By Perry Cockerell
Special to the Business Press
In Texas, homeowners can borrow money by using their homestead as collateral through the home equity loan laws allowed under the Texas Constitution. The loan process requires numerous documents, verifications, acknowledgements and disclosures to be signed by the borrowers. If the loan documentation fails to comply with the Texas Constitution, then the lender faces the possibility of forfeiting its lien – the only security for the loan – as home equity loan borrowers, absent fraud, have no personal liability to pay. The success rate in reported decisions invalidating home equity loans is low because borrowers have necessary steps to comply with prior to forfeiture and lenders have remedies to prevent forfeiture. Before a home equity lien may be forfeited, the borrower must notify the lender of the violation of the law so that the lender can take steps to cure the alleged deficiencies. The notice to the lender must identify the borrower and the loan and describe the failure to comply with the law. The law provides ways for the lender to cure a violation and if unable to cure, the lender may correct the violation by refunding or crediting $1,000 to the account of the borrower and modifying or refinancing the loan in compliance with the constitutional provisions within a reasonable time, not to exceed a certain time period. If the borrower’s notice of the violation is inadequate then the time period does not run. Borrowers attack home equity loans for many reasons. For example, the loan may charge fees in excess of the cap on fees, the loan may exceed the maximum loan-to-value ratio or the loan may fail to provide the required disclosures or other loan documentation due at or before the closing of the loan. Borrowers have attacked the assignments of their home equity notes from one lender to another. So far courts have sided with lenders on this issue because the borrowers are not parties to the assignment. Borrowers have been successful where they raise clear constitutional violations that the lenders were unable to cure. In the case of In re Box the lien was forfeited because the bank required the borrower to use the home-equity loan proceeds to repay a preexisting debt. This violated the Texas Constitution. In Arnold v. Quigley, the lien was forfeited because the lender was not authorized to make home equity loans in Texas, foreclosed the property without the required court approval, and failed to provide certain required closing documentation. In Lovelace v. USAA Fed. Sav. Bank the lien was forfeited because the home equity loan was a second home equity loan on the property. Texas law precludes more than one home equity loan on a property at the same time. In Johnson v. Nat’l City Mortg. Co. the lien was forfeited because it was made on agricultural property. A home equity lien cannot be taken on agricultural property unless it is used for the production of milk. A claim asserted by the borrower more than four years after closing could be barred by limitations. The borrower might also be prevented from making claims that are inconsistent with the loan documents. If the lender loses its home equity lien, but the loan proceeds paid off a prior valid lien against the homestead, then the lender can assume the prior lien position and avoid a complete forfeiture. The lender’s legal fees in prosecuting foreclosure of a home equity loan or defending a suit brought by a borrower to invalidate a home equity lien can only be recovered from the real property and not the borrower personally unless the borrower has committed fraud. Recently in Murphy v. Wells Fargo a borrower tried to recover his legal fees from the lender by filing suit under the declaratory judgment act where a judge has discretion to grant legal fees. This attempt backfired. The borrower lost at trial and the court assessed legal fees against the borrower personally. On appeal the court of appeals reversed and found that legal fees could not be awarded against the borrower personally because there was no fraud in the transaction. Home equity litigation leaves no room for compromise – there are clear winners and losers. Lenders mostly prevail in reported decisions. Borrowers prevail where there are clear violations of the law which cannot, or are not, cured by the lender in accordance with the Constitution.
Perry Cockerell is a partner with the law firm of Cantey Hanger LLP. He may be reached at firstname.lastname@example.org.