Supreme Court of Texas; Recent Texas Home Equity Lending Decisions

On May 20, 2016, the Supreme Court of Texas (the "Court") issued its opinions in two cases involving Texas home equity lending – Garofolo v. Ocwen Loan Servicing and Wood v. HSBC Bank USA.  The decisions are important for the industry and certain highlights are noted below.

Garofolo vs. Ocwen Loan Servicing, ____ S.W.3d ____ (Tex. 2016) (This case involved a borrower's claim for forfeiture because the lender failed to timely provide a release of lien to the borrower upon final payment after notice by the borrower of such failure.)

Highlights include:

• Foreclosure – eligible home equity loans must include specific terms and conditions.
• Loans must include the specific provisions set forth in Sections 50(a)(6)(A)-(P) and Sections 50(a)(6)(Q)(i)-(xi).
• These specific terms and conditions do not amount to constitutional rights and obligations.
• The Texas Constitution does not create a constitutional cause of action or remedy for a lender's subsequent breach of those terms or conditions.
• A post-origination breach of those terms and conditions may give rise to a breach-of-contract claim for which forfeiture can sometimes be an appropriate remedy.
• The Texas Constitution prohibits foreclosure when a loan fails to include a constitutionally – mandated term or condition.
• Forfeiture is an available remedy only if one of the six corrective measures in Section 50(a)(6)(Q)(x)(a)-(f) can actually correct the underlying problem and the lender nonetheless fails to timely perform the corrective measure.
• In the vast majority of cases the catch-all cure will present a fix that will actually correct the borrower's complaint when no other corrective measure would.
• Forfeiture is an unavailable remedy under the case's facts (e.g., refinance of a paid-off loan is ridiculously futile, and refinanced loan on different terms would not repair the underlying deficiency – providing the borrower with a release of lien).
• The remedy in this case is a traditional breach of contract claim, in which the borrower seeks specific performance or other remedies contingent on a showing of actual damages.
   

Wood vs. HSBC Bank USA, ____ S.W.3d____ (Tex. 2016) (This case primarily involved allegations of closing charges exceeding the 3% fee limit and application of a 4 year statute of limitations.)

Highlights include:

• Constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to a statute of limitation for a quiet title action.
• Home equity loans must include terms and conditions, including the forfeiture term, to be foreclosure eligible.
• If constitutionally noncompliant, the lien is not valid before a defect is cured.
• A lender or holder should maintain records throughout the life of the loan.
• The forfeiture provision does not create a constitutional cause of action but rather must be litigated in the context of the borrower's loan agreement.

Some Considerations:

• The Court introduces the concept of "foreclosure-eligible home equity loans."The term refers to Texas home equity loans that include the specific constitutionally mandated terms and conditions.See art XVI, §§ 50(a)(6)(A)-(P) and 50(a)(6)(Q)(i)-(xi).Accordingly, lenders should review their loan documents to insure the specific terms and provisions are included.

• Essentially, a home equity loan is invalid unless it strictly complies with the Texas Constitution.

• Lenders and holders also should review procedures for curing so corrective action is taken timely (i.e., within 60 days after the borrower's notification).

• A breach-of-contract claim may serve as the basis for a borrower to recover attorney's fees pursuant to Tex. Civ. Prac. & Rem. Code § 38.001.

• The Court does not address various issues.For example, in connection with a traditional breach of contract claim seeking forfeiture pertaining to a violation or failure to take corrective action the Court did not expressly state:

  • Whether the statute of limitations applies (a four year limitations period applies to a breach of contract claim), or

  • If a four year limitation period applies, whether the cause of action accrues when the violation accrues (in most cases at the time of origination) or when a lender fails to take corrective action within 60 days after notification by the borrower.

 

Contacts:

Roland Love
214.745.5198
rlove@winstead.com

Brian Morris
214.745.5714
bmorris@winstead.com

Mike O'Neal
214.745.5607
moneal@winstead.com

 

Disclaimer: Content contained within this news alert provides information on general legal issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.