Texas Supreme Court Allows Capitalization Of Interest, Fees, Escrow Items For Home Equity Loan Modifications


On May 16, The Texas Supreme Court held that the state constitution does not prohibit the restructuring of a home equity loan as long as the original loan met constitutional requirements and terms of the original extension of credit are maintained. Sims v. Carrington, No. 13-638, 2014 WL 1998397 (Tex. May 16, 2014). The court’s holding came in response to a series of questions certified by the U.S. Court of Appeals for the Fifth Circuit, which asked whether (i) a modification agreement that capitalizes past due interest, fees, property taxes or insurance premiums into the principal, but does not satisfy or replace the original note, is a modification or refinance for purposes of the constitutional home equity lending provisions; (ii) the capitalization of past-due interest, fees, property taxes, or insurance premiums constitutes an impermissible “advance of additional funds” under regulations implementing the constitutional provisions; (iii) a modification must comply with constitutional requirements that a home equity loan have a maximum loan-to-value ratio of 80%; and (iv) repeated modifications convert a home equity loan into an open-end account that must comply with certain constitutional requirements related to home equity lines of credit. The Texas Supreme Court determined that the restructuring of a home equity loan that involves capitalization of past-due amounts owed under the terms of the initial loan and a lowering of the interest rate and the amount of installment payments, but does not involve the satisfaction or replacement of the original note, an advancement of new funds, or an increase in the obligations created by the original note, is not a new extension of credit, and is thus not required to comply with the constitutional requirements. The court further held that such a restructuring (i) is not an “advance of additional funds” if those amounts were related to the original loan; and (ii) is not subject to LTV limits because it is not a new extension of credit. Finally, the court held that repeated restructurings, as described, do not convert the loan into a line of credit subject to other restrictions, explaining that in the case of a line of credit repeat transactions are contemplated upfront, a situation that “does not remotely resemble” the modification at issue here.


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