Part 2. TEXAS DEPARTMENT OF BANKING

Chapter 12. LOANS AND INVESTMENTS

Subchapter B. LOANS

7 TAC §12.32

The Finance Commission of Texas (commission) adopts an amendment to §12.32, concerning loan fees and charges, with changes to the proposed text as published in the November 7, 2003, issue of the Texas Register (28 TexReg 9630).

As amended, §12.32(a)(2) conforms to Finance Code, §34.203(e). The former text of §12.32(a)(2) permitted the conclusion that all consumer loans payable in two or more installments are subject to certain consumer loan fee limitations (see Finance Code, §342.005). However, consumer loans made at unregulated rates can include loan fees because these consumer loans are not subject to Finance Code, Title 4, Subtitle B.

The commission made non-substantive changes to further conform and clarify §12.32 as the result of two comments received. The Independent Bankers Association of Texas expressed its support for the amendment. Another commenter stated that it was not clear how §12.32 would apply to open-end lines of credit secured by real estate. The commission agrees, and has added the phrase "closed end" to §12.32(a)(1)(A) for clarification.

Finance Code, §31.003(a), authorizes the commission to adopt rules necessary or reasonable to implement and clarify Finance Code, Title 3, Subtitle A. In adopting the amendment to §12.32, the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive position of state banks with regard to national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development in this state.

§12.32.Loan Fees and Charges.

(a) Applicability.

(1) Finance Code, §34.203, and this section apply to:

(A) closed end first lien residential real estate loans;

(B) loans other than for personal, family, or household use (i.e., commercial loans including all commercial real estate loans); and

(C) loans for personal, family, or household use that are repayable in a single installment (i.e., single pay consumer loans).

(2) Finance Code, §34.203, and this section do not apply to a consumer loan payable in two or more installments that is subject to Finance Code, Title 4, Subtitle B.

(b) Reasonable fees authorized. A bank may require a borrower to pay all reasonable expenses and fees incurred in connection with the making, closing, disbursing, extending, readjusting, or renewing of a loan subject to this section, including fees paid to third parties as well as charges and fees paid to the bank itself for the services of the bank employees. However, such charges may not include fees paid by the bank (in addition to regular salary or director's fee) to an officer or director for services rendered within the course and scope of his or her employment with the bank. Subject to limitations of other law, possible fees and charges which may be charged and collected under this section include fees for underwriting, appraisal, document preparation, title insurance or abstract and opinion, insurance (including casualty coverage for collateral and credit products), credit reports, escrows, and filing fees, among others.

(c) Calculation of reasonable fee.

(1) Authorized loan fees must be reasonably related to the costs incurred by the bank. In establishing loan fees, a bank may establish fixed fees for underwriting activities for various categories of loans. In establishing such fixed fees, the bank may take into consideration its average costs in various activities, including but not limited to the average cost of taking an application, obtaining necessary reports and documentation, review of credit reports, analysis of the loan proposal and the prospective borrower's ability to repay, preparation of documents, loan review, and closing activities, plus a reasonable overhead factor. In lieu of conducting its own analysis, where relevant a bank may accept as reasonable and rely on the functional cost analysis prepared by the Board of Governors of the Federal Reserve System.

(2) This section does not require a bank to charge its borrower the full, true cost of accepting and consummating a lending transaction. For example, a bank may choose to assess a lower than actual cost loan fee on smaller consumer single pay loans in the interest of making loans more affordable to low to moderate income borrowers, or may deliberately underestimate its actual costs to provide a margin of security regarding compliance with law.

(3) Fees and expenses charged and collected in accordance with the Finance Code, §34.203, and in accordance with this section are not considered interest or compensation charged by the bank for the use, forbearance, or detention of money. However, fees and expenses which do not comply with these requirements may be characterized in litigation as interest.

(d) Collection of fee. Loan fees may be collected separately or added to the amount of the promissory note and financed as part of the loan.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on April 16, 2004.

TRD-200402545

Everette D. Jobe

Certifying Official

Texas Department of Banking

Effective date: May 6, 2004

Proposal publication date: November 7, 2003

For further information, please call: (512) 475-1300

7 TAC §29.3

The Finance Commission of Texas (commission) adopts the repeal of §29.3, concerning an exemption for commercial transactions, without changes to the proposal as published in the March 5, 2004, issue of the Texas Register (29 TexReg 2163).

Section 29.3 was initially adopted to implement former Finance Code, §152.103, which authorized the banking commissioner, by rule, to exempt persons engaged in certain commercial transactions in interstate commerce from the licensing requirements of Finance Code, Chapter 152 (Chapter 152). In 2001, the Texas Legislature amended Finance Code, §152.103, and deleted the commercial transaction exemption from that section. At the same time, the legislature added a new, broader commercial transaction exemption as Finance Code, §152.202(a)(6). Section 152.202(a)(6) incorporated the qualifying elements of §29.3 and eliminated the requirement that the exemption be established by rule. As a result of the amendments, §29.3 is unnecessary.

The commission received no comments regarding the proposed repeal.

The repeal is adopted under Government Code, §2001.039, which requires a state agency to review each of its rules every four years and readopt, readopt with amendments, or repeal a rule based upon the agency's rule review and its determination as to whether the reasons for initially adopting the rule continue to exist.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on April 16, 2004.

TRD-200402546

Everette D. Jobe

Certifying Official

Texas Department of Banking

Effective date: May 6, 2004

Proposal publication date: March 5, 2004

For further information, please call: (512) 475-1300

Chapter 80. MORTGAGE BROKER AND LOAN OFFICER LICENSING

Subchapter B. PROFESSIONAL CONDUCT

7 TAC §80.9

The Finance Commission of Texas (the "Finance Commission") adopts amendments to 7 TAC §80.9, Required Disclosures, which relates to the disclosures which a mortgage broker or loan officer must give to a mortgage loan applicant, without changes to the proposed text as published in the March 12, 2004, issue of the Texas Register (29 TexReg 2489). The text will not be republished.

The purpose of the amendment is to provide for a more detailed statement as to how consumers may file complaints and to more prominently give notice about the Mortgage Broker Recovery Fund which is administered by the Texas Savings and Loan Department.

The commission received no comments.

The amendments are adopted under Finance Code, Section 11.306, which authorizes the Finance Commission to adopt mortgage broker rules as provided by Chapter 156 of the Act, and under Finance Code, Section 156.102(a) and (b), which authorizes the commissioner of the Texas Savings and Loan Department, subject to review and compliance with the directives of the Finance Commission, to adopt and enforce rules necessary for the intent of or to ensure compliance with the Act.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on April 19, 2004.

TRD-200402587

John Fleming

General Counsel

Texas Savings and Loan Department

Effective date: May 9, 2004

Proposal publication date: March 12, 2004

For further information, please call: (512) 475-1353

7 TAC §80.10

The Finance Commission of Texas (the "Finance Commission") adopts amendments 7 TAC §80.10, Prohibition on False, Misleading, or Deceptive Practices and Improper Dealings by adding in subsection (b) a new paragraph (4) and new subsections (c) and (d) relating to improper dealing. The amendments are adopted without changes to the proposed text as published in the March 12, 2004, issue of the Texas Register (29 TexReg 2491). The text will not be republished.

The amendment prohibits the mislabeling of a fee or a charge as a "discount point" when it is retained by a mortgage broker, loan officer or company affiliate who is not a lender, or when the fee or charge is not reimbursement for sums advanced to the lender to "buy down" the interest rate on the loan. The adoption amends 7 TAC §80.10(b) which outlines certain acts or practices which are defined as "improper dealing" to add a new paragraph (b)(4). This amendment is intended to prevent misrepresentation as to the nature of a fee or charge collected by licensees or their company affiliates when the fee or charge is called a "discount point" by the mortgage broker or loan officer, but the fee or charge is not used to "buy down" or otherwise reduce the stated interest rate charged by the lender for the loan.

The amendment permits a mortgage broker to designate or label a fee or charge as a "discount point" under the following circumstances:

(1) If the broker is in fact the lender. For purposes of the amendment, the mortgage broker will be considered the lender if: the mortgage broker or loan officer or the entity with which he or she is affiliated (as evidenced by the records of the Department) is the person or entity to whom the obligation is initially payable as indicated on the face of the note or other written evidence of indebtedness.

(2) If the broker has paid the lender on behalf of the consumer to buy down the interest rate on a loan and the receipt of discount points by the broker at closing is a reimbursement for the broker's expenditure as demonstrated by clear and convincing evidence. This would include situations in which the payment to the lender is netted against fees otherwise paid or payable by the lender to the broker.

Subsections (c) and (d) reemphasize that the amendment to (b)(4) does not address the question of whether any properly disclosed fee may be legally charged.

Under no circumstances would the mortgage broker or loan officer be entitled to charge or retain a discount point if the loan does not close.

The commission received comments in support of the proposed rule from the Texas Savings and Community Bankers Association and from two individual mortgage brokers. In its letter of support the Texas Savings and Community Bankers Association stated that it believes that all fees must be appropriately labeled and should not be misleading to the public.

The commission received two comments which were in essence questions as to how the amendments would be interpreted and enforced. One commenter stated that some persons had interpreted statements made by the commissioner to mean that under the rule a mortgage broker who was not a lender could charge a discount point if the broker established by clear and convincing evidence that the mortgage broker had established a "price" for the loan based upon all of the broker's available options, and had documented that "but for the discount points" the broker would have elected to offer the borrower a higher priced interest rate from the wholesaler. The commissioner responds that under the amended rule this would only be permitted if the broker is also the lender, ie, the person who is named as the initial payee in the loan documents. The second comment was an inquiry as to how the rule would impact FHA and VA loans. Comments have been made that because of federal restrictions on origination fees for FHA and VA loans, the rule will potentially cause brokers to no longer offer these products to Texas consumers. This issue has been previously raised in public comments before the commission. The commissioner believes that the restrictions on broker compensation imposed by federal regulations on these laws is not a compelling reason to permit the continued mislabeling of these fees to consumers.

The commission has received three comments in opposition to the proposed amendments. The Texas Association of Mortgage Brokers expressed its general support for "clear, accurate, and consistent disclosures of mortgage fees, rates and terms." However, the Association opposes the proposal because it believes it places mortgage brokers at a competitive disadvantage and negatively impacts consumers. The Association points out that a recent study on disclosures conducted by the Federal Trade Commission concluded that certain disclosures which would have been required under then pending changes to RESPA (subsequently withdrawn) resulted in consumers often inadvertently choosing higher priced options offered by lenders over lower priced options offered through mortgage brokers. This seeming anomaly occurred because of the proposed method for disclosing yield spread premiums. The commissioner is familiar with this study, but draws somewhat different conclusions. The commissioner views the study as illustrating the difficulty experienced by the average consumer in evaluating competing mortgage loan products. The commissioner has concluded that if anything, the study reinforces the need for consistent definitions of mortgage terms throughout the mortgage loan industry in order to minimize potential confusion by consumers. The Association also expressed support for the option of brokers being able to label and charge discount points even when the mortgage broker is not the lender so long as the broker maintains an internal price sheet or otherwise documents internal pricing showing the loan price with or without discount. This is similar to the approach outlined in the comment requesting clarification discussed above. The commissioner believes that the mortgage broker may do so, but only if the mortgage broker is the lender. The commissioner believes that the objective of the "non-lender" mortgage broker, which is to collect one or more additional points at closing for his or her services, can be properly done by simply labeling these points as "mortgage broker compensation" and not as discount points.

The Association proposed amending the rule to permit the mortgage broker to label a charge as a discount point so long as the broker provided the borrower a statement that the loan discount charge may not result in a reduction in interest rate. Although this option places the consumer on notice that the loan rate may not be reduced by the payment of the points, this option was ultimately rejected because it does not further the goal of achieving consistent disclosures using consistent terminology throughout the mortgage industry. In sum, the commissioner appreciates the considered and thoughtful comments offered by the Association, but respectfully disagrees with the comments for the above cited reasons.

Another commenter opposing the rule stated that the rule was legally deficient for two reasons. First, Finance Code 156.102(b) provides that the Finance Commission may adopt rules to prohibit false, misleading, or deceptive practices, but may not adopt rules restricting "competitive bidding." The commenter suggested that the proposed rule would restrict "competitive bidding" (a third commenter framed the issue as a rule which regulated prices contrary to free market principles). The commission reiterates that the rule does not restrict what a mortgage broker may charge; the rule does not "cap" or otherwise limit a mortgage broker's fees. The rule only requires that all fees and charges be properly labeled. The rule clearly falls in the first part of §156.102(b) relating to prohibition of false, misleading, or deceptive practices. The commission fails to see how the rule limits competitive bidding solely because the mortgage broker may be required to label the fee as "mortgage broker compensation" rather than "discount points." The use of a proper label does not in and of itself result in any reduction or limitation on compensation unless the consumer is only paying the "discount points" because of a misunderstanding that the consumer is paying the points to get a discounted loan rate.

Second, the commenter suggests that the rule cannot be adopted because §156.102(d) requires the commission to consult with the Mortgage Broker Advisory Committee in connection with proposing and adopting rules. The commission did consult with the Mortgage Broker Advisory Committee on this rule at its February 4, 2004 meeting. The minutes of that meeting reflect that the committee suggested certain revisions to the draft rule which were incorporated into the rule as proposed and published for comment in the Texas Register . To the extent that the commenter implies that the word "consult" should be interpreted to require approval of a rule by the Advisory Committee, the commission disagrees. The commission believes that the word consult should be interpreted by its plain meaning which is "to ask the advice or opinion of" or "to confer" ( Webster's Ninth New Collegiate Dictionary ).

The third individual commenting in opposition expressed several of the same comments addressed above. Additionally, the commenter suggested that by permitting the labeling of a charge as a discount point by those who "table fund", the commission was creating an artificial method of business that many wholesale lenders will have difficulty complying with. The commission believes that this assertion is speculative at best. The commission understands that many wholesale lenders operating in Texas permit table funding. The commission also believes that mortgage brokers whose wholesale lenders will not permit table funding can still maintain their compensation levels by correctly labeling the compensation as "broker compensation" rather than using the misleading term "discount points."

The amendments are adopted under Finance Code , Section 11.306, which authorizes the Finance Commission to adopt mortgage broker rules as provided by Chapter 156 of the Act, and under Finance Code , Section §156.102(a), which authorizes the commissioner, subject to review and compliance with the directives of the Finance Commission, to adopt and enforce rules necessary for the intent of or to ensure compliance with the Act.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on April 19, 2004.

TRD-200402589

John Fleming

General Counsel

Texas Savings and Loan Department

Effective date: May 9, 2004

Proposal publication date: March 12, 2004

For further information, please call: (512) 475-1353

7 TAC §80.11

The Finance Commission of Texas (the "Finance Commission") adopts amendments to 7 TAC §80.11 Advertising concerning content and disclosures to which mortgage brokers or loan officers must adhere. The commission adopts the amendments without changes to the proposed text as published in the March 12, 2004 issue of the Texas Register (29 Tex Reg 2493). The text will not be republished.

The amendments revise §80.11(a) to provide that advertisements for mortgage loans which are offered by or through a mortgage broker or loan officer must contain the information which a creditor is required to provide in an advertisement under Truth in Lending (Regulation Z, 12 CFR Part 226) whether or not the mortgage broker or loan officer is a creditor for purposes of Regulation Z. The amendments will further require that advertising include: (1) the name and license number of the mortgage broker or loan officer or the business entity through which the mortgage broker or loan officer conducts its activities; (2) a physical street address for the mortgage broker, loan officer, or business entity; and (3) the license number of the mortgage broker or loan officer. New subsection (c) provides a definition of "advertising."

The adopted amendments also modify §80.11 (a)(4) [to be renumbered as (a)(6)] to require clear identification of the mortgage broker or loan officer, or the corporation, partnership, or other business through which activities are conducted, including the name, license number, and physical street address.

Current subsection (a)(1) is renumbered as (a)(7) and modified to reinforce the principle that, in addition to complying with the advertising requirements of §80.11, mortgage brokers or loan officers must also comply with all other federal or state laws when applicable.

The commission received no comments on the proposed rule.

The amendments are adopted under Finance Code, Section 11.306, which authorizes the Finance Commission to adopt mortgage broker rules as provided by Chapter 156 of the Act, and under Finance Code, Section 156.102(a) and (b), which authorizes the Commissioner of the Texas Savings and Loan Department, subject to review and compliance with the directives of the Finance Commission, to adopt and enforce rules necessary for the intent of or to ensure compliance with the Act.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on April 19, 2004.

TRD-200402590

John Fleming

General Counsel

Texas Savings and Loan Department

Effective date: May 9, 2004

Proposal publication date: March 12, 2004

For further information, please call: (512) 475-1353