Saturday, February 1, 2014

Texas Supreme Court Further Clarifies Home Equity Lending

Summary:
In a Supplemental Opinion On Motion for Rehearing dated January 24, 2014, the Supreme Court of Texas ruled that: (1) per diem interest and legitimate discount points are not included in the constitutional 3% fee cap in connection with Texas home equity loans secured by homestead; and (2) a power of attorney can only be used in closing a home equity loan if that power of attorney was properly executed in the office of a title company, an attorney, or of the lender.

Impact:
With this additional ruling from the high court, lenders can now exclude prepaid per diem interest from the 3% fee cap.  "Legitimate" discount points can also be excluded, but the Court did not define what constitutes "legitimate".  The intent of the Court was, probably, to state "bona fide" discount point, which is a concept familiar to the mortgage lending industry.  Like with the exclusion of bona fide discount points in calculating the QM 3%, lenders will likely be required to demonstrate the discounts were in fact bona fide.  It's possible the Court may issue additional clarification on "legitimate discount points", and I will continue to monitor for developments on this.  For lenders that only originate QM loans, they will need to comply with both the Texas 3% fee cap and QM 3% when the Texas home equity loan amount is equal to or greater than $100K. 

In addition, borrowers, who must sign closing documents with the help of a power of attorney, will have to execute a Power of Attorney in the office of an attorney, the lender, or title company.  As a practical matter, title companies that close Texas home equity loans may require evidence, proof, or certification that a Power of Attorney was indeed executed in one of the permitted locations.  To be safe, a lender should not allow an agent/attorney-in-fact to execute Texas home equity loan closing documents unless it is certain that the power of attorney giving authority to the agent was properly executed in the office of a title company, an attorney, or of the lender.      

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