The Supreme Court of Texas has finally spoken! Discount points are not considered interest under Section 50(a)(6)(E) of the Texas Constitution.
Section 50(a)(6)(E) provides that a Texas home equity borrower and the borrower’s spouse may not be required 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 …
Historically, home equity lenders have been excluding discount points from the above three percent points and fees limitation based on published interpretations of The Finance Commission of Texas, The Credit Union Commission of Texas and Texas Bankers Association (collectively, the “Commissions”) that discount points are to be considered interest under Section 50(a)(6)(E). The Commissions’ position was that in capping “fees to any person that are necessary to originate, evaluate, maintain, record, insure or service” a home equity loan, the framers and those ratifying intended to cap only fees to any person other than the lender. (Finance Commission of Texas, et al. v. Norwood, et al., No. 10-0121, Tex. Sup. Ct. June 21, 3013)
Not so, said the Texas Supreme Court in a decision rendered on June 21, 2013. In Finance Commission of Texas, et al. v. Norwood, et al., No. 10-0121, (Tex. Sup. Ct. June 21, 3013), the Texas Supreme Court held that the term “interest,” as used in Section 50(a)(6)(E) of the Texas Constitution, means simply the “amount determined by multiplying the loan principal by the interest rate.”
Accordingly, discount points should now be included in the Texas home equity three percent points and fees limitation. Note that origination fees will continue to be included in the limitation.
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 [email protected]