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A Texas Supreme Court ruling has rendered meaningless a notice that the state constitution requires home equity lenders to provide to borrowers. A unanimous court ruled on June 8 in Stringer v. Cendant Mortgage Corp. that lenders can require Texans seeking to borrow against the equity in their homes to use the loan proceeds to pay off credit cards and other debts despite a notice that says otherwise. The 5th U.S. Circuit Court of Appeals asked the Texas Supreme Court to determine whether the Texas Constitution allows home equity lenders to make such a requirement on borrowers. The federal court was unable to resolve two conflicting provisions in the constitution while reviewing an appeal filed by a Tyler, Tex. couple allegedly required by their lender to spend almost half of the $227,150 they received from a home equity loan to pay third-party creditors. Joe and Desiree Stringer sued Cendant Mortgage Corp., alleging that Cendant failed to comply with the constitutionally required notice provision. A provision in the 1997 constitutional amendment that authorized home equity lending in Texas requires a lender to give a borrower notice at least 12 days before a loan’s closing. The notice must state that the lender can’t require the borrower to apply the loan proceeds to debts not secured by the home or another debt owed to the same lender. However, another section in the constitution allows a home equity lender to require a borrower to pay off other debts. That section prevails over the notice provision because it establishes the terms and conditions the lender must meet for a home equity loan to be valid, the court held. William Brown, senior vice president and general counsel for Cendant Mortgage, says the decision speaks for itself. “We believe this decision is consistent with Texas citizens’ desire to open up the opportunity of closed-end second-mortgage loans,” he says. “This is good for Texas citizens — we feel vindicated.” Tyler, Tex. attorney Ralph Allen, who represents the Stringers, says it bothers him that consumers must be given a notice that the Supreme Court has held doesn’t mean anything. “I feel like they have taken a consumer protection that the Legislature created and basically negated it,” Allen says. The court recognizes that the conflict between the two provisions in the constitution can mislead would-be borrowers, Justice James Baker said in the opinion. To avoid confusion, the court suggested that lenders advise borrowers in a second notice to disregard what they read in the first notice. Former state Sen. Jerry Patterson, author of the home equity lending amendment, says the court’s ruling disregards what he intended with the legislation. “That was not my intention, and I’m pretty sure it wasn’t anybody’s else’s intention either,” Patterson says. He suggests that the Texas Legislature address this and other problems created by the amendment in the session next year.

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