Cerda v. 2004-EQR1 L.L.C.

Case: 09-50619 Document: 00511182199 Page: 1 Date Filed: 07/22/2010

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
July 22, 2010

No. 09-50619 Lyle W. Cayce
Clerk

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
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No. 09-50619

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

1
A “good faith estimate” is “an estimate of settlement charges a borrower is likely to
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).
2
To fully amortize a 30-year loan with a principal amount of $344,000 and a fixed
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.
3
This document is prescribed by the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq.,
and its implementing regulations, 12 C.F.R. §§ 226.1 et seq.
4
The contents of the Notice Concerning Extensions of Credit are prescribed by article
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).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 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

5
The URLA is a standardized loan application form developed by the Federal National
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 6
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

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

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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.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

7
Originally, the Cerdas pressed a fourth argument, challenging the district court’s
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.
8
The dissent would certify the Cerdas’ second argument, relating to variable interest
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 T EX. G OV’T C ODE § 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 T EX. C ONST. 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 rule-
making 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 R EGULATORY
C OMMENTARY ON E QUITY L ENDING P ROCEDURES (the “R EGULATORY
C OMMENTARY”). See Stringer, 23 S.W.3d at 357. The Texas Supreme Court has
indicated that the R EGULATORY C OMMENTARY 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 T EX. C ONST. 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 T EX.
C ONST. 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 . . . .
T EX. C ONST. 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 . . . .
T EX . C ONST. art. XVI, § 50(g)(M) (2002) (emphasis added).9 The italicized
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:

9
In the Texas Constitution, the notice required by § 50(g) is written entirely in capital
letters. To more easily compare the terms of §§ 50(a)(6) and (g), we have normalized the
typeface in the notice language.
10
The discrepancy has since been eliminated, as both provisions have been amended
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
R EGULATORY C OMMENTARY 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.” T EX. C ONST. 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
R EGULATORY C OMMENTARY. See R EGULATORY C OMMENTARY 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.” T EX. C ONST. art. XVI, § 50(a)(6)(M)(i); see also 7 T EX. A DMIN. C ODE
§ 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.” T EX. C ONST. art. XVI, § 50(a)(6)(L) (2002).11 Section 50(a)(6)(O),
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.” T EX. C ONST. 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 13 and that balloon payments 14 are
prohibited. The district court accepted the interpretation offered by 2004-EQR1
and HomEq, and we do as well.

11
The version of § 50(a)(6)(L) currently in force changes only the requirement that the
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 . . .”).
12
Section 50(a)(6)(O) has not been amended since the time the Cerdas entered into the
loan.
13
When a loan is fully amortized, the installments suffice to extinguish the principal
amount and all accrued interest over the life of the loan.
14
A “balloon note” is “[a] note requiring small periodic payments but a very large final
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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No. 09-50619

The opinion of the R EGULATORY C OMMENTARY 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.
R EGULATORY C OMMENTARY 8 (discussing T EX. C ONST. 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 T EX.
C ONST. 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 R EGULATORY C OMMENTARY’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 T EX.
A DMIN. C ODE § 153.16(3).15 Similarly, the rule interpreting § 50(a)(6)(L) provides

15
The full text of § 153.16 provides:
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 . ADM IN . CODE § 153.16. This rule has not been amended since it became effective in

16
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No. 09-50619

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 T EX. A DMIN.
C ODE § 153.11(3).16 While the constitutional provisions have been amended
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 R EGULATORY C OMMENTARY
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.
16
The full text of § 153.11 provides:
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 . AD M IN . 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 . ADM IN . 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.
T EX . C ONST. art. XVI, § 50(a)(6)(E) (2002).18 To support their claim that they
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,”

17
The dissent suggests that, in light of the tension between §§ 50(a)(6)(L) and (a)(6)(O)
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 COM M ENTARY and the
current regulations.
18
There have been no subsequent amendments to § 50(a)(6)(E).

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No. 09-50619

several items, totaling $3,242.72, are listed as paid to “Netco.”19 Finally, under
“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.

19
These items are listed as: (1) “Title Insurance” in the amount of $2,619; (2)
“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.
20
This amount excludes both the $325 appraisal fee and the $3,675 yield spread
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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No. 09-50619

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 T EX.
C ONST. 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.21 Accordingly, the district
court did not err in excluding the yield spread premium from the 3% cap imposed
by § 50(a)(6)(E).

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

22
Discount “[p]oints are commonly charged as an added compensation to the lender in
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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No. 09-50619

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. 23 This
included the opinion of the R EGULATORY C OMMENTARY, 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
R EGULATORY C OMMENTARY 3 (emphasis added) (discussing § 50(a)(6)(E)).25 The

23
The sources cited by the Tarver court included provisions relating to bank loans
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 ADM INISTRATIVE
CODE § 83.102(20), secondary loans under what is currently 7 TEXAS ADM INISTRATIVE CODE
§ 83.701(b), and usury under what is currently 7 TEXAS ADM INISTRATIVE CODE § 83.707(f). See
Tarver, 69 S.W.3d at 712.
24
We note that the final sentence of the above-quoted language expressly endorses the
use of lender credits such as the one New Century Mortgage issued to the Cerdas.
25
The current version of the regulations promulgated under § 50(u) provide that the
word “interest” means “interest as defined in the Texas Finance Code § 301.002[a](4) and as
interpreted by the courts.” 7 TEX . ADM IN . CODE § 153.1(11). Section 301.002(a)(4) of the

22
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No. 09-50619

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 T EX. C ONST. 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 R EGULATORY C OMMENTARY. 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.26 While the ACORN court was
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 R EGULATORY
C OMMENTARY, 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

26
It is also possible that applying both a broad and a narrow definition of “interest” in
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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No. 09-50619

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 above-
market 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
R EGULATORY C OMMENTARY expressly provides that “[t]here is no restriction on

25
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No. 09-50619

a lender absorbing costs that might otherwise be fees and, therefore, covered by
the fee limitation.” R EGULATORY C OMMENTARY 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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No. 09-50619

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.” T EX. R. A PP. P. 58.1; see also T EX. C ONST. 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 T EX. C ONST. 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 S T. M ARY’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

27
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No. 09-50619

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); T EX. R. A PP. 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 R EGULATORY C OMMENTARY 8.
The majority resolves this ambiguity by relying upon prior non-binding

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No. 09-50619

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 T EX. C ONST. 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 A M. C RIM.
L. R EV. 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
L AW & B US. R EV. A M. 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”

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