Neal_ 398 Md. 705, 922 A.2d 538 (Md. 2007) that the failure to comply with contractually-incorporated HUD regulations could be raised by the borrower defensively, but not offensively. At the time the foreclosure was commenced there were seven payments due. After resolving a factual dispute over whether the defendant complied with 24 C.F.R. § 203.606, in returning in partial payments that the lender complied with the requirement set forth in 24 C.F.R. § 203.606, that at least three full monthly installments due under the mortgage [were] unpaid after application of any partial payments that may have been accepted but not yet applied to the mortgage account.

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