LEGAL TRENDS

DTPA Ruled Inapplicable to Home Equity Lending Transaction

By Elizabeth M. Bruman

The Supreme Court recently denied a Petition for Review in the case of Fix v. Flagstar Bank FSB, 242 S.W.3d 147 (Tex. App. – Fort Worth 2007, pet. denied). In Fix v. Flagstar, the Fixes had refinanced their home with a second home equity loan which they asserted violated the Texas Constitution. The Fixes sued Flagstar Bank, FSB, the lender, and First American Title, title insurance company. The Fixes notified Flagstar of the violations. Flagstar offered to refinance without any closing costs to the Fixes and to pay the Fixes $1,000. The Fixes rejected this offer and sought to have the entirety of their loan and all interest forgiven.

Among the other claims, the Fixes filed suit under the DTPA asserting that refinancing and title insurance services were provided in an unconscionable manner. Specific violations of the Texas Constitution were admitted: (i) the home equity loan documents were executed within less than one year after a first home equity loan had been executed; and (ii) the loan documents were for a conventional loan with provisions allowing for personal liability against the Fixes and non-judicial foreclosure. The Texas Constitution in effect when the home equity loan was executed provided that

[a] lender . . . shall forfeit all principal and interest of the extension of credit if the lender . . . fails to comply with the lender’s . . . obligations under the extension of credit within a reasonable time after the lender . . . is notified by the borrower of the lender’s failure to comply.

Id. at 154. The Constitution was later amended to require a lender’s action within a 60-day period of notice of violations.

The question of whether a person meets the requirements to be a consumer is a question of law. The Court held that the Fixes did not qualify as a consumer as to Flagstar because they did not seek or acquire goods or services by lease or purchase. The Court reiterated the long held notion that a person cannot qualify as a consumer if the underlying transaction is a pure loan because money is considered neither a good nor a service. The Court stated :

Because the Fixes had already purchased their house, the Flagstar refinance merely extended credit to the Fixes. As such, the refinance cannot qualify as a good or service under the DTPA.

Fix, 242 S.W.3d at 160.

The Fixes alleged that First American Title also violated the DTPA because it provided title insurance services in an unconscionable manner and that the Fixes suffered economic damage from such conduct. However, to the extent the Fixes did acquire a good or service, i.e., a title insurance policy, these goods or services did not form the basis of their complaint. Because the Fixes’ DTPA claim did not implicate the title insurance services provided by First American, the court ruled that summary judgment was proper as to First American.

Elizabeth M. Bruman practices civil appellate law and commercial and consumer litigation in Harris and surrounding counties through the Law Office of Elizabeth Bruman, P.C.

Borrower Seeking Home Equity Loan May Be a Consumer Under DTPA

By Linhuyen Pham

For services by purchase or lease, where those goods or services form the basis of plaintiff’s complaint. In Allen v. Am. Gen. Fin., Inc., 251 S.W.3d 676 (Tex. App.--San Antonio, 2007, pet. filed), the San Antonio Court of Appeals held that a borrower seeking a home equity loan may qualify as a consumer under the DTPA if his primary objective in seeking the loan is to obtain additional services from the lender.

Property owner Kyle Allen, faced with a tax suit, went to an American General Finance, Inc. (“AGF”), branch office to obtain a loan to pay off the delinquent taxes he owed on his family home. Allen gave the tax suit documents to an AGF agent, Mark Esquivel, and took out a $15,000 home equity loan. As part of the loan transaction, AGF obtained a tax certificate showing the amount of tax due before finalizing the loan to Allen and issued a check in the amount of $4,988.28 to the Bexar County Tax Assessor to pay the back taxes owed by Allen. AGF paid the remaining balance of the loan proceeds, $10,011.72, directly to Allen. The tax suit documents, however, reflected that Allen’s total tax liability was over $6,000. AGF never contacted the law firm representing the taxing authorities to confirm that all the taxes had been paid or to obtain a dismissal of the tax suit.

Because AGF did not pay the entire tax delinquency, the taxing authorities proceeded with the tax suit and obtained a default judgment against Allen, resulting in a foreclosure sale of his family home. Meanwhile, Allen failed to make payments on the home equity loan and AGF, unaware of the tax foreclosure sale, filed suit seeking foreclosure on the family home. After learning that the property had been sold, AGF abandoned its foreclosure claim and filed suit against Allen to impose a constructive trust on Allen’s redemption proceeds. Allen counterclaimed for breach of contract, gross negligence, negligence, usury, and violations of the DTPA.

The trial court granted AGF summary judgment on Allen’s DTPA and gross negligence claims and entered judgment on a jury verdict for Allen on his breach of contract and negligence claims. Both Allen and AGF appealed. The appellate court affirmed in part and reversed in part.

The court reversed and remanded the trial court’s summary judgment against Allen on the DTPA claims. The court explained that, although a person seeking only an extension of credit is not a consumer under the DTPA because the lending of money is not a good or service, a borrower seeking a loan would qualify as a consumer “when a borrower’s objective is to obtain goods or services and the loan provides the means for obtaining the goods or services.” Id. at 694. The court found that Allen had presented summary judgment evidence establishing that his objective in going to AGF was to take care of the tax suit and that “Allen [had] told Mark Esquivel when they first met, ‘I need to take care of this tax suit and . . . can you help me out.’” Id. at 695.  The court further found AGF had agreed to take care of the tax suit and undertook to loan Allen money and provide escrow services to accomplish Allen’s objective. Thus, the Court concluded Allen qualified as a consumer and could proceed with his DTPA claims because he had presented more than a scintilla of evidence that his primary objective in taking out the home equity loan was to obtain services that were the basis of his claims.

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