AUSTIN, Texas-The Texas State Supreme Court has ruled illegal two major provisions of the state's home equity rules, the latest setback in a two-decade battle. The state's highest court ruled that the Credit Union Commission and the Finance Commission went too far when modifying loan fee caps and allowing loan closings through an agent.
Texas has a long tradition of protecting homesteads from lenders. It was the last state to allow home equity lending as part of a 2003 constitutional amendment which, at almost 6,000 words, is by far the longest section of the Texas Constitution. The credit union and bank regulators were given the task of writing regulations to implement the constitutional amendment.
The justices ruled that the courts had a role in second-guessing the regulators' view of the Texas Constitution by reviewing these rules. It also ruled that, because this was a constitutional question, no deference was due to the regulators' view.
The court held that the Texas Constitution required a very strict 3% cap on fees other than "interest." While the commissions had provided a looser rule that allowed other items to be included as "interest" (and thus carved out from the 3% cap), the court concluded that the only amounts excluded from the 3% cap were true interest (the amount of principal times an interest rate). Thus, under the court's reading of the Constitution, some fees charged by lenders or their affiliates will not be permitted going forward.
The justices also held that the rules permitting a borrower to simply mail in a power-of-attorney form were invalid. The Constitution requires the closing to take place at one of a few designated locations, not the borrower's home. In the court's view, this requirement would be circumvented by allowing the borrower to simply mail in a form. That's because "it is precisely the common use of the mail and powers of attorney in closing transactions that gives rise to the danger of coercion Section 50(a)(6)(N) was intended to prevent."
It is not clear what effect the court's ruling will have on the expanding market for home equity lending. The opinion does not specify an effective date, but the usual rule is that legal holdings take immediate effect. This means that some lenders (in particular those charging higher fees than 3% or whose closing process happens through the mail) may be pausing their Texas loans until they can bring their procedures in line with the Lone Star States' constitutional requirements.
