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Is There A Constitutional Remedy of Forfeiture for Breach of a Home Equity Loan in Texas?

The Texas Supreme Court recently addressed whether a lender is required to forfeit payment and interest payments made by a borrower when the lender has violated the terms of a home equity loan, and whether this a remedy is a matter of right available under the Texas Constitution or through a breach of contract action.

In the case of Garofolo v. Ocwen Loan Servicing LLC, Ms. Garofolo took out a home equity loan, and repaid the amount she borrowed plus interest in less than five years. Upon repayment, her loan holder, Ocwen Loan Servicing, recorded a release of the lien with Travis County, but failed to provide her with a copy of this release in recordable form, which was required of the lender under the home equity loan agreement.

After Ms. Garofolo notified her lender that they had not provided her with a copy of the lien release, and the lender failed to provide the document for sixty days, Ms. Garofolo sued the lender  seeking forfeiture of all the principal and interest she paid on her home equity loan, claiming this was a constitutional right afforded to her either under the Texas Constitution or because the lender had violated the loan agreement.

The Texas Constitution, Section 50(a) protects Texas homesteads from forced sale, unless certain exceptions apply. One of those exceptions is a home equity loan. The loan agreement must contain specific terms required by the Constitution. Examples of these terms include a requirement that the lender will deliver a release of lien to the borrower once the home equity loan is paid off, and that lenders that fail to meet their loan obligations may forfeit all principal and interest payments received from the borrower.

The Texas Supreme Court did not agree with Ms. Garofalo’s position, and clarified the matter of when a lender can be required to forfeit all payment and interest for a breach of contract. Specifically, the Court held that: “Our constitution lays out the terms and conditions a home equity loan must include if the lender wishes to foreclose on a homestead following borrower default.
It does not, however, create a constitutional cause of action or remedy for a lender’s subsequent breach of those terms or conditions. A post-origination breach of those terms and conditions may give rise to a breach-of-contract claim for which forfeiture can sometimes be an appropriate remedy. But when forfeiture is unavailable, as in this case, the borrower must show actual damages or seek some other remedy such as specific performance to maintain her suit.”

The Court went on to hold that the constitutionally required  terms and conditions are not substantive rights and obligations unto themselves. In fact, the Texas Constitution does not say all home-equity loans must include the constitutional terms and conditions, nor does it prohibit loans made on other terms. It simply describes what a home-equity loan agreement must say if a lender wants the option to foreclose on a homestead upon borrower default. Failure to include these terms and conditions or a lender’s violation of these terms and conditions does not give rise to a cause of action upon which a suit can be based. Instead, they are important only when their absence in a loan’s terms is used to prevent a foreclosure.

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