On May 20, 2016, the Texas Supreme Court ruled on two cases that impact all lenders who make Texas Home Equity Loans. The cases are powerful reminders of the importance of compliance with Texas’ Home Equity law and the potential consequences for failure to comply.
Here is a brief overview of each decision:
- Wood v. HSBC Bank USA, N.A. – Defects in Home Equity loans are not subject to a four-year statute of limitations and a borrower may bring an action against the lender at any time during the life of the loan if the lender fails to correct the alleged defects.
In Wood, the Supreme Court ruled that the Texas Home Equity loans are not subject to a four-year statute of limitations. Prior to the Wood decision, Texas courts had consistently ruled that any action against the lender for Home Equity loan violations must be brought within four years of the loan closing. Cases brought more than four years after closing were routinely dismissed because of the four-year Statute of Limitations.
In 2004, the Woods obtained a $76,000 Home Equity loan. Nine years later, the Woods sent notice to the Lender that the closing fees exceeded 3% of the loan amount, in violation of the Texas Constitution. The Lender did not attempt to cure the default. When the Woods brought suit, the Lender attempted to dismiss the case because it was brought more than four years after the Home Equity loan closing. The Texas Supreme Court rejected the four-year Statute of Limitations defense and sent the case back to a lower court for a trial on the merits.
The decision in Wood makes clear that lenders are potentially liable for Home Equity loan violations for the life of the loan. Lenders must remain vigilant and respond promptly to any notification from the borrower of possible Home Equity loan defects. Almost all Home Equity loan defects are correctable if the lender acts promptly to address the alleged violations.
- Garofolo v. Ocwen Loan Servicing, LLC – The Lender’s failure to deliver the Release of Lien to the borrower after the Home Equity loan had been paid off did not subject the lender to forfeiture of all principal and interest.
In Garofolo, the court ruled that failing to deliver a Release of Lien in a recordable form, as required by Tex. Const. Art. XVI §50(a)(6)(Q)(vii), does not give the borrower a claim of forfeiture. The Home Equity lending provisions in the Constitution contain over 30 consumer protection requirements. If any of these requirements are violated, the consumer may notify the lender of the violation. If the violation is not cured within 60 days of notification, the Constitution provides that the lender “shall forfeit all principal and interest” on the loan. The penalty of forfeiture requires the lender to refund all principal and interest paid on the Home Equity loan.
In Garofolo, the Borrower received a $159,700 home equity loan in 2010. The borrower made their payments on time and the loan was paid off in 2014.
The Texas Constitution requires that when a Home Equity loan is paid off:
“within a reasonable time after termination and full payment of the extension of credit, the lender cancel and return the promissory note to the owner of the homestead and give the owner, in recordable form, a release of the lien securing the extension of credit or a copy of an endorsement and assignment of the lien to a lender that is refinancing the extension of credit.”
Rather than sending the original Release of Lien to the borrower in “recordable form”, the lender recorded the Release. The Borrower sent notification to the lender that they had not received the Release of Lien in recordable form. The lender did not “cure” the violation within 60 days of notification, probably because they had already recorded the Release.
After the 60-cure period expired, the borrower brought suit against the lender, claiming that she was entitled to a full refund of all principal and interest paid over the life of the loan. The Texas Supreme Court disagreed and found that this post-closing defect did not result in forfeiture.
This is an important win for Lenders. Although its impact is narrow, it shows the Texas Supreme Court’s willingness to limit the harsh penalty of forfeiture.
Please contact us if you have any questions on either of these two cases.
242 W. Sunset, Ste. 201
San Antonio, TX 78209