Texas Supreme Court Issues Decision Clarifying Home Equity Lending
by: Nicole Legere
The Texas Supreme Court issued an opinion on June 21, 2013 which addresses three different issues raised in regard to home equity loans. Under Article XVI Section 50 of the Texas State Constitution, a forced sale, in order to repay a home equity loan, is allowed only if the loan meets certain requirements. A number of questions were raised with regard to interpreting Section 50. As a result, state legislature adopted Section 50(u) which allows for state agencies to interpret the provisions governing home equity lending.
Under the authority created in Section 50(u), the Finance Commission and the Credit Union Commission (the Commissions) were created to ensure consumer protection and lender compliance. The Texas Supreme Court opinion discussed three of the Commissions interpretations and, using a de novo standard of review, it upheld one while finding the other two invalid.
Home Equity Fees and Interest
First, the court tackled the meaning of the term interest. Section 50(a)(6)(E) states a home equity borrower may not be required to pay “in addition to any interest, fees to any person that are necessary to originate, evaluate, maintain, record, insure, or service the extension of credit that exceed, in the aggregate, three percent of the original principal amount of the extension of credit.”
- The Commissions had interpreted the meaning of interest to be that “defined in the Texas Finance Code and as interpreted by the courts.”
The Texas Supreme court rejected this definition saying that it allows the legislature to change the meaning of Section 50(a)(6)(E) simply by amending the statute. This gives the legislature uncontrolled authority to alter the constitutional fee cap protections built into Section 50. The court stated that delegating this type of power to the legislature “utterly defeats the purpose of constitutionalizing it (Section 50), which was to place the limitation beyond the legislature’s power to change it without ratification by the voters.”
As a result of the court’s opinion, fees, other than interest, will be included in the three percent cap.
Loan Closing Requirements
Section 50(a)(6)(N) required that a loan be closed only “at the office of the lender, an attorney at law, or a title company.” This was intended to prohibit the “coercive closing of an equity loan at the home of the owner.” However, the Commissions had interpreted this prohibition to still allow borrowers to mail in the required consent and close through an attorney-in-fact.
The Texas Supreme Court rejected this interpretation saying that it still permitted coercion, and defeated the purpose of the provision. The court stated “it would clearly be unreasonable to interpret Section 50(a)(6)(N) to allow all the loan papers to be signed at the borrower’s house and taken to the lender’s office…” The required consent and power of attorney are considered part of the loan closing process, and therefore must only occur at an approved location.
Notice Requirements
Lastly, Section 50(a)(6)(G) requires that a loan cannot be closed before the 12th day after the lender provides the borrower with the “Notice Concerning Extensions of Credit” disclosure required by state law. The commissions established a rebuttable presumption that notice is received three days after being mailed. This presumption means that the lender does not have to prove actual notice.
The Texas Supreme Court agreed with the interpretation, and upheld the rebuttable presumption. The court said the “interpretation does not impair the constitutional requirement; it merely relives the lender of proving receipt unless challenged.”
About the Author:
Nicole Legere, Esq., is Assistant Vice President and Senior Counsel at Bankers Advisory, Inc. She is a graduate of the University of Massachusetts at Amherst and earned her Juris Doctor at Roger Williams School of Law. Nicole is admitted to the Bar in Massachusetts and New York. She can be reached at
nicole@bankersadvisory.comTags: Texas, State Mortgage Compliance | Comments Off on Texas Supreme Court Issues Decision Clarifying Home Equity Lending
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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