Can home equity lenders add to principal for 'future due?'; Clarification sought in class action against Carrington Mortgage

AUSTIN - A motion for rehearing has been filed in the Supreme Court of Texas in a class action lawsuit against Carrington Mortgage Services.

The court's May 16 decision approved restructurings of Texas home equity loans that add past-due property taxes and insurance, but that do not independently satisfy the constitutional requirements for a home equity loan, according to a motion filed May 19 in the Supreme Court of Texas.

Frankie Sims and Patsy Sims claim the court's decision does not specifically address whether a restructuring can add future-due property taxes and insurance without satisfying the requirements for a home equity loan.

"That issue is present in some of the pending cases...and should therefore be resolved in this court before the Fifth Circuit takes up this case again," the motion states. "The Fifth Circuit's order certifying questions to this court does not explicitly break out the issue of past-due sums vs. future-due sums, but the Sims directly addressed the matter in their briefs and oral argument."

According to court filings in the case, many of the pending loan restructuring cases alleged lenders paid future property taxes and insurance from dollars added to the principal of the note.

The plaintiff-appellants claim the future-due problem "goes to the heart of what constitutes home equity lending."

"If this court determines that property taxes and insurance due after a restructuring can be paid from the proceeds of the restructuring, then lenders and borrowers can finance future property taxes and insurance without limitation once a home equity loan has been originated and has once satisfied the 80% loan-to-value test," the motion states.

If that is permissible, the restructuring transaction can finance those items for 20 or 30 years at the note's rate of interest and further collateralize the homestead each year, yet the practice would also "skirt the 80 percent loan-to-value requirement," according to the motion.

"If borrowers can ask lenders to take more collateral every year in this way to pay coming bills for property taxes and insurance, the 80% loan-to-value ratio that was met at inception is really just a one-time test for the particular lender who originates the loan," the motion states.

The Simses are asking the court to grant a rehearing to answer or clarify whether a home equity lender can add dollars to the principal of an existing home equity note in order to pay property taxes and insurance coming due after the transaction adding those dollars to the note.

They are being represented by J. Patrick Sutton of the Law Office of J. Patrick Sutton in Austin; Jeffrey W. Hurt of Hurt & Berry; and David M. Gottfried of the Law Office of David M. Gottfried in Dallas.

Supreme Court of Texas case number: 13-0638