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Texas Supreme Court: Regulators Went Too Far On Home Equity
AUSTIN, Texas (6/25/13)--The Texas Supreme Court, in a partial reaffirmation and partial reversal of a lower appeals court decision, said Friday that the Texas Credit Union Commission and the Finance Commission overstepped in their interpretations of the State Constitution's home equity provision regarding forced sales.

Texas home equity law is unusual because, unlike other states that have protections based in state statutes, Texas' State Constitution protects homesteads from forced sales. A 2003 amendment to the Constitution authorized the legislature to delegate a state agency--in this case the Finance Commission and the Credit Union Commission--under Section 50 of Article XVI  the power to interpret certain of its provisions on home equity lending.

"A homestead may be subject to forced sale to repay a home equity loan only if the loan meets the requirements of Section 50, alterable only by a vote of the people," the ruling said. "The constitutional amendment did not provide for implementing legislation or for administrative interpretation or rule-making."

Once the amendment passed, the two commissions finalized their interpretative rulings, effective Jan. 8, 2004, said the ruling document. Three weeks later, six homeowners challenged several interpretations. A trial court invalidated many of the interpretations..

At issue before the Texas Supreme Court were three interpretations:

1.  Whether the term "interest," which was excluded from the 3% of principal cap to fees to originate, evaluate, maintain, record, insure or serve the extension of credit, means the same thing as interest in the Texas Finance Code, which includes fees paid to the lender, thus removing lender fees from the cap. The commissions maintained it did. However, the court disagreed.

"The fatal difficulty with the commissions' interpretation is that it does not merely adopt the substance of the statute at the time of the interpretation became effective; it adopts whatever definition of 'interest' the legislature may enact from time to time" through amendments," said the high court.  "The commissions' interpretation of the fee cap, tying its meaning to a statute, utterly defeats the clear purpose of constitutionalizing it, which was to place the limitation beyond the legislature's power to change without ratification by the voters. For this reason alone, the commissioners' interpretation is invalid," the court said. 

The court concluded that "interest" as used in the provision means the amount determined by multiplying the loan principal by the interest rate.

2. Whether a loan may be "closed only at the office of the lender, an attorney at law, or a title company," which the commissions argued was intended to prohibit coercive closing of an equity loan at the home of the owner.  The commissions said the provision allowed a borrower to mail a lender the required consent to have a lien placed on the homestead and to attend the closing through an attorney-in-fact.

"The court of appeals concluded that the use of mail to transmit documents and a power of attorney to facilitate execution are so commonplace that had the framers and ratifiers of Section 50 intended to preclude these practices, they would have said so with more specificity …But it is precisely the common use of the mail and powers of attorney in closing transactions that give rise to the danger of coercion" that the section "was intended to prevent," said the Supreme Court. It concluded the commissions' interpretations "contradict the purpose and text of the provision and are therefore invalid."

3. Whether section 50 requires that a loan not be closed before the 12th day after the lender "provides" the borrower the prescribed notice. The commissions interpreted the law to permit a rebuttable presumption that notice is received, and therefore provided, three days after it is mailed. The homeowners maintained that the 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," said the higher court. "We agree with the court of appeals that the interpretation is but a reasonable procedure for establishing compliance" with the section.


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