Sims v. Carrington Mortgage Services, L.L.C. NO. 13-0638
Chief Justice Hecht delivered the opinion of the Court.
Frankie and Patsy Sims obtained a 30-year home equity loan in 2003. In 2009, the Simses, behind on their payments, reached a “Loan Modification Agreement” with Carrington Mortgage Services, L.L.C (CMS). The agreements involved capitalizing past-due interest and other charges, including fees and unpaid taxes and insurance premiums, and reducing the interest rate and monthly payments. Two years later, the Simses were again behind, and this time CMS sought foreclosure. The Simses resisted, asserting that the 2009 restructuring violated constitutional requirements for home equity loans. The parties then reached a second “Loan Modification Agreement,” further reducing the interest rate and payments.
The original note required the Simses to pay principal, interest, and late charges. The security agreement also had that requirement and added an obligation for the Simses to make payments for items such as taxes, assessments, and insurance premiums. The security agreement also authorized the lender to “do and pay for whatever is reasonable or appropriate” to protect its interest in the property and its rights under the agreement and provided that any amount the lender disbursed to that end “shall become additional debt of Borrower secured by this Security Instrument.” The 2009 and 2011 “Loan Modification Agreements” provided that all the Simses’ obligations and all the loan documents remained unchanged.
Two months after the 2011 agreement, the Simses brought this class action against CMS in the U.S. District Court, alleging that CMS’s loan modifications for them and other similarly situated borrowers violated Article XVI, Section 50 of the Texas Constitution. The district court dismissed the case under FRCP 12(b)(6), and the Simses appealed. After oral argument, the Fifth Circuit certified four questions for the Texas Supreme Court:
(1) After an initial extension of credit, if a home equity lender enters into a new agreement with the borrower that capitalizes past-due interest, fees, property taxes, or insurance premiums into the principal of the loan but neither satisfies nor replaces the original note, is the transaction a modification or a refinance for purposes of Section 50 of Article XVI of the Texas Constitution?
If the transaction is a modification rather than a refinance, the following questions also arise:
(2) Does the capitalization of past-due interest, fees, property taxes, or insurance premiums constitute an impermissible “advance of additional funds” under Section 153.14(2)(B) of the Texas Administrative Code?
(3) Must such a modification comply with the requirements of Section 50(a)(6), including subsection (B), which mandates that a home equity loan have a maximum loan-to-value ratio of 80%? (4) Do repeated modifications like those in this case convert a home equity loan into an open-end account that must comply with Section 50(t)?
In response to the first question posed by the Fifth Circuit, the Texas Supreme Court clarified that “[t]he applicability of this particular provision, as well as all of Section 50(a)(6), which governs home equity loans, depends not on whether the transaction is a modification or a refinance but on whether it is an “extension of credit”. If the transaction is not an extension of credit, then the section simply does not apply. The Court’s ultimate answer to the first question was that the restructuring of a home equity loan that, as in the context from which the question arises, involves capitalization of pastdue amounts owed under the terms of the initial loan and a lowering of the interest rate and the amount of installment payments, but does not involve the satisfaction or replacement of the original note, an advancement of new funds, or an increase in the obligations created by the original note, is not a new extension of credit that must meet the requirements of Section 50.
As to the second question, the Court articulated that the capitalization of past-due interest, fees, property taxes, and insurance premiums are not the advancement of additional funds “if those amounts were among the obligations assumed by the borrower under the terms of the original loan. And more importantly, such capitalization is not a new extension of credit under Section 50(a)(6).”
Third, a restructuring like the Simses does not have to comply with the requirements of Section 50(a)(6) because it does not involve a new extension of credit.
Fourth, repeated modifications like those in this case do not convert a home equity loan into an open-end account that Section 50(t) applies to because a home equity loan has a stated principle and is to be repaid on a specific schedule from the outset, but might be restructured to avoid foreclosure. An open-ended account under Section 50(t) is “a form of an openend account that may be debited from time to time, under which credit may be extended from time to time and under which . . . the owner requests advances, repays money, and reborrows money.” The repeated transactions are clearly contemplated from the outset. The listed responses were then submitted to the Fifth Circuit for consideration.