Texas Supreme Court Clarifies Discount Points and Per Diem Interest Excluded From Three Percent Points and Fees By Melanie A. Feliciano Esq.
MARCH 2014 n National Mortgage Professional Magazine n
NationalMortgageProfessional.com
58
In June, 2013, the Supreme Court of Texas held in Finance Commission of Texas, et al. v. Norwood, et al., [http://alturl.com/qqj5x] 2013 WL 3119481 (Tex. June 21, 2013), that discount points are not considered interest under Section 50(a)(6)(E) of the Texas Constitution [http://alturl.com/cbw7s] and, therefore, should be included in the Texas home equity points and fees cap of three percent. In a Supplemental Opinion on a Motion for Rehearing [http://alturl.com/fbhfn] of the Texas Supreme Court’s original opinion, published on Jan. 31, 2014, the Supreme Court clarified, among other things, that bona-fide discount points “to lower the loan interest rate, in effect, substitute for interest” and, accordingly, are not subject to the three percent cap. The original opinion in Norwood resulted in many Texas-licensed attorneys questioning the Supreme Court’s decision that bona fide discount points do not constitute interest. In addition, the opinion left open to question whether or not per diem interest actually constitutes interest. The Norwood opinion also seemed to adversely affect the use of powers of attorney for the closing of home equity loans. Confirming that the term “interest,” as used in Section 50(a)(6)(E) of the Texas Constitution, simply means the “amount determined by multiplying the loan principal by the interest rate,” the Texas Supreme Court clarified in its Supplemental Opinion the following: l Bona-fide discount points are not fees “necessary to originate, evaluate, maintain, record, insure or service” a home equity loan, but an option available to the borrower. Accordingly, bona-fide discount points constitute interest and are not subject to the three percent points and fees cap. l Per diem interest is still interest, though prepaid, and not subject to the three percent points and fees cap. In addition, the Texas Supreme Court confirmed its original opinion that a power of attorney is part of the “closing process” for a home equity loan, and Section 50(a)(6)(N) of the Texas Constitution precludes a borrower from closing the loan through an attorney-in-fact under a power of attorney not itself executed at the office of the lender, an attorney at law, or a title company. Based on the Supplemental Opinion, lenders’ internal audits and quality assurance processes may exclude bona fide discount points from the Texas home equity three percent points and fees limitation. Furthermore, if lenders were previously including per diem interest in the points and fees limitation, per diem interest may be excluded as well. Melanie A. Feliciano Esq. is DocMagic Inc.’s chief legal officer and currently serves as editor-in-chief of DocMagic’s electronic compliance newsletter, The Compliance Wizard. She received her JD from the Georgetown University Law Center, and is licensed in California and Texas. She may be reached by phone at (800) 649-1362 or e-mail melanie@docmagic.com.
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Investment within MBS were pensation classes for at least three years? essentially stacked on each other such that, as losses were realized within and the ++Mandatory Arbitration loan portfolios, bond holders at the Financed Single-Premium Insurance bottom of the stack would have their Do your policies and procedures investments ‘written-down’ first. Once address provisions that: their class was deemed to have been ++Prohibit contracts or agreements fully written-down, loan losses would from requiring consumers to submit start eating away at the next class,mortand disputes concerning a residential so it would untilequity losses line would evengage loan orgohome of credit tually be allocated to the most senior to arbitration and prohibit applying or class. What made enticingor foragreebond interpreting suchthis contracts investors who felt that the pools of ments to waive federal statutory causes mortgages were not sufficiently diverse, of action? from either a financing borrower oforany collateral ++Prohibit premiperspective, is that they could simply ums or fees for credit insurance or debt request a class created which exhibcancellation orbe suspension in connecited greater cushion than existed at the tion with a consumer credit transaction pool’s stated LTV. This was particularly secured by a dwelling?20 important for financial liquidity providers, suchpolicies as GSEs, banks 2. Do your contain all and the insurance companies, which were relevant disclosures required by only the capitalized new rules? to absorb sporadic losses in their loansyou and use investments. This extra ++Do model disclosure cushion, called subordination, forms and language contained proved in the effective in many ways though would regulatory guidance? ultimately not the disclosures same as choosing ++If not, arebeyour clearly loans with a lower LTV begin with.are written in a way that toconsumers In time, the techniques used to turn likely to understand? loans into would be used ++Are thesecurities disclosures presented in a again to repackage securities into new way that is likely to call the consumer’s securities.toNew types and of significance investment attention the nature trusts were developed, or expanded, to of the information in the notice? create additional liquidity for MBS. For ++Have disclosures been reviewed example, collateralized debt obligaby compliance and audit? tions (CDOs) and structured investment vehicles allowed specialized 3. Have(SIVs) the policies been reviewed investors the ability to additionally by the board (or similar oversight funcdiversifyand or senior concentrate what were tions) management as already diversified or concentrated appropriate, the compliance officer, MBS.management In a sense, these types investrisk firm, or legalofcounsel? ment trusts were able to replicate both ++Were any concerns identified at the regulated financial liquidity this level? providers found as well as the ++If yes, have today they been resolved? unregulated speculative trusts which were subjected to Pecora Committee 4. Do the policies reflect your actual investigation years earlier. practices? ++Do you have testing planned to Post-mortgage crisis confirm this?
reform efforts
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