The Virginia Supreme Court recently expanded the grounds under which a private borrower can sue a lender for violations of HUD regulations. In Squire v. Virginia Housing Development Authority, a decision issued on April 17, 2014, the court held that a borrower can sue a lender for breach of contract if the lender fails to follow all HUD regulations incorporated into the deed of trust before commencing foreclosure.

The lender and substitute trustee in Squire initiated foreclosure before having, or making reasonable efforts to have, the face-to-face meeting with the borrower required by a section of the HUD regulations governing pre-foreclosure review. The court held that the lender’s failure to comply with this requirement constituted a breach of the deed of trust, which incorporated this requirement by reference. It also held that the borrower could sue the trustee for breach of fiduciary duty for conducting the foreclosure sale before holding the face-to-face meeting.

The court did so in part because the meeting requirement served to "reduce the incidence of foreclosure by providing an environment in which a mortgagee employee can often determine the cause of default, obtain financial information, establish a repayment schedule, and prevent foreclosure by influencing the payment habits of mortgagors.” Even so, the court would not order rescission of the foreclosure sale when the property sold far below appraised value because the plaintiff failed to allege that the sale price was so low that it shocked the conscience and failed to introduce any evidence of fraud.

Notably, three justices dissented from the holding, disagreeing with the majority that HUD regulations support either direct or private causes of action. According to the dissenters, Virginia is in the minority of states, such as Texas and West Virginia, that allow borrowers to use contract law to create private rights of action under HUD.