Texas Home Equity and Equitable Subrogation

With the recent decision in Federal Home Loan Mortgage Corporation v. Zepeda, No19-0712, the Texas Supreme Court issued a significant decision in favor of home equity lenders in, answering the question, “Is a lender entitled to equitable subrogation, where it failed to correct a curable constitutional defect in the loan documents under §50 of the Texas Constitution?” Or more specifically, “If the party seeking equitable subrogation could have satisfied the requirements of §50(a)(6)(Q)(ix) but failed to do so, does that failure preclude it from invoking equitable subrogation?”

Here, Zepeda in 2007 obtained a loan from CIT Group/Consumer Finance, Inc., to purchase her homestead and secured the loan using her homestead as collateral. In 2011, Zepeda refinanced her debt with a home equity loan from Embrace Home Loans, Inc., which paid the balance Zepeda’s debt to CIT, which then released its claim. Years later, as an opportunity to cure, Zepeda notified the lender that the loan documents did not comply with Article XVI §50 of the Texas Constitution because the lender has not signed a form acknowledging the homestead’s fair market value. Embrace failed to cure the defect. Embrace later sold the to Federal Home Loan Mortgage Corp. (“Freddie Mac”) and Zepeda again sent a letter notifying of the constitutional defect and an opportunity to cure. Freddie Mac did not respond, and Zepeda brought an action to quiet title under the theory that because the lender did not cure the defects in the loan documents after being notified of such, they do not possess a valid lien on her property. 

The Court in a victory for home equity lenders, confirmed the well-established principal of subrogation (i.e. the substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor) and answered, YES. Under Texas law, a lender who discharges a prior, valid lien on the borrower’s homestead property is entitled to subrogation, even if the lender failed to correct a curable defect in the loan documents under §50 of the Texas Constitution.