The Texas Supreme Court recently delivered two significant decisions concerning the home equity provisions of the Texas Constitution.
In Wood v. HSBC Bank USA, N.A. and Ocwen Loan Servicing, L.L.C., the Court rejected a 4-year statute of limitations on a borrower’s right to request a cure of a defective home equity loan. The 14th Texas Court of Appeals had held that home equity liens that do not comply with the requirements in §50(a)(6) of the Texas Constitution are voidable, and therefore subject to the “residual” 4-year SOL under Texas law. The Supreme Court rejected that conclusion and held that such liens are void until cured, regardless of the limitations period. This conclusion was based on a related provision in the Texas Constitution – §50(c) – which states that “no lien shall ever be valid” unless it complies with the requirements in §50. A lien that is invalid cannot be made valid by the mere passage of time, and as long as this cloud on title exists, “so too does an equitable action to remove the cloud; therefore, a suit to remove the cloud is not time-barred.” Therefore, “no statute of limitations applies to a borrower’s request for cure.”
In Garofolo v. Ocwen Loan Servicing, L.L.C., the Court held that the sole purpose of §50(a) of the Texas Constitution is to provide that a homestead is “protected from forced sale for the payment of all debts” except the 8 types of loans listed in §50(a) (home equity loans being only one of them). The requirements to create a valid lien for each type of loan do not themselves constitute constitutional rights, but compliance with those requirements is necessary to make a lien “foreclosure-eligible”, as the Court put it. Garofolo had asserted a constitutional right to demand forfeiture of all principal and interest in all circumstances under §50(a)(6)(Q), the cure provision applicable to home equity exteensions of credit. But, Garofolo had already paid her loan in full, so there was no cure provision that was applicable or that would actually cure the defect (which was Ocwen’s failure to timely send Garofolo a copy of the cancelled note and the release of lien, even though the release of lien had been properly recorded). Even the “catch-all” provision that requires a refund of $1,000 and an offer to refinance the debt would not have worked because the lien had ceased to exist. The Court concluded that “forfeiture is available only if one of the six specific constitutional corrective measures would actually correct the lender’s failure to comply with its obligations under the terms of the loan.” Forfeiture of principal and interest is not available as a remedy if an attempted cure would be inapplicable or ineffectual. The Court held that Garofolo had other remedies – a suit for breach of contract seeking actual damages or specific performance.
Almost every other scenario is open to some form of cure. The exception is the case where the spouse did not give written consent to the lien when the loan was closed. The very first condition for a valid, enforceable home equity lien (§50(a)(6)(A)) is that the extension of credit must be “secured by a voluntary lien on the homestead created under a written agreement with the consent of each owner and each owner’s spouse”. This is reinforced by §50(a)(6)(Q)(xi) – “the lender or any holder of the note for the extension of credit shall forfeit all principal and interest of the extension of credit . . . if the lien was not created under a written agreement with the consent of each owner and each owner’s spouse, unless each owner and each owner’s spouse who did not initially consent subsequently consents.” The spouse’s subsequent consent is beyond the holder’s control, and it is unlikely that the lender can avoid the necessity of that consent merely by paying $1,000 and making an offer to refinance; spouse’s rights are no so easily dismissed under Texas law. Note also that, as a matter of statutory construction, this subpart (xi) stands equal with subpart (x), which could be interpreted to mean that it is not susceptible to cure using the catch-all cure.