Texas Supreme Court Clarifies a Home-Equity Lien’s Constitutional Requirements

On May 20, 2016, the Texas Supreme Court decided two cases clarifying borrower protections on home-equity loans under Article XVI, Section 50 of the Texas constitution by holding that: (1) if a home-equity loan fails to comply with constitutional requirements, the borrower may bring a quiet title action against the lender to extinguish its lien at any time during the loan’s life; and (2) there is no constitutional forfeiture remedy for such liens, but rather the defect eliminates the lender’s ability to foreclose.

The Texas constitution requires home-equity loans to meet specific constitutional requirements to be valid.  The constitution specifically defines methods to cure such deficiencies within a limited timeframe after the lender receives notice.  However, the constitution does not define a statute of limitations for borrowers to sue lenders for constitutionally noncompliant loans.

In Wood v. HSBC Bank USA, N.A. and Ocwen Loan Servicing, L.L.C., a borrower sought to quiet title due to a constitutionally noncompliant loan, and the lender argued that the statute of limitations had expired.  The question at issue turned on whether a loan which fails to meet constitutional requirements is void when made, or is voided once the lender fails to cure after the borrower gives notice.  Under the former, no statute of limitations would apply, while under the latter, a four-year statute of limitations would apply.

The court held that liens securing constitutionally noncompliant home-equity loans are void until cured and thus no statute of limitations applies.  Accordingly, if a lender fails to cure even a minor constitutional violation after notice, the borrower may sue at any time during the loan’s life to eliminate the lender’s lien, leaving the lender with no ability to foreclose.

However, the court clarified the limits of this constitutional protection in Garofolo v. Ocwen Loan Servicing, L.L.C.  There, a borrower who fully paid her loan but did not receive proof of a release of lien within 60 days in violation of constitutional requirements, requested to have the entire loan principle and interest forfeited.  The court denied her request by explaining that the constitution does not provide a forfeiture remedy, but rather merely protects a borrower’s right to be free from a foreclosure of a noncompliant home-equity loan.

The borrower argued in the alternative that Ocwen must forfeit under a breach of contract claim.  The contract, however, provided for forfeiture only if Ocwen failed to cure the deficiencies in a manner prescribed by the constitution.  Ocwen argued that it could not cure because none of the constitutionally mandated corrective measures would actually remedy a failure to give the borrower proof of a lien release within 60 days.

The court agreed with Ocwen, holding that in order for forfeiture to occur as a result of failing to meet the constitutional provisions, one of the constitutional corrective measures must actually be able to resolve the underlying issue.  Accordingly, the borrowers’ contract did not permit forfeiture under the facts at issue.

Weiner Brodsky Kider regularly represents mortgage loan originators and servicers throughout the United States against all types of consumer and mortgagor claims.