Title: Mathews v. PHH Mortgage Corp.
Citation: N/A
Docket Number: 110967
State: Virginia
Issuer: Virginia Supreme Court
Date: April 20, 2012

PRESENT:  All the Justices 
 
RICHARD MATHEWS, ET AL.  
 
 
 
 
 
 
 
 OPINION BY  
v. 
Record No. 110967 
  
    JUSTICE WILLIAM C. MIMS 
 
 
 
 
 
 
 
    April 20, 2012 
PHH MORTGAGE CORPORATION 
 
FROM THE CIRCUIT COURT OF NELSON COUNTY 
J. Michael Gamble, Judge 
 
In this appeal, we consider whether a landowner who has 
breached a deed of trust by failing to make payments as 
required under the associated note may nevertheless enforce its 
conditions precedent.  We also consider the prerequisites to 
foreclosure set forth in 24 C.F.R. § 203.604 and whether they 
are incorporated as conditions precedent in a deed of trust. 
I. 
BACKGROUND AND MATERIAL PROCEEDINGS BELOW 
Richard M. and Karin L. Mathews owned a parcel of land in 
Nelson County (“the Parcel”), which they conveyed by deed of 
trust (“the Deed of Trust”) on June 28, 2002, to Wendall L. 
Winn, Jr., trustee, for the benefit of University of Virginia 
Community Credit Union to secure a note in the principal amount 
of $118,505.00, plus interest (“the Note”).  The indebtedness 
secured by the Deed of Trust was insured by the Federal Housing 
Authority under regulations promulgated by the Secretary of 
Housing and Urban Development (“HUD”) under the National 
Housing Act, 12 U.S.C. §§ 1701-1750jj, and codified in Part 203 
of Title 24 of the Code of Federal Regulations.  PHH Mortgage 
Corporation (“PHH”) subsequently became the holder of the Note 
and the beneficiary of the Deed of Trust. 
The Mathewses fell into arrears on the payments due under 
the Note.  Consequently, PHH appointed Professional Foreclosure 
Corporation of Virginia (“PFC”) as substitute trustee under the 
Deed of Trust to commence foreclosure proceedings on the 
Parcel.  PFC scheduled a foreclosure sale for November 11, 
2009. 
On November 10, 2009, the Mathewses filed a complaint in 
the circuit court seeking a declaratory judgment that the 
foreclosure sale would be void because PHH had not satisfied 
conditions precedent to foreclosure set forth in the Deed of 
Trust.  Specifically, they alleged that 24 C.F.R. § 203.604 
(“the Regulation”) required PHH to have a face-to-face meeting 
with them at least 30 days before the commencement of 
foreclosure proceedings.  They asserted that the Regulation was 
incorporated into the Deed of Trust as a condition precedent to 
foreclosure.  No such meeting had occurred before PFC commenced 
foreclosure proceedings. 
PHH removed the action to the United States District Court 
for the Western District of Virginia, which remanded it to the 
circuit court for lack of subject-matter jurisdiction.  PHH 
then filed a demurrer in which it argued that the Mathewses 
could not sue to enforce the Regulation because (a) it 
conferred no private right of action and (b) they had committed 
the first breach of the Deed of Trust by failing to pay as 
required under the Note.  PHH also argued that, even if the 
Mathewses could sue to enforce the Regulation, it did not apply 
to them because, under HUD’s interpretation, a face-to-face 
meeting is only required if the mortgagee has a “servicing 
office” within 200 miles of the mortgaged property.  PHH did 
not have such an office within that distance from the Parcel. 
The circuit court ruled that the Regulation was 
incorporated into the Deed of Trust as a condition precedent to 
foreclosure.  However, the court also determined that under 
Virginia common law, the party who breaches a contract first 
cannot sue to enforce it.  The court therefore ruled that the 
Mathewses could not sue to enforce the conditions precedent in 
the Deed of Trust because they had breached it first through 
non-payment.  The court also ruled that the Regulation did not 
apply to them because PHH did not have a “servicing office” 
within 200 miles of the Parcel.  Accordingly, the court 
sustained PHH’s demurrer and dismissed the complaint.  We 
awarded the Mathewses this appeal. 
II. ANALYSIS 
A.  ENFORCEMENT OF CONDITIONS PRECEDENT TO FORECLOSURE 
IN A DEED OF TRUST BY A BORROWER IN DEFAULT 
The threshold question is whether the Mathewses’ failure 
to pay under the Note precludes them from enforcing the 
conditions precedent to foreclosure in the Deed of Trust.  If 
so, the questions of whether the Regulation applies and whether 
it is incorporated into the Deed of Trust are moot. 
In Horton v. Horton, 254 Va. 111, 115-16, 487 S.E.2d 200, 
203-04 (1997), we acknowledged that as a matter of Virginia 
common law, 
a party who commits the first breach of a 
contract is not entitled to enforce the 
contract.  An exception to this rule arises when 
the breach did not go to the “root of the 
contract” but only to a minor part of the 
consideration.  
 
If the first breaching party committed a 
material breach, however, that party cannot 
enforce the contract.  A material breach is a 
failure to do something that is so fundamental 
to the contract that the failure to perform that 
obligation defeats an essential purpose of the 
contract.  If the initial breach is material, 
the other party to the contract is excused from 
performing his contractual obligations. 
 
(Internal citations omitted.)  We echoed this statement in 
Countryside Orthopaedics, P.C. v. Peyton, 261 Va. 142, 154, 541 
S.E.2d 279, 285 (2001), and reiterated that “the first party to 
commit a material breach [of a contract cannot] maintain an 
action on it.”  Id. at 156, 541 S.E.2d at 287 (citing Hurley v. 
Bennett, 163 Va. 241, 253, 176 S.E. 171, 175 (1934)). 
Nevertheless, the Mathewses argue that under Bayview Loan 
Servicing, LLC v. Simmons, 275 Va. 114, 654 S.E.2d 898 (2008), 
a lender must comply with all conditions precedent to 
foreclosure in a deed of trust even if the borrowers are in 
arrears.  We agree. 
In Bayview, the borrower was in arrears.  Consequently, 
the lender accelerated repayment under the note and directed 
the trustee under the deed of trust to begin foreclosure 
proceedings.  Thereafter, the parcel was sold at a foreclosure 
auction and the borrower filed a suit for damages alleging 
breach of the deed of trust.  Id. at 117-18, 654 S.E.2d at 899.  
We determined that the sale was improper because Bayview and 
its servicer had failed to provide a pre-acceleration notice, 
which was a condition precedent to acceleration under the deed 
of trust.  By failing to provide the notice, Bayview breached 
the deed of trust by accelerating repayment and foreclosing: 
Because Bayview did not comply with the specific 
condition precedent under the Deed of Trust, 
prior to the notice of foreclosure sale by [the 
trustee], Bayview had not acquired the right to 
accelerate payment under the terms of the Deed 
of Trust.  Thus, [the trustee] could exercise no 
right of acceleration because no such right had 
then accrued to Bayview. . . . 
While Code § 55-59.1(A) does allow a proper 
notice of foreclosure sale to exercise an 
accrued right of acceleration, Bayview failed to 
fulfill the contractual condition precedent that 
would have given it such a right. 
 
Id. at 121-22, 654 S.E.2d at 901 (emphasis added).  
Accordingly, we affirmed the circuit court’s judgment in favor 
of the borrower.  Id. at 122, 654 S.E.2d at 902. 
A trustee’s power to foreclose is conferred by the deed of 
trust.  Fairfax County Redevelopment & Hous. Auth. v. Riekse, 
281 Va. 441, 445-46, 707 S.E.2d 826, 829 (2011).  That power 
does not accrue until its conditions precedent have been 
fulfilled.  See Bayview, 275 Va. at 121, 654 S.E.2d at 901. The 
fact that a borrower is in arrears does not allow the trustee 
to circumvent the conditions precedent.  However, if the 
general rule of contract enforcement enunciated in Horton and 
Countryside Orthopaedics applied to deeds of trust, a trustee 
could not be held accountable for exercising his latent power 
to foreclose before it actually had accrued, for two reasons.  
First, the borrower is the only party with standing to bring an 
action, whether for damages after the fact of the improper sale 
or to bar the improper sale in equity before it occurs.1  
Second, the paramount prerequisite to foreclosure is some 
breach of the deed of trust by the borrower – a trustee under a 
deed of trust cannot commence foreclosure proceedings on the 
parcel of a borrower who has not first breached the deed of 
                                                 
 
1 Bayview illustrates the principle that damages may be 
awarded at law after a foreclosure sale has been conducted 
improperly because the power of foreclosure has not accrued.  
Equitable relief is available to enjoin the improper sale 
before it occurs as well.  See Rossett v. Fisher, 52 Va. (11 
Gratt.) 492, 499 (1854) (stating that a debtor may resort to 
equity to ensure that a trustee under a deed of trust fulfills 
his duties under the deed of trust); see also 19 Michie’s 
Jurisprudence, Trusts and Trustees § 120 (“Equity . . . could 
interfere by injunction to restrain [a trustee] from improperly 
exercising his powers.”).  
trust in some way.  The conditions precedent in the deed of 
trust which govern the accrual of his latent power to foreclose 
are irrelevant before such a breach. 
Therefore, prohibiting the borrower who has breached from 
bringing an action to enforce the conditions precedent in a 
deed of trust would nullify such conditions.  The mere fact of 
the borrower’s breach alone would become, de facto, the only 
condition precedent to foreclosure. 
Addressing this concern at oral argument, PHH contended 
that failure to pay under the note was only one of several 
possible breaches of a deed of trust.  Because other breaches 
might “not go to the ‘root of the contract’ but only to a minor 
part of the consideration,” PHH continued, they would fall into 
the exception recognized in Horton.  254 Va. at 115, 487 S.E.2d 
at 203.  Therefore, according to PHH, such a borrower could 
still sue to enforce the deed of trust and its conditions 
precedent to foreclosure would not be nullified. 
We accept the validity of PHH’s premise and recognize that 
a deed of trust may anticipate breaches other than by non-
payment that could enable the trustee to commence foreclosure 
proceedings.  Yet non-payment under the note is the principal 
reason for foreclosure.  Regardless of whether a deed of trust 
may permit foreclosure when the borrower breaches other than by 
non-payment, and acknowledging that such breaches may not be 
material and therefore may not bar the borrower’s suit to 
enforce the deed of trust under Horton, we observe that deeds 
of trust universally anticipate breach by non-payment.  Thus, 
to accept PHH’s argument, we would have to rule that conditions 
precedent to foreclosure in deeds of trusts are nullities when 
the breach is by non-payment – the vast majority of cases – but 
that such conditions are fully enforceable in the rare cases 
when the breach is not by non-payment.  Such a ruling would 
defy common sense. 
The solution lies in the definition of material breach.  
In Horton and Countryside Orthopaedics, we defined material 
breach as “a failure to do something that is so fundamental to 
the contract that the failure to perform that obligation 
defeats an essential purpose of the contract.”  Countryside 
Orthopaedics, 261 Va. at 154, 541 S.E.2d at 285 (quoting 
Horton, 254 Va. at 115, 487 S.E.2d at 204).  The essential 
purposes of a deed of trust are two-fold:  to secure the 
lender-beneficiary’s interest in the parcel it conveys and to 
protect the borrower from acceleration of the debt and 
foreclosure on the securing property prior to the fulfillment 
of the conditions precedent it imposes.  Because a deed of 
trust permits the trustee to sell the parcel to protect the 
interest of the lender-beneficiary upon the borrower’s breach 
by non-payment, the fact of non-payment of the note does not 
“defeat[] an essential purpose of the contract.”  Id.  To the 
contrary, lenders require deeds of trust precisely because they 
contemplate the possibility of non-payment.  In other words, by 
its nature, the deed of trust is a contract in which the 
parties have agreed that material breach of the note by non-
payment will not deprive borrowers of their rights to enforce 
the conditions precedent.  Accordingly, non-payment of a note 
is not a material breach of a deed of trust within the meaning 
of Horton and Countryside Orthopaedics.2 
We therefore reject PHH’s argument.  Borrowers may sue to 
enforce conditions precedent to foreclosure even if they were 
the first party to breach the note secured by a deed of trust 
through non-payment. 
B. INCORPORATION OF THE REGULATION AS A CONDITION  
PRECEDENT TO FORECLOSURE UNDER THE DEED OF TRUST 
We now turn to the question of whether the Regulation is 
incorporated into the Deed of Trust as a condition precedent to 
foreclosure.  The circuit court determined that the Regulation 
was incorporated and PHH has assigned cross-error to this 
ruling.  PHH first argues that terms may be incorporated into a 
contract by reference only if the intent to incorporate is 
clear.  PHH asserts that the language of the Deed of Trust does 
                                                 
 
2 While the Note is not in the record of this case and this 
precise issue is not presently before us, we observe that non-
payment may be a material breach of a note, which may enable a 
lender to bring an action on it independent of the deed of 
trust. 
not clearly express intent to incorporate HUD’s regulations.  
We disagree. 
A deed of trust is construed as a contract under Virginia 
law, see, e.g., Virginia Hous. Dev. Auth. v. Fox Run Ltd. 
P’shp., 255 Va. 356, 365, 497 S.E.2d 747, 753 (1998), and we 
“consider the words of [a] contract within the four corners of 
the instrument itself.”  Uniwest Constr., Inc. v. Amtech 
Elevator Servs., 280 Va. 428, 440, 699 S.E.2d 223, 229 (2010) 
(quoting Eure v. Norfolk Shipbuilding & Drydock Corp., 263 Va. 
624, 631, 561 S.E.2d 663, 667 (2002)).  It 
is construed as written, without adding terms 
that were not included by the parties.  When the 
terms in a contract are clear and unambiguous, 
the contract is construed according to its plain 
meaning.  Words that the parties used are 
normally given their usual, ordinary, and 
popular meaning.  No word or clause in the 
contract will be treated as meaningless if a 
reasonable meaning can be given to it, and there 
is a presumption that the parties have not used 
words needlessly. 
 
Id. (quoting PMA Capital Ins. Co. v. US Airways, Inc., 271 Va. 
352, 358, 626 S.E.2d 369, 372-73 (2006)). 
Paragraph 18 of the Deed of Trust sets forth the procedure 
for foreclosure.  It states in relevant part that the power of 
sale may be invoked only after the lender “requires immediate 
payment in full under paragraph 9.”  In other words, 
acceleration of repayment is a condition precedent to 
foreclosure.  Paragraph 9 sets forth the “Grounds for 
Acceleration of Debt,” which includes payment default: 
(a) Default.  Lender may, except as limited by 
regulations issued by the Secretary, in the case 
of payment defaults, require immediate payment 
in full of all sums secured by this Security 
Instrument if: 
(i) Borrower defaults by failing to pay in 
full any monthly payment required by this 
Security Instrument prior to or on the due 
date of the next monthly payment . . . . 
 
(Emphasis added.)  Paragraph 9 also includes the following 
subparagraph: 
(d) Regulations of HUD Secretary.  In many 
circumstances regulations issued by the 
Secretary will limit [the l]ender’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 the regulations of the Secretary. 
 
(Emphasis added.) 
These words “are clear and unambiguous” and we will 
construe them according to their plain meaning.  Uniwest 
Constr., 280 Va. at 440, 699 S.E.2d at 229.  They express the 
intent of the parties that the rights of acceleration and 
foreclosure do not accrue under the Deed of Trust unless 
permitted by HUD’s regulations.  We cannot conceive of any 
other purpose for which they would have been included.  
Therefore, the Deed of Trust expressly withholds authorization 
to accelerate or foreclose if the Regulation does not permit 
PHH to do so.  Any other interpretation would render these 
provisions meaningless.  We will not adopt such an 
interpretation.  Id. 
Accordingly, the references to HUD’s regulations in the 
Deed of Trust are sufficient to incorporate them insofar as 
they prevent the borrower from accelerating or foreclosing.  
Cf. High Knob Assocs. v. Douglas, 249 Va. 478, 488, 457 S.E.2d 
349, 354-55 (1995) (ruling that language by which a party 
merely acknowledges that he has received, read, and understands 
an otherwise extrinsic document prior to executing a contract 
is sufficient to incorporate the document into the contract); 
Marriott v. Harris, 235 Va. 199, 214, 368 S.E.2d 225, 232 
(1988) (same). 
PHH next argues that terms may be incorporated into a 
contract by reference only if it is clear which terms are to be 
incorporated.  PHH asserts that any language in the Deed of 
Trust appearing to incorporate HUD’s regulations fails to state 
explicitly which regulations are intended to be incorporated.  
Part 203 of Title 24 of the Code of Federal Regulations 
contains 681 regulations, PHH observes, and the Deed of Trust 
fails to identify which of them are incorporated.  We again 
disagree. 
Only those regulations that prevent a lender from 
accelerating or foreclosing are incorporated by the cited 
language in the Deed of Trust.  Whether every regulation 
included in Part 203 of Title 24 does so is not before us.  We 
must determine only whether the Regulation invoked in this case 
prevents a borrower from accelerating or foreclosing.  For two 
reasons, we conclude that it does, and therefore that it is 
incorporated into the Deed of Trust as a condition precedent. 
First, 24 C.F.R. § 203.606(a) requires that “[b]efore 
initiating foreclosure, the mortgagee must ensure that all 
servicing requirements of this subpart have been met.”  
(Emphasis added.)  24 C.F.R. § 203.606(a) is codified in 
Subpart C of Part 203, which is captioned “Servicing 
Responsibilities.”  The first section in Subpart C is 24 C.F.R. 
§ 203.500, which further states that “[i]t is the intent of the 
Department that no mortgagee shall commence foreclosure or 
acquire title to a property until the requirements of this 
subpart have been followed.”  (Emphasis added.) 
Second, 24 C.F.R. § 203.606(a) directs that “[t]he 
mortgagee may not commence foreclosure for a monetary default 
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.”  Id.3  Therefore, while none of the pleadings set 
forth the amount or duration of the Mathewses’ arrearage at the 
                                                 
 
3 24 C.F.R. § 203.606(b) provides exceptions to the delay 
in commencing foreclosure imposed by subsection (a) but PHH 
does not assert that any of them apply. 
time PHH instructed PFC to commence foreclosure proceedings on 
the Parcel, PHH could not have instructed PFC to do so unless 
they were in arrears for at least three full monthly 
installments. 
In addition, the Regulation itself provides that “[t]he 
mortgagee must have a face-to-face interview with the 
mortgagor, or make a reasonable effort to arrange such a 
meeting, before three full monthly installments due on the 
mortgage are unpaid.”  24 C.F.R. § 203.604(b) (emphasis added).4  
The Regulation is codified in Subpart C and therefore is a 
servicing requirement that PHH must meet “[b]efore initiating 
foreclosure.”  24 C.F.R. § 203.606(a) (emphasis added). 
Accordingly, the face-to-face meeting requirement is a 
condition precedent to the accrual of the rights of 
acceleration and foreclosure incorporated into the Deed of 
Trust.  Cf. Manufacturers Hanover Mortgage Corp. v. Snell, 370 
N.W.2d 401, 404 (Mich. Ct. App. 1985) (suggesting that HUD’s 
servicing requirement regulations may be a defense to 
foreclosure if they are made terms of a mortgage contract). 
PHH also argues that the language in the Deed of Trust 
should not be construed to incorporate the Regulation because 
the language was not bargained for by the parties; rather, it 
                                                 
 
4 Certain exceptions set forth in 24 C.F.R. § 203.604(c) 
apply to this requirement and we will consider them below. 
is language imposed by HUD, which requires the use of a 
standardized form deed of trust.  We again disagree. 
As noted above, the lender-beneficiary and trustee under a 
deed of trust have only those powers that it confers upon them.  
Riekse, 281 Va. at 445-46, 707 S.E.2d at 829 (2011).  As a 
matter of Virginia law, when a deed of trust expressly states 
on its face that it “does not authorize acceleration or 
foreclosure if not permitted by” some external set of 
conditions identified within the deed of trust, those 
conditions are fully incorporated as conditions precedent to 
acceleration and foreclosure.  HUD requires this language to be 
incorporated into deeds of trust which secure its federally 
insured loans.  24 C.F.R § 203.17(a).  Doing so makes its 
regulations enforceable by borrowers as conditions precedent to 
acceleration and foreclosure as through a state-law action for 
breach of contract.  This is entirely consistent with the 
intention expressed in 24 C.F.R §§ 203.500 and 203.606(a). 
Conversely, PHH offers no explanation for HUD’s decision 
to require this language in deeds of trust which secure its 
insured loans if, as PHH contends, the regulations govern only 
the relationship between the lender and the government, rather 
than the lender and the borrower.  The regulations themselves 
govern the relationship between the lender and the government; 
there is no reason to refer to them in the deed of trust other 
than to affect the duties of the parties to it.  If, as PHH 
asserts, HUD has a contrary intention, it may either (a) cease 
to require or allow language that incorporates its regulations 
as conditions precedent to acceleration or foreclosure in the 
deeds of trust or (b) require or allow language that expressly 
states its intent that its regulations are not conditions 
precedent.  It has done neither. 
In conclusion, the terms used in Paragraphs 9 and 18 of 
the Deed of Trust clearly state that the rights of acceleration 
and foreclosure accrue only if permitted by HUD’s regulations.  
24 C.F.R. §§ 203.500 and 203.606(a) clearly express HUD’s 
intent that foreclosure proceedings are not permitted unless 
the lender has complied with the Regulation.  The Regulation 
therefore is incorporated as a condition precedent in the Deed 
of Trust. 
C.  APPLICABILITY OF 24 C.F.R § 203.604 
The final issue is whether the Regulation applies in this 
case.  As noted above, the Regulation requires the lender to 
“have a face-to-face interview” with the borrower, “or make a 
reasonable effort to arrange such a meeting.”  24 C.F.R. 
§ 203.604(b).  However, it also states that “[a] face-to-face 
meeting is not required if . . . [t]he mortgaged property is 
not within 200 miles of the mortgagee, its servicer, or a 
branch office of either.”  24 C.F.R. § 203.604(c). 
In its demurrer, PHH cited a frequently-asked-questions 
webpage (“the FAQ”) on the HUD website in which HUD purportedly 
interpreted the term “branch office” as used in 24 C.F.R. 
§ 203.604(c) to mean only a “servicing office.”  The relevant 
portion of the webpage responds to the question, “Please clarify 
HUD’s requirement to conduct a face-to-face meeting with a 
delinquent mortgagor.  This is often impossible as many 
mortgagees maintain only one centralized servicing office.”  
U.S. Department of Housing and Urban Development, General 
Servicing Frequently Asked Questions, 
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing
/sfh/nsc/faqgnsrv (last visited Mar. 12, 2012).  HUD replied, 
The Department is aware that many Mortgagees 
maintain “branch offices” that deal only with 
loan origination and some of these offices may 
only be staffed part-time.  For the most part, 
individuals that staff an origination office are 
not familiar with servicing issues and are not 
trained in debt collection or HUD’s Loss 
Mitigation Program. 
 
The Department has always considered that 
the face-to-face meeting must be conducted by 
staff that is adequately trained to discuss the 
delinquency and the appropriate loss mitigation 
options with the mortgagor.  Therefore, for the 
purpose of this discussion, the face-to-face 
meeting requirement referenced in [the 
Regulation] relates only to those mortgagors 
living within a 200-mile radius of a servicing 
office. 
 
Id. 
PHH asserted that it did not have a “servicing office” 
within 200 miles of the Parcel and that the face-to-face 
meeting requirement therefore did not apply.  The circuit court 
accepted this argument and the Mathewses assign error to its 
ruling. 
The Mathewses argue the term “branch office” is 
unambiguous and that the plain language of the Regulation 
supersedes HUD’s response in the FAQ.  They assert that the 
common and popular meaning of a “branch office” is “a place for 
the regular transaction of business or performance of a 
particular service located at a different location from the 
business’s main office or headquarters.”  Moreover, HUD 
expressly acknowledged in the FAQ that the term “branch office” 
encompasses not only a “servicing office” but a loan 
origination office as well.  We agree. 
When interpreting a federal administrative regulation, “a 
court must necessarily look to the administrative construction 
of the regulation if the meaning of the words used is in 
doubt.”  Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 
(1945).  While the Constitution and federal statutes also must 
be considered, “the ultimate criterion is the administrative 
interpretation, which becomes of controlling weight unless it 
is plainly erroneous or inconsistent with the regulation.”  
Id.; accord Long Island Care at Home, Ltd. v. Coke, 551 U.S. 
158, 171 (2007) (“[A]n agency's interpretation of its own 
regulations is controlling unless plainly erroneous or 
inconsistent with the regulations being interpreted.” (internal 
quotation marks omitted)); Auer v. Robbins, 519 U.S. 452, 461 
(1997) (The Secretary’s interpretation of his own regulation is 
“controlling unless plainly erroneous or inconsistent with the 
regulation.” (internal quotation marks omitted)). 
However, “[i]f the regulation is unambiguous, then what is 
known as Seminole Rock deference does not apply, and the 
regulation's plain language, not the agency's interpretation, 
controls.”  United States v. Deaton, 332 F.3d 698, 709 (4th 
Cir. 2003); accord Christensen v. Harris County, 529 U.S. 576, 
588 (2000) (“Auer deference is warranted only when the language 
of the regulation is ambiguous.”).  To defer to an agency’s 
interpretation when the regulation itself is unambiguous “would 
be to permit the agency, under the guise of interpreting a 
regulation, to create de facto a new regulation.”  Christensen, 
529 U.S. at 588. 
The term “branch office” in the Regulation is unambiguous.  
“Branch” is defined as, among other things, “a part of a 
complex body: as . . . a section, department, or division of an 
organization,” or “a subordinate or dependent part of a central 
system or organization,” e.g., “a neighborhood branch of a city 
library” or “a branch bank in a suburb.”  Webster’s Third New 
International Dictionary 267 (1993) (emphasis added).  “Office” 
is defined as, among other things, “a place where a particular 
kind of business is transacted or a service is supplied.”  Id. 
at 1567.  Because the Regulation applies if the mortgaged 
property is within 200 miles “of the mortgagee, its servicer, 
or a branch office of either,” the particular type of business 
or service supplied by an office within the contemplation of 
the Regulation is not limited to servicing.  Rather, every type 
of business and service supplied by the mortgagee, including 
loan origination, is within its scope.5 
This conclusion is underscored by the language of the FAQ 
itself, which states that “[t]he Department is aware that many 
Mortgagees maintain ‘branch offices’ that deal only with loan 
origination.”  HUD therefore acknowledges that offices that 
deal only with loan origination are “branch offices” within the 
meaning of the Regulation but purports to limit the unambiguous 
regulatory term to include only “servicing offices.”  The 
Regulation itself does not support this limitation.  To accept 
HUD’s interpretation would amount to allowing it to create a 
                                                 
 
5 HUD considered limiting the scope of “branch office” only 
to “servicing offices” in the course of substantive rulemaking 
by amending 24 C.F.R. § 203.604(c)(2) to remove references to 
mortgagees.  Revisions to the Single Family Mortgage Insurance 
Program; Proposed Rule, 69 Fed. Reg. 65,325 (Nov. 10, 2004) (to 
be codified at 24 C.F.R. pt. 203).  Under the proposed 
amendment, the face-to-face meeting would not apply if “[t]he 
mortgaged property is not within 200 miles of the servicer, or 
a branch office of the servicer.”  Id. at 65,327.  However, the 
amendment was not included in the final rule.  Revisions to the 
Single Family Mortgage Insurance Program; Final Rule, 72 Fed. 
Reg. 56,156, 56,157 (Oct. 2, 2007) (to be codified at 24 C.F.R. 
pt. 203) (“[T]his final rule does not effectuate the revisions 
to § 203.604(c)(2) that were contained in the proposed rule.”). 
new regulation or tacitly amend 24 C.F.R § 203.604(c)(2) 
without following the proper statutory procedure.  We are not 
permitted to do so.  Christensen, 529 U.S. at 588. 
Alternatively, even if we were to conclude that “branch 
office” is ambiguous, HUD’s interpretation as supplied in the 
FAQ would not control because it was not promulgated under the 
procedures for substantive rulemaking required by the 
Administrative Procedure Act, 5 U.S.C. §§ 551-559.  It 
therefore does not have the force of law.  Shalala v. Guernsey 
Mem’l Hosp., 514 U.S. 87, 99 (1995); Chrysler Corp. v. Brown, 
441 U.S. 281, 301-02 & 302 n.31 (1979).  Rather, it is at most 
“an interpretive rule issued by an agency to advise the public 
of the agency's construction of the statutes and rules which it 
administers.”  Shalala, 514 U.S. at 99 (internal quotation 
marks omitted); Chrysler Corp., 441 U.S. at 302 n.31 (internal 
quotation marks omitted); see also Reno v. Koray, 515 U.S. 50, 
61 (1995) (distinguishing between the deference accorded 
substantive rules adopted pursuant to the Administrative 
Procedure Act and that accorded mere interpretive rules). 
We acknowledge that mere interpretive rules are entitled 
to some measure of judicial deference.  Reno, 515 U.S. at 61; 
Martin v. Occupational Health and Safety Review Commission, 499 
U.S. 144, 157 (1991); see also United States v. Mead Corp., 533 
U.S. 218, 234 (2001) (“[A]n agency's interpretation may merit 
some deference whatever its form, given the specialized 
experience and broader investigations and information available 
to the agency, and given the value of uniformity in its 
administrative and judicial understandings of what a national 
law requires.” (internal citations and quotation marks 
omitted)).  However, “[s]ome indicia of reliability and 
reasonableness must exist in order for us to defer to the 
agency's interpretation.”  Shipbuilders Council of Am., Inc. v. 
United States Coast Guard, 578 F.3d 234, 245 (4th Cir. 2009). 
According to the FAQ, the purpose of interpreting “branch 
office” to mean only “servicing office” is to ensure that the 
face-to-face meeting takes place between the borrower and 
“staff that is adequately trained to discuss the delinquency 
and the appropriate loss mitigation options.”  Because 
“individuals that staff an origination office are not familiar 
with servicing issues and are not trained in debt collection or 
HUD’s Loss Mitigation Program,” the FAQ’s interpretation 
excludes such offices from the term “branch office.”  But we do 
not consider this exclusion to be reasonable.  If an 
originating office within the 200-mile radius lacks staff with 
the appropriate training, appropriately-trained staff could 
participate in a face-to-face meeting between the borrower and 
the staff of the originating office by tele- or video-
conference, for example, thereby imposing a minimal burden on 
the lender while furthering the loss mitigation purpose of the 
Regulation and its underlying statutory authority.6  Because the 
stated rationale for the interpretation is not reasonable, we 
would not defer to it even if the term “branch office” were 
ambiguous. 
Accordingly, we reject PHH’s argument that the Regulation 
does not apply because it does not have a “servicing office” 
within the 200-mile radius set forth in 24 C.F.R. 
§ 203.604(c)(2).  Because the Mathewses alleged in their 
complaint that PHH has branch offices within the 200-mile 
radius, they have pled sufficient facts for the Regulation to 
apply. 
III.  CONCLUSION 
For the foregoing reasons, we will affirm the judgment in 
part, reverse it in part, and remand for further proceedings 
consistent with this opinion. 
 
Affirmed in part, 
reversed in part, 
and remanded. 
 
CHIEF JUSTICE KINSER, concurring.
                                                 
 
6 The Regulation is authorized by 12 U.S.C § 1715b, which 
enables HUD to promulgate regulations necessary to carry out 
the insured loan program, and 12 U.S.C. § 1715u(a), which 
requires lenders to “engage in loss mitigation actions.”  In 
May 2009, Congress amended 12 U.S.C. § 1715u(a) to expressly 
include “support for borrower housing counseling” within such 
actions.  The Helping Families Save Their Homes Act of 2009, 
Pub. L. No. 111-22, § 203(d)(1)(C), 123 Stat. 1631, 1645. 
 
I agree with the majority's conclusion that 24 C.F.R. 
§§ 203.500 and 203.606(a) express the intent of the Secretary 
of Housing and Urban Development ("HUD") that a mortgagee 
cannot commence foreclosure proceedings until it has complied 
with the requirements of certain regulations and that 24 C.F.R. 
§ 203.604 is incorporated as a condition precedent in the deed 
of trust executed by Richard M. Mathews and Karin L. Mathews 
("the Mathewses").  I write separately, however, to clarify the 
actual requirements set forth in 24 C.F.R. § 203.604 because 
the Mathewses distort the 30-day face-to-face meeting 
requirement at issue in this appeal. 
Subpart C ("Servicing Responsibilities"), of Part 203 
("Single Family Mortgage Insurance"), in Title 24 ("Housing and 
Urban Development"), of the Code of Federal Regulations 
provides, in relevant part: 
This subpart identifies servicing practices 
of lending institutions that HUD considers 
acceptable for mortgages insured by HUD. . . . 
It is the intent of [HUD] that no mortgagee 
shall commence foreclosure or acquire title to a 
property until the requirements of this subpart 
have been followed.  
 
24 C.F.R. § 203.500.  Continuing, 24 C.F.R. § 203.606(a) 
states: 
Before initiating foreclosure, the 
mortgagee must ensure that all servicing 
requirements of this subpart have been met.  The 
mortgagee may not commence foreclosure for a 
monetary default 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.  In addition, prior to 
initiating any action required by law to 
foreclose the mortgage, the mortgagee shall 
notify the mortgagor in a format prescribed by 
the Secretary that the mortgagor is in default 
and the mortgagee intends to foreclose unless 
the mortgagor cures the default.  
 
The 30-day face-to-face meeting requirement at issue in 
this appeal is found in 24 C.F.R. § 203.604(b).  In relevant 
part, the subsection requires that 
[t]he mortgagee must have a face-to-face 
interview with the mortgagor, or make a 
reasonable effort to arrange such a meeting, 
before three full monthly installments due on 
the mortgage are unpaid. If default occurs in a 
repayment plan arranged other than during a 
personal interview, the mortgagee must have a 
face-to-face meeting with the mortgagor, or make 
a reasonable attempt to arrange such a meeting 
within 30 days after such default and at least 
30 days before foreclosure is commenced . . . . 
 
Pursuant to this subsection, the mortgagee is required to 
conduct a face-to-face interview with the mortgagor before 
three full monthly installments are unpaid.  A face-to-face 
meeting at least 30 days before commencement of foreclosure 
proceedings is required "[i]f default occurs in a repayment 
plan arranged other than during a personal interview."  Id. 
(emphasis added).  Thus, the face-to-face interview 
requirements are triggered by two separate events.  The one at 
issue in this appeal, a face-to-face meeting at least 30 days 
before foreclosure is commenced, as I have already pointed out, 
becomes necessary "[i]f default occurs in a repayment plan 
arranged other than during a personal interview."  Id. 
However, in their complaint, the Mathewses quoted only 
part of the language in 24 C.F.R. § 203.604(b) and thereby 
distorted what is actually required.  In one paragraph, the 
Mathewses alleged that 
the holder of the note can foreclose on the home 
in the event of arrearage on payment of the 
note, but only if the holder of the note has 
complied with . . . regulations, including inter 
alia, 24 C.F.R. § 203.604, whereby 'The 
mortgagee must have a face-to-face interview 
with the mortgagor . . . or make a reasonable 
attempt to arrange such a meeting within 30 days 
after such default or at least 30 days before 
foreclosure is commenced . . . .'∗ 
 
24 C.F.R. § 203.604(b).  The Mathewses then alleged that "no 
creditor entity ever had a face[-]to[-]face meeting with [them] 
or made any attempt to arrange for any such face-to-face 
meeting."  Later in the complaint, the Mathewses asserted that 
"[a]t no time has [the mortgagee] complied with 24 C.F.R. 
[§] 203.604, a federal regulation whereby 'The mortgagee must 
have a fac[e]-to-face interview with the mortgagor [ ] or make 
                                                 
∗ The majority also states that 24 C.F.R. § 203.604 
"requires the lender to 'have a face-to-face interview' with 
the borrower, 'or make a reasonable effort to arrange such a 
meeting' " without reciting the events that trigger such 
requirements. 
a reasonable attempt to arrange such a meeting within 30 days 
after such default or at least 30 days before foreclosure is 
commenced . . . .' " 
Notably, the Mathewses did not allege that the mortgagee 
failed to have a face-to-face interview with them before three 
full monthly installments were unpaid.  Likewise, the Mathewses 
did not allege that the mortgagee failed to have a face-to-face 
meeting with them within 30 days after default and at least 30 
days before foreclosure was commenced upon their default on "a 
repayment plan arranged other than during a personal 
interview."  24 C.F.R. § 203.604(b).  Although the Mathewses 
admitted in their complaint that they "fell into arrears on the 
note," they did not allege that they ever defaulted on "a 
repayment plan arranged other than during a personal 
interview."  24 C.F.R. § 203.604(b).  Instead, by omitting 
relevant portions of 24 C.F.R. § 203.604(b), the Mathewses were 
able to allege that the mortgagee failed to conduct a face-to-
face meeting with them 30 days before commencing foreclosure, a 
requirement not set forth in the plain terms of that 
subsection.  Thus, in my view, the Mathewses failed to state a 
cause of action upon which relief could be granted.  See 
Kaltman v. All American Pest Control, 281 Va. 483, 489, 706 
S.E.2d 864, 867 (2011) (demurrer tests the legal sufficiency of 
facts alleged in a pleading); Glazebrook v. Board of 
Supervisors, 266 Va. 550, 554, 587 S.E.2d 589, 591 (2003) 
(same). 
In this case, however, when PHH Mortgage Corporation filed 
its demurrer to the Mathewses' complaint seeking declaratory 
judgment, it did not assert as a basis for its demurrer the 
issue I have identified.  In ruling on a demurrer, a trial 
court cannot consider any "grounds other than those stated 
specifically in the demurrer."  Code § 8.01-273(A); see also TC 
MidAtlantic Dev., Inc. v. Commonwealth, 280 Va. 204, 214, 695 
S.E.2d 543, 549 (2010); Chippenham Manor, Inc. v. Dervishian, 
214 Va. 448, 451, 201 S.E.2d 794, 796 (1974).  Nor can this 
Court on appeal. 
For these reasons, I respectfully concur and, like the 
majority, would affirm in part and reverse in part the circuit 
court's judgment and remand for further proceedings. 
 
JUSTICE McCLANAHAN, concurring.
 
 
I agree with the majority's holdings in this case.  
However, in my opinion, the first material breach doctrine, as 
applied in Horton v. Horton, 254 Va. 111, 115-16, 487 S.E.2d 
200, 203-04 (1997), and Countryside Orthopaedics, P.C. v. 
Peyton, 261 Va. 142, 154, 541 S.E.2d 279, 285 (2001), is 
 
 
inapplicable here for reasons not specifically addressed by 
the majority. 
 
The Mathewses' failure to pay under the terms of the note 
and deed of trust at issue – which defendant PHH became the 
holder and beneficiary, respectively, as the successor in 
interest – was clearly a material breach of both the note and 
the deed of trust.1  Following this default, PHH sought to 
foreclose on the Mathewses' residence pursuant to PHH's 
remedies set forth in paragraph eighteen of the non-uniform 
covenants of the deed of trust.2 
 
The Mathewses, in turn, sought by the instant declaratory 
judgment action to stop PHH from going forward with its remedy 
of foreclosure based on their claim that PHH failed to first 
comply with a condition precedent to its right to enforce this 
                                                 
 
1 As stated in paragraph one of the uniform covenants of 
the deed of trust: "Borrower shall pay when due the principal 
of, and interest on, the debt evidenced by the Note and late 
charges due under the Note."  Then in paragraph nine of these 
covenants, the deed of trust states, in relevant part: "Lender 
may, except as limited by regulations issued by the Secretary 
[of Housing and Urban Development], in the case of payment 
defaults, require immediate payment in full of all sums 
secured by this Security Instrument if . . . Borrower defaults 
by failing to pay in full any monthly payment required by this 
Security Instrument prior to or on the due date of the next 
monthly payment . . . ." 
 
2 The deed of trust there provides in relevant part, under 
the heading "Foreclosure Procedure": "If Lender requires 
immediate payment in full under paragraph 9, Lender may invoke 
the power of sale and any other remedies permitted by 
applicable law.  Lender shall be entitled to collect all 
expenses incurred in pursuing the remedies provided in this 
paragraph 18 . . . ."  (Emphasis added.) 
 
 
remedy – i.e., the "face-to-face interview" requirement under 
24 C.F.R. § 203.604 as incorporated into the deed of trust.  
Citing Horton and Countryside, PHH asserted below in support 
of its demurrer to this action, as it does on appeal, that the 
Mathewses were precluded from making this claim by virtue of 
the first material breach doctrine.  That is, under this 
doctrine, because the Mathewses first materially breached the 
deed of trust by their payment defaults, they could not 
require PHH to comply with the terms of the deed of trust.  As 
the doctrine has been applied under Virginia law, however, it 
is inapplicable here.  The doctrine has functioned as an 
affirmative defense to the first breaching party's action 
against a defendant who purportedly failed to perform a 
contractual obligation unrelated to the defendant's own 
remedies against the plaintiff for the plaintiff's breach of 
the parties' contract.  See SunTrust Mortg., Inc. v. United 
Guar. Residential Ins. Co., 806 F.Supp.2d 872, 887 (E.D. Va. 
2011) ("[T]he first material breach doctrine operates not as 
remedy requested by a party in its capacity as a plaintiff, 
but as an affirmative defense pled by a party in its capacity 
as a defendant."); cf. Bayview Loan Servicing, LLC v. Simmons, 
275 Va. 114, 121-22, 654 S.E.2d 898, 901 (2008) (holding that 
borrower was entitled to damages based on lender's violation 
of the terms of its remedies under its deed of trust). 
 
 
 
In this case, the original lender, PHH's predecessor in 
interest, performed its primary obligation at the inception of 
the subject transaction between it and the Mathewses when it 
made the loan to them under the terms of the note and deed of 
trust.  And the Mathewses' instant action, of course, has 
nothing to do with them seeking damages or specific 
performance in regard to any non-performance of that 
contractual obligation.  Rather, this action was instituted in 
the context of their defense to PHH's enforcement of its 
remedy of foreclosure against them. 
 
Unlike the Mathewses, the breaching party in both Horton 
and Countryside sought damages based on the defendant's 
failure to perform one of the defendant's contractual 
obligations that was unrelated to any remedy of the defendant 
for the plaintiff's breach of the parties' contract.3 
                                                 
 
3 In Horton, a former wife sought damages from her former 
husband due to his failure to make supplemental payments to an 
escrow account established for her benefit pursuant to the 
terms of a joint venture dissolution agreement entered into by 
the parties.  254 Va. at 112-14, 487 S.E.2d at 202-03.  We 
held that because the former wife first committed a material 
breach of the agreement, which "defeated an essential purpose 
of the contract," the former husband's nonperformance was 
excused.  Id. at 116, 487 S.E. 2d at 204.  Similarly, in 
Countryside, we held that, based on the first material breach 
doctrine, the plaintiff employee/stockholder was not entitled 
to contract damages in the form of severance pay, as provided 
for in his employment agreement with the defendant 
professional corporation.  261 Va. at 154-56, 541 S.E.2d at 
285-87.  We reached that conclusion because the plaintiff, 
before resigning from the corporation, first materially 
 
 
 
For these reasons, I agree with the majority that the 
circuit court erred in holding that, because the Mathewses 
first materially breached the deed of trust, they were not 
entitled to enforce the terms of the deed of trust against PHH 
in regard to its remedy of foreclosure. 
                                                                                                                                                           
breached his related stock purchase agreement in which he 
acquired an ownership interest in the corporation.  Id.