IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 09-50619

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

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 the Cerdas have failed to

show a violation of the Texas Constitution, and we affirm.

I. BACKGROUND

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

United States Court of Appeals

Fifth Circuit

F I L E D

July 22, 2010

Lyle W. Cayce

Clerk

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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, bearing a

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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. On May 15, 2002, the

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Cerdas signed the following documents: (1) the Good Faith Estimate; (2) a

Federal Truth-In-Lending Disclosure Statement; and (3) a Notice Concerning

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Extensions of Credit Defined by Section 50(a)(6), Article XVI, Texas

Constitution.

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A “good faith estimate” is “an estimate of settlement charges a borrower is likely to 1

incur, as a dollar amount, and related loan information, based upon common practice and

experience in the locality of the mortgaged property.” 24 C.F.R. § 3500.2; see generally 12

U.S.C. §§ 2601 et seq. (the Real Estate Settlement Procedures Act).

To fully amortize a 30-year loan with a principal amount of $344,000 and a fixed 2

interest rate of 8.5%, a borrower would need to make annual payments in excess of $31,000.

At the time the Cerdas sought refinancing through Clarity Mortgage, Mr. Cerda was 72 years

old and had retired from his job as a postal worker. At trial, counsel for the Cerdas indicated

that Mr. Cerda’s pension at the time of refinancing was $25,000 per year. Mr. Cerda testified

that he sought the cash at closing to allow him to make payments on the loan for the first

several months while he either sold the house or refinanced the loan.

 This document is prescribed by the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq.,

3

and its implementing regulations, 12 C.F.R. §§ 226.1 et seq.

The contents of the Notice Concerning Extensions of Credit are prescribed by article 4

XVI, section 50(g) of the Texas Constitution.

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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). They also executed a

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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 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

The URLA is a standardized loan application form developed by the Federal National 5

Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation

(Freddie Mac).

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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

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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 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 fees

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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

 The 3% cap on fees was $11,025 for the principal amount of $367,500. 6

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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.

II. DISCUSSION

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. In addition, the Cerdas request that we certify these issues

7

to the Texas Supreme Court. We decline their request for certification and

instead address each of their arguments in turn.

8

Originally, the Cerdas pressed a fourth argument, challenging the district court’s 7

denial of their motion to remand the action to state court on the basis of untimely removal.

However, approximately three weeks before oral argument, they voluntarily withdrew that

issue from their appeal. Accordingly, we do not address whether the district court erred in

denying the motion to remand. In addition, the Cerdas do not challenge the district court’s

conclusion that the loan did not violate article XVI, section 50(a)(6)(H), by securing property

other than the homestead, and 2004-EQR1 and HomEq have not cross-appealed the dismissal

of their counterclaim for fraud.

The dissent would certify the Cerdas’ second argument, relating to variable interest

8

rates and substantial equality of payments. As the dissent recognizes, the decision whether

to certify a question lies within our discretion. Patterson v. Mobil Oil Corp., 335 F.3d 476, 487

(5th Cir. 2003) (citing Nationwide Mut. Ins. Co. v. Unauthorized Practice of Law Comm., 283

F.3d 650, 656 (5th Cir. 2002)). In our view and as set out in detail infra, Texas law is

sufficiently clear to counsel against certification. See Patterson, 335 F.3d at 487 (denying

certification where, “[a]lthough the state law questions . . . [we]re important and complex, . . .

Texas law [wa]s sufficiently clear”).

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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 conclusions of law de novo and its factual findings for clear

error. Arete Partners, L.P. v. Gunnerman, 594 F.3d 390, 394 (5th Cir. 2010).

The legal questions in this case require interpretation of the Texas

Constitution. The Texas Supreme Court has set out the following approach to

constitutional construction:

When interpreting our state constitution, we rely heavily on

its literal text and must give effect to its plain language. We strive

to give constitutional provisions the effect their makers and

adopters intended. We construe constitutional provisions and

amendments that relate to the same subject matter together and

consider those amendments and provisions in light of each other.

And we strive to avoid a construction that renders any provision

meaningless or inoperative.

Doody v. Ameriquest Mortg. Co., 49 S.W.3d 342, 344 (Tex. 2001) (citations

omitted). “In construing a constitutional amendment, we may also consider its

legislative history.” Stringer v. Cendant Mortg. Corp., 23 S.W.3d 353, 355 (Tex.

2000) (citing TEX. GOV’T CODE § 311.023(3); Harris v. City of Fort Worth, 180

S.W.2d 131, 133 (Tex. 1944)).

B. Background of Texas Home Equity Loans

Home equity loans are of relatively recent vintage in Texas. The Texas

Supreme Court has explained:

For over 175 years, Texas has carefully protected the family

homestead from foreclosure by limiting the types of liens that can

be placed upon homestead property. Texas became the last state in

the nation to permit home-equity loans when constitutional

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amendments voted on by referendum took effect in 1997. Such

loans permit homeowners to use the equity in their home as

collateral to refinance the terms of prior debt and secure additional

loans at rates more favorable than those for consumer loans.

Although home-equity lending is now constitutionally permissible,

article XIV, section 50(a)(6) of the Texas Constitution still places a

number of limitations on such lending.

LaSalle Bank Nat’l Ass’n v. White, 246 S.W.3d 616, 618 (Tex. 2007) (per curiam).

Among the limitations placed on such lending is the requirement that lenders

forfeit all principal and interest if they fail to cure violations of their obligations.

See TEX. CONST. art. XVI, § 50(a)(6)(Q)(x). In addition, before issuing home

equity loans, lenders must provide borrowers with a notice, the content of which

is specified in article XVI, section 50(g).

Originally, no Texas administrative agency was empowered with rulemaking authority over the amendments. However, shortly after the amendment

was enacted, four Texas agencies charged with regulating entities that made

home equity loans issued an advisory publication entitled the REGULATORY

COMMENTARY ON EQUITY LENDING PROCEDURES (the “REGULATORY

COMMENTARY”). See Stringer, 23 S.W.3d at 357. The Texas Supreme Court has

indicated that the REGULATORY COMMENTARY is persuasive authority:

Although the commentary is advisory and not authoritative, it

represents four Texas administrative agencies’ interpretation of the

Home Equity Constitutional Amendment. These agencies are

responsible for regulating the entities that make home equity loans.

The Commentary’s purpose is to provide guidance to lenders and

consumers about the regulatory views on the meaning and effect of

article XVI, section 50.

Id. Subsequently, authority to issue binding rules was granted:

The Texas Constitution was amended again in 2003 to

authorize the legislature to delegate the authority to issue

interpretations of the home equity lending provisions . . . . Pursuant

to this amendment, the legislature delegated interpretive authority

over the home equity provisions to the [c]ommissions, and the

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[c]ommissions in turn adopted a number of regulations interpreting

the home equity provisions. The [c]ommissions’ interpretations are

subject to review under the [Texas] Administrative Procedure Act

(APA).

Tex. Bankers Ass’n v. Ass’n of Cmty. Orgs. for Reform Now (ACORN), 303 S.W.3d

404, 407–08 (Tex. App.—Austin 2010, pet. filed) (citations and footnote omitted)

(citing TEX. CONST. art. XVI, § 50(u)). However, the home equity loan

amendments do not apply retroactively, see Fix v. Flagstar Bank, FSB, 242

S.W.3d 147, 155–57 (Tex. App.—Fort Worth 2007, pet. denied), and a rule

promulgated under authority of those constitutional provisions provides safe

harbor to lenders only if the rule is in effect when the loan is made, see TEX.

CONST. art. XVI, § 50(u)(1). Thus, we apply the version of the Texas

Constitution that was in effect in 2002—when the Cerdas entered into the loan

with New Century Mortgage—and treat administrative interpretations as

persuasive authority.

C. Waiting Period

The Cerdas first argue that their loan did not comply with the mandatory

waiting periods prescribed by article XVI, section 50(a)(6)(M) and (g)(M). In

2002, § 50(a)(6)(M) provided:

The homestead of a family, or of a single adult person, shall be, and

is hereby protected from forced sale, for the payment of all debts

except for: . . . an extension of credit that: . . . is closed not before:

the 12th day after the later of the date that the owner of the

homestead submits an application to the lender for the extension of

credit or the date that the lender provides the owner a copy of the

notice prescribed by Subsection (g) of this section . . . .

TEX. CONST. art. XVI, § 50(a)(6)(M)(i) (2002) (emphasis added). At that time,

§ 50(g)(M) provided:

An extension of credit described by Subsection (a)(6) of this section

may be secured by a valid lien against homestead property if the

extension of credit is not closed before the 12th day after the lender

provides the owner with the following written notice on a separate

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instrument: . . . the loan may not close before 12 days after you

submit a written application to the lender or before 12 days after

you receive this notice, whichever is later . . . .

TEX. CONST. art. XVI, § 50(g)(M) (2002) (emphasis added). The italicized

9

language reveals a discrepancy between subsections (a)(6)(M) and (g)(M): the

former contemplates “an application” while the latter contemplates “a written

application.”

10

Whether the waiting period is triggered by any application or only a

written application will determine whether the 12-day waiting period was met

in this case. The Cerdas submitted a telephonic application prior to May 15,

2002. On May 15, 2002, they signed both the Good Faith Estimate and a Notice

Concerning Extensions of Credit Defined by Section 50(a)(6), Article XVI, Texas

Constitution—a notice specifying the requirement of “a written application.”

They submitted the URLA—their first and only written application—at the

closing on June 17, 2002. On appeal, the Cerdas do not contest that their

submission of a telephonic application and receipt of the notice prescribed by

§ 50(g) each occurred at least 12 days prior to closing. Instead, they argue that

the 12-day waiting period before closing could occur did not begin to run until

June 17, 2002, when they submitted a written application—the URLA—at the

closing itself. They claim, therefore, that the requirement of a 12-day waiting

period was simply not met.

In Stringer, the Texas Supreme Court was faced with a conflict between

provisions in § 50(a)(6) and (g), which it described as follows:

In the Texas Constitution, the notice required by § 50(g) is written entirely in capital 9

letters. To more easily compare the terms of §§ 50(a)(6) and (g), we have normalized the

typeface in the notice language.

The discrepancy has since been eliminated, as both provisions have been amended 10

so that the version presently in force refers simply to the submission of “a loan application.”

TEX. CONST. art. XVI, § 50(a)(6)(M) & (g)(M).

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Section 50(a)(6) allows a home-equity lender to require the

borrower to use loan proceeds to pay: (1) debts secured by the

homestead; and (2) non-homestead debts to third-party creditors.

On the other hand, section 50(g) provides that a home-equity lender

cannot require a borrower to apply loan proceeds to another debt

that is not secured by the home or to another debt to the same

lender.

We agree . . . that the plain language of section 50(a)(6)(Q)(i)

and section 50(g)(Q)(1) conflict. And, there is nothing in the

amendment, its legislative history, or the parties’ arguments that

hints at a legislative reason for the conflict other than speculation

that the difference in the language arises from an oversight.

23 S.W.3d at 356 (citations omitted). The court agreed with the view of the

REGULATORY COMMENTARY that “section 50(a)(6)(Q)(i) provides the substantive

rights and obligations of lenders and borrowers while section 50(g)(Q)(1)

provides only the language for the mandatory notice to borrowers.” Id. It then

expressly held that “section 50(a)(6) and the loan documents themselves provide

the substantive rights and obligations of the lenders and borrowers” and “section

50(g)’s notice provisions do not independently establish rights or obligations for

the extension of credit.” Id. at 357. Accordingly, under Stringer, we must look

to § 50(a)(6)(M)(i) for the Cerdas’ substantive rights relating to the 12-day

waiting period. Under that provision, the waiting period was triggered and

began to run when the Cerdas “submit[ted] an application.” TEX. CONST. art.

XVI, § 50(a)(6)(M)(i) (2002). The question remains, however, whether

submission of the telephonic application constituted the submission of an

application within the meaning of § 50(a)(6)(M)(i).

The Cerdas assert that the term “written application” in § 50(g)(M)(1) does

not contradict the term “application” in § 50(a)(6)(M)(i) but instead informs its

meaning. We disagree. The Texas Supreme Court has explained that, in

interpreting the meaning of a constitutional provision, we must “rely heavily on

its literal text and . . . give effect to its plain language.” Stringer, 23 S.W.3d at

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355 (citing cases). Under this approach, it is clear that the term “written

application” refers to a subset of “application[s].” Because the broad term

“application” is not restricted by the word “written” in § 50(a)(6)(M)(i), we

interpret it to encompass oral applications, including telephonic applications

such as the one submitted by the Cerdas. This is the approach adopted by the

REGULATORY COMMENTARY. See REGULATORY COMMENTARY 7 (“An application

for a loan may be given orally or electronically and does not have to be in

writing.”).

Our interpretation is consistent with the version of § 50(a)(6)(M)(i)

currently in force, which was amended in 2007 to refer generally to a “loan

application.” TEX. CONST. art. XVI, § 50(a)(6)(M)(i); see also 7 TEX. ADMIN. CODE

§ 153.12(2) (“A loan application may be given orally or electronically.”). The

legislative history behind that amendment reveals the broad reach of that term:

Section 50(a)(6)(M)(i) was amended to change the phrase, “submits

an application to the lender,” to “submits the loan application to the

lender.” . . . In passing the joint resolution proposing the 2007

constitutional amendment, however, the legislature recorded a

“Statement of Legislative Intent” in the House Journal, in which the

author of the resolution states, “The homeowner may submit a

written, electronic, or oral application.” H.J. of Tex., 80th Leg., R.S.

2432 (2007) (emphasis added); see also Tex. H.R.J. Res. 72, 80th

Leg., R.S., 2007 Tex. Gen. Laws 6138.

ACORN, 303 S.W.3d at 413. The ACORN court concluded that the

administrative “interpretation of ‘application’ to include oral applications is

consistent with the plain language of the constitution as it is currently written.”

Id. at 414. We agree that the plain meaning of the term “loan application”

includes oral applications. Similarly, we see nothing in the term “application”

that would operate to exclude oral applications.

The Cerdas argue in the alternative that the telephonic application did not

trigger the 12-day waiting period because it was an application for a $344,000

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loan that was never made and not for the $367,500 loan on which they

ultimately closed. Following the bench trial, the district court expressly rejected

that contention, stating that “[w]hile there is evidence to suggest that [the

Cerdas] and Clarity [Mortgage] originally discussed a loan with a principal of

$344,000 and $10,600 cash back to the Cerdas, . . . the Court concludes that this

was part of the same loan transaction as the final loan for $367,500, and thus

was sufficient to begin the 12-day period.” In reaching this finding of fact, the

court reasoned that a loan of $344,000 would have been unable to satisfy both

the Ameriquest Mortgage loan amount and the property taxes that were owed,

so the parties negotiated an increase in the principal amount of the loan. Thus,

even though the terms of the New Century Mortgage note ultimately differed

from those shown in the Good Faith Estimate, the same loan was contemplated

by both documents. We agree with 2004-EQR1 and HomEq that this “account

of the evidence is plausible in light of the record viewed in its entirety,”

Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985), and, accordingly, is

not clearly erroneous.

D. Substantial Equality

The Cerdas next argue that the variable interest rate of the loan violated

the constitutional requirement that scheduled payments be “substantially equal”

in amount. This claim involves two distinct constitutional provisions, one

requiring substantial equality between payments and another authorizing

variable rates of interest. Section 50(a)(6)(L) imposes the requirement of

substantial equality, stating that a home equity loan must be “scheduled to be

repaid in substantially equal successive monthly installments beginning no later

than two months from the date the extension of credit is made, each of which

equals or exceeds the amount of accrued interest as of the date of the scheduled

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installment.” TEX. CONST. art. XVI, § 50(a)(6)(L) (2002). Section 50(a)(6)(O),

11

in contrast, authorizes variable rates of interest by providing that a home equity

loan may “permit[] a lender to contract for and receive any fixed or variable rate

of interest authorized under statute.” TEX. CONST. art. XVI, § 50(a)(6)(O)

(2002).

12

As the parties recognize, these two provisions exist in some tension with

each other. The parties therefore offer divergent constructions that seek to

“avoid . . . render[ing] [either] provision meaningless or inoperative.” Stringer,

23 S.W.3d at 355 (citing Hanson v. Jordan, 198 S.W.2d 262, 263 (Tex. 1946)).

The Cerdas press a construction that would convert a variable rate of interest

into a variable term: an increase in the interest rate must be accompanied by an

extension of the term of the loan, and vice versa, for scheduled installments to

remain “substantially equal.” 2004-EQR1 and HomEq dispute that construction,

urging instead that the requirement of substantial equality exists to ensure that

home equity loans are fully amortized and that balloon payments are

13 14

prohibited. The district court accepted the interpretation offered by 2004-EQR1

and HomEq, and we do as well.

The version of § 50(a)(6)(L) currently in force changes only the requirement that the 11

installments be “monthly.” See TEX. CONST. art. XVI, § 50(a)(6)(L)(i) (stating that scheduled

repayments must be “in substantially equal successive periodic installments, not more often

than every 14 days and not less often than monthly . . .”).

Section 50(a)(6)(O) has not been amended since the time the Cerdas entered into the 12

loan.

 When a loan is fully amortized, the installments suffice to extinguish the principal 13

amount and all accrued interest over the life of the loan.

A “balloon note” is “[a] note requiring small periodic payments but a very large final

14

payment.” BLACK’S LAW DICTIONARY 1162 (9th ed. 2009). If, for example, a loan is amortized

over a 30-year period but has only a 15-year term, a substantial amount of principal will

remain at the end of the 15th year. In such a case, the lender will require that the principal

be paid off in a lump sum with the final payment. The final payment, called a “balloon

payment,” is “much larger than the preceding regular payments and . . . discharges the

principal balance of the loan.” Id. at 1243.

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The opinion of the REGULATORY COMMENTARY supports the requirement

of full amortization and the prohibition on balloon payments:

The authorization of a variable interest rate is ambiguous when

read in connection with the provision relating to substantially equal

successive monthly installments. . . . [A]n equity loan providing in

accordance with applicable law for an interest rate that varies from

time to time may provide for a payment amount that varies from

time to time, assuming that the loan is regularly amortizing and

that the rate adjusts on a regular basis, such as annually. . . . The

amount of the payment should not change more frequently than the

interest rate adjustment. The scheduled payment amount between

each payment change date should be substantially equal and the

amount of the payment should equal or exceed the amount of

interest scheduled to accrue between each payment date.

. . . An equity loan must be structured in a way such that the

transaction regularly amortizes, contributes to amortization of

principal, and does not result in a balloon payment.

REGULATORY COMMENTARY 8 (discussing TEX.CONST. art. XVI, § 50(a)(6)(O)); see

also id. at 7 (“[T]o have substantially equal installments would require that

some amount of principal must be reduced with each installment. This

effectively precludes the permissibility of balloon payments.” (discussing TEX.

CONST. art. XVI, § 50(a)(6)(L))). This construction gives effect to both

§ 50(a)(6)(L) and (a)(6)(O) while still offering three forms of protection to the

borrower: (1) if all payments are made according to schedule, the loan will be

fully extinguished; (2) at the end of the loan’s term, the borrower will not have

to worry about obtaining a second loan to satisfy the balloon payment; and (3)

the borrower will not be confronted with large month-to-month variations in

payment amount. In contrast, the Cerdas’ interpretation would effectively

provide for a loan with a variable term, not a variable rate, and § 50(a)(6)(O)

speaks of variable rates. Such an approach would also require payments to be

exactly equal rather than substantially equal—a requirement not found in the

text of § 50(a)(6).

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In addition, the legislative history of § 50(a)(6)—or more precisely, the lack

thereof—supports adopting the REGULATORYCOMMENTARY’s view. In 2004, rules

were issued under the authority of § 50(u). The rule interpreting § 50(a)(6)(O)

provides that “[t]he lender may contract to vary the scheduled installment

amount when the interest rate adjusts on a variable rate equity loan.” 7 TEX.

ADMIN.CODE § 153.16(3). Similarly, the rule interpreting § 50(a)(6)(L) provides

15

 The full text of § 153.16 provides:

15

A lender may contract for and receive any fixed or variable rate of interest

authorized under statute.

(1) An equity loan that provides for interest must comply with

constitutional and applicable law. Interest rates on certain first

mortgages are not limited on loans subject to the federal Depository

Institutions Deregulation and Monetary Control Act of 1980 and the

Alternative Mortgage Transaction Parity Act. Chapter 342 of the Texas

Finance Code provides for a maximum rate on certain secondary

mortgage loans. Chapter 124 of the Texas Finance Code and federal law

provide for maximum rates on certain mortgage loans made by credit

unions. These statutes operate in conjunction with Section 50(a) and

other constitutional sections.

(2) An equity loan must amortize and contribute to amortization of

principal.

(3) The lender may contract to vary the scheduled installment amount

when the interest rate adjusts on a variable rate equity loan. A

variable-rate loan is a mortgage in which the lender, by contract, can

adjust the mortgage’s interest rate after closing in accordance with an

external index.

(4) The scheduled installment amounts of a variable rate equity loan

must be:

(A) substantially equal between each interest rate adjustment;

and

(B) sufficient to cover at least the amount of interest scheduled

to accrue between each payment date and a portion of the

principal.

(5) An equity loan agreement may contain an adjustable rate of interest

that provides a maximum fixed rate of interest pursuant to a schedule

of steps or tiered rates or provides a lower initial interest rate through

the use of a discounted rate at the beginning of the loan.

7 TEX. ADMIN. CODE § 153.16. This rule has not been amended since it became effective in

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that “[f]or a closed-end equity loan to have substantially equal successive

periodic installments, some amount of principal must be reduced with each

installment. This requirement prohibits balloon payments.” 7 TEX. ADMIN.

CODE § 153.11(3). While the constitutional provisions have been amended

16

since 2004, there has been no proposal to amend § 50(a)(6)(L) and (a)(6)(O) to

alter or undo the rules’ interpretations of those provisions. This is especially

significant in light of the fact that the advisory REGULATORY COMMENTARY

endorsed the same construction for nearly six years prior to these rules taking

effect. We thus agree with the district court that “the agencies’ interpretation

is consistent with the legislative history,” and we affirm summary judgment for

2004.

 The full text of § 153.11 provides:

16

Unless an equity loan is a home equity line of credit under Section 50(t), the

loan must be scheduled to be repaid in substantially equal successive periodic

installments, not more often than every 14 days and not less often than

monthly, beginning no later than two months from the date the extension of

credit is made, each of which equals or exceeds the amount of accrued interest

as of the date of the scheduled installment.

(1) The two month time period contained in Section 50(a)(6)(L)(i) begins

on the date of closing.

(2) For purposes of Section 50(a)(6)(L)(i), a month is the period from a

date in a month to the corresponding date in the succeeding month. For

example, if a home equity loan closes on March 1, the first installment

must be due no later than May 1. If the succeeding month does not have

a corresponding date, the period ends on the last day of the succeeding

month. For example, if a home equity loan closes on July 31, the first

installment must be due no later than September 30.

(3) For a closed-end equity loan to have substantially equal successive

periodic installments, some amount of principal must be reduced with

each installment. This requirement prohibits balloon payments.

(4) Section 50(a)(6)(L)(i) does not preclude a lender’s recovery of

payments as necessary for other amounts such as taxes, adverse liens,

insurance premiums, collection costs, and similar items.

7 TEX. ADMIN. CODE § 153.11. This provision was amended, effective in 2008. The original

rule lacked the language currently contained in subsections (1) and (2). See 29 Tex. Reg. 84

(2004) (7 TEX. ADMIN. CODE § 153.11).

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2004-EQR1 and HomEq on this claim.

17

E. Fees Cap

Finally, the Cerdas claim that the loan required them to pay fees in excess

of the 3% cap imposed by the Texas Constitution. The relevant provision

mandates that a home equity loan must:

not require the owner or the owner’s spouse to pay, in addition to

any interest, fees to any person that are necessary to originate,

evaluate, maintain, record, insure, or service the extension of credit

that exceed, in the aggregate, three percent of the original principal

amount of the extension of credit.

TEX. CONST. art. XVI, § 50(a)(6)(E) (2002). To support their claim that they

18

were charged fees in excess of 3%—which the parties agree is $11,025 for the

loan—the Cerdas direct us to a settlement statement on a form HUD-1 (the

“HUD-1”) that they signed at the closing on June 17, 2002.

The settlement charges listed on the HUD-1 are arranged within four

distinct categories. Under “Items Payable in Connection with Loan,” six items

are listed: (1) a “loan origination fee” of $10,694 to Clarity Mortgage; (2) a “loan

discount” of $11,025 to New Century Mortgage; (3) an “appraisal fee” of $325; (4)

a “credit report” of $6 to Clarity Mortgage; (5) a “lender credit” of $4,827.80 from

New Century Mortgage; and (6) a “yield spread preium [sic]” of $3,675 to Clarity

Mortgage. Under “Items Required by Lender to Be Paid in Advance,” an item

of $905.20 is listed for “interest from 6/21/02 to 7/1/02.” Under “Title Charges,”

The dissent suggests that, in light of the tension between §§ 50(a)(6)(L) and (a)(6)(O)

17

and the dangers arising from “payment shock,” we should certify this issue to the Texas

Supreme Court for resolution rather than reject the variable-term theory pursued by the

Cerdas. Although the danger to a homeowner arising from a sudden large change in the

interest rate is real, we do not believe that it would cause the Texas Supreme Court to resolve

the tension in a manner contrary to that set forth by the REGULATORY COMMENTARY and the

current regulations.

 There have been no subsequent amendments to § 50(a)(6)(E). 18

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several items, totaling $3,242.72, are listed as paid to “Netco.” Finally, under

19

“Government Recording and Transfer Charges,” a $69 item appears for

“recording deed” and “mtg releases.” In total, the HUD-1 lists settlement

charges of $21,114.12.

20

The district court held—and the parties do not dispute—that three of these

items count toward the 3% cap as fees that the Cerdas were required to pay: the

$10,694 loan origination fee paid to Clarity Mortgage, the $6 credit report fee

paid to Clarity Mortgage, and the $325 appraisal fee paid to an unknown

“appraiser.” These amounts total $11,025—exactly 3% of the loan’s principal

amount of $367,500. In addition, the Cerdas were required to pay title charges

and recording fees totaling $3,311.72—bringing the fees to $14,336.72. However,

this amount was offset by the $4,827.80 lender credit, lowering the total to

$9,508.92. At issue are the remaining two items: the $3,675 yield spread

premium and the $11,025 in discount points. The Cerdas argue that the district

court failed to properly characterize those items as fees for purposes of

§ 50(a)(6)(E). Specifically, they claim that the yield spread premium must be

factored into the other fees Clarity Mortgage received, resulting in a total broker

fee of $14,375, or 4% of the principal amount of the loan. They also claim that

the $11,025 in discount points were not legitimate but were instead diverted to

the lender credit, which was used to offset non-interest fees. 2004-EQR1 and

HomEq respond that the district court correctly determined that neither the

yield spread premium nor the discount points counted toward the 3% cap.

These items are listed as: (1) “Title Insurance” in the amount of $2,619; (2) 19

“EPA/ARM” in the amount of $70; (3) “TAX DEL” in the amount of $25; (4) “TAX CERT” in the

amount of $41.82; (5) “ESCROW FEE” in the amount of $225; and (6) “T-42" in the amount of

$261.90.

This amount excludes both the $325 appraisal fee and the $3,675 yield spread

20

premium. Including the appraisal fee yields a total settlement charge of $21,439.12, while

including both items yields a total settlement charge of $25,114.12.

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1. Yield Spread Premium

We have previously addressed whether a yield spread premium constitutes

a fee that counts against the 3% cap imposed by § 50(a)(6)(E). In Maluski v. US

Bank NA, we addressed a borrower’s claim that “a yield spread premium was

paid outside of closing by the lender to the mortgage broker” and that the “fee

was ultimately passed on to him.” 349 F. App’x 971, 973 (5th Cir. 2009) (per

curiam). Following the Texas Supreme Court’s directive that, in interpreting the

Texas Constitution, “‘we rely heavily on its literal text and we must give effect

to its plain language,’” id. (alteration omitted) (quoting Doody, 49 S.W.3d at 344),

we recognized that “[t]he literal text of the Texas [C]onstitution protects the

‘owner or the owner’s spouse’ from paying the prohibited fees,” id. (quoting TEX.

CONST. art. XVI, § 50(a)(6)(E)). We then reasoned that because the yield spread

premium was paid to the broker by the lender and not by the owner or the

owner’s spouse, it was not a fee within the meaning of § 50(a)(6)(E). Id. That

reasoning applied even if the lender “ultimately recoup[ed] the payment due to

[the borrower] paying a higher interest rate over the life of the loan” because

such an “indirect payment is not contemplated by a plain reading of the state

constitution.” Id. (citing Bjustrom v. Trust One Mortg. Corp., 322 F.3d 1201,

1205 (9th Cir. 2003) (reaching the same result under a plain reading of the

Federal Housing Administration’s regulations)).

We find Maluski’s reasoning persuasive, and we hold that the yield spread

premium paid by New Century Mortgage to Clarity Mortgage was not a fee that

the Cerdas were required to pay to originate the loan. Accordingly, the district

21

court did not err in excluding the yield spread premium from the 3% cap imposed

by § 50(a)(6)(E).

The parties in this case stipulated that a “yield spread premium . . . is a payment to 21

the broker for selling a loan at an interest rate higher than market rates” and that “New

Century Mortgage Corp.[] paid . . . Clarity Mortgage Services[] a 1% yield premium of $3,675.”

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2. Discount Points

The Cerdas also challenge the district court’s finding that the $11,025 in

discount points was appropriately deemed interest rather than fees.

22

Essentially, they claim that “the lender purportedly charged $11,025 for discount

points, but most of the money was used to pay the non-interest fees” and, thus,

“[t]he 3% charge for discount points is a transparent attempt to evade the 3%

closing cost limit.”

In determining whether discount points are properly characterized as

interest or as fees counting against the 3% cap, we are without the benefit of

guidance from the Texas Supreme Court on the matter. In this diversity case,

because “no state court decisions control, we must make an ‘Erie guess’ as to how

the Texas Supreme Court would apply state law.” Beavers v. Metro. Life Ins. Co.,

566 F.3d 436, 439 (5th Cir. 2009) (quoting Travelers Cas. & Sur. Co. of Am. v.

Ernst & Young LLP, 542 F.3d 475, 483 (5th Cir. 2008)). “In making an Erie

guess, we defer to intermediate state appellate court decisions, unless convinced

by other persuasive data that the higher court of the state would decide

otherwise.” Mem’l Hermann Healthcare Sys. Inc. v. Eurocopter Deutschland,

GmbH, 524 F.3d 676, 678 (5th Cir. 2008) (internal quotation marks omitted)

(quoting Herrmann Holdings Ltd. v. Lucent Techs., Inc., 302 F.3d 552, 558 (5th

Cir. 2002)).

There are two conflicting decisions by Texas intermediate courts regarding

the proper definition of “interest” for purposes of § 50(a)(6)(E) and whether

discount points fall within that definition. In Tarver v. Sebring Capital Credit

Corp., the court addressed the borrowers’ claims that “a liberal interpretation

Discount “[p]oints are commonly charged as an added compensation to the lender in 22

exchange for a lower interest rate.” Tarver v. Sebring Capital Credit Corp., 69 S.W.3d 708,

709 (Tex. App.—Waco 2002, no pet.); accord ACORN, 303 S.W.3d at 412 n.10 (noting that

discount points are “charged by the lender in exchange for a lower interest rate”).

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of section 50(a)(6)(E) should lead to the conclusion that points are ‘fees’;

otherwise, lenders could disguise many ‘fees’ as points and circumvent the

three-percent rule.” 69 S.W.3d at 711. The Tarver court first noted that

points—like interest—“are calculated as a percent of the principal.” Id. (“The

difference is that points are calculated once on the original principal balance,

whereas interest is calculated monthly on a decreasing principal balance. In

either case, there is a percent charged in relation to the principal balance.”).

However, the court did not rely solely on that analogy and instead looked to a

variety of “statutory and administrative definitions of and references to ‘interest’

[that] either expressly or impliedly include[d] points.” Id. at 712. This

23

included the opinion of the REGULATORY COMMENTARY, which states:

A borrower may not be required to pay fees, in addition to any

interest, in excess of three percent of the principal amount. The

language specifically excludes interest from the limitation. The

word “interest” means interest as defined in the Texas Credit Title

and as interpreted by the courts of the state of Texas. Additionally,

charges that constitute interest under the law, including, for

example, points, are not fees subject to the three percent limit. Fees

that are required to be paid and that are not interest are subject to

the three percent limitation. There is no restriction on a lender

absorbing costs that might otherwise be fees and, therefore, covered

by the fee limitation.

24

REGULATORY COMMENTARY 3 (emphasis added) (discussing § 50(a)(6)(E)). The

25

The sources cited by the Tarver court included provisions relating to bank loans

23

under TEXAS FINANCE CODE ANN. § 34.203, interest rates and usury under TEXAS FINANCE

CODE ANN. § 301.002(a)(4), consumer loans under what is currently 7 TEXAS ADMINISTRATIVE

CODE § 83.102(20), secondary loans under what is currently 7 TEXAS ADMINISTRATIVE CODE

§ 83.701(b), and usury under what is currently 7 TEXAS ADMINISTRATIVE CODE § 83.707(f). See

Tarver, 69 S.W.3d at 712.

We note that the final sentence of the above-quoted language expressly endorses the 24

use of lender credits such as the one New Century Mortgage issued to the Cerdas.

The current version of the regulations promulgated under § 50(u) provide that the 25

word “interest” means “interest as defined in the Texas Finance Code § 301.002[a](4) and as

interpreted by the courts.” 7 TEX. ADMIN. CODE § 153.1(11). Section 301.002(a)(4) of the

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Tarver court then concluded that “the plain language of [§ 50(a)(6)(E)], as

interpreted by reference to Texas statutes and administrative regulations,”

compelled the “conclu[sion] that points are not ‘fees’ . . . because they are not

charged to ‘originate, evaluate, maintain, record, insure, or service the extension

of credit.’” 69 S.W.3d at 712 (quoting TEX. CONST. art. XVI, § 50(a)(6)(E)).

More recently, however, another Texas intermediate court has disagreed.

In ACORN, the court found that, “[g]iven the inherent differences between the

consumer-protection mechanisms of the usury statutes, which require a broad

definition of interest, and the protective purposes of the home equity fee cap, use

of the usury definition of interest for purposes of the fee cap fails to preserve the

legislative intent” of § 50(a)(6)(E). 303 S.W.3d at 410. The ACORN court

reasoned that “[t]he plain language of [§ 50(a)(6)(E)] creates a three-percent cap

on fees other than interest in the context of a home equity loan,” and the

administrative “interpretation, which classifies fees charged by the lender as

interest, essentially renders this cap meaningless.” Id. at 412. Accordingly, the

ACORN court affirmed the trial court’s judgment invalidating the

administrative rules to the extent that they used the broader definition of

interest in the usury context. Id.

We are persuaded that the Texas Supreme Court, if faced with a choice

between the approaches to defining “interest” in Tarver and in ACORN, would

follow the Tarver court’s approach. The Tarver court’s approach is supported by

numerous current regulations as well as the REGULATORY COMMENTARY. It also

TEXAS FINANCE CODE provides the following definition of “interest”:

“Interest” means compensation for the use, forbearance, or detention of money. 

The term does not include time price differential, regardless of how it is

denominated. The term does not include compensation or other amounts that

are determined or stated by this code or other applicable law not to constitute

interest or that are permitted to be contracted for, charged, or received in

addition to interest in connection with an extension of credit.

TEX. FIN. CODE ANN. § 301.002(a)(4) (West 2006).

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has the advantage of providing lenders and borrowers with a consistent and

straightforward definition of “interest,” rather than one that varies depending

on the nature of the underlying loan. While the ACORN court was

26

appropriately concerned with ensuring that the 3% cap adequately protected

consumers, we disagree that the Tarver approach “essentially renders this cap

meaningless.” Id. A broad definition of “interest” that includes discount points

does not result in an absence of consumer protection: Characterizing discount

points as interest rather than fees would not give lenders carte blanche to charge

exorbitant fees through the guise of discount points precisely because the

discount points would then be characterized as interest—and thus subject to the

consumer-protection provisions of the usury laws. Moreover, the ACORN court,

while finding the usury definition of “interest” incompatible with the “plain

language” of § 50(a)(6)(E), failed to suggest any viable alternative definition. See

id. at 412 n.10 (“[W]e are not in the position to provide a substitute definition of

interest or to definitively categorize ‘discount points,’ ‘origination points,’ or any

other charges that might be imposed by a lender as either ‘interest’ or ‘fees.’”).

Following Tarver, which endorsed the approach commended by the REGULATORY

COMMENTARY, we conclude that the district court correctly found that the

discount points involved in the Cerdas’ loan were interest that did not count

against the 3% cap in § 50(a)(6)(E).

Even assuming, arguendo, that the Texas Supreme Court would adopt the

ACORN court’s approach and impose a narrower definition of “interest” than the

regulations provide, we would still find no error in the district court’s conclusion.

The ACORN court noted that “true ‘discount points,’ charged by the lender in

It is also possible that applying both a broad and a narrow definition of “interest” in 26

a single loan transaction might lead to the result that a particular settlement charge item

would be counted against the lender both as “interest” under the usury laws and as “fees”

under § 50(a)(6)(E).

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exchange for a lower interest rate, should qualify as interest.” Id. at 412 n.10.

Here, the Cerdas have offered two reasons why the discount points in this case

are not “true” discount points. First, they urge that it would be inconsistent for

a lender to pay a broker a yield spread premium for selling a loan with an abovemarket interest rate while simultaneously charging discount points that reduce

the interest rate. Second, they suggest that the lender credit—which was used

to offset non-interest fees—was paid directly out of the funds set aside as

discount points; accordingly, they argue, we should treat the discount points not

as interest but instead as non-interest fees. However, neither of these

contentions can overcome the district court’s factual finding—which we review

for clear error—that the Cerdas “have not shown by a preponderance of the

evidence, or in fact by any evidence, that the 3% paid by the Cerdas in loan

discount fees was not a legitimate discount point fee.”

Regarding the presence of the yield spread premium, it is not implausible

that a yield spread premium and the payment of discount points could coexist

within the same loan transaction. A yield spread premium, as stipulated by the

parties, is “a payment to the broker for selling a loan at an interest rate higher

than market rates.” Nothing in this definition precludes the borrower from

negotiating with the lender to reduce that interest rate by paying up-front

discount points. There is nothing inherently illogical about a lender rewarding

a broker for selling a loan with a higher interest rate but being willing to accept

some of that interest in advance. At the very least, we see no clear error in the

district court’s finding that the Cerdas’ arguments, “based on an apparent

inconsistency between payment of discount points by the borrower and the

payment of a yield premium/rebate by the lender and an allegedly excessive fee

to the broker,” were “speculative.”

With respect to the lender credit of $4,827.80, we note that the

REGULATORY COMMENTARY expressly provides that “[t]here is no restriction on

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a lender absorbing costs that might otherwise be fees and, therefore, covered by

the fee limitation.” REGULATORY COMMENTARY 3 (discussing § 50(a)(6)(E)).

Additionally, we addressed this situation in Maluski, where we affirmed the

grant of summary judgment to the lender despite the borrower’s argument that

the lender was merely shifting numbers from one column to another to avoid the

3% cap:

The HUD-1 statement shows $5,557.95 in fees that were subject to

the three percent cap. It also shows, however, that Maluski was

given a closing cost credit of $2,070.45, meaning that the total fees

were actually $3,487.50, exactly three percent of the principal

amount. Maluski argues that U.S. Bank admitted that it lacked

evidence of how the credit was applied, and he speculates that a

portion of the credit could have been applied to interest points

charged at closing, which were not subject to the three percent cap.

We are unpersuaded. The settlement statement clearly shows that

Maluski was not actually charged fees of more than three percent

of the principal loan. His unsubstantiated argument of how the

credit theoretically could have been manipulated is insufficient to

defeat summary judgment.

349 F. App’x at 972–73. We accord the district court greater deference here

because it sat as the trier of fact in a bench trial, see Arete Partners, 594 F.3d at

394, and we discern no clear error in the district court’s finding that the discount

points were the legitimate prepayment of interest.

III. CONCLUSION

The Cerdas have failed to demonstrate that their home equity loan

violated the provisions of article XVI, section 50(a)(6) of the Texas Constitution,

and the loan is thus not subject to forfeiture under article XVI, section

50(a)(6)(Q)(x). Accordingly, the judgment of the district court is AFFIRMED.

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HAYNES, Circuit Judge, concurring and dissenting:

I concur in the majority’s opinion with the exception of section II.D. As to

this subject – the meaning of “substantially equal” – I respectfully dissent from

the decision not to certify this question to the Texas Supreme Court. Under

Texas law, “[t]he Supreme Court of Texas may answer questions of law certified

to it by any federal appellate court if the certifying court is presented with

determinative questions of Texas law having no controlling Supreme Court

precedent.” TEX. R. APP. P. 58.1; see also TEX. CONST. art. V, § 3-c(a). Our court

should certify the question of whether sections 50(a)(6)(L) and 50(a)(6)(O) allow

as great a variation in monthly payments as the Cerdas’ loan provides.

Great care is required when we interpret article XVI, section 50 of the

Texas Constitution because of the harsh consequences that follow from its

violation, see TEX. CONST. art. XVI, § 50(a)(6)(Q)(x), and the broad reach of the

section, see, e.g., James W. Paulsen, Acquiring Separate Property on Credit: A

Review and Proposed Revision of Texas Marital Property Doctrine, 37 ST.MARY’S

L.J. 675, 679–80 & nn. 12–13 (2006) (reviewing government estimates of scope

of home equity lending following the section 50 amendment and concluding that

as many as fifteen percent of Texas homeowners have loans governed by section

50(a)). In the past, we have not hesitated to certify questions concerning the

proper interpretation of this provision. For example, in 1999, in Stringer v.

Cendant Mortgage Corp., 199 F.3d 190, 191–92 (5th Cir. 1999), we certified the

question of whether, where the notice provision of the amendment conflicted

with the substantive rights provision on the question, a lender could permissibly

require a borrower to pay off third-party debt with the proceeds of the loan. A

few months later, the Texas Supreme Court explained that the substantive

provisions control over the notice provisions. Stringer v. Cendant Mortgage

Corp., 23 S.W.3d 353, 357-58 (Tex. 2000). In 2001, in Doody v. Ameriquest

Mortgage Co., 242 F.3d 286, 290 (5th Cir. 2001), we certified the question of

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whether a lender may bring itself into compliance with the three percent fee cap

of section 50(a)(6)(E) by subsequently refunding the excess portion of the fee to

the borrower. Later that year, the Texas Supreme Court answered that a timely

refund cures the violation. Doody v. Ameriquest Mortgage Co., 49 S.W.3d 342,

345–47 (Tex. 2001). Most recently, in 2005, in Norris v. Thomas (In re Norris),

413 F.3d 526, 530 (5th Cir. 2005), we certified the question of whether a

houseboat is a homestead under sections 50 and 51 of article XVI. The Texas

Supreme Court responded that a boat could not be a homestead. Norris v.

Thomas, 215 S.W.3d 851, 852 (Tex. 2007). Indeed, certification from this court

has generated much of the Texas Supreme Court’s jurisprudence concerning

section 50.

The majority’s holding on this issue in this case has the potential for a

much greater impact than those issues presented in Stringer, Doody, or Norris.

In contrast to those cases, this case effectively adjudicates the validity of

thousands of adjustable-rate home equity loans originated between at least the

1997 enactment of the amendment and the 2004 effective date of the regulations

that now provide a safe harbor.

Certification is, of course, discretionary both by our court in certifying and

the Texas Supreme Court in accepting the question. Patterson v. Mobil Oil

Corp., 335 F.3d 476, 487 (5th Cir. 2003); TEX. R. APP. P. 58.1. Undoubtedly,

construction of a state constitution in a case of first impression is the type of

matter appropriate for certification. In such an area, we have generally declined

to exercise that discretion only where the controlling state law issues presented

by the case are, though “important and complex, . . . sufficiently clear.” Id. That

is patently not the case here. Rather, we are faced with two provisions of the

Texas Constitution that four Texas administrative agencies acknowledged are

“ambiguous” when read together. See REGULATORY COMMENTARY 8.

The majority resolves this ambiguity by relying upon prior non-binding

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agency determinations. Admittedly, however, we have no case law whatsoever

construing these sections or resolving this ambiguity. Were the provisions in

question clear, I would have no hesitation in following the agency determination

which, prior to 2004, is entitled to some, though not controlling, deference. See

Tex. Bankers Ass’n v. Ass’n of Cmty. Orgs. for Reform Now (ACORN), 303 S.W.3d

404, 408–09 (Tex. App.—Austin 2010, pet. filed) (holding that the

constitutionally-authorized regulatory interpretations of article XVI, section 50

are “‘entitled to serious consideration, so long as the construction is reasonable

and does not contradict the plain language of the statute’” (quoting Tarrant

Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993)); Stringer, 23 S.W.3d

at 357 (characterizing the Regulatory Commentary as “advisory and not

authoritative” but looking to it as “support[ing]” the court’s conclusion).

However, here, the construction of “substantially equal” payments to mean only

“all payments that are not balloon payments” is arguably contrary to the plain

language of the section. See, e.g., Moore, 845 S.W.2d at 823; see also LaSalle

Bank Nat’l Ass’n v. White, 246 S.W.3d 616, 619 (Tex. 2007) (“When interpreting

the Texas Constitution, we ‘rely heavily on its literal text and must give effect

to its plain language.’” (quoting Stringer, 23 S.W.3d at 355)).

The majority’s approach is certainly plausible. But section 50(a)(6)(L) can

easily be read to bar more than simply balloon payments: indeed, the language

is much broader than the straightforward 1994 federal statutory language that

does expressly prohibit only balloon payments. Compare TEX. CONST. art. XVI,

§ 50(a)(6)(L) with 15 U.S.C. § 1639(e) (“No balloon payments. [Certain]

mortgage[s] . . . having a term of less than 5 years may not include terms under

which the aggregate amount of the regular periodic payments would not fully

amortize the outstanding principal balance.”). The Cerdas’ loan, if enforced as

written, would allow payments ranging from $2,950 to almost $5,000 per month

over the course of the loan. It is difficult to reconcile the plain English-language

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meaning of “substantially equal payments” with such huge variations. It is

hard to imagine how, if the Texas legislature were to disagree with the

majority’s reading, the provision even could be rewritten to, in fact, require

substantially equal payments.

The danger of such wide fluctuations is real, as evidenced by the recent

“subprime mortgage meltdown” during which the so-called “payment shock” from

sharp increases in variable interest rates did result in many homeowners across

the country losing their homes. See, e.g., Andrew J. Ceresney, Gordon Eng &

Sean R. Nuttall, Regulatory Investigations and the Credit Crisis, 46 AM. CRIM.

L. REV. 225, 261 (2009) (“One of the more common complaints . . . concerns

homeowners confronted with ‘payment shock’ regarding adjustable rate

mortgages . . . . Often these loans were originated with very low ‘teaser’ rates

. . . during the first few months of the mortgage; at the end of the low

interest-paying period, however, the rates reset at substantially higher rates,

leaving homeowners unable to afford monthly payments and placing them at

risk of foreclosure.”); Bernhard Grossfeld & Hansjoerg Heppe, The 2008

Bankruptcy of Literacy: A Legal Analysis of the Subprime Mortgage Fiasco, 15

LAW & BUS. REV. AM. 713, 722–29 (2009).

1

When the plain language of the section is viewed through the prism of

Texas’s conservatism on home equity lending in light of the state’s long history

of “carefully protect[ing] the family homestead from foreclosure,” see LaSalle

Bank, 246 S.W.3d at 618, the Cerdas’ argument that “substantially equal” means

only small variations are permitted in the monthly payments seems at least

equally plausible to the meaning advanced by the lender and adopted by the

majority, perhaps more so. Indeed, the relationship between “payment shock”

Although the change from one month to the next in the Cerdas’ loan is more gradual 1

than may occur with the so-called “teaser rates” – where originally very low rates are suddenly

raised precipitously – the contemplated payments are not “substantially equal” as that term

would be understood by a layperson.

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and Texas’s historical desire to protect the homestead is especially (though not

exclusively) relevant to home equity loans, which are, by their nature, more

likely than purchase money loans to be made to borrowers on fixed incomes for

whom increases in monthly payments are particularly problematic. Cf. Kristine

M. Young, Note, The Aging Population and Maturing Mortgage Loans: Ensuring

a Secure Financial Lifeline for the Elderly Through Mortgage Lending, 16 ELDER

L.J. 477, 487–91 (2009) (expressing concern that variable-rate mortgages are

likely inappropriate for older borrowers with significant home equity but living

on fixed incomes).

This question thus is one of the few examples of “genuinely unsettled

matters of state law” where certification is most appropriate. See Jefferson v.

Lead Indus. Ass’n, 106 F.3d 1245, 1247 (5th Cir. 1997); see also De Checa v.

Diagnostic Ctr. Hosp., Inc., 967 F.2d 126, 129 (5th Cir. 1992) (certifying a

question of Texas law where there was “an apparent conflict between” multiple

provisions of the same statute). The majority’s decision—as would be any

decision on this point by a federal court at this juncture—is an “Erie guess” that

is just that: a guess. It is, moreover, a guess as to a proposition of state

constitutional law that potentially affects the rights of thousands of Texas

homeowners and their lenders and noteholders.

Accordingly, I respectfully submit that the appropriate course of action on

this issue would be to certify the question to the Texas Supreme Court, and I

dissent from the majority’s decision not to do so.

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