Due to the complexity of home equity laws in Texas, including the potential forfeiture of principal and interest for even an innocent violation, lenders have always needed to proceed with caution when making home equity loans in Texas. On June 21, 2013, the Texas Supreme Court added new hurdles when it addressed three interpretations of home equity law by state commissions: (1) the distinction between fees and interest; (2) the location of the closing; and (3) the providing of the mandatory 12-day notice. Its holdings on two of these three issues will likely have a significant impact on home equity lenders.
Background
Home equity lending came late to Texas. It was first allowed by constitutional amendment in 1998. In 2003, the Texas Constitution was amended again to allow the Texas Legislature to delegate to state commissions the power to interpret provisions of the Constitution regarding home equity lending. The Texas Finance Commission and the Texas Credit Union Commission (collectively "the Commissions) duly issued interpretations of Texas home equity law, which were then challenged (most successfully) in district court in Travis County1. Those interpretations eventually reached the Texas Supreme Court, which issued its opinion on Friday, June 21, 2013, in Texas Finance Commission v. Norwood, ___ S.W.3d ___ (No.10-0121)2.
Ruling on Interest and Fees
The first interpretation addressed by the Supreme Court arose from the constitutional cap on the fees lenders can charge to home equity borrowers. Article 16, section 50(a)(6)(E) limits fees, "other than interest," to 3% of the principal amount of the loan. The Commissions interpreted "interest" to have the same broad meaning as Texas Finance Code section 301.002(a)(4) regarding usury – "compensation for the use, forbearance, or detention of money." The Supreme Court first found that, by using the statutory definition, the Commissions essentially re-delegated their interpretive authority back to the Legislature. That is, an amendment to the usury statute would necessarily reinterpret the constitutional cap on fees, all without a formal constitutional amendment. Therefore, the interpretation was invalid.
For lenders, the holding has an immediate practical impact. The Commissions explicitly included points as "interest" and, therefore, points were not "fees" for purposes of the constitutional 3% cap. The Supreme Court, like the lower courts before it, found that protection of consumers, while justifying a broad definition of interest in the usury law, required a narrow definition of interest for the exclusion from the constitutional fee cap. Therefore, the Court held that "‘interest' as used in that provision means the amount determined by multiplying the loan principal by the interest rate." As a result, points charged at the inception of a loan, even if to lower the interest rate, are "fees" to be aggregated with other fees in calculating the 3% cap.
Ruling on the Location of Closing
The Constitution (Article 16, section 50(a)(6)(N)) requires a home equity loan to be closed only at the office of "the lender, an attorney at law or a title company." The Commissions determined that the intent of this provision was to avoid coercion of a homeowner by a closing in the home. Therefore, they interpreted the provision to allow homeowners to mail their executed consent form to the lender and to attend closing through an attorney-in-fact. However, the Supreme Court held that both interpretations actually permit coercion by obtaining the required consent and a power of attorney at the borrower's home, with the final closing occurring later at one of the prescribed locations. The Court also held that the consent form and power of attorney are part of the closing "process," not discrete events, and therefore must be executed at one of the three prescribed locations.
Ruling on the 12 Day Notice
A home equity lender must "provide" a constitutionally prescribed Notice to the homeowner at least twelve days before closing (Article 16, section 50(g)). The Commissions interpreted "provides" to include a presumption that a mailed Notice was received three days after it was mailed. The Supreme Court held that this interpretation was reasonable and that the law does not require a lender to obtain proof of actual receipt of the Notice. However, it noted that a lender may need to prove receipt if it is challenged.
Conclusion
According to the Office of the Consumer Credit Commissioner, the number of home equity loans made in Texas has declined sharply since the filing of the lawsuit challenging the Commissions' interpretations. The Supreme Court's holdings on fees and closings will likely further discourage lenders from making such loans. The inclusion of points as "fees" necessarily means that the higher cost of making home equity loans in Texas will be reflected in higher interest rates to Texas borrowers. The Court itself noted that its holding "does not limit the amount a lender can charge for a loan." Lenders in Texas already face a complex and risky environment for home equity loans. The Supreme Court's new opinion will likely make Texas an even less attractive venue for lenders and borrowers alike.
1Only three issues remained for the Supreme Court to review because the Commissions had repealed or amended several other interpretations addressed by the lower courts.
2The Court initially had to decide if Texas courts even have the power to review the Commissions interpretations, and if the plaintiff-homeowners have standing to sue. It resolved both issues in favor of its ability to hear the case and review the Commissions' intepretations. It also decided to apply a "de novo" rather than a deferential standard of review.
