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Class Actions Challenge Adjustable Rate Home Equity Loans in Texas

June 9, 2005
Class action lawsuits against Ameriquest, Option One, Washington Mutual and Long Beach Mortgage allege that their adjustable rate home equity loans written between 1998 and 2003 violate a critical provision of the Texas Constitution.

The suits, filed in the U.S. District Court for the Eastern District of Texas, seek immediate injunctions against the lenders to prevent further foreclosures on homeowners with adjustable rate home equity loans until the case can be heard.

Texas' foreclosure rate in recent months has been more than 2.5 times the national average. Nationally, it trails only Florida.

The suits charge that adjustable rate home equity loans are illegal in Texas, under terms of an amendment to the Texas Constitution passed in 1997. The amendment states that home equity loans are required to be repaid "in substantially equal successive periodic installments," thereby invalidating variable rate loans.

The purpose of that stipulation was to protect homeowners from losing their homes and the plaintiffs say they are prepared to subpoena Texas legislators who were instrumental in drafting the amendment to testify as to its intent.

If the class actions prove successful, the lenders -- all based in California -- face foreiture of all adjustable rate home equity loans written in Texas between 1998 and 2003.

In the Ameriquest case, plaintiffs Jerry and Linda Morehouse of Huntington, Texas, state that they took out an adjustable rate home equity loan in October 2003. It contains a clause allowing the lender to modify the payments based on prevailing interest rates and therefore is illegal under Texas law.

Under the terms of the Texas Constitution, the lender must forfeit all principal and interest repayments if it fails to correct any noncomplying terms of the loan within 60 days after it is notified of the noncompliance.

Similar allegations are made in the lawsuits against the other lenders.

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