Home Equity Lender Must Submit Lack of Notice Issue to Jury Or Risk Waiver on Appeal

A valid Texas home equity loan must comply with the Texas Constitution. The failure to comply with the Texas constitution does not result in an automatic forfeiture of the home equity lien because of a constitutional cure provision that requires the borrower to give the lienholder notice of the alleged violation. The lienholder has sixty days to take curative measures to bring the loan into compliance with the constitution after receiving proper notification. When the loan fails to meet the constitutional requirements and the lender cannot cure within sixty days, then the lien can be declared invalid, and all principal and interest are forfeited. Tex. Const. art. XVI, § 50(a)(6)(A)–(Q).

Proper notice of non-compliance requires that the notice include a reasonable: (1) identification of the borrower; (2) identification of the loan; and (3) a description of the alleged failure to comply. If the borrower provides the lender or holder inadequate notice, the 60-day period does not begin to run. 7 Tex. Admin. Code § 153.91(a), (b).

Wells Fargo Bank NA v Leath

In Wells Fargo Bank, N.A. v. Leath, 2014 WL 31352 (Tex. App.—Dallas Jan. 6, 2014) opinion supplemented on denial of reh’g, 2014 WL 1141248 (Tex. App.—Dallas Mar. 21, 2014, no. pet. h.) the jury found that the loan violated the 80% loan to fair market value ratio under Tex. Const. art. XVI, § 50(a)(6)(B). No other issue was submitted to the jury.

The Dallas Court of Appeals found since the lack of notice was not submitted to the jury it was waived and not preserved on appeal. One Justice dissented from a denial of an en banc rehearing and disagreed with the panel’s conclusion of adequate notice of the failure to comply. The Justice argued that the 60-day cure period is to give the lender enough detail about the alleged defect so that the lender can take advantage of the 60-day cure period. The justice contended that the pleading that the mortgage violated the constitution because the loan amount exceeded 80% of the actual fair market value at the time of the closing gave no other details and was too conclusory to inform appellant what it needed to do to cure the alleged defect and that the lender could not have cured without additional information and cooperation from the debtor. He contended that the notice provision should not be construed to make the lender’s ability to cure within sixty days contingent on the debtor’s cooperation.

Home equity lenders who are confronted with borrowers complaints of constitutional violations should assert defenses of failure to comply with the notice requirements, file special exceptions to the lack of notice issue or move for summary judgment and tender a jury issue at the time of trial. As the lender would have the burden of proof on lack of proper notice it would carry the burden to tender an issue to the court and obtain a ruling prior to submission of the charge to the jury.