612 F.3d 781 (5th Cir. 2010), 09-50619, Cerda v. 2004-EQR1 L.L.C.

Docket Nº:09-50619.
Citation:612 F.3d 781
Opinion Judge:KING, Circuit Judge:
Party Name:Manuel B. CERDA; Petra G. Cerda, Plaintiffs-Appellants, v. 2004-EQR1 L.L.C.; Barclays Capital Real Estate, Inc., doing business as HomEq Servicing, Defendants-Appellees.
Attorney:Charles Darby Riley (argued), Riley & Riley, San Antonio, TX, for Plaintiffs-Appellants. Robert Lee Horn (argued), Mann & Stevens, P.C., Houston, TX, for Defendants-Appellees.
Judge Panel:Before JONES, Chief Judge, and KING and HAYNES, Circuit Judges. HAYNES, Circuit Judge, concurring and dissenting:
Case Date:July 22, 2010
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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612 F.3d 781 (5th Cir. 2010)

Manuel B. CERDA; Petra G. Cerda, Plaintiffs-Appellants,


2004-EQR1 L.L.C.; Barclays Capital Real Estate, Inc., doing business as HomEq Servicing, Defendants-Appellees.

No. 09-50619.

United States Court of Appeals, Fifth Circuit

July 22, 2010

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Charles Darby Riley (argued), Riley & Riley, San Antonio, TX, for Plaintiffs-Appellants.

Robert Lee Horn (argued), Mann & Stevens, P.C., Houston, TX, for Defendants-Appellees.

Appeal from the United States District Court for the Western District of Texas.

Before JONES, Chief Judge, and KING and HAYNES, Circuit Judges.

KING, Circuit Judge:

Manuel and Petra Cerda appeal from the district court's judgment rejecting their claims that aspects of their home equity loan violated the Texas Constitution. We agree with the district court that

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the Cerdas have failed to show a violation of the Texas Constitution, and we affirm.


In 1993, Manuel and Petra Cerda purchased an unimproved five-acre lot in San Antonio, Texas, on which they subsequently built a house. Using the house as collateral, they obtained a home equity loan from Associates Home Equity Services, Inc., in 1999, borrowing a principal sum of $238,659.33 to be repaid over 30 years. The next year, in 2000, the Cerdas refinanced that loan with Ameriquest Mortgage Company, this time with a principal sum of $325,000. The terms of the Ameriquest Mortgage loan provided for interest at a fixed rate of 10.9% for the first two years, followed by a variable rate-not less than 10.9% or greater than 16.9%-that was equal to the London Interbank Offered Rate (LIBOR) plus 6.5%.

In April 2002, in order to obtain a lower interest rate and to pay property taxes, the Cerdas again sought to refinance their home equity loan. They contacted Clarity Mortgage Services, a mortgage broker, and applied by telephone. Clarity Mortgage prepared a Good Faith Estimate,1 bearing a preparation date of April 30, 2002, that showed a loan with a principal amount of $344,000, a fixed interest rate of 8.5%, estimated closing costs of $8,600, and cash to the Cerdas at closing in the amount of $10,400.2 On May 15, 2002, the Cerdas signed the following documents: (1) the Good Faith Estimate; (2) a Federal Truth-In-Lending Disclosure Statement; 3 and (3) a Notice Concerning Extensions of Credit Defined by Section 50(a)(6), Article XVI, Texas Constitution.4

The closing for this refinancing took place over one month later, on June 17, 2002. There, the Cerdas signed their only written loan application-the Uniform Residential Loan Application (URLA).5 They also executed a promissory note and deed of trust in favor of New Century Mortgage Corporation on the same terms specified in the URLA. These terms included a principal sum of $367,500, and-like the Ameriquest Mortgage loan-provided for a variable interest rate: 8.99% for the first two years, followed by a variable rate-adjusted semiannually-equal to the six-month LIBOR plus 7.1%. The difference between interest rates from one six-month period to the next could not exceed 1.5%, and the interest rate could not fall below 8.99% or exceed 15.99%. The closing documents reflected that they were-in addition to satisfying the Ameriquest

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Mortgage loan, the Cerdas' property taxes, and amounts due the title and escrow company-effectuating the following transfers: (1) Clarity Mortgage received a 2.9% loan origination fee of $10,694, a credit report fee of $6, and a yield spread premium of $3,675; (2) " Appraiser" received a $325 appraisal fee; and (3) New Century Mortgage received a 3% loan discount in the amount of $11,025 and prepayment of $905.20 interest, and it issued a lender credit of $4,827.80. After all was said and done, out of the $367,500 loan, $10,923.89 was paid to satisfy outstanding property taxes, $767.97 was paid to the Cerdas as cash at closing, and over $21,000 was paid to cover fees and advance interest charges.

As a result of assignment, 2004-EQR1 L.L.C. became the holder of the Cerdas' note and deed of trust. Barclays Capital Real Estate Inc. (HomEq) services the loan. The Cerdas have not made any payments on the note since they executed it in 2002. As a result, 2004-EQR1 made several attempts to foreclose on the Cerdas' house, leading to litigation in Texas state courts and the issuance of several temporary restraining orders (TROs). This action represents the latest in that series of filings. On July 3, 2007, the Cerdas filed an amended petition in state court against 2004-EQR1 and HomEq, seeking a judgment of forfeiture, attorney's fees, damages, a TRO, and a permanent injunction. 2004-EQR1 and HomEq filed a joint answer, then removed the action to federal district court. The district court denied the Cerdas' motion to abstain and remand. 2004-EQR1 and HomEq later filed an amended answer, asserting various affirmative defenses and counterclaims.

After discovery, the parties submitted motions for partial summary judgment. The Cerdas' motion argued that the loan was invalid because: (1) it called for monthly payments that were not " substantially equal," in violation of article XVI, section 50(a)(6)(L) of the Texas Constitution; (2) it was issued in violation of the waiting periods prescribed by article XVI, section 50(a)(6)(M)(i) and (ii); and (3) it required the payment of fees in excess of the 3% cap imposed by article XVI, section 50(a)(6)(E). The Cerdas further argued that 2004-EQR1 and HomEq had failed to cure these violations within 60 days, thus requiring them to forfeit all principal and interest pursuant to article XVI, section 50(a)(6)(Q)(x). They also sought summary judgment on 2004-EQR1 and HomEq's affirmative defenses and counterclaims. 2004-EQR1 and HomEq sought summary judgment on the damages claims and on the claim that the loan called for payments that were not substantially equal.

On November 17, 2008, the district court considered the parties' competing motions for partial summary judgment. It agreed with 2004-EQR1 and HomEq that the loan did not call for payments that were not substantially equal and granted summary judgment on that issue. It denied the Cerdas' requests for summary judgment on whether the loan satisfied the waiting periods prescribed by article XVI, section 50(a)(6)(M)(i) and (ii), and on whether the loan violated the 3% cap on fees imposed by article XVI, section 50(a)(6)(E). The court further granted summary judgment in favor of the Cerdas on 2004-EQR1 and HomEq's counterclaims, denied summary judgment on several affirmative defenses, and deferred ruling on defenses premised on limitations until trial.

The case then proceeded to a bench trial. At trial, the parties stipulated to several facts, including that New Century Mortgage paid Clarity Mortgage a " yield spread premium," which they defined as follows: " A yield premium or yield spread premium or yield rebate is a payment to the broker for selling a loan at an interest rate higher than market rates." On June

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10, 2009, the district court issued a careful, thoughtful opinion containing findings of fact and conclusions of law. The court found that the same loan was at issue in both the Good Faith Estimate and the closing documents, despite the ultimate discrepancy in principal amount due. The court thus concluded that the waiting periods prescribed by article XVI, section 50(a)(6)(M), began to run when the Cerdas submitted their application to Clarity Mortgage by telephone sometime prior to signing the Good Faith Estimate on May 15, 2002, and were thus met by the closing date of June 17, 2002. The court further found that the 3% cap on fees6 imposed by article XVI, section 50(a)(6)(E), had not been violated. The court found it undisputed that the Cerdas paid 3% in fees-the $10,694 broker origination fee, the $6 credit report fee, and the $325 appraisal fee. It found that other title charges and recording fees were offset by the $4,827.80 lender credit. In response to the Cerdas' arguments, the district court also found that the additional challenged payments did not count against the 3% cap: (1) the payment of $11,025 in discount points was prepayment of interest, not fees; and (2) the payment by New Century Mortgage of a $3,675 yield spread premium to Clarity Mortgage was not a payment by " the owner or the owner's spouse," as required to count for purposes of article XVI, section 50(a)(6)(E). The court also concluded that the loan did not violate article XVI, section 50(a)(6)(H), by securing property other than the homestead, and that the Cerdas' claims for damages failed due to the loan's compliance with the Texas Constitution. On June 24, 2009, the district court ordered that 2004-EQR1 and HomEq were entitled to foreclose, and it entered final judgment dismissing the Cerdas' claims.

The Cerdas timely appealed.


On appeal, the Cerdas press three arguments. First, they claim that the district court incorrectly determined that the waiting period began to run when they submitted a telephonic application. Second, they argue that the variable interest rate caused the loan payments not to be substantially equal. Finally, they argue that the discount points are properly characterized as fees that count against the 3% cap.7 In addition, the Cerdas request that we certify these issues to the Texas Supreme Court. We decline their request for certification and instead address each of their arguments in turn.8

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A. Legal Standards

We apply Texas substantive law and federal procedural law in this diversity action. See Foradori v. Harris, 523 F.3d 477, 486 (5th Cir.2008). We review the grant of summary judgment de novo, viewing the evidence in the light most favorable to the nonmoving party. Offshore Drilling Co. v. Gulf Copper & Mfg. Corp., 604 F.3d 221, 225 (5th Cir.2010). Following a bench trial, we review the district court's...

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