Gregory G. Graze and Cynthia A. Criddle v. Nationstar Mortgage, LLC ( 2015 )

ACCEPTED
03-15-00329-CV
6045320
THIRD COURT OF APPEALS
AUSTIN, TEXAS
7/13/2015 4:29:26 PM
JEFFREY D. KYLE
No. 03-15-00329-CV CLERK
FILED IN
In The Court of Appeals For the Third
3rd COURT OF APPEALS
AUSTIN, TEXAS
District of Texas at Austin
7/13/2015 4:29:26 PM
JEFFREY D. KYLE
Clerk
GREGORY G. GRAZE AND CYNTHIA A. CRIDDLE, on behalf of
themselves and all others similarly situated,
Appellants,
v.
NATIONSTAR MORTGAGE, LLC,
Appellee.
On Appeal from the 261st District, Travis County, Texas
MDL Pretrial Court No. D-1-GN-14-005248
Dallas County Originating Case No. DC-13-05406
MDL No. 13-0427
REPLY BRIEF OF APPELLANTS
J. Patrick Sutton Jeffrey W. Hurt, Esq.
Texas Bar No. 24058143 Texas Bar No. 10317055
1706 W. 10th Street 10670 N. Central Expy Ste 450
Austin Texas 78703 Dallas, Texas 75231
Tel. (512) 417-5903 Tel: (214) 382-5656
Fax. (512) 355-4155 Fax: (214) 382-5657
jpatricksutton@ jwhurt@hurtberry.com
jpatricksuttonlaw.com
Counsel for Appellants
July 13, 2015
TABLE OF CONTENTS
INDEX OF AUTHORITIES ...................................................................... iii
INTRODUCTION ....................................................................................... 1
ADDITIONAL FACTS IN REPLY ............................................................. 2
ARGUMENT IN REPLY ............................................................................ 3
I. Sims briefly recapitulated .................................................................. 4
II. Sims addresses solely capitalization events, not changes to the
terms of the original loan. ....................................................................... 5
III. New extensions of credit must satisfy all of Section 50(a)(6), but
a mere modification may, separately, violate any or all of the
particular requirements of Section 50(a)(6) ......................................... 11
IV. Nationstar miscalculates the balloon ............................................. 13
V. Nationstar's purported cures are the violations of Section
50(a)(6)(L) .............................................................................................. 15
VI. The independent requirement that payments pay all interest
coming due doesn't doesn't provide a safe-harbor for payments
composed solely of interest.................................................................... 17
VII. “Temporary” = Volatile = Bad ....................................................... 18
CONCLUSION ......................................................................................... 21
CERTIFICATE OF SERVICE ................................................................. 23
CERTIFICATE OF COMPLIANCE ........................................................ 23
ii
INDEX OF AUTHORITIES
Cases
Hawkins v. JP Morgan Chase Bank, N.A., No. 13-50086, 2015 WL
3505353 (5th Cir. June 4, 2015), reh'g and reh'g en banc denied
(June 30, 2015) .............................................................................. 2, 3, 9
Sims v. Carrington Mortgage Servs., L.L.C., 440 S.W.3d 10 (Tex.
2014, reh'g denied) ...................................................................... passim
Starkey et al. v. Bank of America, N.A., No. 4:12-cv-02084 (S.D.
Tex. 2012) ............................................................................................... 3
Statutes and Rules
7 Tex. Admin. Code § 151.1(1) .......................................................... 8, 14
7 Tex. Admin. Code § 153.14 ................................................................ 10
7 Tex. Admin. Code § 153.14(2)(B) ...................................................... 10
7 Tex. Admin. Code § 153.14(2)(C) ...................................................... 10
7 Tex. Admin. Code § 153.16 ................................................................ 20
Other Authorities
Ann Graham, Where Agencies, the Courts, and the Legislature
Collide: Ten Years of Interpreting the Texas Constitutional
Provisions for Home Equity Lending, 9 Tex. Tech Admin. L.J.
69, 84 (2007) ......................................................................................... 18
Constitutional Provisions
Section 50(a)(6)(L) .......................................................................... passim
Section 50(a)(6)(Q)(x)(c) ........................................................................ 15
Section 50(a)(6)(Q)(x)(f) ......................................................................... 16
iii
INTRODUCTION
Is Section 50's requirement of "substantially equal" payments
a one-time requirement applicable only at closing, and thus
waivable at any time thereafter? Section 50(a)(6)(L). Nationstar
and now the Fifth Circuit U.S. Court of Appeals say it is. That
conclusion requires indiscriminately lumping together
capitalization events that do not alter the loan terms (a Sims
"restructuring" of the loan principal) with true modification
agreements that do change the original loan's terms. But by that
logic -- in which all post-closing agreements that do not extend
new credit are permissible -- other flatly-prohibited terms will also
become legal at any time after closing, such as personal recourse
and nonjudicial foreclosure. Section 50(a)(6) loans will effectively
cease to be Section 50(a)(6) loans after closing, since any
substantive term will become subject to amendment. The profound
issue for this Court -- an issue of first impression in the Texas
appellate courts -- is whether the cornerstone perpetual
requirements of home equity loans, such as substantial payment
equality, will survive.
1
ADDITIONAL FACTS IN REPLY
The Fifth Circuit U.S. Court of Appeals recently held, in an
unpublished per curiam decision, that a Texas $190,000 home
equity loan that began life with a schedule of substantially-equal
payments can be modified to schedule a $146,000 balloon due at
maturity. Hawkins v. JP Morgan Chase Bank, N.A., No. 13-
50086, 2015 WL 3505353, at *2 (5th Cir. June 4, 2015), reh'g and
reh'g en banc denied (June 30, 2015) (remanded for
determination whether new money was in fact added to Ms.
Brooks's loan to potentially explain such a large balloon). The
Fifth Circuit also held that Texas home equity loans can be
modified to schedule five years of interest-only payments followed
by a large payment spike. Id. (dismissing Mr. Hawkins’ claim
with prejudice). The Fifth Circuit based its decision on an
erroneous interpretation of Sims v. Carrington Mortgage Servs.,
L.L.C., 440 S.W.3d 10 (Tex. 2014, reh'g denied), which legalized
"restructurings" that capitalize past-due sums into the note.
According to the Fifth Circuit, a modification of a home equity
loan can include terms that otherwise violate Section 50(a)(6) so
long as the modification agreement does not extend new credit to
the borrower.
2
Also pending in federal court, an identical case against
Bank of America alleges a $414,500 home equity loan that was
modified to include a $280,000 balloon, and another loan that
was modified to schedule interest-only for five years. See Starkey
et al. v. Bank of America, N.A., No. 4:12-cv-02084, Doc. 58 (S.D.
Tex. Nov. 3, 2014) (3d A. Complaint) (stayed pending finality in
Hawkins, cited above).
ARGUMENT IN REPLY
The trial court's decision in this case and the Fifth Circuit's
decision in Hawkins would legalize both balloons and other terms
that are anathema to Section 50(a)(6) loans, like personal recourse
and nonjudicial foreclosure. Appellants argued in their opening
brief that some of the requirements of Section 50(a)(6) are facially
perpetual for the life of a home equity loan and cannot be
bargained away after closing. Brief of Appellants at 18. This reply
brief offers additional points in response to Nationstar's brief and
the recent Fifth Circuit decision in Hawkins, which Appellants
believe was wrongly decided. 1
1Hawkins is not controlling on this Court, and, as an unpublished per curiam
opinion, is not even controlling in other federal cases. See Hayes v. Bank of
Am., N.A., No. 4:13-CV-760-A, 2014 WL 308129, at *6 n. 2 (N.D. Tex. 2014)
3
I. Sims briefly recapitulated
Appellants' opening brief discusses Sims at length. Brief of
Appellants at 14-16. Summarized to frame the arguments in this
Reply, Sims legalizes the capitalization of past-due sums into a
home equity note without the parties having to go through all the
hoops of originating a new home equity loan. Sims holds that
adding principal already due under the loan documents does not,
in and of itself, represent new money or a change in loan terms,
but is instead a mere "restructuring" of existing obligations. 440
S.W.3d. at 16.
However, the Texas Supreme Court stressed that the loan at
issue in Sims continued, upon modification, to have substantially
equal, regular payments as originally agreed when the loan was
made: "Section 50(a)(6) does not forbid a revision of the initial
repayment schedule that merely adjusts the regular installment
amount." Id. No issue was presented in Sims of balloons, payment
spikes, or other volatile payment schedules, which would
constitute modifications of substantive loan repayment terms.
Indeed, the Simses' restructuring actually lowered their regular
monthly payment, and did so for the entire remainder of their
(acknowledging non-controlling nature of unpublished per curiam decisions of
the 5th Circuit).
4
loan's term. Id. at *13 (table of figures shows that original
payment was permanently lowered from $611 to $492 in successive
rate-step increments over 2 years). The lesson: any amount of
past-due sums authorized by the loan documents can be added
back into the note without having to originate a new loan, but
there must still be a "regular installment amount" as contemplated
by the original note. Nothing in Sims impliedly or expressly allows
the parties to substitute a new, volatile payment schedule for the
substantially-equal payment schedule in the original note.
II. Sims addresses solely capitalization events, not
changes to the terms of the original loan.
Sims is a narrow holding on specific facts concerning the
amount of money included in a loan's principal, and the
terminology it employs to limit its holding to such situations is
critical to understanding why it has nothing to do with this case.
The facts in Sims deal solely with a "restructuring" event
that capitalizes past-due sums into the note and adjusts the
"regular installment amount" accordingly. 440 S.W.3d at 16. The
Simses had past-due sums capitalized into their existing note,
their interest rate lowered by several percent in stages, and their
monthly installment of principal and interest permanently lowered
5
by $120 until maturity. 440 S.W.3d at 12. Their original loan's
substantially-equal payment scheme was not altered; nor were any
other substantive changes made to the loan terms. The sole issue
for decision was whether the capitalization event constituted a
new extension of credit (that is, a new home equity loan). The
Texas Supreme Court said No, the existing loan merely continues
rolling on with the increased, reamortized principal allocated to
slightly lower regular payments.
The Sims decision takes pains to refer to the narrow type of
agreement at issue there as either a "restructuring" or else a
"capitalization," avoiding use of the term "modification" since no
changes were made to the terms of the loan:
The applicability . . . 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
restructuring of a home equity loan does not involve a
new extension of credit, the requirements of Section
50(a)(6) do not apply. Thus, we restate the first certified
question as follows:
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 new
extension of credit for purposes of section 50 of
Article XVI of the Texas Constitution?
6
440 S.W.3d at 15; see id. at 17 (using "restructuring"). The Sims
Court in fact expressly rejected use of the term "modification" to
describe capitalization-type agreements because, in the Supreme
Court's view, the capitalization event does not modify the terms of
the loan. 440 S.W.3d at 15-16.
At the risk of repetition but to bring the point home, the
narrow holding of Sims is that if an agreement (by whatever
name) does no more than add ("capitalize") sums already due
under the existing terms of the loan back into to the principal of
the note, then that specific agreement or event is not a "new
extension of credit." Accordingly, the post-closing restructuring
agreement does not have to comply anew with all the myriad
requirements of Section 50(a)(6), as a new extension of credit
would.
By contrast with the Sims facts, it is emphatically true that
the post-closing agreements at issue in this case contain two
distinct components, a Sims-type capitalization/restructuring that
is not a modification at all, and also a modification of the original
notes' substantially-equal payment schedules. Despite this
seemingly irrefutable fact, Nationstar consistently conflates the
restructuring aspect (authorized by Sims) with the separate and
7
distinct change to the payment scheme (not authorized by Sims).
Brief of Appellees at 21. Nationstar further confuses matters with
a digression into a three-part test whether a "modification" is an
"extension of credit." But the issue whether the restructuring
aspect of Appellants' modification agreements constitute an
extension of credit is irrelevant --Appellants acknowledge that the
capitalization portion of their loan modification agreements is
permissible. It is the separate and distinct implementation of new,
volatile payment schedules that is at issue here.
A restructuring and an actual modification of a loan term can
exist either side-by-side in one agreement, or else separately in
unrelated agreements. In this case, Nationstar both restructured
the loan to capitalize past-due payments and also rescheduled that
restructured principal to include a teaser-period of interest-only
payments followed by a payment spike meeting the definition of a
balloon. See 7 Tex. Admin. Code § 151.1(1) (2015). However, a
given post-closing agreement could do nothing more than amend
the payment schedule to lower the monthly payments and schedule
a large balloon to recapture the deferred amounts, or else create a
multi-year period of interest-only payments followed by a payment
spike. Neither is permissible at closing; the issue here is whether
8
such practices are permissible afterward, whether combined with a
restructuring or not.
What Nationstar does, by misconstruing Sims to cover all
post-closing transactions and not only capitalizations, is construct
an argument that any post-closing agreement short of a new
extension of credit is permissible no matter what it provides -- in
other words, that any event that does not include new money is
allowed to violate any provision in Section 50(a)(6): "Because the
modifications were not new extensions of credit, none of the
requirements in Section 50(a)(6)—including those in Section
50(a)(6)(L)—apply to them." Brief of Appellees at 21. The Fifth
Circuit similarly conflates restructurings and substantive changes
to the loan terms and makes the same mistake:
The Hawkins and Cusick transactions each involved
capitalization of past-due amounts under the loan
without satisfying or replacing the original note,
advancing new funds, or increasing the obligations
created by the original note. Thus, the restructurings of
these loans were modifications, which do not require
compliance with Section 50(a)(6).
Hawkins, 2015 WL 3505353, at *2 (emphasis added). The upshot of
misapplying Sims to cover all post-closing agreements is that all
modifications become exempt from Section 50, since by definition a
mere modification does not extend new credit. See Sims; see also 7
9
Tex. Admin. Code § 153.14(2)(B) (2008) (the advance of additional
funds is not permitted by a modification).
This confused commingling of capitalizations that don't alter
the loan and modifications that do is disastrous. No authority
(except the new Hawkins decision in the Fifth Circuit) supports a
broad rule allowing literally anything except new money to be
included in a modification. The narrow holding in Sims, validating
capitalizations, does not reject or even conflict with how the
official regulations treat "modifications" that actually alter the
terms of the loan. See 7 Tex. Admin. Code § 153.14. The
regulations say, among other things, that a modification cannot
implement "new terms" that would have been prohibited "at the
date of closing." 7 Tex. Admin. Code § 153.14(2)(C) (emphasis
added). Would a balloon note have been prohibited at closing?
Plainly Yes, which is why it isn't allowed at any point later and is
an impermissible "modification" of loan terms. The same holds
true for modifications that permit personal recourse and
nonjudicial foreclosure. Since such "new terms" were not at issue
in Sims, Sims had no need to fashion a general rule concerning
true modifications.
In summary, Sims does legalize capitalization agreements,
10
which do not modify the terms of the loan; but it does not legalize
(or even address) agreements that do modify the terms of the loan.
No conclusion can be drawn from Sims concerning post-closing
events other than the capitalization of past-due sums, and that is
true whether such events accompany a capitalization (as occurred
in this case) or are the subject of a separate agreement. That said,
it is supremely troublesome when a borrower facing foreclosure
gives up important borrower protections of Section 50(a)(6), such
as substantially-equal payments, as the price for having the lender
capitalize past-due payments to bring the loan current and prevent
foreclosure. There is no reason why Nationstar could not have
stopped at mere capitalization, adjusting the interest rate and
potentially the maturity date to achieve low payments
permanently, rather than resorting to a new schedule of payments
with profound payment volatility.
III. New extensions of credit must satisfy all of
Section 50(a)(6), but a mere modification may,
separately, violate any or all of the particular
requirements of Section 50(a)(6)
Another way Nationstar incorrectly characterizes Sims stems
from how Sims permits capitalization restructurings to avoid "all"
of Section 50(a)(6):
The applicability . . . of Section 50(a)(6), which governs
11
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
restructuring of a home equity loan does not involve a
new extension of credit, the requirements of Section
50(a)(6) do not apply.
440 S.W.3d at 15 (emphasis added). Sims only addresses whether
an all-new loan must be originated -- from scratch, at a stroke,
with a new closing and all the bells and whistles -- in order for
past-due sums to be added to loan principal. Id. at 11-12 ("the
restructuring . . . need not meet the constitutional requirements
for a new loan").
Sims had no occasion to address whether a separate,
substantive modification of a loan term violated one (and only one)
specific provision of Section 50(a)(6). The Supreme Court did
discuss specific subsections of Section 50, but solely in the context
of the core issue whether all of Section 50(a)(6)(A)-(Q) is triggered.
The Supreme Court discussed Section 50(a)(6)(B), the 80% loan-to-
value ratio requirement, but merely to point out that it only
applies "on the date the extension of credit is made." 440 S.W.3d at
17 (emphasis in original). Since the Simses' later capitalization
restructuring was not an extension of new credit, it did not trigger
the one-time 80% test again. That leaves open the obvious question
whether requirements that apply for the life of the loan, like
12
Section 50(a)(6)(L), can be waived after closing. All the Supreme
Court said about that subsection was that the Simses'
capitalization didn't implicate it since payments remained
substantially equal after the capitalization. In summary, the
whole basis for the Sims suit was the Simses' claim that they
received new loans that should have triggered all the required
formalities; they made no claim that, apart from the capitalization
restructuring, the agreements at issue changed substantive terms
of the original loan. Id. at 11-12.
Here, by contrast, Appellants acknowledge that, since no new
extension of credit occurred, no new loan was required to be
originated triggering all of Section 50(a)(6) again. They challenge
solely the modification of the original loan's repayment scheme, a
modification that abandoned substantial payment equality in
order to implement a new, volatile payment scheme. That is
analytically distinct and separate from the Sims issue and does
not invoke all of Section 50(a)(6), but only the clause the
modification runs afoul of, Section 50(a)(6)(L).
IV. Nationstar miscalculates the balloon
Nationstar argues there were no payment shocks or balloons,
avoiding any mention of the 400%-500% payment spikes and the
13
necessity creating a new schedule of payments once principal was
increased. Brief of Appellee at 29-30.
Section 50(a)(6)(L)'s regulations define a balloon as any
payment more than twice the average of all prior "scheduled"
payments. 7 Tex. Admin. Code § 151.1(1). Nationstar averages all
payments back to loan origination, but that cannot be correct. As
Nationstar's own evidence shows, the loans were restructured to
capitalize past-due sums into the notes and re-amortize the
payments according the new principal sums and interest rates.
CR206-207 (¶¶ 10-11, 17-18). It makes no sense to refer to the
payments scheduled under the original amortization schedule
because those payments were based on superseded loan figures.
The relevant "scheduled" payments for Graze and Criddle can only
be those set out in the post-origination modifications since those
schedules contain the new, increased principal sums upon which
the new payment schedules are based. Nationstar is comparing
apples to oranges in order to minimize the harm it did to
Appellants and avoid the regulations' technical definition of a
"balloon."
In any event, whether or not the post-modification payment
spikes constitute "balloons" according to the regulations, the fact
14
that the borrowers' payments went up by factors of over 400% in
each case defeats any contention that the borrowers' payments
were "substantially equal" within the meaning of Section
50(a)(6)(L).
V. Nationstar's purported cures are the
violations of Section 50(a)(6)(L)
Nationstar argues that certain letters it sent to the borrowers
in 2012, a year before the borrowers notified Nationstar of
violations, were in fact cures. Brief of Appellee at 31 (citing
CR266, 321). But those weren't cures -- they are the violations
complained of.
Section 50's cure process requires a borrower to notify the
lender, at which time the lender has 60 days to cure the illegality.
Section 50(a)(6)(Q)(x). A Section 50 cure requires that the lender
[send] the owner a written notice modifying any other
amount, percentage, term, or other provision prohibited
by this section to a permitted amount, percentage, term,
or other provision and adjusting the account of the
borrower to ensure that the borrower is not required to
pay more than an amount permitted by this section and
is not subject to any other term or provision prohibited
by this section.
Section 50(a)(6)(Q)(x)(c). In the alternative, if a cure isn't possible
under subsection (c) above, the lender must credit the borrower
$1,000 and
15
[offer] the owner the right to refinance the extension of
credit with the lender or holder for the remaining term
of the loan at no cost to the owner on the same terms,
including interest, as the original extension of credit
with any modifications necessary to comply with this
section or on terms on which the owner and the lender
or holder otherwise agree that comply with this section.
Section 50(a)(6)(Q)(x)(f). Failure to cure according to this process
results in forfeiture. Id.
Graze's evidence shows that he notified Nationstar of
illegality on February 19, 2013. CR347. Any cure was due April 19,
2013. Nationstar took no action to cure thereafter. CR340.
Criddle's evidence establishes that she sent notices of illegality on
January 28, 2013, and April 23, 2013. CR356, 358. Nationstar
never responded. CR354, 360. Nationstar in fact believed that the
modifications violated Section 50 in the ways the borrowers
identified, and told Graze and other borrowers as much; yet
Nationstar still refused to cure and began foreclosure proceedings.
CR349, 351, 363-366 (admissions); CR 343, 349, 372 (foreclosure
notices).
Inspection of the letters to Graze and Criddle reveals that
they are not cures contemplated by the process set out in Section
50, but instead ordinary lender notifications to Graze and Criddle
that the borrowers are about to get hit with balloon payments
16
owing to the conclusion of the interest-only payment periods. As a
matter of law, these do not constitute cures. They do not comply
the cure process contemplated by Section 50 and evidence no
agreement or implementation of any cures. And they do not, in
fact, cure the illegality of the modifications -- they affirmatively
implement it. These letters, far from showing any cure, constitute
the proof that Plaintiffs' loans violate the "substantially equal"
requirement.
VI. The independent requirement that payments pay all
interest coming due doesn't doesn't provide a safe-
harbor for payments composed solely of interest
Nationstar argues that since Appellants' interest-only
payments paid all interest coming due every period, the altered
payment schedules fully comply with Section 50(a)(6)(L). Brief of
Appellee at 25-26. But paying all interest due each period is not
the sole criterion for legality under Section 50(a)(6)(L). If that
were the case, then balloons composed of principal deferred for 30
years would be legal. Meeting the independent requirement that
payments pay all current interest cannot exempt an otherwise
volatile payment schedule from the other requirements.
As argued in Appellants' opening brief, interest-only
payments do not meet the first discrete requirement of Section
17
50(a)(6)(L), that the loan be "repaid." Brief of Appellants at 23.
Payments without a principal component do not, by definition,
"repay" the original loan amount. In addition, interest-only
schedules generate substantial inequality and balloons, as
demonstrated with the Graze and Criddle modifications, where
payments went up by four-fold and five-fold at the end of the
interest-only periods.
What the requirement that all interest coming due must be
paid with each installment addresses is a specific problem not
implicated in this case: negative amortization. That occurs when
accrued but unpaid interest builds up. As explained in the Graham
article:
Interest that has accrued but has not been paid is added
to the original amount owed, with the result being the
borrower owes more principal each month, despite
making payments. Negative amortization is expressly
prohibited for Texas home equity loans.
Ann Graham, Where Agencies, the Courts, and the Legislature
Collide: Ten Years of Interpreting the Texas Constitutional
Provisions for Home Equity Lending, 9 Tex. Tech Admin. L.J. 69,
84-85 (2007).
VII. “Temporary” = Volatile = Bad
Nationstar repeatedly characterizes the interest-only period
of Appellants’ loan modifications as “temporary,” as though that
18
were a good thing. By that test, “temporary” interest-only periods
at the outset of a loan would be good too, since a 2% teaser rate
would permit borrowers who could not otherwise afford a home
equity loan to get one – at least initially. But teaser periods are
Constitutionally bad. They create surprise payment obligations
later. And they are as bad at the middle of the loan as they are at
the beginning or the end. What the requirement of “substantially
equal” prohibits is, precisely, payment volatility. “Temporary” 2-
year periods where the bottom drops out entirely, as illustrated in
Nationstar’s graphs (Brief of Appellee at 12-13) do not help the
borrower because they exemplify the volatility that Section
50(a)(6)(L) seeks to prevent.
While payments that pay no interest are an independent
violation of Section 50(a)(6)(L) as argued in Appellants’ opening
brief, the volatility metric looks only at dollar amount variability.
That metric is not dependent on whether principal is included with
every payment, but instead on the delta in the payment amount
from month to month, or year to year. That is why, in the case of
variable-rate home equity loans, the regulations permit only
gradual interest-rate steps so that payments will remain
“substantially equal between each interest rate adjustment.” 7
19
Tex. Admin. Code § 153.16. Preventing huge interest-rate swings
is one important reason Section 50(a)(6)(L) exists.
The bottom fell out of Appellants’ monthly payments for two
years in this case, which was good only while it lasted. The
interest rate was slashed to 2%, a fraction of the notes’ respective
rates, but after two years it would abruptly jump back up to the
original rate, multiples higher. That is textbook substantial
inequality, since there are no tiers or baby-steps as a variable-rate
loan -- which in essence is what these loans became -- would
require. These huge swings would be as bad month to month as
they would be year to year because they whipsaw the borrower in
either case, belying Nationstar’s assertion that Section 50(a)(6)(L)
favors “temporary” volatility as a foreclosure prevention tool.
Finally, nothing in Section 50(a)(6) defines “temporary” for
purposes of allowing a holiday from substantially-equal payment
schedules. This Court would have to legislate that. While
Appellants’ fractional-payment periods were two years, other cases
in the MDL were both shorter and longer. In the recent Hawkins
case in the Fifth Circuit, the period was five years. 2013 WL
3505353, at *1. It is difficult to see how to settle on any given
allowable period, since short periods done sporadically can
20
generate volatility just as one long period followed by a balloon
can. The test for volatility is not the duration of the payment
steps, but their magnitude. Had Nationstar scheduled Appellants’
payments to rise in 1% increments annually following the rate
plummet to 2%, that would have avoided creating the brick wall
following the “temporary” period of reduced payments.
CONCLUSION
The most important thing for the Court to take from Sims is
that it does not address modifications of the original loan's terms.
In fact, Sims took pains to distinguish capitalizations
(restructurings) from all other kinds of post-closing agreements.
And the facts of Sims gave the Supreme Court no occasion to
address changes to the original loan's terms. The Simses, unlike
Appellants here, continued to have substantially equal payments
after their modifications because their agreements did not change
the repayment terms of their original loan but merely adjusted it
slightly downward permanently. Nationstar and the Fifth Circuit
U.S. Court of Appeals both miss that point. While the
capitalization events within Appellants' "loan modification
agreements" were valid and did not trigger anew a Section 50(a)(6)
lending moment (with all the bells and whistles), the separate and
21
distinct change to the repayment scheme implicated Section
50(a)(6)(L) because it affirmatively abandoned "substantially
equal" payments. Section 50(a)(6)(L) abhors volatile repayment
schemes throughout the life of the loan. Otherwise, it would be an
all-but meaningless one-time requirement at closing, easily
abandoned by modification the day after.
Respectfully submitted,
/s/ JPS
J. Patrick Sutton
Texas Bar No. 24058143
1706 W. 10th Street
Austin Texas 78703
Tel. (512) 417-5903/Fax. (512) 355-4155
jpatricksutton@ jpatricksuttonlaw.com
Jeffrey W. Hurt, Esq.
Texas Bar No. 10317055
10670 N. Central Expy Ste 450
Dallas, Texas 75231
Tel: (214) 382-5656/Fax: (214) 382-5657
jwhurt@hurtberry.com
Attorneys for Appellants
22
CERTIFICATE OF SERVICE
I certify that on July 13, 2015, per T.R.A.P. 6.3(b), a true and
correct copy of this brief was served by efiling and email on:
Thomas G. Yoxall
Daron Janis B. David L. Foster
Locke Lord LLP Locke Lord LLP
2200 Ross Avenue Suite 2200 600 Congress Avenue, Suite
Dallas TX 75201 2200
tyoxall@lockelord.com Austin, Texas 78701
djanis@lockelord.com dfoster@lockelord.com
/s/ J. Patrick Sutton
Attorney for Plaintiffs-Appellants
CERTIFICATE OF COMPLIANCE
This document complies with the typeface requirements of Tex. R.
App. P. 9.4(e) because it has been prepared in Century Schoolbook
14-point for text and 12-point for footnotes. Spacing is expanded
by .6 point for clarity. This document also complies with the word-
count limitations of Tex. R. App. P. 9.4(i)(2) because it contains
4317 words, excluding any parts exempted by Tex. R. App. P.
9.4(i)(1), and Appellants' briefs do not in the aggregate exceed
27,000 words.
/s/ J. Patrick Sutton
Attorney for Appellants
23