In 2003, the Texas Constitution was amended to permit the issuance of interpretations relating to the home equity provisions of the Constitution. A lender acting in compliance with these interpretations would have a defense (or safe harbor) in an action by a consumer. The Finance Commission and Credit Union Commission were given the authority to write these interpretations. They did so, relying heavily on earlier Commentary that they had issued. Within weeks, ACORN, along with six individuals, and with the assistance of other organizations including AARP, filed a lawsuit challenging some of the rules. The trial court acted fairly quickly on the case, but the Third Court of Appeals held the appeal for years! During that delay, the legislature further amended the Constitution, eliminating several of the issues initially raised.
The Texas Supreme Court issued a decision in the case on June 21. Following are the consequences and possible actions for lenders to consider.
Fee Cap and Origination Fees. In effect, the Court concluded that while origination fees and discount points are interest for usury purposes, they are fees for the 3% fee cap. Typically, banks have used the origination fee to assure that the costs of making the loan can be covered. With this change in the law, consider the following possible responses:
Charge only the origination fee and do not charge any other fees to make the loan. Keep it at 3% or under.
Do not charge discount points. The case didn’t address this, but the risk is too great.
Re-evaluate the minimum size home equity loan that you can make and still cover your out-of-pocket costs.
Consider ways to reduce the costs of making the loan while still satisfying federal residential mortgage requirements. For example, use a less costly evaluation (provided that the Appraisal Guidance requirements are met).
Increase your interest rate to be sure that costs are covered. Of course, if the loan is prepaid, the lender may not actually recover the upfront costs. And, prepayment penalties are prohibited.
Place of Closing. The opinion stated that applicants may not mail their “consent” to the lender. This “consent” is the consent to home equity lien. They must sign this waiver at the bank, title company or attorney’s office under this opinion. But, if the borrowers could get to the bank, title company or attorney’s office to sign the waiver, they wouldn’t need the waiver! Thus, this part of the opinion appears to simply void the ability to waive the receipt of the closing statement and documents one day in advance.
Also, loans may not be closed under a power of attorney unless the borrowers had signed that power of attorney at the bank, title company or attorney’s office. The impact of this part is less clear. We would suggest that most powers of attorney are signed in an attorney’s office. Therefore, the attorney-in-fact apparently could sign the home equity documents for the principal providing he does so at the bank, title company or attorney’s office. Unfortunately, the initial bulletins from several title companies are taking a harder line and making it virtually impossible to close on power of attorney.
Mailbox Rule. This interpretation, which creates a rebuttable presumption that a notice sent by mail is received three days after it is mailed, was upheld. But, the Court emphasized the point that this is merely a presumption. If the consumer challenges the fact that a notice was received, the lender will have to prove up actual receipt.
Recommendation: Send notices by UPS, Fed Ex or USPS methods that include proof of delivery!
Effective Date. The official Interpretations create a safe harbor until they are overturned by a court in a final decision. The Supreme Court’s decision was rendered on June 21. The parties have 15 days to file a motion for rehearing and a possible additional 15 days for extension of time. Then, the court has 10 days to file its mandate. Thus, the opinion is technically not final for 40 days (unless these timeframes were waived). Nonetheless, we recommend that banks begin making changes to their procedures now.
Consequences. Loans that were closed under the prior rules are not affected by this ruling. However, the ultimate impact of this case is likely to be a constriction of credit availability, with higher principal amounts required and either higher interest rates or a flat 3% origination fee. The elderly and military personnel may be unable to take advantage of this product with the virtual elimination of the use of a power of attorney. These results should not create a fair lending issue, however, since they are based on business necessity derived from the law. Finally, the secondary market is likely to take a very hard look at Texas home equity loans. Expect tighter standards for purchase.