Tex. Const. art. 16, § 50 states the following in regards to home equity loans (aka “Texas 50[a][6] loans”):
“(a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:
(6) an extension of credit that:
(E) does not require the owner or the owner’s spouse to pay, in addition to any interest, fees to any person that are necessary to originate, evaluate, maintain, record, insure, or service the extension of credit that exceed, in the aggregate, three percent of the original principal amount of the extension of credit.”
Under Subsection (u) of this Section, the Texas legislature is authorized to appoint one or more state agencies to interpret this requirement (among others). The Texas Finance Commission has been so appointed and has promulgated interpretations under Chapter 153, Title 7 of the Texas Administrative Code.
Under these interpretations, the Finance Commission has interpreted “interest,” as used in Subsection (a)(6)(E), to mean “interest as defined in the Texas Finance Code § 301.002[4] and as interpreted by the courts” (7 Tex. Admin. Code § 153.1[11]). In addition to this, the Finance Commission has interpreted points (including discount points) to be “interest” and, as such, excluded from the 3% fee restriction set forth in Subsection (a)(6)(E).
Cx5029 is an acknowledgment by Texas home equity loan borrowers that they are electing to pay discount points, to receive a lower interest rate on their loan, and that they understand that such points are considered “interest” under Texas law and that they are not subject to the 3% fee restriction.
However, on June 21, 2013, the Texas Supreme Court in Fin. Comm’n of Texas v. Norwood, 2013 WL 3119481 (Tex. 2013), held that the Finance Commission’s interpretation and definition of “interest” – which basically pegs it to laws promulgated by the Texas legislature, thus effectively allowing the legislature to modify Constitutional protections – is unconstitutional and the court held that “’interest’ as used in [Subsection {a}{6}{E}] means the amount determined by multiplying the loan principal by the interest rate.”
This ruling excludes discount points from the definition of “interest” and, as such, they may be subject to the 3% fee restriction. In their ruling, the Supreme Court, however, did not explicitly state that such points are subject to the restriction. It is therefore possible for a lender to make the case that a discount point is either an optional fee (the restriction only applies to required fees; see 7 Tex. Admin. Code § 153.5[1]) or it is a fee that is not made for one of the six purposes specified in the Constitution (a fee to originate, evaluate, maintain, record, insure, or service the loan). No guidance or interpretations on this matter have been promulgated, largely due to the fact that discount points were considered “interest” for a significant period of time and, since they were already excluded from the restriction as such, it was not necessary to make a separate determination as to whether they are excluded or not under other clauses of the Texas Constitution and the Finance Commission’s interpretations.
Due to this ambiguity, we will continue to provide Cx5029, but with modified language. Rather than acknowledging their understanding that discount points are a part of interest under Texas law (which is no longer correct), the borrowers will be acknowledging that they are choosing to obtain a loan with discount points and that such a choice is optional. Clients who believe that Cx5029 is no longer necessary may request to have this document set to not print in their packages.
We will continue watching for additional interpretations and guidelines from Texas authorities to see whether this ambiguity is clarified or not and whether Cx5029 should continue to print or be discontinued. Changes to Cx5029 will take effect immediately.
July 3, 2013
DR 138024