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Texas Supreme Court opens door to home equity lien challenge
The Texas Supreme Court ruled on May 20, 2016, on two cases arising from the requirement of Article XVI, Section 50 of the Texas Constitution, regarding the home loan provision. Views have great relevance for mortgages providers, authors and home titles insurance companies dealing with Texas home equity lending.
Claim related to errors once thought to be time-barred for limitation reasons are now a play unto themselves throughout the term of the loan and will no doubt provide a new stimulus for borrower to question the eligibility of the pledge that secures their home loan. In 1998, the Texas Constitution was changed to allow home equity lending, basically a non-recourse loan prolongation or refinancing through a farmstead.
The compulsory resale of the property for the purpose of repaying it is forbidden unless there is a current mortage, a fiduciary agreement or any other pledge which fulfils certain conditions and times. When a pledge is imposed on these conditions, a debtor can report an allegation and the creditor has sixty working days to remedy it.
Up until recently, creditors were convinced that the Texas Civil Practice and Remedies Code provided for a remaining four-year statute of limitation for such exposures from the date the loan was closed. With its recent statement in Wood v. HSBC Bank USA, N.A., No. 14-0714, the Texas Supreme Court has completely altered the scene with respect to liens on homes.
At Holz, eight years after receiving a home equity loan, the company informed the present owners and holders of the notice that the loan did not meet the requirements of the constitution on home equity loan. Once the supposed deficiencies had not been remedied, the forest filed an action for peaceful possession and requested a statement that the loan was invalid and that all capital and interest payments should lapse.
On a 6-3 ruling, the Supreme Court found that although deficiencies in home equity loan can be healed, the loan is void until the deficiencies are healed. Therefore, the Court found that a claim for implied titles due to allegations of unconstitutional deficiencies is not time-barred. It contradicts the recent participation of the Fifth Circle in Priests v. JPMorgan Chase Bank,708 F.3d 667, 674 (5th Circle ^ 2013), as well as the comments of the Texas Courts of Appeals for the Third, Fifth, Sixth, Sixth, Thirteenth and Fourteenth Circuits.
Whilst the Court's involvement in itself is worrying, the Court's proposal in Dikta that "lenders are entitled and should indeed be discouraged from remedying unconstitutional non-compliance alone and without notifying the borrower" is also worrying. "As highlighted by the deviators, the Wood statement is troublesome in that there are no boundaries to when a debtor can contest the validity of a home equity security right, which can take a long time after it is " hard or impossible to obtain witness, evidences or other supporting documentation for regulatory adherence.
Whilst this ruling is relevant to those participating in home equity operations, the court has given the creditor some discharge. On the basis of the statement of reasons in Garofolo v. Ocwen Loan Servicing, LLC, No. 15-0437, ruled on the same date, the court found that the forest was not in a position to apply for a declaratory judgement in order to obtain the loss of capital and interest on the loan, which is generally considered to be a redress for non-compliance with unconstitutional obligations.
At Garafolo, the court dealt with a Fifth Circle certificated issue. Once she had repaid her home equity loan, the debtor filed a lawsuit for lapse of all capital and interest payments because she was not granted a registered pledge after the loan was repaid. Borrowers' claims were supported by a constitution clause and a clause in their loan agreements, both of which require the creditor to give the debtor a describable pledge upon repayment of the loan.
The Court stated in Statement No 7-2 that the debtor had neither a right under the law nor a right under the contract to recovery. Rather, the creditor must provide evidence of real loss or pursue other remedies, such as a particular benefit, because foreclosure is only available if one of the six remedies under the Basic Law can actually resolve the root cause of the deficiency and the creditor does not resolve the deficiency in a timely manner.
Thus, as used in Wood, Garafolo resolves a declaratory relief claim basing on a statutory right of forfeiture is not available to intervene in the forfeit. Wood and Garafolo will both have an important and direct influence on Texas mortgages providers, service providers and securities underwriters. There is a likelihood of a sharp rise in the share price writings of debtors and their lawyers, which may result in a transient deceleration - or even standstill - of home loans and foreclosure sales.
Imagining that service providers should proactively remedy breaches (even in the case of a non-performing loan with a debtor who does not show any sign of grievance or dissatisfaction) also leads to the spectre of a comprehensive credit check, similar to the "retrospect" after the enforcement crises.