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:
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Foreclosure – eligible home equity loans must include specific terms and conditions.
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Loans must include the specific provisions set forth in Sections 50(a)(6)(A)-(P) and Sections 50(a)(6)(Q)(i)-(xi).
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These specific terms and conditions do not amount to constitutional rights and obligations.
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The Texas Constitution does not create a constitutional cause of action or remedy for a lender's subsequent breach of those terms or conditions.
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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.
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The Texas Constitution prohibits foreclosure when a loan fails to include a constitutionally – mandated term or condition.
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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.
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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.
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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).
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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:
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Constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to a statute of limitation for a quiet title action.
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Home equity loans must include terms and conditions, including the forfeiture term, to be foreclosure eligible.
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If constitutionally noncompliant, the lien is not valid before a defect is cured.
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A lender or holder should maintain records throughout the life of the loan.
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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:
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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.
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Essentially, a home equity loan is invalid unless it strictly complies with the Texas Constitution.
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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).
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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.
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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:
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Whether the statute of limitations applies (a four year limitations period applies to a breach of contract claim), or
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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.