Recent HELOC Ruling Could Eliminate 'Safe Harbor' Provisions

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While credit unions and other financial service providers will still be able to offer home equity lines of credit, a recent ruling by a state judge could erode or eliminate the "safe harbor" provisions governing such lending in the Lone Star State.

Travis County District Judge Scott Jenkins struck down a number of these safe harbor provisions in his final ruling on a lawsuit challenging the way the state's HELOC law has been implemented by the Texas CU Commission and the Texas Finance Commission.

In 1997, Texas became the last state in the union to grant HELOC authority to its financial services providers in a constitutional amendment. The problem was, the language used in that amendment was confusing, so the Texas CU Commission and the Texas Finance Commission were tasked with interpreting that language in order to implement the new law.

The idea was to create a "safe harbor" for financial services providers so that, as long as they followed the interpretations laid out by the two commissions, their HELOC offerings would pass muster with the state.

But several consumer groups have suggested these safe harbor provisions were tilted too much in favor of the lenders and challenged nine of the commissions' interpretations. Judge Jenkins' ruling invalidated seven of those nine interpretations.

The consumer groups-Association of Community Organizations for Reform Now (ACORN), American Association of Retired Persons (AARP) and Texas Rio Grande Legal Aid-have suggested that the two commissions overstepped their bounds when they issued the safe harbor interpretations and particularly took issue with the way those interpretations treated the 3% cap on fees.

According to the consumer groups, the interpretations allow too much leeway in defining what counts as a "fee" and what counts as interest, watering down the consumer protections intended by the limit on fees.

Texas Rio Grande Legal Aid said in some cases people were actually paying fees of 7% or 8%, well beyond the 3% cap.

Other provisions being challenged are exceptions to the waiting period, a requirement to provide actual loan costs before the closing, allowing oral submissions of loan applications and the use of convenience checks for disbursements.

Both sides have indicated they plan to appeal the ruling. In the case of the consumer groups, they want to see the other two provisions they challenged invalidated, while the state commissions, of course, wish to see the ruling overturned.

While the litigation is important for credit unions, for the moment at least, they are safe to continue making HELOCs.

"This doesn't change the constitution, so credit unions still have the ability to make home equity loans," explained Suzanne Yashewski, VP-regulatory compliance and legal affairs for the Texas Credit Union League. "But they will be operating under the broader, more confusing language of the Constitution instead of the interpretations created by the two commissions. Credit unions should exercise more caution in trying to comply with the law until new interpretations have been issued."

The safe harbor provisions will be in place for 30 days following the May 1 ruling, and it is expected the state attorney general's office, which has been handling the case on behalf of the two commissions, will request an additional stay to keep those interpretations in place until after the appeals process runs its course.

Because HELOC authority was only granted in 1997, with the safe harbor provisions issued in 2004, home equity lending is still very new in the Lone Star State, Yashewski noted. The league recently surveyed its members to determine how many have gotten into home equity lending but had not tallied that data at press time.

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