In Texas, the forced sale of a homestead is protected by both statute and the State Constitution, which prohibits foreclosure when a home-equity loan fails to include constitutionally mandated terms or conditions. Among these terms and conditions is that lenders that fail to meet their loan obligations may forfeit all principal and interest payments received from the borrower.

The Texas Supreme Court recently delivered an opinion on the issue of whether a lender violates the Texas Constitution, becoming liable for forfeiture of principal and interest, when the loan agreement incorporates the constitutionally mandated terms and conditions, but the lender fails to adhere. See Teresa Garofolo v. Ocwen Loan Servicing (Tex. May 20, 2016). In this case, the borrower used the lender’s failure to adhere to the terms of the lending agreement as a basis for suing for the return of all principal and interest on the loan which the borrower had already paid in full.

This was a bold move by the borrower and, although the Court ruled in favor of the lender in this case, it came at a high price. Had the lender paid closer attention to the terms of the agreement, this costly litigation could have been avoided. Borrowers are becoming more and more savvy as consumers; and with this, comes a greater risk of loss to lenders who breach their own lending agreements.