Manuel Cerda, et al v. 2004-EQR1 LLC, et al

Filing

Download PDF
Manuel Cerda, et al v. 2004-EQR1 LLC, et al Doc. 0 Case: 09-50619 Document: 00511182199 Page: 1 Date Filed: 07/22/2010 IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED July 22, 2010 N o . 09-50619 Lyle W. Cayce Clerk M A N U E L B. CERDA; PETRA G. CERDA, P la in t iffs - Appellants v. 2 0 0 4 -E Q R 1 L.L.C.; BARCLAYS CAPITAL REAL ESTATE INC., doing b u s in e s s as HomEq Servicing, D e fe n d a n t s - Appellees A p p e a l from the United States District Court fo r the Western District of Texas B e fo r e JONES, Chief Judge, and KING and HAYNES, Circuit Judges. K I N G , Circuit Judge: M a n u e l and Petra Cerda appeal from the district court's judgment r e je c t in g their claims that aspects of their home equity loan violated the Texas C o n s t it u t io n . We agree with the district court that the Cerdas have failed to s h o w a violation of the Texas Constitution, and we affirm. I . BACKGROUND I n 1993, Manuel and Petra Cerda purchased an unimproved five-acre lot in San Antonio, Texas, on which they subsequently built a house. Using the h o u s e as collateral, they obtained a home equity loan from Associates Home E q u it y Services, Inc., in 1999, borrowing a principal sum of $238,659.33 to be Dockets.Justia.com Case: 09-50619 Document: 00511182199 Page: 2 Date Filed: 07/22/2010 No. 09-50619 r e p a id over 30 years. The next year, in 2000, the Cerdas refinanced that loan w ith Ameriquest Mortgage Company, this time with a principal sum of $325,000. The terms of the Ameriquest Mortgage loan provided for interest at a fixed rate o f 10.9% for the first two years, followed by a variable rate--not less than 10.9% o r greater than 16.9%--that was equal to the London Interbank Offered Rate (L I B O R ) plus 6.5%. I n April 2002, in order to obtain a lower interest rate and to pay property t a x e s , the Cerdas again sought to refinance their home equity loan. They c o n t a c t e d Clarity Mortgage Services, a mortgage broker, and applied by te le p h o n e . Clarity Mortgage prepared a Good Faith Estimate,1 bearing a p r e p a r a t io n date of April 30, 2002, that showed a loan with a principal amount o f $344,000, a fixed interest rate of 8.5%, estimated closing costs of $8,600, and c a s h to the Cerdas at closing in the amount of $10,400.2 On May 15, 2002, the C e r d a s signed the following documents: (1) the Good Faith Estimate; (2) a F e d e r a l Truth-In-Lending Disclosure Statement;3 and (3) a Notice Concerning E x t e n s io n s of Credit Defined by Section 50(a)(6), Article XVI, Texas C o n s t it u t io n .4 A "good faith estimate" is "an estimate of settlement charges a borrower is likely to incur, as a dollar amount, and related loan information, based upon common practice and experience in the locality of the mortgaged property." 24 C.F.R. 3500.2; see generally 12 U.S.C. 2601 et seq. (the Real Estate Settlement Procedures Act). To fully amortize a 30-year loan with a principal amount of $344,000 and a fixed interest rate of 8.5%, a borrower would need to make annual payments in excess of $31,000. At the time the Cerdas sought refinancing through Clarity Mortgage, Mr. Cerda was 72 years old and had retired from his job as a postal worker. At trial, counsel for the Cerdas indicated that Mr. Cerda's pension at the time of refinancing was $25,000 per year. Mr. Cerda testified that he sought the cash at closing to allow him to make payments on the loan for the first several months while he either sold the house or refinanced the loan. This document is prescribed by the Truth in Lending Act, 15 U.S.C. 1601 et seq., and its implementing regulations, 12 C.F.R. 226.1 et seq. The contents of the Notice Concerning Extensions of Credit are prescribed by article XVI, section 50(g) of the Texas Constitution. 4 3 2 1 2 Case: 09-50619 Document: 00511182199 Page: 3 Date Filed: 07/22/2010 No. 09-50619 T h e closing for this refinancing took place over one month later, on June 1 7 , 2002. There, the Cerdas signed their only written loan application--the U n ifo r m Residential Loan Application (URLA).5 They also executed a p r o m is s o r y note and deed of trust in favor of New Century Mortgage Corporation o n the same terms specified in the URLA. These terms included a principal sum o f $367,500, and--like the Ameriquest Mortgage loan--provided for a variable in t e r e s t rate: 8.99% for the first two years, followed by a variable rate--adjusted s e m ia n n u a lly -- e q u a l to the six-month LIBOR plus 7.1%. The difference b e tw e e n interest rates from one six-month period to the next could not exceed 1 .5 % , and the interest rate could not fall below 8.99% or exceed 15.99%. The c lo s in g documents reflected that they were--in addition to satisfying the A m e r iq u e s t Mortgage loan, the Cerdas' property taxes, and amounts due the t it le and escrow company--effectuating the following transfers: (1) Clarity M o r t g a g e received a 2.9% loan origination fee of $10,694, a credit report fee of $ 6 , and a yield spread premium of $3,675; (2) "Appraiser" received a $325 a p p r a is a l fee; and (3) New Century Mortgage received a 3% loan discount in the a m o u n t of $11,025 and prepayment of $905.20 interest, and it issued a lender c r e d it of $4,827.80. After all was said and done, out of the $367,500 loan, $ 1 0 ,9 2 3 .8 9 was paid to satisfy outstanding property taxes, $767.97 was paid to t h e Cerdas as cash at closing, and over $21,000 was paid to cover fees and a d v a n c e interest charges. A s a result of assignment, 2004-EQR1 L.L.C. became the holder of the C e r d a s ' note and deed of trust. Barclays Capital Real Estate Inc. (HomEq) s e r v i c e s the loan. The Cerdas have not made any payments on the note since t h e y executed it in 2002. As a result, 2004-EQR1 made several attempts to The URLA is a standardized loan application form developed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). 5 3 Case: 09-50619 Document: 00511182199 Page: 4 Date Filed: 07/22/2010 No. 09-50619 fo r e c lo s e on the Cerdas' house, leading to litigation in Texas state courts and the is s u a n c e of several temporary restraining orders (TROs). This action represents t h e latest in that series of filings. On July 3, 2007, the Cerdas filed an amended p e t it io n in state court against 2004-EQR1 and HomEq, seeking a judgment of fo r fe it u r e , attorney's fees, damages, a TRO, and a permanent injunction. 2004E Q R 1 and HomEq filed a joint answer, then removed the action to federal d is t r ic t court. The district court denied the Cerdas' motion to abstain and r e m a n d . 2004-EQR1 and HomEq later filed an amended answer, asserting v a r io u s affirmative defenses and counterclaims. A fte r discovery, the parties submitted motions for partial summary ju d g m e n t . The Cerdas' motion argued that the loan was invalid because: (1) it c a lle d for monthly payments that were not "substantially equal," in violation of a r t ic le XVI, section 50(a)(6)(L) of the Texas Constitution; (2) it was issued in v io la t io n of the waiting periods prescribed by article XVI, section 50(a)(6)(M)(i) a n d (ii); and (3) it required the payment of fees in excess of the 3% cap imposed b y article XVI, section 50(a)(6)(E). The Cerdas further argued that 2004-EQR1 a n d HomEq had failed to cure these violations within 60 days, thus requiring t h e m to forfeit all principal and interest pursuant to article XVI, section 5 0 (a )(6 )(Q )(x ). They also sought summary judgment on 2004-EQR1 and 2004-EQR1 and HomEq H o m E q 's affirmative defenses and counterclaims. s o u g h t summary judgment on the damages claims and on the claim that the loan c a lle d for payments that were not substantially equal. O n November 17, 2008, the district court considered the parties' competing m o t io n s for partial summary judgment. It agreed with 2004-EQR1 and HomEq t h a t the loan did not call for payments that were not substantially equal and g r a n t e d summary judgment on that issue. It denied the Cerdas' requests for s u m m a r y judgment on whether the loan satisfied the waiting periods prescribed b y article XVI, section 50(a)(6)(M)(i) and (ii), and on whether the loan violated 4 Case: 09-50619 Document: 00511182199 Page: 5 Date Filed: 07/22/2010 No. 09-50619 t h e 3% cap on fees imposed by article XVI, section 50(a)(6)(E). The court further g r a n t e d summary judgment in favor of the Cerdas on 2004-EQR1 and HomEq's c o u n t e r c la im s , denied summary judgment on several affirmative defenses, and d e fe r r e d ruling on defenses premised on limitations until trial. T h e case then proceeded to a bench trial. At trial, the parties stipulated t o several facts, including that New Century Mortgage paid Clarity Mortgage a " y ie ld spread premium," which they defined as follows: "A yield premium or yield s p r e a d premium or yield rebate is a payment to the broker for selling a loan at a n interest rate higher than market rates." On June 10, 2009, the district court is s u e d a careful, thoughtful opinion containing findings of fact and conclusions o f law. The court found that the same loan was at issue in both the Good Faith E s t im a t e and the closing documents, despite the ultimate discrepancy in p r in c ip a l amount due. The court thus concluded that the waiting periods p r e s c r ib e d by article XVI, section 50(a)(6)(M), began to run when the Cerdas s u b m it t e d their application to Clarity Mortgage by telephone sometime prior to s ig n in g the Good Faith Estimate on May 15, 2002, and were thus met by the c lo s in g date of June 17, 2002. The court further found that the 3% cap on fees 6 im p o s e d by article XVI, section 50(a)(6)(E), had not been violated. The court fo u n d it undisputed that the Cerdas paid 3% in fees--the $10,694 broker o r ig in a t io n fee, the $6 credit report fee, and the $325 appraisal fee. It found that o t h e r title charges and recording fees were offset by the $4,827.80 lender credit. In response to the Cerdas' arguments, the district court also found that the a d d it io n a l challenged payments did not count against the 3% cap: (1) the p a y m e n t of $11,025 in discount points was prepayment of interest, not fees; and (2 ) the payment by New Century Mortgage of a $3,675 yield spread premium to C la r it y Mortgage was not a payment by "the owner or the owner's spouse," as 6 The 3% cap on fees was $11,025 for the principal amount of $367,500. 5 Case: 09-50619 Document: 00511182199 Page: 6 Date Filed: 07/22/2010 No. 09-50619 r e q u ir e d to count for purposes of article XVI, section 50(a)(6)(E). The court also c o n c lu d e d that the loan did not violate article XVI, section 50(a)(6)(H), by s e c u r in g property other than the homestead, and that the Cerdas' claims for d a m a g e s failed due to the loan's compliance with the Texas Constitution. On J u n e 24, 2009, the district court ordered that 2004-EQR1 and HomEq were e n tit le d to foreclose, and it entered final judgment dismissing the Cerdas' claims. T h e Cerdas timely appealed. I I . DISCUSSION O n appeal, the Cerdas press three arguments. First, they claim that the d is t r ic t court incorrectly determined that the waiting period began to run when t h e y submitted a telephonic application. Second, they argue that the variable in t e r e s t rate caused the loan payments not to be substantially equal. Finally, t h e y argue that the discount points are properly characterized as fees that count a g a in s t the 3% cap.7 In addition, the Cerdas request that we certify these issues t o the Texas Supreme Court. We decline their request for certification and in s t e a d address each of their arguments in turn.8 Originally, the Cerdas pressed a fourth argument, challenging the district court's denial of their motion to remand the action to state court on the basis of untimely removal. However, approximately three weeks before oral argument, they voluntarily withdrew that issue from their appeal. Accordingly, we do not address whether the district court erred in denying the motion to remand. In addition, the Cerdas do not challenge the district court's conclusion that the loan did not violate article XVI, section 50(a)(6)(H), by securing property other than the homestead, and 2004-EQR1 and HomEq have not cross-appealed the dismissal of their counterclaim for fraud. The dissent would certify the Cerdas' second argument, relating to variable interest rates and substantial equality of payments. As the dissent recognizes, the decision whether to certify a question lies within our discretion. Patterson v. Mobil Oil Corp., 335 F.3d 476, 487 (5th Cir. 2003) (citing Nationwide Mut. Ins. Co. v. Unauthorized Practice of Law Comm., 283 F.3d 650, 656 (5th Cir. 2002)). In our view and as set out in detail infra, Texas law is sufficiently clear to counsel against certification. See Patterson, 335 F.3d at 487 (denying certification where, "[a]lthough the state law questions . . . [we]re important and complex, . . . Texas law [wa]s sufficiently clear"). 8 7 6 Case: 09-50619 Document: 00511182199 Page: 7 Date Filed: 07/22/2010 No. 09-50619 A. L e g a l Standards W e apply Texas substantive law and federal procedural law in this d iv e r s it y action. See Foradori v. Harris, 523 F.3d 477, 486 (5th Cir. 2008). We r e v ie w the grant of summary judgment de novo, viewing the evidence in the light m o s t favorable to the nonmoving party. Offshore Drilling Co. v. Gulf Copper & M fg . Corp., 604 F.3d 221, 225 (5th Cir. 2010). Following a bench trial, we review t h e district court's conclusions of law de novo and its factual findings for clear e r r o r . Arete Partners, L.P. v. Gunnerman, 594 F.3d 390, 394 (5th Cir. 2010). T h e legal questions in this case require interpretation of the Texas C o n s t it u t io n . The Texas Supreme Court has set out the following approach to c o n s t it u t io n a l construction: W h e n interpreting our state constitution, we rely heavily on it s literal text and must give effect to its plain language. We strive t o give constitutional provisions the effect their makers and a d o p t e r s intended. We construe constitutional provisions and a m e n d m e n t s that relate to the same subject matter together and c o n s id e r those amendments and provisions in light of each other. And we strive to avoid a construction that renders any provision m e a n in g le s s or inoperative. D o o d y v. Ameriquest Mortg. Co., 49 S.W.3d 342, 344 (Tex. 2001) (citations o m it t e d ). "In construing a constitutional amendment, we may also consider its le g is la t iv e history." Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex. 2 0 0 0 ) (citing TEX. GOV'T CODE 311.023(3); Harris v. City of Fort Worth, 180 S .W .2 d 131, 133 (Tex. 1944)). B. B a c k g r o u n d of Texas Home Equity Loans H o m e equity loans are of relatively recent vintage in Texas. The Texas S u p r e m e Court has explained: F o r over 175 years, Texas has carefully protected the family h o m e s t e a d from foreclosure by limiting the types of liens that can b e placed upon homestead property. Texas became the last state in t h e nation to permit home-equity loans when constitutional 7 Case: 09-50619 Document: 00511182199 Page: 8 Date Filed: 07/22/2010 No. 09-50619 a m e n d m e n t s voted on by referendum took effect in 1997. Such lo a n s permit homeowners to use the equity in their home as c o lla t e r a l to refinance the terms of prior debt and secure additional lo a n s at rates more favorable than those for consumer loans. Although home-equity lending is now constitutionally permissible, a r t ic le XIV, section 50(a)(6) of the Texas Constitution still places a n u m b e r of limitations on such lending. L a S a lle Bank Nat'l Ass'n v. White, 246 S.W.3d 616, 618 (Tex. 2007) (per curiam). Among the limitations placed on such lending is the requirement that lenders fo r fe it all principal and interest if they fail to cure violations of their obligations. See TEX. CONST. art. XVI, 50(a)(6)(Q)(x). In addition, before issuing home e q u it y loans, lenders must provide borrowers with a notice, the content of which is specified in article XVI, section 50(g). O r ig in a lly , no Texas administrative agency was empowered with rulem a k in g authority over the amendments. However, shortly after the amendment w a s enacted, four Texas agencies charged with regulating entities that made h o m e equity loans issued an advisory publication entitled the REGULATORY C OMMENTARY ON EQUITY LENDING PROCEDURES (the "REGULATORY C OMMENTARY" ). See Stringer, 23 S.W.3d at 357. The Texas Supreme Court has in d ic a te d that the REGULATORY COMMENTARY is persuasive authority: A lt h o u g h the commentary is advisory and not authoritative, it r e p r e s e n t s four Texas administrative agencies' interpretation of the H o m e Equity Constitutional Amendment. These agencies are r e s p o n s ib le for regulating the entities that make home equity loans. The Commentary's purpose is to provide guidance to lenders and c o n s u m e r s about the regulatory views on the meaning and effect of a r t ic le XVI, section 50. I d . Subsequently, authority to issue binding rules was granted: T h e Texas Constitution was amended again in 2003 to a u t h o r iz e the legislature to delegate the authority to issue in t e r p r e t a t io n s of the home equity lending provisions . . . . Pursuant t o this amendment, the legislature delegated interpretive authority o v e r the home equity provisions to the [c]ommissions, and the 8 Case: 09-50619 Document: 00511182199 Page: 9 Date Filed: 07/22/2010 No. 09-50619 [c ]o m m is s io n s in turn adopted a number of regulations interpreting t h e home equity provisions. The [c]ommissions' interpretations are s u b je c t to review under the [Texas] Administrative Procedure Act (A P A ). T e x . Bankers Ass'n v. Ass'n of Cmty. Orgs. for Reform Now (ACORN), 303 S.W.3d 4 0 4 , 40708 (Tex. App.--Austin 2010, pet. filed) (citations and footnote omitted) (c it in g TEX. CONST. art. XVI, 50(u)). However, the home equity loan a m e n d m e n t s do not apply retroactively, see Fix v. Flagstar Bank, FSB, 242 S .W .3 d 147, 15557 (Tex. App.--Fort Worth 2007, pet. denied), and a rule p r o m u lg a t e d under authority of those constitutional provisions provides safe h a r b o r to lenders only if the rule is in effect when the loan is made, see TEX. C ONST. art. XVI, 50(u)(1). Thus, we apply the version of the Texas C o n s t it u t io n that was in effect in 2002--when the Cerdas entered into the loan w it h New Century Mortgage--and treat administrative interpretations as p e r s u a s iv e authority. C. W a i t i n g Period T h e Cerdas first argue that their loan did not comply with the mandatory w a it in g periods prescribed by article XVI, section 50(a)(6)(M) and (g)(M). In 2 0 0 2 , 50(a)(6)(M) provided: T h e homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts e x c e p t for: . . . an extension of credit that: . . . is closed not before: t h e 12th day after the later of the date that the owner of the h o m e s t e a d submits an application to the lender for the extension of c r e d it or the date that the lender provides the owner a copy of the n o tic e prescribed by Subsection (g) of this section . . . . T EX. CONST. art. XVI, 50(a)(6)(M)(i) (2002) (emphasis added). At that time, 50(g)(M) provided: A n extension of credit described by Subsection (a)(6) of this section m a y be secured by a valid lien against homestead property if the e x t e n s io n of credit is not closed before the 12th day after the lender p r o v id e s the owner with the following written notice on a separate 9 Case: 09-50619 Document: 00511182199 Page: 10 Date Filed: 07/22/2010 No. 09-50619 i n s t r u m e n t: . . . the loan may not close before 12 days after you s u b m it a written application to the lender or before 12 days after y o u receive this notice, whichever is later . . . . T EX . CONST. art. XVI, 50(g)(M) (2002) (emphasis added).9 The italicized la n g u a g e reveals a discrepancy between subsections (a)(6)(M) and (g)(M): the fo r m e r contemplates "an application" while the latter contemplates "a written a p p lic a t io n ." 1 0 W h e t h e r the waiting period is triggered by any application or only a w r it t e n application will determine whether the 12-day waiting period was met in this case. The Cerdas submitted a telephonic application prior to May 15, 2 0 0 2 . On May 15, 2002, they signed both the Good Faith Estimate and a Notice C o n c e r n in g Extensions of Credit Defined by Section 50(a)(6), Article XVI, Texas C o n s t it u t io n -- a notice specifying the requirement of "a written application." They submitted the URLA--their first and only written application--at the c lo s in g on June 17, 2002. On appeal, the Cerdas do not contest that their s u b m is s io n of a telephonic application and receipt of the notice prescribed by 50(g) each occurred at least 12 days prior to closing. Instead, they argue that t h e 12-day waiting period before closing could occur did not begin to run until J u n e 17, 2002, when they submitted a written application--the URLA--at the c l o s in g itself. They claim, therefore, that the requirement of a 12-day waiting p e r io d was simply not met. I n Stringer, the Texas Supreme Court was faced with a conflict between p r o v is io n s in 50(a)(6) and (g), which it described as follows: In the Texas Constitution, the notice required by 50(g) is written entirely in capital letters. To more easily compare the terms of 50(a)(6) and (g), we have normalized the typeface in the notice language. The discrepancy has since been eliminated, as both provisions have been amended so that the version presently in force refers simply to the submission of "a loan application." TEX. CONST. art. XVI, 50(a)(6)(M) & (g)(M). 10 9 10 Case: 09-50619 Document: 00511182199 Page: 11 Date Filed: 07/22/2010 No. 09-50619 S e c t io n 50(a)(6) allows a home-equity lender to require the b o r r o w e r to use loan proceeds to pay: (1) debts secured by the h o m e s t e a d ; and (2) non-homestead debts to third-party creditors. On the other hand, section 50(g) provides that a home-equity lender c a n n o t require a borrower to apply loan proceeds to another debt t h a t is not secured by the home or to another debt to the same le n d e r . W e agree . . . that the plain language of section 50(a)(6)(Q)(i) a n d section 50(g)(Q)(1) conflict. And, there is nothing in the a m e n d m e n t , its legislative history, or the parties' arguments that h in t s at a legislative reason for the conflict other than speculation t h a t the difference in the language arises from an oversight. 2 3 S.W.3d at 356 (citations omitted). The court agreed with the view of the R EGULATORY COMMENTARY that "section 50(a)(6)(Q)(i) provides the substantive r ig h t s and obligations of lenders and borrowers while section 50(g)(Q)(1) p r o v id e s only the language for the mandatory notice to borrowers." Id. It then e x p r e s s ly held that "section 50(a)(6) and the loan documents themselves provide t h e substantive rights and obligations of the lenders and borrowers" and "section 5 0 (g )'s notice provisions do not independently establish rights or obligations for t h e extension of credit." Id. at 357. Accordingly, under Stringer, we must look t o 50(a)(6)(M)(i) for the Cerdas' substantive rights relating to the 12-day w a it in g period. Under that provision, the waiting period was triggered and b e g a n to run when the Cerdas "submit[ted] an application." TEX. CONST. art. X V I, 50(a)(6)(M)(i) (2002). The question remains, however, whether s u b m i s s io n of the telephonic application constituted the submission of an a p p lic a t io n within the meaning of 50(a)(6)(M)(i). T h e Cerdas assert that the term "written application" in 50(g)(M)(1) does n o t contradict the term "application" in 50(a)(6)(M)(i) but instead informs its m e a n in g . We disagree. The Texas Supreme Court has explained that, in in t e r p r e t in g the meaning of a constitutional provision, we must "rely heavily on it s literal text and . . . give effect to its plain language." Stringer, 23 S.W.3d at 11 Case: 09-50619 Document: 00511182199 Page: 12 Date Filed: 07/22/2010 No. 09-50619 3 5 5 (citing cases). Under this approach, it is clear that the term "written a p p l ic a t io n " refers to a subset of "application[s]." Because the broad term " a p p lic a t io n " is not restricted by the word "written" in 50(a)(6)(M)(i), we in t e r p r e t it to encompass oral applications, including telephonic applications s u c h as the one submitted by the Cerdas. This is the approach adopted by the R EGULATORY COMMENTARY. See REGULATORY COMMENTARY 7 ("An application fo r a loan may be given orally or electronically and does not have to be in w r i t i n g ." ) . O u r interpretation is consistent with the version of 50(a)(6)(M)(i) c u r r e n t ly in force, which was amended in 2007 to refer generally to a "loan a p p lic a t io n ." TEX. CONST. art. XVI, 50(a)(6)(M)(i); see also 7 TEX. ADMIN. CODE 153.12(2) ("A loan application may be given orally or electronically."). The le g is la t iv e history behind that amendment reveals the broad reach of that term: S e c t io n 50(a)(6)(M)(i) was amended to change the phrase, "submits a n application to the lender," to "submits the loan application to the le n d e r ." . . . In passing the joint resolution proposing the 2007 c o n s t it u t io n a l amendment, however, the legislature recorded a " S t a t e m e n t of Legislative Intent" in the House Journal, in which the a u t h o r of the resolution states, "The homeowner may submit a w r it t e n , electronic, or oral application." H.J. of Tex., 80th Leg., R.S. 2 4 3 2 (2007) (emphasis added); see also Tex. H.R.J. Res. 72, 80th L e g ., R.S., 2007 Tex. Gen. Laws 6138. A C O R N , 303 S.W.3d at 413. The ACORN court concluded that the a d m in is t r a t iv e "interpretation of `application' to include oral applications is c o n s is t e n t with the plain language of the constitution as it is currently written." Id. at 414. We agree that the plain meaning of the term "loan application" in c lu d e s oral applications. Similarly, we see nothing in the term "application" t h a t would operate to exclude oral applications. T h e Cerdas argue in the alternative that the telephonic application did not t r ig g e r the 12-day waiting period because it was an application for a $344,000 12 Case: 09-50619 Document: 00511182199 Page: 13 Date Filed: 07/22/2010 No. 09-50619 lo a n that was never made and not for the $367,500 loan on which they u lt im a te ly closed. Following the bench trial, the district court expressly rejected t h a t contention, stating that "[w]hile there is evidence to suggest that [the C e r d a s ] and Clarity [Mortgage] originally discussed a loan with a principal of $ 3 4 4 ,0 0 0 and $10,600 cash back to the Cerdas, . . . the Court concludes that this w a s part of the same loan transaction as the final loan for $367,500, and thus w a s sufficient to begin the 12-day period." In reaching this finding of fact, the c o u r t reasoned that a loan of $344,000 would have been unable to satisfy both t h e Ameriquest Mortgage loan amount and the property taxes that were owed, s o the parties negotiated an increase in the principal amount of the loan. Thus, e v e n though the terms of the New Century Mortgage note ultimately differed fr o m those shown in the Good Faith Estimate, the same loan was contemplated b y both documents. We agree with 2004-EQR1 and HomEq that this "account o f the evidence is plausible in light of the record viewed in its entirety," A n d e r s o n v. City of Bessemer City, 470 U.S. 564, 574 (1985), and, accordingly, is n o t clearly erroneous. D. S u b s t a n t ia l Equality T h e Cerdas next argue that the variable interest rate of the loan violated th e constitutional requirement that scheduled payments be "substantially equal" in amount. This claim involves two distinct constitutional provisions, one r e q u ir in g substantial equality between payments and another authorizing v a r ia b le rates of interest. Section 50(a)(6)(L) imposes the requirement of s u b s t a n t ia l equality, stating that a home equity loan must be "scheduled to be r e p a id in substantially equal successive monthly installments beginning no later t h a n two months from the date the extension of credit is made, each of which e q u a ls or exceeds the amount of accrued interest as of the date of the scheduled 13 Case: 09-50619 Document: 00511182199 Page: 14 Date Filed: 07/22/2010 No. 09-50619 in s t a llm e n t ." TEX. CONST. art. XVI, 50(a)(6)(L) (2002).1 1 Section 50(a)(6)(O), in contrast, authorizes variable rates of interest by providing that a home equity lo a n may "permit[] a lender to contract for and receive any fixed or variable rate o f interest authorized under statute." (2 0 0 2 ).1 2 A s the parties recognize, these two provisions exist in some tension with e a c h other. The parties therefore offer divergent constructions that seek to " a v o id . . . render[ing] [either] provision meaningless or inoperative." Stringer, 2 3 S.W.3d at 355 (citing Hanson v. Jordan, 198 S.W.2d 262, 263 (Tex. 1946)). The Cerdas press a construction that would convert a variable rate of interest in t o a variable term: an increase in the interest rate must be accompanied by an e x t e n s io n of the term of the loan, and vice versa, for scheduled installments to r e m a in "substantially equal." 2004-EQR1 and HomEq dispute that construction, u r g in g instead that the requirement of substantial equality exists to ensure that h o m e equity loans are fully amortized 1 3 and that balloon payments 1 4 are p r o h ib it e d . The district court accepted the interpretation offered by 2004-EQR1 a n d HomEq, and we do as well. The version of 50(a)(6)(L) currently in force changes only the requirement that the installments be "monthly." See TEX. CONST. art. XVI, 50(a)(6)(L)(i) (stating that scheduled repayments must be "in substantially equal successive periodic installments, not more often than every 14 days and not less often than monthly . . ."). 12 11 TEX. CONST. art. XVI, 50(a)(6)(O) Section 50(a)(6)(O) has not been amended since the time the Cerdas entered into the loan. When a loan is fully amortized, the installments suffice to extinguish the principal amount and all accrued interest over the life of the loan. A "balloon note" is "[a] note requiring small periodic payments but a very large final payment." BLACK'S LAW DICTIONARY 1162 (9th ed. 2009). If, for example, a loan is amortized over a 30-year period but has only a 15-year term, a substantial amount of principal will remain at the end of the 15th year. In such a case, the lender will require that the principal be paid off in a lump sum with the final payment. The final payment, called a "balloon payment," is "much larger than the preceding regular payments and . . . discharges the principal balance of the loan." Id. at 1243. 14 13 14 Case: 09-50619 Document: 00511182199 Page: 15 Date Filed: 07/22/2010 No. 09-50619 T h e opinion of the REGULATORY COMMENTARY supports the requirement o f full amortization and the prohibition on balloon payments: T h e authorization of a variable interest rate is ambiguous when r e a d in connection with the provision relating to substantially equal s u c c e s s iv e monthly installments. . . . [A]n equity loan providing in a c c o r d a n c e with applicable law for an interest rate that varies from t im e to time may provide for a payment amount that varies from t im e to time, assuming that the loan is regularly amortizing and t h a t the rate adjusts on a regular basis, such as annually. . . . The a m o u n t of the payment should not change more frequently than the in t e r e s t rate adjustment. The scheduled payment amount between e a c h payment change date should be substantially equal and the a m o u n t of the payment should equal or exceed the amount of in t e r e s t scheduled to accrue between each payment date. . . . An equity loan must be structured in a way such that the t r a n s a c t io n regularly amortizes, contributes to amortization of p r in c ip a l, and does not result in a balloon payment. R EGULATORY COMMENTARY 8 (discussing TEX. CONST. art. XVI, 50(a)(6)(O)); see a ls o id. at 7 ("[T]o have substantially equal installments would require that s o m e amount of principal must be reduced with each installment. This e ffe c t iv e ly precludes the permissibility of balloon payments." (discussing TEX. C ONST. art. XVI, 50(a)(6)(L))). This construction gives effect to both 50(a)(6)(L) and (a)(6)(O) while still offering three forms of protection to the b o r r o w e r : (1) if all payments are made according to schedule, the loan will be fu lly extinguished; (2) at the end of the loan's term, the borrower will not have t o worry about obtaining a second loan to satisfy the balloon payment; and (3) t h e borrower will not be confronted with large month-to-month variations in p a y m e n t amount. In contrast, the Cerdas' interpretation would effectively p r o v id e for a loan with a variable term, not a variable rate, and 50(a)(6)(O) s p e a k s of variable rates. Such an approach would also require payments to be e x a c tly equal rather than substantially equal--a requirement not found in the t e x t of 50(a)(6). 15 Case: 09-50619 Document: 00511182199 Page: 16 Date Filed: 07/22/2010 No. 09-50619 In addition, the legislative history of 50(a)(6)--or more precisely, the lack t h e r e o f-- s u p p o r t s adopting the REGULATORY COMMENTARY's view. In 2004, rules w e r e issued under the authority of 50(u). The rule interpreting 50(a)(6)(O) p r o v id e s that "[t]he lender may contract to vary the scheduled installment a m o u n t when the interest rate adjusts on a variable rate equity loan." 7 TEX. A DMIN. CODE 153.16(3).1 5 Similarly, the rule interpreting 50(a)(6)(L) provides 15 The full text of 153.16 provides: A lender may contract for and receive any fixed or variable rate of interest authorized under statute. (1) An equity loan that provides for interest must comply with constitutional and applicable law. Interest rates on certain first mortgages are not limited on loans subject to the federal Depository Institutions Deregulation and Monetary Control Act of 1980 and the Alternative Mortgage Transaction Parity Act. Chapter 342 of the Texas Finance Code provides for a maximum rate on certain secondary mortgage loans. Chapter 124 of the Texas Finance Code and federal law provide for maximum rates on certain mortgage loans made by credit unions. These statutes operate in conjunction with Section 50(a) and other constitutional sections. (2) An equity loan must amortize and contribute to amortization of principal. (3) The lender may contract to vary the scheduled installment amount when the interest rate adjusts on a variable rate equity loan. A variable-rate loan is a mortgage in which the lender, by contract, can adjust the mortgage's interest rate after closing in accordance with an external index. (4) The scheduled installment amounts of a variable rate equity loan must be: (A) substantially equal between each interest rate adjustment; and (B) sufficient to cover at least the amount of interest scheduled to accrue between each payment date and a portion of the principal. (5) An equity loan agreement may contain an adjustable rate of interest that provides a maximum fixed rate of interest pursuant to a schedule of steps or tiered rates or provides a lower initial interest rate through the use of a discounted rate at the beginning of the loan. 7 TEX. ADMIN. CODE 153.16. This rule has not been amended since it became effective in 16 Case: 09-50619 Document: 00511182199 Page: 17 Date Filed: 07/22/2010 No. 09-50619 t h a t "[f]or a closed-end equity loan to have substantially equal successive p e r io d ic installments, some amount of principal must be reduced with each in s t a llm e n t . This requirement prohibits balloon payments." 7 TEX. ADMIN. C ODE 153.11(3).1 6 While the constitutional provisions have been amended s i n c e 2004, there has been no proposal to amend 50(a)(6)(L) and (a)(6)(O) to a lt e r or undo the rules' interpretations of those provisions. This is especially s ig n ific a n t in light of the fact that the advisory REGULATORY COMMENTARY e n d o r s e d the same construction for nearly six years prior to these rules taking e ffe c t . We thus agree with the district court that "the agencies' interpretation is consistent with the legislative history," and we affirm summary judgment for 2004. 16 The full text of 153.11 provides: Unless an equity loan is a home equity line of credit under Section 50(t), the loan must be scheduled to be repaid in substantially equal successive periodic installments, not more often than every 14 days and not less often than monthly, beginning no later than two months from the date the extension of credit is made, each of which equals or exceeds the amount of accrued interest as of the date of the scheduled installment. (1) The two month time period contained in Section 50(a)(6)(L)(i) begins on the date of closing. (2) For purposes of Section 50(a)(6)(L)(i), a month is the period from a date in a month to the corresponding date in the succeeding month. For example, if a home equity loan closes on March 1, the first installment must be due no later than May 1. If the succeeding month does not have a corresponding date, the period ends on the last day of the succeeding month. For example, if a home equity loan closes on July 31, the first installment must be due no later than September 30. (3) For a closed-end equity loan to have substantially equal successive periodic installments, some amount of principal must be reduced with each installment. This requirement prohibits balloon payments. (4) Section 50(a)(6)(L)(i) does not preclude a lender's recovery of payments as necessary for other amounts such as taxes, adverse liens, insurance premiums, collection costs, and similar items. 7 TEX. ADMIN. CODE 153.11. This provision was amended, effective in 2008. The original rule lacked the language currently contained in subsections (1) and (2). See 29 Tex. Reg. 84 (2004) (7 TEX. ADMIN. CODE 153.11). 17 Case: 09-50619 Document: 00511182199 Page: 18 Date Filed: 07/22/2010 No. 09-50619 2 0 0 4 -E Q R 1 and HomEq on this claim.1 7 E. F e e s Cap F in a lly , the Cerdas claim that the loan required them to pay fees in excess o f the 3% cap imposed by the Texas Constitution. m a n d a t e s that a home equity loan must: n o t require the owner or the owner's spouse to pay, in addition to a n y interest, fees to any person that are necessary to originate, e v a lu a t e , maintain, record, insure, or service the extension of credit t h a t exceed, in the aggregate, three percent of the original principal a m o u n t of the extension of credit. T EX . CONST. art. XVI, 50(a)(6)(E) (2002).1 8 To support their claim that they w e r e charged fees in excess of 3%--which the parties agree is $11,025 for the lo a n -- t h e Cerdas direct us to a settlement statement on a form HUD-1 (the " H U D -1 " ) that they signed at the closing on June 17, 2002. T h e settlement charges listed on the HUD-1 are arranged within four d is t in c t categories. Under "Items Payable in Connection with Loan," six items a r e listed: (1) a "loan origination fee" of $10,694 to Clarity Mortgage; (2) a "loan d is c o u n t " of $11,025 to New Century Mortgage; (3) an "appraisal fee" of $325; (4) a "credit report" of $6 to Clarity Mortgage; (5) a "lender credit" of $4,827.80 from N e w Century Mortgage; and (6) a "yield spread preium [sic]" of $3,675 to Clarity M o r t g a g e . Under "Items Required by Lender to Be Paid in Advance," an item o f $905.20 is listed for "interest from 6/21/02 to 7/1/02." Under "Title Charges," The relevant provision The dissent suggests that, in light of the tension between 50(a)(6)(L) and (a)(6)(O) and the dangers arising from "payment shock," we should certify this issue to the Texas Supreme Court for resolution rather than reject the variable-term theory pursued by the Cerdas. Although the danger to a homeowner arising from a sudden large change in the interest rate is real, we do not believe that it would cause the Texas Supreme Court to resolve the tension in a manner contrary to that set forth by the REGULATORY COMMENTARY and the current regulations. 18 17 There have been no subsequent amendments to 50(a)(6)(E). 18 Case: 09-50619 Document: 00511182199 Page: 19 Date Filed: 07/22/2010 No. 09-50619 s e v e r a l items, totaling $3,242.72, are listed as paid to "Netco."1 9 Finally, under " G o v e r n m e n t Recording and Transfer Charges," a $69 item appears for " r e c o r d in g deed" and "mtg releases." c h a r g e s of $21,114.12.2 0 T h e district court held--and the parties do not dispute--that three of these it e m s count toward the 3% cap as fees that the Cerdas were required to pay: the $ 1 0 ,6 9 4 loan origination fee paid to Clarity Mortgage, the $6 credit report fee p a id to Clarity Mortgage, and the $325 appraisal fee paid to an unknown " a p p r a is e r ." These amounts total $11,025--exactly 3% of the loan's principal a m o u n t of $367,500. In addition, the Cerdas were required to pay title charges a n d recording fees totaling $3,311.72--bringing the fees to $14,336.72. However, t h is amount was offset by the $4,827.80 lender credit, lowering the total to $ 9 , 5 0 8 .9 2 . At issue are the remaining two items: the $3,675 yield spread In total, the HUD-1 lists settlement p r e m iu m and the $11,025 in discount points. The Cerdas argue that the district c o u r t failed to properly characterize those items as fees for purposes of 50(a)(6)(E). Specifically, they claim that the yield spread premium must be fa c t o r e d into the other fees Clarity Mortgage received, resulting in a total broker fe e of $14,375, or 4% of the principal amount of the loan. They also claim that t h e $11,025 in discount points were not legitimate but were instead diverted to t h e lender credit, which was used to offset non-interest fees. 2004-EQR1 and H o m E q respond that the district court correctly determined that neither the y ie ld spread premium nor the discount points counted toward the 3% cap. These items are listed as: (1) "Title Insurance" in the amount of $2,619; (2) "EPA/ARM" in the amount of $70; (3) "TAX DEL" in the amount of $25; (4) "TAX CERT" in the amount of $41.82; (5) "ESCROW FEE" in the amount of $225; and (6) "T-42" in the amount of $261.90. This amount excludes both the $325 appraisal fee and the $3,675 yield spread premium. Including the appraisal fee yields a total settlement charge of $21,439.12, while including both items yields a total settlement charge of $25,114.12. 20 19 19 Case: 09-50619 Document: 00511182199 Page: 20 Date Filed: 07/22/2010 No. 09-50619 1. Y ie ld Spread Premium W e have previously addressed whether a yield spread premium constitutes a fee that counts against the 3% cap imposed by 50(a)(6)(E). In Maluski v. US B a n k NA, we addressed a borrower's claim that "a yield spread premium was p a id outside of closing by the lender to the mortgage broker" and that the "fee w a s ultimately passed on to him." 349 F. App'x 971, 973 (5th Cir. 2009) (per c u r ia m ). Following the Texas Supreme Court's directive that, in interpreting the T e x a s Constitution, "`we rely heavily on its literal text and we must give effect t o its plain language,'" id. (alteration omitted) (quoting Doody, 49 S.W.3d at 344), w e recognized that "[t]he literal text of the Texas [C]onstitution protects the `o w n e r or the owner's spouse' from paying the prohibited fees," id. (quoting TEX. C ONST. art. XVI, 50(a)(6)(E)). We then reasoned that because the yield spread p r e m iu m was paid to the broker by the lender and not by the owner or the o w n e r 's spouse, it was not a fee within the meaning of 50(a)(6)(E). Id. That r e a s o n in g applied even if the lender "ultimately recoup[ed] the payment due to [t h e borrower] paying a higher interest rate over the life of the loan" because s u c h an "indirect payment is not contemplated by a plain reading of the state c o n s t it u t io n ." Id. (citing Bjustrom v. Trust One Mortg. Corp., 322 F.3d 1201, 1 2 0 5 (9th Cir. 2003) (reaching the same result under a plain reading of the F e d e r a l Housing Administration's regulations)). W e find Maluski's reasoning persuasive, and we hold that the yield spread p r e m iu m paid by New Century Mortgage to Clarity Mortgage was not a fee that t h e Cerdas were required to pay to originate the loan.2 1 Accordingly, the district c o u r t did not err in excluding the yield spread premium from the 3% cap imposed b y 50(a)(6)(E). The parties in this case stipulated that a "yield spread premium . . . is a payment to the broker for selling a loan at an interest rate higher than market rates" and that "New Century Mortgage Corp.[] paid . . . Clarity Mortgage Services[] a 1% yield premium of $3,675." 21 20 Case: 09-50619 Document: 00511182199 Page: 21 Date Filed: 07/22/2010 No. 09-50619 2. D is c o u n t Points T h e Cerdas also challenge the district court's finding that the $11,025 in d is c o u n t points was appropriately deemed interest rather than fees.22 E s s e n tia lly , they claim that "the lender purportedly charged $11,025 for discount p o in ts , but most of the money was used to pay the non-interest fees" and, thus, " [t ]h e 3% charge for discount points is a transparent attempt to evade the 3% c lo s in g cost limit." I n determining whether discount points are properly characterized as in t e r e s t or as fees counting against the 3% cap, we are without the benefit of g u id a n c e from the Texas Supreme Court on the matter. In this diversity case, b e c a u s e "no state court decisions control, we must make an `Erie guess' as to how t h e Texas Supreme Court would apply state law." Beavers v. Metro. Life Ins. Co., 5 6 6 F.3d 436, 439 (5th Cir. 2009) (quoting Travelers Cas. & Sur. Co. of Am. v. E r n s t & Young LLP, 542 F.3d 475, 483 (5th Cir. 2008)). "In making an Erie g u e s s , we defer to intermediate state appellate court decisions, unless convinced b y other persuasive data that the higher court of the state would decide o t h e r w is e ." Mem'l Hermann Healthcare Sys. Inc. v. Eurocopter Deutschland, G m b H , 524 F.3d 676, 678 (5th Cir. 2008) (internal quotation marks omitted) (q u o tin g Herrmann Holdings Ltd. v. Lucent Techs., Inc., 302 F.3d 552, 558 (5th C ir . 2002)). T h e r e are two conflicting decisions by Texas intermediate courts regarding t h e proper definition of "interest" for purposes of 50(a)(6)(E) and whether d is c o u n t points fall within that definition. In Tarver v. Sebring Capital Credit C o r p ., the court addressed the borrowers' claims that "a liberal interpretation Discount "[p]oints are commonly charged as an added compensation to the lender in exchange for a lower interest rate." Tarver v. Sebring Capital Credit Corp., 69 S.W.3d 708, 709 (Tex. App.--Waco 2002, no pet.); accord ACORN, 303 S.W.3d at 412 n.10 (noting that discount points are "charged by the lender in exchange for a lower interest rate"). 22 21 Case: 09-50619 Document: 00511182199 Page: 22 Date Filed: 07/22/2010 No. 09-50619 o f section 50(a)(6)(E) should lead to the conclusion that points are `fees'; o t h e r w is e , lenders could disguise many `fees' as points and circumvent the t h r e e -p e r c e n t rule." 69 S.W.3d at 711. The Tarver court first noted that p o in ts -- lik e interest--"are calculated as a percent of the principal." Id. ("The d iffe r e n c e is that points are calculated once on the original principal balance, w h e r e a s interest is calculated monthly on a decreasing principal balance. In e it h e r case, there is a percent charged in relation to the principal balance."). However, the court did not rely solely on that analogy and instead looked to a v a r ie t y of "statutory and administrative definitions of and references to `interest' [ t h a t ] either expressly or impliedly include[d] points." Id. at 712. 2 3 This in c lu d e d the opinion of the REGULATORY COMMENTARY, which states: A borrower may not be required to pay fees, in addition to any in t e r e s t , in excess of three percent of the principal amount. The la n g u a g e specifically excludes interest from the limitation. The w o r d "interest" means interest as defined in the Texas Credit Title a n d as interpreted by the courts of the state of Texas. Additionally, c h a r g e s that constitute interest under the law, including, for e x a m p le , points, are not fees subject to the three percent limit. Fees t h a t are required to be paid and that are not interest are subject to t h e three percent limitation. There is no restriction on a lender a b s o r b in g costs that might otherwise be fees and, therefore, covered b y the fee limitation.2 4 R EGULATORY COMMENTARY 3 (emphasis added) (discussing 50(a)(6)(E)).2 5 The The sources cited by the Tarver court included provisions relating to bank loans under TEXAS FINANCE CODE ANN. 34.203, interest rates and usury under TEXAS FINANCE CO D E ANN. 301.002(a)(4), consumer loans under what is currently 7 TEXAS ADMINISTRATIVE CO D E 83.102(20), secondary loans under what is currently 7 TEXAS ADMINISTRATIVE CODE 83.701(b), and usury under what is currently 7 TEXAS ADMINISTRATIVE CODE 83.707(f). See Tarver, 69 S.W.3d at 712. We note that the final sentence of the above-quoted language expressly endorses the use of lender credits such as the one New Century Mortgage issued to the Cerdas. The current version of the regulations promulgated under 50(u) provide that the word "interest" means "interest as defined in the Texas Finance Code 301.002[a](4) and as interpreted by the courts." 7 TEX. ADMIN. CODE 153.1(11). Section 301.002(a)(4) of the 25 24 23 22 Case: 09-50619 Document: 00511182199 Page: 23 Date Filed: 07/22/2010 No. 09-50619 T a r v e r court then concluded that "the plain language of [ 50(a)(6)(E)], as in t e r p r e t e d by reference to Texas statutes and administrative regulations," c o m p e lle d the "conclu[sion] that points are not `fees' . . . because they are not c h a r g e d to `originate, evaluate, maintain, record, insure, or service the extension o f credit.'" 69 S.W.3d at 712 (quoting TEX. CONST. art. XVI, 50(a)(6)(E)). M o r e recently, however, another Texas intermediate court has disagreed. In ACORN, the court found that, "[g]iven the inherent differences between the c o n s u m e r -p r o t e c tio n mechanisms of the usury statutes, which require a broad d e fin it io n of interest, and the protective purposes of the home equity fee cap, use o f the usury definition of interest for purposes of the fee cap fails to preserve the le g is la t iv e intent" of 50(a)(6)(E). 303 S.W.3d at 410. The ACORN court r e a s o n e d that "[t]he plain language of [ 50(a)(6)(E)] creates a three-percent cap o n fees other than interest in the context of a home equity loan," and the a d m in is t r a t iv e "interpretation, which classifies fees charged by the lender as in t e r e s t , essentially renders this cap meaningless." Id. at 412. Accordingly, the ACORN court affirmed the trial court's judgment invalidating the a d m i n is t r a t iv e rules to the extent that they used the broader definition of in t e r e s t in the usury context. Id. W e are persuaded that the Texas Supreme Court, if faced with a choice b e tw e e n the approaches to defining "interest" in Tarver and in ACORN, would fo llo w the Tarver court's approach. The Tarver court's approach is supported by n u m e r o u s current regulations as well as the REGULATORY COMMENTARY. It also TE X A S FINANCE CODE provides the following definition of "interest": "Interest" means compensation for the use, forbearance, or detention of money. The term does not include time price differential, regardless of how it is denominated. The term does not include compensation or other amounts that are determined or stated by this code or other applicable law not to constitute interest or that are permitted to be contracted for, charged, or received in addition to interest in connection with an extension of credit. TE X . FIN. CODE ANN. 301.002(a)(4) (West 2006). 23 Case: 09-50619 Document: 00511182199 Page: 24 Date Filed: 07/22/2010 No. 09-50619 h a s the advantage of providing lenders and borrowers with a consistent and s t r a ig h t fo r w a r d definition of "interest," rather than one that varies depending o n the nature of the underlying loan.2 6 While the ACORN court was a p p r o p r ia te ly concerned with ensuring that the 3% cap adequately protected c o n s u m e r s , we disagree that the Tarver approach "essentially renders this cap m e a n in g le s s ." Id. A broad definition of "interest" that includes discount points d o e s not result in an absence of consumer protection: Characterizing discount p o in ts as interest rather than fees would not give lenders carte blanche to charge e x o r b it a n t fees through the guise of discount points precisely because the d is c o u n t points would then be characterized as interest--and thus subject to the c o n s u m e r -p r o t e c tio n provisions of the usury laws. Moreover, the ACORN court, w h ile finding the usury definition of "interest" incompatible with the "plain la n g u a g e " of 50(a)(6)(E), failed to suggest any viable alternative definition. See id . at 412 n.10 ("[W]e are not in the position to provide a substitute definition of in t e r e s t or to definitively categorize `discount points,' `origination points,' or any o t h e r charges that might be imposed by a lender as either `interest' or `fees.'"). Following Tarver, which endorsed the approach commended by the REGULATORY C OMMENTARY, we conclude that the district court correctly found that the d is c o u n t points involved in the Cerdas' loan were interest that did not count a g a in s t the 3% cap in 50(a)(6)(E). E v e n assuming, arguendo, that the Texas Supreme Court would adopt the A C O R N court's approach and impose a narrower definition of "interest" than the r e g u la tion s provide, we would still find no error in the district court's conclusion. The ACORN court noted that "true `discount points,' charged by the lender in It is also possible that applying both a broad and a narrow definition of "interest" in a single loan transaction might lead to the result that a particular settlement charge item would be counted against the lender both as "interest" under the usury laws and as "fees" under 50(a)(6)(E). 26 24 Case: 09-50619 Document: 00511182199 Page: 25 Date Filed: 07/22/2010 No. 09-50619 e x c h a n g e for a lower interest rate, should qualify as interest." Id. at 412 n.10. Here, the Cerdas have offered two reasons why the discount points in this case a r e not "true" discount points. First, they urge that it would be inconsistent for a lender to pay a broker a yield spread premium for selling a loan with an abovem a r k e t interest rate while simultaneously charging discount points that reduce t h e interest rate. Second, they suggest that the lender credit--which was used t o offset non-interest fees--was paid directly out of the funds set aside as d is c o u n t points; accordingly, they argue, we should treat the discount points not a s interest but instead as non-interest fees. However, neither of these c o n t e n t io n s can overcome the district court's factual finding--which we review fo r clear error--that the Cerdas "have not shown by a preponderance of the e v id e n c e , or in fact by any evidence, that the 3% paid by the Cerdas in loan d is c o u n t fees was not a legitimate discount point fee." R e g a r d in g the presence of the yield spread premium, it is not implausible t h a t a yield spread premium and the payment of discount points could coexist w it h in the same loan transaction. A yield spread premium, as stipulated by the p a r tie s , is "a payment to the broker for selling a loan at an interest rate higher t h a n market rates." Nothing in this definition precludes the borrower from n e g o t ia t in g with the lender to reduce that interest rate by paying up-front d is c o u n t points. There is nothing inherently illogical about a lender rewarding a broker for selling a loan with a higher interest rate but being willing to accept s o m e of that interest in advance. At the very least, we see no clear error in the d is t r ic t court's finding that the Cerdas' arguments, "based on an apparent in c o n s is t e n c y between payment of discount points by the borrower and the p a y m e n t of a yield premium/rebate by the lender and an allegedly excessive fee t o the broker," were "speculative." W it h respect to the lender credit of $4,827.80, we note that the R EGULATORY COMMENTARY expressly provides that "[t]here is no restriction on 25 Case: 09-50619 Document: 00511182199 Page: 26 Date Filed: 07/22/2010 No. 09-50619 a lender absorbing costs that might otherwise be fees and, therefore, covered by t h e fee limitation." REGULATORY COMMENTARY 3 (discussing 50(a)(6)(E)). Additionally, we addressed this situation in Maluski, where we affirmed the g r a n t of summary judgment to the lender despite the borrower's argument that t h e lender was merely shifting numbers from one column to another to avoid the 3 % cap: T h e HUD-1 statement shows $5,557.95 in fees that were subject to t h e three percent cap. It also shows, however, that Maluski was g iv e n a closing cost credit of $2,070.45, meaning that the total fees w e r e actually $3,487.50, exactly three percent of the principal a m o u n t . Maluski argues that U.S. Bank admitted that it lacked e v id e n c e of how the credit was applied, and he speculates that a p o r t io n of the credit could have been applied to interest points c h a r g e d at closing, which were not subject to the three percent cap. We are unpersuaded. The settlement statement clearly shows that M a lu s k i was not actually charged fees of more than three percent o f the principal loan. His unsubstantiated argument of how the c r e d it theoretically could have been manipulated is insufficient to d e fe a t summary judgment. 3 4 9 F. App'x at 97273. We accord the district court greater deference here b e c a u s e it sat as the trier of fact in a bench trial, see Arete Partners, 594 F.3d at 3 9 4 , and we discern no clear error in the district court's finding that the discount p o in ts were the legitimate prepayment of interest. I I I . CONCLUSION T h e Cerdas have failed to demonstrate that their home equity loan v io la t e d the provisions of article XVI, section 50(a)(6) of the Texas Constitution, a n d the loan is thus not subject to forfeiture under article XVI, section 5 0 (a )(6 )(Q )(x ). Accordingly, the judgment of the district court is AFFIRMED. 26 Case: 09-50619 Document: 00511182199 Page: 27 Date Filed: 07/22/2010 No. 09-50619 H A Y N E S , Circuit Judge, concurring and dissenting: I concur in the majority's opinion with the exception of section II.D. As to t h is subject the meaning of "substantially equal" I respectfully dissent from t h e decision not to certify this question to the Texas Supreme Court. Under T e x a s law, "[t]he Supreme Court of Texas may answer questions of law certified t o it by any federal appellate court if the certifying court is presented with d e t e r m in a t iv e questions of Texas law having no controlling Supreme Court p r e c e d e n t ." TEX. R. APP. P. 58.1; see also TEX. CONST. art. V, 3-c(a). Our court s h o u ld certify the question of whether sections 50(a)(6)(L) and 50(a)(6)(O) allow a s great a variation in monthly payments as the Cerdas' loan provides. G r e a t care is required when we interpret article XVI, section 50 of the T e x a s Constitution because of the harsh consequences that follow from its v io la t io n , see TEX. CONST. art. XVI, 50(a)(6)(Q)(x), and the broad reach of the s e c t io n , see, e.g., James W. Paulsen, Acquiring Separate Property on Credit: A R e v ie w and Proposed Revision of Texas Marital Property Doctrine, 37 ST. MARY'S L .J . 675, 67980 & nn. 1213 (2006) (reviewing government estimates of scope o f home equity lending following the section 50 amendment and concluding that a s many as fifteen percent of Texas homeowners have loans governed by section 5 0 (a )). In the past, we have not hesitated to certify questions concerning the p r o p e r interpretation of this provision. For example, in 1999, in Stringer v. C e n d a n t Mortgage Corp., 199 F.3d 190, 19192 (5th Cir. 1999), we certified the q u e s t i o n of whether, where the notice provision of the amendment conflicted w it h the substantive rights provision on the question, a lender could permissibly r e q u ir e a borrower to pay off third-party debt with the proceeds of the loan. A fe w months later, the Texas Supreme Court explained that the substantive p r o v is io n s control over the notice provisions. Stringer v. Cendant Mortgage C o r p . , 23 S.W.3d 353, 357-58 (Tex. 2000). In 2001, in Doody v. Ameriquest M o r tg a g e Co., 242 F.3d 286, 290 (5th Cir. 2001), we certified the question of 27 Case: 09-50619 Document: 00511182199 Page: 28 Date Filed: 07/22/2010 No. 09-50619 w h e t h e r a lender may bring itself into compliance with the three percent fee cap o f section 50(a)(6)(E) by subsequently refunding the excess portion of the fee to t h e borrower. Later that year, the Texas Supreme Court answered that a timely r e fu n d cures the violation. Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342, 3 4 5 4 7 (Tex. 2001). Most recently, in 2005, in Norris v. Thomas (In re Norris), 4 1 3 F.3d 526, 530 (5th Cir. 2005), we certified the question of whether a h o u s e b o a t is a homestead under sections 50 and 51 of article XVI. The Texas S u p r e m e Court responded that a boat could not be a homestead. Norris v. T h o m a s , 215 S.W.3d 851, 852 (Tex. 2007). Indeed, certification from this court h a s generated much of the Texas Supreme Court's jurisprudence concerning s e c t io n 50. The majority's holding on this issue in this case has the potential for a m u c h greater impact than those issues presented in Stringer, Doody, or Norris. In contrast to those cases, this case effectively adjudicates the validity of t h o u s a n d s of adjustable-rate home equity loans originated between at least the 1 9 9 7 enactment of the amendment and the 2004 effective date of the regulations t h a t now provide a safe harbor. Certification is, of course, discretionary both by our court in certifying and t h e Texas Supreme Court in accepting the question. Patterson v. Mobil Oil C o r p ., 335 F.3d 476, 487 (5th Cir. 2003); TEX. R. APP. P. 58.1. Undoubtedly, c o n s t r u c t i o n of a state constitution in a case of first impression is the type of m a t t e r appropriate for certification. In such an area, we have generally declined t o exercise that discretion only where the controlling state law issues presented b y the case are, though "important and complex, . . . sufficiently clear." Id. That is patently not the case here. Rather, we are faced with two provisions of the T e x a s Constitution that four Texas administrative agencies acknowledged are " a m b ig u o u s " when read together. See REGULATORY COMMENTARY 8. The majority resolves this ambiguity by relying upon prior non-binding 28 Case: 09-50619 Document: 00511182199 Page: 29 Date Filed: 07/22/2010 No. 09-50619 a g e n c y determinations. Admittedly, however, we have no case law whatsoever c o n s t r u in g these sections or resolving this ambiguity. Were the provisions in q u e s t io n clear, I would have no hesitation in following the agency determination w h ic h , prior to 2004, is entitled to some, though not controlling, deference. See T e x . Bankers Ass'n v. Ass'n of Cmty. Orgs. for Reform Now (ACORN), 303 S.W.3d 404, 40809 (Tex. App.--Austin 2010, pet. filed) (holding that the c o n s t it u t io n a lly -a u t h o r iz e d regulatory interpretations of article XVI, section 50 a r e "`entitled to serious consideration, so long as the construction is reasonable a n d does not contradict the plain language of the statute'" (quoting Tarrant A p p r a is a l Dist. v. Moore, 845 S.W.2d 8

Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.


Why Is My Information Online?