Home Equity: Equitable Subrogation Upheld by Texas Supreme Court
On April 24th, the Texas Supreme Court ruled in Federal Home Loan Mortgage Corporation v. Zepeda that a home equity lender who discharges a prior valid lien on a borrower’s homestead property is entitled to equitable subrogation, even if the lender failed to correct a curable defect in the loan documents under § 50 of the Texas Constitution. This is a major victory for home equity lenders in Texas.
This case involved a borrower, Zepeda, who obtained a loan from CIT Group/Consumer Finance, Inc., to buy her homestead, then refinanced that debt with a home equity loan from Embrace Home Loans, Inc. Zepeda subsequently notified Embrace that the home equity loan did not comply with Article XVI, § 50(a)(6) of the Texas Constitution because Embrace had not signed the Acknowledgment of Fair Market Value document required by § 50(a)(6)(Q)(ix). Embrace sent Zepeda another copy of the Acknowledgment of Fair Market Value, but again failed to sign it. Embrace later sold the loan to FHLMC (Freddie Mac). Zepeda then notified Freddie Mac of the constitutional defect and offered an opportunity to cure, but Freddie Mac did not respond. Zepeda sued, claiming that because Freddie Mac failed to cure the defect, it did not possess a valid lien on her property. Freddie Mac claimed it was subrogated to CIT Group’s 2007 lien because its predecessor Embrace paid off the balance of CIT’s loan to Zepeda.
The doctrine of equitable subrogation allows a lender who discharges a valid lien on the property of another to step into the prior lienholder’s shoes and assume that lienholder’s security interest in the property, even though the lender cannot foreclose on its own lien. Zepeda argued that Freddie Mac lost its right of equitable subrogation when it failed to cure the defect after being offered an opportunity to do so per §50(a)(6)(Q)(x)(d) of the Texas Constitution.
The Texas Supreme Court disagreed with Zepeda and held that that a home equity lender who discharges a prior, valid lien on a borrower’s homestead property is entitled to subrogation in the amount of the loan it discharged, even if the lender failed to correct a curable defect in the loan documents under § 50(a)(6)(Q)(x) of the Texas Constitution.
This is very good news for the mortgage industry in Texas. Despite the fact that the borrower in this case did not prevail, It is also good news for home equity borrowers in Texas; an adverse ruling would likely have increased the costs of cash out refinances and limited access to these loans as lenders exited the cash out refinance market in Texas.
Note: A recent, unrelated, opinion from the 14th Court of Appeals in Houston raised a question about when the lender must sign the Acknowledgment of Fair Market Value. The 14th COA opinion in that case gave rise to concern that the Texas Constitution potentially requires the lender to sign the Acknowledgment of Fair Market Value on the actual day of closing to comply with Article XVI, Section 50(a)(6)(Q)(ix). Although the Zepeda case involved a lender’s failure to sign the Acknowledgment of Fair Market Value, The Texas Supreme Court did not address the question of whether the lender must sign the Acknowledgment on the date of closing. We noticed in the Zepeda opinion, however, that the court recognized that the cure for a lender’s failure to sign the Acknowledgement is to subsequently sign and deliver the form to the borrower within 60 days of receiving notice of the defect from the borrower. We cannot say for sure how the court would have ruled on this question had it been presented to the court, but Zepeda does hold that a lender notified by a borrower that it neglected to sign the Acknowledgment needs to timely sign and send it to the borrower.
CFPB Issues Interpretative Rule Addressing TRID Waiting Periods and Reg. Z Rescission Rules
On April 29, the CFPB issued an interpretive rule clarifying that consumers can exercise their rights to modify or waive certain required waiting periods under the TILA-RESPA Integrated Disclosure Rule and Regulation Z rescission rules. The Bureau is also issuing an FAQ document that addresses when creditors must provide appraisals or other written valuations to mortgage applicants in order to expedite access to credit for consumers affected by the COVID-19 pandemic.
The CFPB stated they recognize COVID-19 as a bona fide financial emergency, but the CFPB did not change the process for the waiver itself. This applies to those consumers that request the waiver due to COVID-19 and affects the TRID waiting periods as well as the rescission periods under TILA. The rule is effective immediately upon publication in the Federal Register, which had not occurred at the time of this publication.
Creditors are required to deliver or place in the mail the Loan Estimates no later than seven business days before consummation, and consumers must receive Closing Disclosures no later than three business days before consummation. For certain principal dwelling secured credit, the Reg. Z rescission rules provide that consumers must receive notice of rescission rights and be given three days to rescind the transaction after consummation. Under TRID and Reg. Z, the consumer may modify/waive these waiting or rescission periods when the consumer determines they need the credit to meet a bona fide financial emergency, and that emergency necessitates the modification or waiver. The interpretive rule is the CFPB’s official determination that the COVID-19 pandemic can create such a bona fide financial emergency for a consumer.
For the waiting periods to be modified or waived, the creditor must have a dated written statement by the consumer that: (1) describes the emergency, (2) specifically modifies or waives the waiting period, and (3) bears the signature of all consumers who are primarily liable on the legal obligation (for TRID) or who are entitled to rescind (for Rescission Rules).
Please note that preprinted forms may not be used for the purpose of modification or waiver of the TRID waiting or TILA rescission periods.
Federal Banking and Credit Union Agencies Defer Appraisals and Evaluations for Transactions Affected by COVID-19
On April 14, the federal banking agencies issued an interim final rule to temporarily defer real estate-related appraisals and evaluations under the agencies’ interagency appraisal regulations. The NCUA followed suit with an interim final rule on April 16. The agencies are deferring certain appraisals and evaluations for up to 120 days after closing of residential or commercial real estate loan transactions. Transactions involving acquisition, development, and construction of real estate are excluded from this interim rule. These temporary provisions will expire on December 31, 2020, unless extended by the federal banking agencies.
NCUA Increases Residential Appraisal Threshold
The NCUA Board approved a final rule on April 16, which was published in the Federal Register and effective as of April 22, to increase the residential appraisal threshold from $250,000 to $400,000. The raised threshold provides long-term regulatory relief to credit unions and members. The rule also increases flexibility for credit unions struggling with mortgage pipeline delays due to appraisals during the COVID-19 pandemic.
Federal Banking and Credit Union Agencies Provide Flexibility for Appraisals and Evaluations
On April 14, the federal banking and credit union agencies issued an interagency statement to address challenges relating to appraisals and evaluations for real estate related financial transactions affected by COVID-19. This interagency statement outlines existing flexibilities in industry appraisal standards and in the appraisal regulations issued by the OCC, FRB, FDIC, and NCUA (agencies) and describes temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this challenging time. In particular, the statement highlights flexibilities offered by:
- USPAP—USPAP does not specifically require interior inspections as part of its standards. An appraiser can determine a property’s characteristics using alternative methods or can bypass a physical inspection provided the appraiser notes appropriate disclosures, and the absence of an interior inspection does not diminish the credibility of the appraisal report.
- Fannie Mae and Freddie Mac—Certain residential mortgages that qualify for sale to Fannie Mae and Freddie Mac can utilize appraisals with exterior-only inspections, desktop appraisals, and appraisal waivers.
- Existing Regulations—Certain real estate related transactions are exempt from appraisal and evaluation requirements under each regulator’s existing appraisal regulations.
The U.S. Department of Housing and Urban Development, U.S. Department of Veterans Affairs, and United States Department of Agriculture have also updated their appraisal flexibilities for residential mortgages that they insure or guarantee.
On March 30, the Federal Housing Finance Agency announced several loan processing flexibilities from Fannie Mae and Freddie Mac designed to help lenders process loans, including:
- Allowing desktop appraisals on new construction loans;
- Allowing flexibility on demonstrating construction has been completed (alternative to the Completion Report);
- Allowing flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws); and
- Expanding the use of power of attorney and remote online notarizations.
These accommodations only apply to loans being originated for sale to Fannie or Freddie.
CFPB Releases Factsheets on ECOA Valuation Rule
The Bureau released two factsheets on the Equal Credit Opportunity Act Valuation Rule on April 29. The factsheets provide information on transaction coverage under the Rule and delivery method and timing requirements for appraisals and other written valuations. The Bureau also published an FAQ related to the ECOA valuations rule in light of the COVID-19 emergency.
In 2013, the Bureau published the ECOA Valuations Rule, which amended Regulation B to require creditors to provide applicants free copies of all appraisals and other written valuations developed in connection with an application secured by a first lien on a dwelling and to notify applicants of their right to receive copies of appraisals within three business days. The factsheets address frequently asked questions the Bureau has received since the Rule went into effect.
Frequently Asked Question
Question: With all the requests we are getting for mortgage deferrals related to COVID-19, we want to make sure we understand how to enter them into the PPDocs system. We are keeping our program simple, regular mortgages and home equity will be handled the same. We are allowing up to 3 months forbearance, then capitalizing and recasting interest for the remainder of the original term. No extensions of maturity date will be granted. We are requiring escrow payments be made.
As an example, one of the requests we received was for a 2-month forbearance with the April 1, 2020 payment unpaid. They will not pay for April or May, and their next payment will be June 1. Can you advise me on how to complete the forbearance letter? What would the effective date of the modification be?
- 1. In this case, the lender is forbearing the April 1 and May 1 payments. The forbearance letter should be dated for when the interest that was due on April 1 began to accrue. Accordingly, the forbearance letter would be dated March 1.
- 2. Because the lender expects the borrower to begin making payments again on June 1, the lender would make the effective date of the modification the date that interest will begin to accrue for the June 1 payment, which is May 1. Accordingly, the effective date of the modification would be May 1.
- 3. In our system, the lender is able to select “x number of days” or “x number of months”. It’s a dropdown selection.