ACORN challenged several of the Home Equity Interpretations issued by the Finance Commission to be used as guidelines for lenders in Texas
On October 7, 2005, Judge Scott H. Jenkins of the 53rd District Court, Travis County, Texas, issued a letter setting forth his findings and requested that the parties draft an Agreed Order in line with his letter.
The specific sections of the Interpretations and the Court’s findings are summarized below:
Section 153.5(3) of the Interpretations provides:
“(3) Charges that are Interest. Charges an owner or an owner’s spouse is required to pay that constitute interest under the law, for example per diem interest and points, are not fees subject to the three percent limitation.” Judge Jenkins declared that all points are not discount points, thus this section is unconstitutional. The Judge indicated that if points charged were in fact discount points which in fact were a prepayment of interest in order to lower the interest rate, then the discount points are clearly interest and would not be included in the three percent limitation. He also indicates that Texas usury laws are not controlling when it comes to determining whether a fee charged on a home equity loan is considered interest and not subject to the three percent fee limitation.
Section 153.10(2) of the Interpretations provides:
“(2) Loss of Homestead Designation. If under Texas law the property ceases to be the homestead of the owner, then the lender, for purposes of Section 50(a)(6)(K), may treat what was previously a home equity mortgage as a non-homestead mortgage. ”Regretfully, the arguments against this provision were withdrawn by Plaintiff’s counsel and so the Court did not address this issue. We will need to wait to see if this issue is litigated in the future and if lenders will continue to rely on the Interpretation to make cash out loans or rate/term refinances on properties with existing home equity mortgages where the owners no longer claim the property secured by the mortgage as their homestead.
Section 153.12(2) of the Interpretations provides:
“(2) A loan application may be given orally or electronically. ”The Court held that there can be NO ORAL APPLICATIONS in connection with a home equity or HELOC loan application; however, electronic applications are acceptable.
Section 153.13 of the Interpretations deals with the requirement regarding preclosing disclosures wherein a lender must disclose to the owner at least one business day prior to closing the actual fees, points, interest, costs and charges that will be charged at closing. The Interpretations at paragraph (4) provides:
“(4) A de minimus variance can be good cause at the owner’s option. An owner who has received a preclosing disclosure may consent to receive a subsequent or modified preclosing disclosure on the date of closing under the good cause standard if:
(A)….
(B) one or more items in subparagraph (A) of this paragraph (actual disclosed fees, costs, points and charges) is less than the disclosed rate or amount on the initial preclosing disclosure.”
Judge Jenkins held that all a lender would need do is to reduce one of the items listed in subparagraph (A) and then the remaining amounts required to be predisclosed could be increased substantially and the Lender would still be in compliance according to the Interpretations. The Judge held that Section 153.13(4(B) clearly violates the Texas Constitution.
Section 153.15 of the Interpretations deals with the Constitutional provision requiring home equity loans to be closed only at a lender’s office, attorney’s office or title company office.
Section 153.15 (2) approves the use of powers of attorney in connection with the closing of a home equity loan and Section 153.15(3) approves obtaining the consent of an owner’s spouse by mail or other delivery of the party’s signature to an authorized physical location and not the homestead.
The Court held that both of these provisions are constitutional and approved their use.
Section 153.18 deals with the Constitutional provision that prohibits lenders from requiring a borrower to use loan proceeds for any particular purpose other than paying off debt secured by the homestead or debt owed to another lender even though it is not secured by the homestead.
Section 153.18(3) of the Interpretations provides as follows:
“(3) When an owner applies for a debt consolidation loan, it is the owner, not the lender that is requiring that proceeds to applied to another debt. If the proceeds of a home equity loan are used in conformity with owner’s credit application, the limitations of this section do not apply.”
The Judge found the above section to be unconstitutional as its provisions are exactly what the Constitutional provisions were intended to prevent. A lender can not require the borrower to pay debt owed to it unless that debt is secured by the homestead. Period.
Sections 153.20 and 153.22 of the Interpretations deal with “no blanks” in documents and copies of all documents must be given to the borrower at closing. The Interpretations try to limit “no blanks” to omitted contract terms and allow a lender to deliver copies of some documents after closing. Judge Jenkins held both provisions to be unconstitutional. No blanks means no blanks anywhere in the documents and copies of documents, means copies of all documents.
Section 153.51 provides guidance on the requirement that home equity disclosures must be given at least twelve days prior to loan closing. The Interpretation sets up methods and presumptions when the disclosure is mailed. The Judge found the entire Section to be consistent with the Constitution and thus upheld the Section as constitutional.
Section 153.84 of the Interpretations deals with what types of devices are permissible in connection with a request for an advance on a HELOC loan. The Interpretations specifically approved the use of “prearranged drafts, convenience checks, or written transfer instructions. ”Judge Jenkins held that “convenience checks” are “similar devices” and the use of same is prohibited by the Constitution.