Texas Supreme Court Clarifies HELOC Fee Cap Decision

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On January 31, the Texas Supreme Court released a January 24 supplemental opinion clarifying a June 2013 opinion in which it invalidated state regulations that (i) defined “interest” with regard to home equity loans to exclude lender-retained fees, and (ii) would have allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2014 WL 349790 (Tex. Jan. 24, 2013). The Texas Bankers Association sought clarification as to whether interest paid at closing falls outside the definition of interest, noting (i) that interest can be paid at closing for part of a payment period, calculated per diem, until the regular payment date, and (ii) that a borrower may pay discount points at closing to lower the interest rate for the term of the loan. In its supplemental opinion, the court held that per diem interest is still interest, even if prepaid, and that legitimate or “bona fide” discount points to lower the loan interest rate are, in effect, a substitute for interest. The court further explained that true discount points are not fees “necessary to originate, evaluate, maintain, record, insure, or service,” but are an option available to the borrower and thus are not subject to the three percent cap. The court also reaffirmed its holding requiring borrowers to be present at closing. It rejected the bankers’ argument that requiring a power of attorney, like other closing documents, to be executed “at the office of the lender, an attorney at law, or a title company” can be a hardship on certain borrowers for whom such locations are not readily accessible, explaining that such hardships are a public policy issue that should be addressed by the framers and ratifiers of the state Constitution.