Texas regulators have issued guidelines clarifying how lenders there may use their newly acquired power to offer home equity loans.
State banking supervisors will examine whether:
The board has approved a policy for making home equity loans.
The underwriting standards are consistent with the risk of the loan.
The rates include the cost of collection in case of default.
The guidelines also direct examiners to ensure that loans are closed at least 12 business days after the bank receives the application. Also, the closing must occur at the bank, a law office, or title company.
"We issued these documents to make sure banks don't trip over themselves," Texas Banking Commissioner Catherine A. Ghiglieri said Wednesday. "The penalties are so severe that it could become a safety and soundness concern if a bank makes mistakes on enough loans."
On Jan. 1, Texas dropped a 157-year ban on home equity lending. But the new law contained few details about the process of making these loans.
"Bankers were given broad authority to get into home equity lending, but they are used to much more defined regulatory direction," said John M. Heasley, general counsel of the Texas Bankers Association. "For those that were reluctant, these guidelines will provide lenders with more of an impetus to go out and make these loans."
The Texas Banking Department-along with the agencies that regulate consumer credit, thrifts, and credit unions-released the exam procedures and an 11-page interpretation of the new law last week.
The regulators clarified the amount that lenders may charge to make home equity loans. The new law bars lenders from charging more than three points in fees, but the agencies explained that the limit does not apply to interest. In addition, they said banks are barred from accelerating payments on home equity loans just because a borrower defaults on other loans.
A failure to comply with any part of the new law carries a stiff penalty: The bank would have to repay the borrower's interest and principal.
Because the new law is an amendment to the Texas constitution, no state agency may write rules interpreting it, Ms. Ghiglieri said. Although the documents issued last week do not carry the force of regulations, Ms. Ghiglieri predicted that courts generally will defer to the regulators' judgment.
"Could a court come in and overturn this? Yes," Ms. Ghiglieri said. "But we do expect to get deference."
The exam procedures are available at the banking department's Web site, www.banking.state.tx.us. The legal interpretation is available at www.occc.state.tx.us, the Office of the Consumer Credit Commissioner's Web site.
