The Texas Supreme Court released its opinions in two important cases relating to home equity lending on May 20, 2016. In Garofolo v. Ocwen Loan Servicing, LLC, the court answered certified questions from the U.S. Fifth Circuit Court of Appeals. The borrowers in that case paid off their loan. Ocwen filed a release of lien rather than provide it to the borrowers but did not return the cancelled note even after a demand from Ms. Garofolo. The original loan documentation incorporated all of the requirements in the Constitution for lien validity, including the condition that the note would be returned and the borrower would receive a release of lien in recordable form.
In response to the first certified question, the Supreme Court concluded that the litany of terms and conditions in the Constitution must be satisfied—at the time the loan is made—in order to have a valid lien that is subject to foreclosure. The loan documentation, by incorporating the substantive requirement for returning the cancelled note and providing the lien release, satisfied this. The court went on to say that these conditions are not “substantive constitutional rights and obligations” but rather affect lien validity.
In response to the second question as to whether forfeiture of principal and interest was the remedy for failure to comply with the lien validity criteria, the court said yes—but not in this case! So, breach of contract remedies could include forfeiture if the lender fails to use one of the cure provisions in the Constitution. The saving point for Ocwen in this case was the court’s determination that none of the specific cures were applicable and the “catch-all” cure of paying $1,000 and offering to refinance the remaining balance was “ridiculously futile” and thus not applicable. IBAT filed an amicus curiae brief in this matter along with TBA and TMBA that argued the same point approved by the court as to the first question. However, we had suggested that the appropriate remedy was traditional “breach of contract” rather than forfeiture.
The second case, Wood v. HSBC Bank USA, N.A. and Ocwen Loan Servicing, LLC, raised the issue of statute of limitations. Applying the logic of the Garofolo case, the court concluded that liens securing constitutionally noncompliant home equity loans are simply invalid until cured. The lien is void, not voidable. Thus, they are not subject to any statute of limitations. But the court also concluded that there was no claim for forfeiture because the constitutional requirements relating to lien validity do not create substantive constitutional rights and obligations.
Below are key take-away lessons learned from these cases:
Home equity loan documentation should include an acknowledgement of some sort relating to all of the requirements for lien validity;
If the borrower sends a cure notice, respond in 60 days. Only exception—situations not covered by a specific provision in which the demand is made after the loan is paid off;
Statute of limitations defense appears to be finally put to bed; and
Constitutional requirements apply to lien validity and are not independent substantive constitutional rights.