A dispute over lending laws in Texas has thrown a new obstacle in the path of interstate banking legislation, and Texas banks, thrifts and financial services companies that thought the road was finally clear for home equity lending might need to think again.
Rep. Henry Gonzalez, D-Texas, has drafted an amendment he wants to attach to the long-awaited interstate banking legislation during the conference committee, which is expected later this month.
Gonzalez and his staff aren't talking about the amendment, but according to sources in Texas, it is designed to prevent federal regulators from preempting Texas's Homestead Act, a provision in its constitution which has the effect of barring lenders from originating home equity loans and reverse mortgages because they can't put a lien against a property to secure their loan. Texas is the only, state that bars these type of loans, and the state banking industry has been trying for several years to find a way around the law.
Although the interstate legislation has already passed both chambers of Congress, banking lobbyists say there's nothing to prevent Gonzalez from bringing his amendment to the negotiating table during the conference committee.
That will add further complicate to a bill that already has run into several delays caused by conflicts over timing issues, branching rights for foreign banks, and applicable state laws.
One reason for Gonzalez's action is the interstate banking and branching bill may likely be the only banking legislation passed by Congress this year. It is unclear whether there is enough support in Congress to pass the provision, or whether he is just using his power as chairman to indulge a basic populist urge.
Gonzalez's action was triggered by a recent appeals court decision that overruled state law and gave thrifts and mortgage bankers the authority to make home equity loans through an Office of Thrift Supervision opinion, which pre-empted state restrictions on issuing these instruments.
One concern is the OCC will issue a similar provision, giving banks the same authority based on the same legal theory of the court decision. The decision, which was handed down by the 5th U.S. Circuit Court of Appeals on April 29, allowed an OTS regulation to pre-empt the homestead provision in the Texas Constitution. (See Mortgage Marketplace May 9.
The homestead provision has been interpreted as allowing liens against residential property only for taxes, purchased money mortgages and home improvement loans. In other words, Texans can get a home improvement loan to build a new swimming pool, but they can't get a home equity loan to send their children to college or to start a business.
It's quite an emotional issue in Texas, according to banking and legal sources. One source said it's a legacy of an old "your home is your castle" mentality and added there are fears that creditors might seize people's homes.
Another possible factor is the injury to the Texan sense of pride and independence caused by the fact the state constitution was overruled by a mere federal regulatory agency.
Evidently the supporters of the homestead provision have found an ally in Gonzalez, a perennial Washington gadfly and strong supporter of consumer rights.
Kelly Rodgers, an assistant general counsel at the Texas Bankers Association, told Mortgage Marketplace she expects the state attorney general to take the case to the U.S. Supreme Court for possible consideration in the October term.
Although the banking industry was left out of the 5th Circuit ruling, the association and its members are eager to get into this potential market. The association has been working for several years to get a compromise solution through the state legislature that would amend the constitution, remove the prohibition on home equity loans.