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Supreme Court of Texas Issues Opinion Impacting Texas Home Equity Loans—Claims Based on Constitutional Noncompliance Are Not Subject to a Statute Of Limitations

courtroom-justicescalesOn May 20, 2016, the Supreme Court of Texas issued a 6-3 opinion in the matter Wood v. HSBC and Ocwen. The Court concluded “that liens securing constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to any statute of limitations.”

Historically, constitutionally noncompliant homestead liens were absolutely void in Texas. It was not until 1997 that the Texas Constitution was first amended to allow homestead liens to secure home-equity loans. However, specific and extensive limitations on this type of lending remain. For instance, a loan secured by the homestead must be made on the condition that forfeiture of all principal and interest is available if the loan is constitutionally noncompliant and the lender fails to cure within 60 days of being given notice by the borrower.

In the present case, Alice and Daniel Wood (“the Woods”) obtained a $76,000 home-equity loan secured by their homestead on July 2, 2004. Almost eight years later, the Woods notified their loan servicer (Ocwen) and their current noteholder (HSBC) that their loan did not comply with the Texas Constitution, one such instance of alleged non-compliance related to the closing fees exceeding 3% of the loan amount. It was undisputed that no attempt was made to cure the alleged defect. More than sixty (60) days later on July 9, 2012, the Woods filed suit seeking to quiet title and asserting claims for constitutional violations, breach of contract, fraud, and a declaratory judgment that the lien securing the home-equity loan is void, that all principal and interest paid must be forfeited, and that the Woods have no further obligation to pay.

While each party moved for summary judgment, the trial court granted summary judgment in favor of HSBC and Ocwen, whose motions were based, in pertinent part, that the lien is voidable, not void, and that the statute of limitations barred all the borrowers’ claims. The Woods’ only issue on appeal was whether their claims based on noncompliance with the Texas constitution are subject to a statute of limitations. The court of appeals affirmed the decision, holding that liens securing noncompliant home-equity loans are voidable and that the residual four (4) year statute of limitations applied to the Woods’ claims, accruing from the date of closing.

The Woods argue that a home-equity lien securing a constitutionally noncompliant loan is invalid until the defect is cured. If a lender chooses not to cure within the constitutional period upon receiving notice of the defect, they argue the defect is no longer curable and the lien becomes absolutely void. They argue no statute of limitations should apply to actions seeking to declare the status of an already invalid lien.

The Court analyzed the plain language of Section 50(c) which reads “No mortgage, trust deed, or other lien on the homestead shall ever be valid unless it secures a debt described by this section...” Through their reading of Section 50 and prior case law, holding such a lien is made valid by the lender’s compliance with a cure provision, the Court determined no statute of limitations applies to a borrower’s request for cure or attempt to quiet title on such an invalid lien.

What does this mean for lenders?

First, it is important to note that lenders are permitted to cure constitutionally noncompliant liens on their own, without notice from the borrower, as a proper cure will make valid a homestead lien that may not have complied with the constitution at origination. If a curable defect is discovered, it is advisable that the lender cure the defect, even if the defect is not raised by the borrower.

It will be also be important to maintain complete and accurate records on these home equity loans throughout their life cycle as a challenge to the validity of these liens may now be made many years after origination.

Lastly, lenders traditionally foreclose these liens through a unique quasi-judicial process under the Texas Rules of Civil Procedure. In certain situations (e.g., if a question as to constitutional compliance exists) it may now be advisable to foreclose these liens through a full judicial foreclosure action. It is still too early to determine how this court ruling will affect, and how title companies are going to treat, previously foreclosed home equity transactions that are in REO or have been conveyed to new owners out of REO.

About Author: Dustin J. Dreher

Dustin J. Dreher is a Managing Attorney with Barrett Daffin Frappier Turner & Engel, LLP and oversees the Compliance Department of the BDF Law Group of Firms, which provide legal services in Arizona, California, Colorado, Georgia, Nevada, and Texas. As a member of the Firm’s Executive Committee, Dreher provides strategic leadership and has management responsibilities for implementing client directives, employee training, vendor management, policies and procedures, as well as ensuring compliance with applicable state and federal law. He attended the University of Texas earning a Bachelor of Arts in Government, and graduated from Texas Tech University with a JD/MBA. Prior to working at the Firm he worked as an Assistant General Counsel in Citi’s legal department. Dreher is licensed to practice law with the State Bar of Texas.

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