The Fifth Circuit has certified another question to the Texas Supreme Court about the meaning of Texas's constitutional provision relating to home-equity lending.

Here, the homeowner made all their payments, completing their obligations under the note. But — perhaps contrary to a contractual provision and this portion of the Texas Constitution — the holder of the note did not send the homeowner the cancelled promissory note or a release of the lien. When this remained uncured, the homeowner filed suit for a violation of Article XVI, § 50(a)(6)(Q)(vii) the Texas Constitution and for breach of contract. The remedy she sought was "forfeiture of all principal and interest paid pursuant to the note."

As the Fifth Circuit explained, the district court had dismissed the constitutional claim on the ground that the Constitution merely required the term be included in the contract, but that violating it was not of constitutional dimension:

[The holder of the note] Ocwen contended that the Texas Constitution is satisfied by merely including such a requirement in the terms of the Security Instrument. Because the Security Instrument here included that requirement, Ocwen asserted that [the homeowner] Garofolo did not suffer a constitutional injury. Ocwen’s motion to dismiss also argued that Garofolo did not allege actual damages, a predicate to recovering money damages for breach of contract. The district court agreed with both arguments.

There appears to be little dispute that the lender's conduct here violated the contractual terms. The question is whether any remedy exists. The lender has argued both that the Constitution merely requires the term by included in a contract and that Texas contract law would require a party to prove up actual damages before obtaining the remedy of forfeiture. The Fifth Circuit recognized that the combination would "render the requirement a virtual nullity except in the (hopefully rare) circumstance where a lender unscrupulously attempts to enforce a paid note resulting in recoverable damages." Nonetheless, it saw the remedy sought by the homeowner as a "drastic remedy."

The Fifth Circuit has certified both claims to the Texas Supreme Court:

1. Does a lender or holder violate Article XVI, Section 50(a)(6)(Q)(vii) of the Texas Constitution, becoming liable for forfeiture of principal and interest, when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder fails to return the cancelled note and release of lien upon full payment of the note and within 60 days after the borrower informs the lender or holder of the failure to comply?

2. If the answer to Question 1 is “no,” then, in the absence of actual damages, does a lender or holder become liable for forfeiture of principal and interest under a breach of contract theory when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder, although filing a release of lien in the deed records, fails to return the cancelled note and release of lien upon full payment of the note and within 60 days after the borrower informs the lender or holder of the failure to comply?