Today's Trends in Credit Regulation

Texas Supreme Court Clarifies that True Discount Points that Lower Interest Rate are Interest Excluded from Fee Cap for Home Equity Loans and Lines of Credit
By Shawnielle Predeoux

On June 21, 2013, the Texas Supreme Court its Finance Commission of Texas v. Norwood opinion holding that "interest" for purposes of the home equity lending provisions in the Texas Constitution should be the general meaning of "interest" or the amount calculated by multiplying the interest rate by the principal balance. As a result, it appeared that discount points could no longer be considered interest, but were a fee subject to a 3% cap on fees required to originate, evaluate, maintain, record, insure, or service the mortgage loan. A portion of the lending community also believed that per diem interest would be considered a fee subject to the 3% cap because per diem interest is collected in advance at closing.

On January 24, 2014, the Texas Supreme Court issued a supplemental opinion in response to a motion for rehearing filed by the Texas Bankers Association to clarify its Norwood decision. In its motion, the Texas Bankers Association questioned whether interest paid at closing, but more specifically discount points and per diem interest, were excluded from the Supreme Court's definition of interest. In the supplemental opinion, the Texas Supreme Court held that true discount points that lower the interest rate are a substitute for interest, so true discount points are not a fee subject to the 3% cap because a borrower is not required to pay discount points, but may elect to. The Texas Supreme Court also held that per diem interest meets its definition of interest even though it is prepaid.

The Texas Supreme Court also affirmed its earlier decision that the home equity lending provisions in the Texas Constitution require that a power of attorney be executed by the borrower at the office of the lender, an attorney at law, or a title company. The Texas Bankers Association argued that such a result would create a hardship on borrowers who could not readily access the prescribed locations, such as deployed military personnel and the homebound elderly or infirm. The Texas Supreme Court stated that its decision is necessary to prevent coercion in the marketing of a home equity loan and to "sober" the borrower's decision to place a lien upon the homestead. The Texas Supreme Court noted that addressing the hardship is a question for the legislature and the people, not the court.

Texas mortgage lenders of non-purchase money cash out home equity loans and lines of credit are now free to exclude discount points and per diem interest from the 3% fee cap without any uncertainty due to this supplemental opinion. Texas mortgage lenders also should ensure that whenever a power of attorney is used to allow a person to sign the mortgage documents on behalf of the property owner, the power of attorney is executed at a permissible location.

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

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