Today's Trends in Credit Regulation

Texas Supreme Court Tightens Home Equity Loan Rules
By Shawnielle Predeoux

The Texas Supreme Court has ruled that discount points are no longer treated as interest for purposes of exclusion from the 3% cap on fees on homestead secured home equity loans and lines of credit.

On June 21, the Texas Supreme Court issued a decision, Finance Commission of Texas v. Norwood, that prohibits lenders from treating discount points as interest that is not subject to the 3% cap on fees on homestead secured home equity loans and lines of credit. In January 2004, the Finance Commission issued regulations adopting the definition of interest under Texas Finance Code Chapter 301 for purposes of the constitutional home equity lending provisions, as interpreted by courts. Regulations also stated that per diem interest and points constitute interest that are not fees subject to the 3% cap. In Tarver v. Sebring Capital Credit Corp (2002), the Texas Court of Appeals, opined that discount points are interest and are excluded from the 3% cap. Based upon the Tarver decision, and the subsequently enacted regulation, lenders have excluded discount points from the calculation of fees subject to the 3% cap.

In 2010, the Texas Court of Appeals invalidated the regulations defining interest. The Texas Court of Appeals reasoned that including lender retained fees would render the 3% cap meaningless.

On appeal, the Texas Supreme Court affirmed the lower court decision. The Texas Supreme Court reasoned that such an interpretation allowing the legislature to define interest would permit the legislature to periodically modify that definition, there by defeating the purpose of the Constitutional home equity lending fee cap, which could only be amended by popular vote. The Texas Supreme Court also noted that the definition of interest was modified to include lender retained fees after the regulations became effective. The Texas Supreme Court found that interest for purposes of the home equity lending provisions should be the general meaning of “interest” or the amount calculated by multiplying the interest rate by the principal balance.

The Texas Supreme Court also invalidated regulations interpreting the constitutional requirement that a home equity loan only be closed at the office of the lender, an attorney at law, or a title company to mean that the borrower could consent to the creation of a lien on the homestead by mailing the lender the required consent or attend the closing through an attorney-in-fact. The appellate court reasoned that the regulation defeated the purpose of the provision that was implemented to prohibit the coercive closing of an equity loan at the owner’s home.

The Texas Supreme Court upheld a regulation establishing a rebuttable presumption that the notice prescribed in Texas Constitution article XVI, Section 50(g) is received three days after it is mailed.

This decision means that Texas homestead secured home equity lenders must immediately include all lender retained charges, including origination and discount points, within the 3% cap. Lenders also should not close a home equity loan unless the borrower can attend closing at the office of a lender, an attorney at law, or a title company.

Shawnielle D. Predeoux is an associate in the Hanover, MD office of Hudson Cook, LLP. Shawnielle can be reached at 410-865-5425 or by email at

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