Home Equity Loan Laws in Texas
In a recent Texas bankruptcy case, the court rejected the assertion of a creditor that it had a home equity loan that should be secured and nondischargeable. The bankruptcy court argued that because there was an pre-existing home equity loan on the property the second home equity loan was in fact not really a home equity loan at all and could not be granted a secured and nondischargeable status.
Details of the bankruptcy case:
Approximately two years later (after the first home equity loan was issued), Timothy Lovelace contacted USAA by telephone concerning a banking matter. During the course of the conversation, Mr. Lovelace was advised by a USAA representative that he qualified for a home equity loan. Thereafter, the Plaintiffs filled out an application and applied for a home equity loan. On October 17, 2006, the Plaintiffs executed (through a power of attorney) a Note in the amount of $57,799.00 in favor of USAA, along with a Texas Home Equity Deed of Trust. This loan was also a Texas Home Equity loan, being the type of credit defined by Section 50(a)(6), Article XVI of the Texas Constitution. All of the funds advanced by USAA in connection with this transaction were placed in the Plaintiffs’ checking account and used for personal purposes such as paying down credit card debt or personal loans. The USAA FSB Texas Home Equity Deed of Trust was executed and recorded in the deed records for Medina County on October 27, 2006, approximately two years after the Bank of America, N.A., Texas Home Equity Deed of Trust, which was recorded October 25, 2004.
However, a home equity loan already existed on the property. Under the Texas Constitution, there can only be one home equity loan on a property at any given time. The creditor in this case failed to take this law into consideration and issued the home equity loan despite the fact that they should have known of an existing loan on the property. Once the debtors filed bankruptcy and the trustee agreed to discharge the second home equity loan because it was classified as an unsecured debt, the lender of the second home equity loan challenged the discharge. The creditor said that since the second home equity loan was used to make payments on the first home equity loan that that gave it secured status.
The bankruptcy court disagreed with this argument saying that the Texas Constitution does not give any credence to how a second home equity loan is being used; it only says that only one home equity loan can exist on any one property. In other words the second loan was not a home equity loan at all, or would not be recognized by the Texas Constitution as a home equity loan. The bankruptcy court ruled that the second home equity loan would be discharged.