Section 50 Forfeiture and its Contents
March 31, 2012 08:09 Filed in: Texas constitution section 50 | Texas home equity loan modifications
Under important recent cases in Texas federal courts, there's no statute of limitations on bringing a lawsuit to confirm that a home equity lien has been invalidated by lender misconduct under Tex. Const. Art. 16 Section 50. However, a very recent case indicates that as to the companion penalty under Section 50, forfeiture, there is a four-year statute of limitations. Therefore, if a lender fails to cure a Section 50 defect, it not only loses the lien on a home; it not only loses all future payments from the borrower. It also loses as much as the previous four years of payments, which it must pay back to the borrower!
Previous blog entries here have explained how lenders stand to lose their lien and their loan under Section 50 when they don't cure defects. And while there's been a very well-reasoned Section 50 statute of limitations case out there since November, 2011, holding that there's no statute of limitations in Section 50 cases, a more recent case clarifies how a statute of limitations can still apply as to part of the penalty the lender is hit with for noncompliance.
The key to the distinction is that under Section 50, the lien on the homestead -- that is, the lender's "hold" on your house that lets the lender sell it if you don't pay your loan -- is invalid from the moment there's a Section 50 violation. In essence, the lien never springs into being, or else it's invalidated when a problem crops up by later lender actions. When someone brings a lawsuit to have that lien actually declared by the court to be, in fact, invalid, then the lien was always invalid, so no statute of limitations applies, according to the cases.
A newer case addresses a slightly different issue. Okay, so there's no lien, but what about the penalty of the loan being forfeited? It's obvious that the borrower makes no more payments. But if the loan is entirely forfeit, then all payments made are also forfeit, right? The borrower is not only off the hook for future payments, but for all payments already made.
EXCEPT, according to a recent case, a four-year statute of limitations applies to payments made more than 4 years prior. Thus, the lender must, if I'm reading the cases correctly, pay the borrower as much as 4 years' worth of prior payments. That is consistent with other cases that have held that the forfeiture penalty includes disgorgement of payments already made by the borrower, but it appears to place a cap on the payment to the borrower. Still, four years of past payments being paid is very significant, especially when it's considered that most Section 50 loans aren't that old and have most of their principal and interest forgiven in a forfeiture.
The case last week was lost by Citibank. The Plaintiff apparently never responded to Citi's motion to dismiss, so the court went out of its way to address the statute of limitations issue. It's Santos v. Citimortgage, 3:11-cv-2592 (N.D.Tex.-Dallas). Here are the Magistrate's Report and the Judge's order of March 29, 2012.
The key to the distinction is that under Section 50, the lien on the homestead -- that is, the lender's "hold" on your house that lets the lender sell it if you don't pay your loan -- is invalid from the moment there's a Section 50 violation. In essence, the lien never springs into being, or else it's invalidated when a problem crops up by later lender actions. When someone brings a lawsuit to have that lien actually declared by the court to be, in fact, invalid, then the lien was always invalid, so no statute of limitations applies, according to the cases.
A newer case addresses a slightly different issue. Okay, so there's no lien, but what about the penalty of the loan being forfeited? It's obvious that the borrower makes no more payments. But if the loan is entirely forfeit, then all payments made are also forfeit, right? The borrower is not only off the hook for future payments, but for all payments already made.
EXCEPT, according to a recent case, a four-year statute of limitations applies to payments made more than 4 years prior. Thus, the lender must, if I'm reading the cases correctly, pay the borrower as much as 4 years' worth of prior payments. That is consistent with other cases that have held that the forfeiture penalty includes disgorgement of payments already made by the borrower, but it appears to place a cap on the payment to the borrower. Still, four years of past payments being paid is very significant, especially when it's considered that most Section 50 loans aren't that old and have most of their principal and interest forgiven in a forfeiture.
The case last week was lost by Citibank. The Plaintiff apparently never responded to Citi's motion to dismiss, so the court went out of its way to address the statute of limitations issue. It's Santos v. Citimortgage, 3:11-cv-2592 (N.D.Tex.-Dallas). Here are the Magistrate's Report and the Judge's order of March 29, 2012.