In The Finance Commission of Texas v. Norwood, the Texas Supreme Court determined that an agency's interpretation of legislation was not outside the review of the courts. No. 10-0121, 2013 Tex. LEXIS 491 (Tex. June 21, 2013). The Court reviewed several important statutory provisions. My partners, Mike O'Neal and Brian Morris, have the following comments regarding this important decision.

Before addressing the substantive issues, the Court confirms it has jurisdiction to review the interpretations and that the Plaintiffs have standing to prosecute the action.

The Court then addresses the three remaining issues –

1. Fee Cap - Section 50(a)(6)(E) caps “fees to any person that are necessary to originate, evaluate, maintain, record, insure, or service the extension of credit” at three percent of principal. Did the Commissions correctly give “interest” the same meaning as Section 301.002(a)(4) of the Texas Finance Code, which includes fees paid to the lender, thereby removing lender fees from the cap?

Held: Interest does not include fees paid to the lender. “We conclude that consistent with the history, purpose, and text of Section 50(a)(6)(E), ‘interest’ as used in that provision means the amount determined by multiplying the loan principal by the interest rate.”

Rationale: The functions of “interest” in applying the constitutional fee cap for home equity loans and in prohibiting usury are inversely related. If the word is given the same meaning in both contexts, then including lender-charged fees in “interest” strengthens usury laws and weakens the fee cap, though both are designed to protect consumers. That this was the intent of the framers and ratifiers of Section 50(a)(6)(E) is simply implausible.

Note. The Court’s conclusion raises an issue with discount points and pre-paid interest. Lenders should review their practices. In this context, Footnote 104 provides: “This narrower definition of interest does not limit the amount a lender can charge for a loan; it limits only what part of the total charge can be paid in front-end fees rather than interest paid over time. In so doing, it incentivizes lenders to determine borrowers’ creditworthiness more carefully and helps borrowers better assess the costs of credit.”

2. Closing Location/Power of Attorney - Section 50(a)(6)(N) provides that a loan may be “closed only at the office of the lender, an attorney at law, or a title company.” The Commissions interpreted this provision to allow a borrower to mail a lender the required consent to having a lien placed on his homestead and to attend closing through his attorney-in-fact.

Held: A loan may be closed only at the office of the lender, an attorney at law, or a title company. “We conclude that the Commissions’ interpretations of Section 50(a)(6)(N) contradict the purpose and text of the provision and are therefore invalid.”

Rationale: Closing a loan is a process. 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 then taken to the lender’s office, where funding was finally authorized. Closing is not merely the final action, and in this context, to afford the intended protection, it must include the initial action. Executing the required consent or a power of attorney are part of the closing process and must occur only at one of the locations allowed by the constitutional provision.

3. Notice/Presumption - Section 50(g) requires that a loan not be closed before the 12th day after the lender “provides” the borrower the prescribed notice. Did the Commissions correctly interpret Section 50(g) to permit a rebuttable presumption that notice is received, and therefore provided, three days after it is mailed?

Held: Yes, the interpretation is a reasonable procedure for establishing compliance with Section 50(g).

Rationale: In giving meaning to “provides”, the Commissions have determined there is a rebuttable presumption that notice is received three days after it is mailed. The Homeowners insist that a lender must establish actual receipt of notice in each case.

But the Commissions’ interpretation does not impair the constitutional requirement; it merely relieves a lender of proving receipt unless receipt is challenged. We agree with the court of appeals that the interpretation is but a reasonable procedure for establishing compliance with Section 50(g).

The most important aspect of this opinion is that it makes all discount points and pre-paid interest for Texas home equity loans subject to the 3% cap.

All points and closing charges must be less than 3%.

The cap limits fees that are required.

An argument still exists that if discount points are optional and paid at the election of the borrower (i.e. the borrower could have obtained the loan at a higher rate without paying points), the points are not required and fall outside the cap.

However, there will be a fact issue in each case.

The opinion should only apply to new loans originated after the mandate is issued.