On April 24, 2020, the Texas Supreme Court responded to a certified question from the U.S. Circuit Court of Appeals for the Fifth Circuit, ruling that under the Texas Constitution, a lender is entitled to equitable subrogation when ‘he failed to correct a curable constitutional flaw in the loan documents. This decision represents a positive change in case law in favor of Texas home lenders on the issue of subrogation.
This case involved a borrower who obtained a home loan from one lender and refinanced her mortgage with a home equity loan from another lender years later. The second lender has paid the balance of their mortgage to the first lender. The borrower then sent a letter to the second lender, claiming that the home equity loan did not comply with Section XVI, § 50 (a) (6) (Q) (ix) of the Texas Constitution because that the second lender did not sign a form “acknowledging the fair market value of the house on the date the loan was made”. The borrower’s letter requested that the default be corrected within 60 days, but the lender did not correct the default. When the home equity loan was sold to the Federal Home Loan Mortgage Corporation (Freddie Mac), they again sent a letter advising of the default and asking Freddie Mac to try to correct it. However, Freddie Mac did not respond to the letter and did not remedy the constitutional flaw. The borrower filed a lawsuit in federal court to silence the title, arguing that Freddie Mac did not have a valid lien on his property because she had not responded or corrected the default within 60 days. its notification. Freddie Mac argued that he is subrogated to the original lien of the first lender on the property because his predecessor, the second lender, paid off the borrower’s original loan balance. Both parties applied for summary judgment and the district court allowed the borrower’s petition and dismissed Freddie Mac’s petition.
The district court found that Freddie Mac had been negligent in failing to remedy the constitutional defect in the loan documents and was therefore not entitled to equitable subrogation. Freddie Mac appealed to the Fifth Circuit, and the appeals court certified the following question to the Texas Supreme Court: Failure to do so, does this failure prevent him from invoking fair subrogation? “
The Texas Supreme Court found that “[u]Under Texas law, a lender who discharges a prior and valid lien on the borrower’s homestead is entitled to subrogation, even if the lender has not corrected a curable defect in the documents. loan under Section 50 of the Texas Constitution. In the court’s view, Chief Justice Nathan Hecht explained that it is a well-established law in Texas that “a lender’s right of subrogation is ‘fixed’ when the valid prior lien is discharged” and that in previous cases the court has “honored claims for equitable subrogation against homestead when a refinancing, even unconstitutional, has been used to pay for valid liens. Additionally, the court cited its previous views that subrogation helps homeowners because without it “lenders would be reluctant to refinance homestead due to the increased risk that they will be forced to relinquish their liens.” The court said this decision was consistent with its historical and procedural background, and determined that the court’s previous consideration of the subrogation issue should not be altered.