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Changes to Home Equity Rules
Tuesday, June 25, 2013 9:55 AM

Last week, the Texas State Supreme Court invalidated two rules relating to home equity lending. As a result, credit unions offering home equity loans will need to review their practices concerning loan fees and loan closings.

The Texas Constitutional provisions permitting home equity lending impose a laundry list of restrictions and details that must be followed by lenders. The joint financial institution regulators (Credit Union Commission and the Finance Commission) passed rules clarifying many of the provisions. 

In 2004, the joint regulators adopted 7 TAC 153.5 [Three Percent Fee Limitation].  The rule excludes certain lender fees from the 3 percent cap.  The Supreme Court held that the Texas Constitution requires a strict reading of the 3 percent cap on fees other than interest and invalidated the regulators’ rule.  Therefore, some fees currently charged by credit unions may not be permitted going forward.  

According to the Court, “interest” in the Constitutional provision means “loan principal multiplied by the interest rate” and nothing else.  The Court notes, “This narrower definition of interest does not limit the amount a lender can charge for a loan; it limits only what part of the total charge can be paid in front-end fees rather than interest paid over time. In doing, it incentivizes lenders to determine borrowers’ creditworthiness more carefully and helps borrowers better assess the costs of credit.”

The joint regulators also adopted 7 TAC 153.15 [Location of Closing] in 2004.  This rule permits a lender to accept a power of attorney to execute closing documents and to receive consent for the loan by mail or other delivery. The Supreme Court ruled this provision invalid, stating that rule established a way to circumvent the constitutional requirement to hold the closing only at one of the designated locations (office of the lender, an attorney or title company).  The Court expressed concern for coercion under the rule as written.

The Supreme Court upheld 7 TAC 153.51, providing that a lender can presume that the required consumer notice is received three days after it is mailed, thereby establishing the beginning of the 12 day period before which an equity loan may be closed.

The opinion did not list an effective date, but such opinions are generally considered effective immediately.  The opinion can be viewed here.  We anticipate the joint regulators to propose a revised rule in the near future.

Please contact Suzanne Yashewski, TCUL senior vice president of Regulatory Compliance & Legal Affairs, at, with any questions you may have.