A court decision involving reverse mortgages could help provide the leverage Texas bankers have long awaited to join the rest of America in offering general-purpose home equity loans.
The U.S. 5th Circuit Court of Appeals decided in First Gibraltar Bank vs. Dan Morales, attorney general of Texas (93-8170) to overrule a lower court's decision and allow an Office of Thrift Supervision regulation to pre-empt the homestead provisions in the Texas Constitution that prohibit reverse mortgages.
As a result of the April 29 decision, thrifts and some mortgage and finance companies - which also are covered by some OTS regulations - in Texas can now offer previously prohibited reverse mortgages and line of credit conversions. First Gibraltar Bank, an Irving-based thrift, was joined in the legal action with co-plaintiff Beneficial Texas Inc., a finance company also based in Irving, and had their case argued by the Houston law firm of Liddell, Sapp, Zivley, Hill & LaBoon.
The U.S. District Court for the Western District of Texas originally entered a summary judgment for the state of Texas, but First Gibraltar and Beneficial Texas appealed the decision.
Texas had contended that its state constitution pre-empted the OTS regulation preventing reverse mortgage loans and LOCs, but in its ruling, the court of appeals, while acknowledging its requirement to give deference to executive agencies' interpretations of statute or regulation that the agency is responsible for administering, said "if the intent of Congress is clear, that intent will trump any contrary agency interpretation."
The ruling said state laws can be "pre-empted by regulations promulgated by federal agencies acting within the scope of their congressionally delegated authority," which would give the precedence to the OTS regulation.
"[Texas Attorney General Dan] Morales has said he will appeal," said Robert King, a partner with Liddell, Sapp, Zivley, Hill & LaBoon, adding that in order for a rehearing to be considered, Morales' motion will have to be presented by May 13. Once the motion is filed, the circuit court will determine if a rehearing is necessary.
The decision is a victory for Texas thrifts and nonbank lenders, but most of these institutions are likely to wait before making those loans part of their repertoires. If the ruling is heard and is overturned again, King said, thrifts and other applicable lenders, such as mortgage companies, would be vulnerable to the no-foreclose policy which would again take effect. There are roughly 65 thrifts and another 150 mortgage banks and finance companies operating in Texas.
Banks and credit unions don't benefit from the decision, because they have other regulators. But that could change practically anytime, suggests Laura M. Hale, general counsel of the Texas Bankers Association.
The Texas Constitution allows liens on homes for only three purposes: the original purchase money, unpaid taxes and loan money used for home improvement.
The federal court decision also could put more pressure on the Texas legislature to amend the constitution regarding general-purpose home equity loans. The legislature meets again in January.