documents
signed by the owner related to the extension
of credit).
In proposing the new interpretation, the commissions considered and gave
weight to the usage of the term "instrument" employed by the Legislature in
Finance Code §342.454 which defines the term "instrument" for purposes
of the Code regulating certain consumer loans, including secondary mortgage
loans on a consumer's homestead. In that section, the term "instrument" expressly
includes a note, assignment, security agreement, or mortgage. Each of these
documents is included within the scope of the
Webster's
definition, and each of these documents creates or alters a legal
obligation. Thus, the commissions believe that the proposed interpretation
is consistent with the traditional definition of the term and its historical
usage by the Legislature in the context of creation of liens on homesteads.
In the proposed interpretation, the commissions give special consideration
to the phrase "
blanks left to be filled in
."
The phrase, which qualifies the term "instrument," is deemed to mean something
more than the requirement that an owner not sign an instrument which contains
blanks. If this were the intent, there would be no need to add the phrase
"
left to be filled in
." The proposed interpretation
is consistent with Finance Code §342.506 which prohibits a lender from
taking an instrument "in which a blank is left to be filled in after the loan
is made." By giving appropriate attention to the phrase "
blanks left to be filled in
," the proposed interpretation is consistent
with the directive that in interpreting a constitutional provision one should
avoid a construction which renders any provision meaningless or inoperative
and must lean in favor of a construction which will render every word operative,
rather than one which may make some words idle and nugatory. See
Hanson v. Jordan
145 Tex. 320, 198 S.W. 2d 262 (1946).
Contemporary mortgage lending practices rely heavily on the use of preprinted
or computer generated "standard forms." The use of these forms benefits consumers
by lowering transaction costs and by providing uniformity of documentation
with a company's portfolio and within the industry. Often these forms incorporate
a menu of options for certain terms such as payment terms and interest rates,
or optional insurance coverages. The selection of one of the options necessarily
constitutes the rejection of the unselected option. In these instances, the
unselected option will be left blank by design. For instance, some documents
may provide that in a variable rate product, the customer may select a rate
that adjusts monthly, quarterly, or yearly. The checking of a box to select
a quarterly adjust period is a
de facto
rejection
of the monthly option or the yearly option, and those boxes are left blank.
In a similar context, an instrument may provide the consumer with the option
to include credit life insurance. The consumer may initial one blank to accept
this optional coverage or may initial the other blank to decline coverage.
When the consumer initials the box declining coverage, the instrument should
not be deemed to violate the constitution because the "acceptance" blank is
left empty. If an unscrupulous lender subsequently altered the instrument,
then the legal rules on alteration would protect the consumer. Additionally,
because the lender is required to provide the consumer with a copy of all
documents signed in connection with the equity loan under Section 50(a)(6)(Q)(v),
the consumer would be able to document the consumer's choice and the subsequent
alteration.
Section 153.22
Section 50(a)(6)(Q)(v) provides that, at the time the extension of credit
is made, the lender must "provide the owner of the homestead a copy of all
documents signed by the owner related to the extension of credit." Existing §153.22
interprets Section 50(a)(6)(Q)(v) by requiring the lender to provide the owner
with copies of all documents that are signed at closing in connection with
the equity loan, but not requiring the lender to provide the owner with copies
of documents that were signed prior to closing.
Existing §153.22 was drafted to give meaning to the plain language
of the constitution and to avoid unnecessary regulatory burden. By requiring
the lender to provide the owner with copies of only those documents signed
by the owner at closing, existing §153.22 assures that all of the copies
the owner receives are of documents that are signed in the process of obtaining
an equity loan, that are in the actual or constructive possession of the lender,
and that are signed in direct relationship to the equity loan.
In adopting existing §153.22, the commissions placed greatest importance
on assuring that the owner was fully informed. Secondarily, the commissions
strove to reduce the number of irrelevant or marginally relevant documents
the lender provides the owner at closing. Any information the owner might
glean from copies of irrelevant or marginally relevant documents provided
at closing, could be overshadowed by the confusion caused by adding more documents
to the stack of documents the owner receives at closing. Additionally, the
unnecessary regulatory burden of requiring the lender to provide these copies
exceeds the benefit, if any, to the owner. The commissions believe that avoiding
unnecessary regulatory burden and owner confusion is more important than requiring
the lender to provide copies of irrelevant or marginally relevant owner-signed
documents that do not create or alter an obligation of a party to the equity
loan.
However, because existing §153.22 limits Section 50(a)(6)(Q)(v) to
only those documents that are signed at closing, it may occasionally exclude
a document that is signed by the owner in direct relation to the equity loan
merely because it is signed prior to closing. The commissions determined that
there is a way to rewrite existing §153.22 to exclude most or all irrelevant
and marginally relevant owner-signed documents and include any directly related
documents signed by the owner prior to closing. The commissions believe that
proposed §153.22 accomplishes this while giving full effect to the intent
of the drafters and voters.
Proposed §153.22 improves on existing §153.22 by requiring that
a lender provide the owner with directly relevant documents signed by the
owner whether signed at or prior to closing. Further, although different from
the exclusion in existing §153.22, proposed §153.22 also contains
an exclusion of irrelevant or marginally relevant documents signed by the
owner. Specifically, proposed §153.22 requires a lender to provide the
owner with all documents in the lender's actual or constructive possession,
custody, or control that were signed by the owner as a condition to obtaining
the equity loan; and were either: (1) intended for use in the process of evaluating
and underwriting the equity loan; or (2) signed by the owner to create a legal
obligation of the owner in favor of the originator or lender.
In some equity loan transactions, proposed §153.22 will encompass
more owner-signed documents than existing §153.22, and one or more of
these documents may already be in the owner's possession. However, the public
benefit of requiring the lender to provide the owner with copies of all documents
the owner signed directly related to the equity loan transaction outweighs
any minimally increased regulatory burden on the lender or risk of further
confusion of the owner caused by requiring the additional documents.
Existing §153.22 also addresses providing the owner with copies of
documents signed by the owner after closing. Proposed §153.22 does not
provide an interpretation regarding documents signed by the owner after closing
because, although the commissions believe it is important for owners to have
copies of any such documents (such as any document whereby the owner exercises
the right of rescission), these documents are not addressed in Section 50(a)(6)(Q)(x)(d).
It is worth noting that Section 50(a)(6)(Q)(x)(d) provides that when an
owner notifies a lender or holder that it failed to provide documents required
by Section 50(a)(6)(Q)(v), the lender or holder has 60 days to correct the
failure by delivering the documents to the owner. If a lender or holder does
not deliver the documents within 60 days after such notice, the lender or
holder forfeits all principal and interest of the equity loan.
Harold Feeney, Credit Union Commissioner, on behalf of the Texas Credit
Union Commission and Leslie L. Pettijohn, Consumer Credit Commissioner, on
behalf of the Finance Commission of Texas have determined that for the first
five-year period the interpretations are in effect there will be no fiscal
implications for state or local government as a result of administering the
interpretations.
Commissioner Feeney and Commissioner Pettijohn also have determined that
for each year of the first five years the interpretations as proposed are
in effect, the public benefit anticipated as a result of the proposed interpretations
will be to support the stability of the credit markets and ensure that equity
loans are widely available to Texas homeowners, through the creation of reliable
standards and guidelines.
There is no anticipated cost to persons who are required to comply with
the interpretations as proposed. There will be no adverse economic effect
on small or micro businesses.
Written comments on the proposed interpretations may be submitted to Kerri
T. Galvin, General Counsel, Credit Union Department, 914 East Anderson Lane,
Austin, Texas 78752-1699, or to Sealy Hutchings, General Counsel, Office of
Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207
or by email to kerri.galvin@tcud.state.tx.us or sealy.hutchings@occc.state.tx.us.
To be considered, a written comment must be received on or before the 40th
day after the date the proposed sections (interpretations) are published in
the
Texas Register
. At the conclusion of the
40th day after the proposed interpretations are published in the
Texas Register
, no further written comments will be considered or accepted
by the commissions.
The Credit Union Commissioner and the Consumer Credit Commissioner have
been delegated the authority to conduct a public meeting on behalf of the
commissions for the purpose of receiving oral comments, views, and/or testimony
concerning the proposed interpretations. A public meeting will be held in
Austin on April 6, 2006, at 2:00 p.m. in the State Finance Commission Building,
William F. Aldridge Hearing Room, located at 2601 North Lamar Boulevard. To
be considered, an oral comment must be received at this public meeting; at
the conclusion of the meeting, no further oral comments will be considered
or accepted by the commissions.
Persons with disabilities who are planning to attend the meeting and have
special communication or other accommodation needs should contact Joann McAnally
at the Office of Consumer Credit Commissioner at (512) 936-7640. Requests
should be made as far in advance of the meeting as possible.
The interpretations are proposed pursuant to Texas Finance Code, §11.308
and §15.413, which separately and independently authorize each commission
to issue interpretations of the Texas Constitution, Article XVI, §50(a)(5)
- (7), (e) - (p), (t), and (u), subject to Texas Government Code, Chapter
2001.
The Texas Constitution, Article XVI, §50(a)(6) is affected by the
proposed interpretations.
§153.13.Preclosing Disclosures: Section 50(a)(6)(M)(ii).
An equity loan may not be closed before one business day after the
date that the owner of the homestead receives a final itemized disclosure
of the actual fees, points, interest, costs, and charges that will be charged
at closing. If a bona fide emergency or another good cause exists and the
lender obtains the written consent of the owner, the lender may provide the
documentation to the owner or the lender may modify previously provided documentation
on the date of closing.
(1)
A lender may satisfy the disclosure requirement of this
section by delivery to the borrower of a properly completed Department of
Housing and Urban Development (HUD) disclosure Form HUD-1 or HUD-1A.
(2)
Bona fide emergency.
(A)
An owner may consent to receive the preclosing disclosure
on the date of closing in the case of a bona fide emergency occurring before
the date of the extension of credit. An equity loan secured by a homestead
in an area designated by Federal Emergency Management Agency (FEMA) as a disaster
area is an example of a bona fide emergency if the homestead was damaged during
FEMA's declared incident period.
(B)
To document an emergency modification, the lender should
obtain a written statement from the owner that:
(i)
describes the emergency;
(ii)
specifically states that the owner consents to receive
the preclosing disclosure on the date of closing;
(iii)
bears the signature of all of the owners entitled to
receive the preclosing disclosure; and
(iv)
affirms the owner has received notice of their right to
receive a final itemized disclosure containing all fees, costs, points, or
charges one day prior to closing.
(3)
Good cause.
(A)
Good cause to modify the preclosing disclosure or to receive
a subsequent disclosure on the date of closing may only be established by
the owner.
(i)
The term "good cause" as used in this section means a legitimate
or justifiable reason, such as financial impact or an adverse consequence.
(ii)
The term "de minimus" as used in this section means a
very small or insignificant amount.
(B)
At the owner's election, a de minimus good cause standard
may be presumed if:
(i)
the modification does not create a material adverse financial
consequence to the owner;
(ii)
a delay in the closing would create an adverse consequence
to the owner;
(iii)
the total actual disclosed fees, costs, points, and charges
on the date of closing do not exceed in the aggregate more than 0.125 percent
of the principal amount of the loan (e.g. 0.125 percent on a $80,000 principal
loan amount equals $100) from the initial preclosing disclosure;
(iv)
each itemized fee, cost, point, or charge does not exceed
more than 0.125 percent of the principal amount of the loan than the amount
disclosed in the initial preclosing disclosure; and
(v)
either:
(I)
the modification is necessary because of an accidental
and bona fide error, such as a mathematical computation error, despite control
systems that are in place to detect and prevent this type of error; or
(II)
the modification is necessary because of an unanticipated
additional fee, that is to be paid only to a third party and not to the lender
or the mortgage originator.
(C)
To document a good cause modification of the disclosure,
the lender should obtain a written statement from the owner that:
(i)
describes the good cause standard;
(ii)
specifically states that the owner consents to receive
the preclosing disclosure on the date of closing;
(iii)
bears the signature of all of the owners entitled to
receive the preclosing disclosure; and
(iv)
affirms the owner has received notice of their right to
receive a final itemized disclosure containing all fees, costs, points, or
charges one day prior to closing.
(D)
Nothing in this section precludes an owner from establishing
good cause under independent facts that cause the owner material financial
hardship or material adverse consequences if the equity loan were not allowed
to close on the scheduled date of closing.
(4)
An equity loan may be closed at any time during normal
business hours on the next business day following the calendar day on which
the owner receives the preclosing disclosure or any calendar day thereafter.
(5)
The owner maintains the right of rescission under Section
50(a)(6)(Q)(viii) even if the owner exercises an emergency or good cause modification
of the preclosing disclosure.
§153.18.Limitation on Application of Proceeds: Section 50(a)(6)(Q)(i).
An equity loan must be made on the condition that the owner of the
homestead is not required to apply the proceeds of the extension of credit
to repay another debt except debt secured by the homestead or debt to another
lender.
(1)
The lender may not require an owner to repay a debt owed
to the lender, unless it is a debt secured by the homestead. The lender may
require debt secured by the homestead or debt to another lender or creditor
be paid out of the proceeds of an equity loan. The lender may not otherwise
specify or restrict the use of the proceeds.
(2)
An owner may use the proceeds of an equity loan for any
purpose. An owner is not precluded from voluntarily using the proceeds of
an equity loan to pay on a debt owed to the lender making the equity loan.
If the owner uses proceeds from the equity loan to pay any amount on a debt
to the lender making the equity loan, whether the payment was voluntary is
a question of fact.
§153.20.No Blanks in Any Instrument: Section 50(a)(6)(Q)(iii).
(a)
This Section of the Constitution prohibits the owner of
the homestead from signing any instrument in which blanks are "left to be
filled in". This Section is intended to prohibit a person other than the owner
from completing one or more blanks in an instrument after the owner has signed
the instrument and delivered it to the lender, thereby altering a party's
obligation created in the instrument. Not all documents or records executed
in connection with an equity loan are instruments, and not all blanks contained
in an instrument are "blanks that are left to be filled in" as contemplated
by this Section.
(b)
As used in this Section, the term instrument means a document
or record which creates a legal obligation of the owner in favor of an originator
or lender. A disclosure required under state or federal law is not an instrument
if the disclosure does not create or alter the obligation of a party.
(c)
If at the time the owner signs an instrument, a blank is
completed or box checked which indicates the owner's election to select one
of multiple options offered (such as an election to select a fixed rate instead
of an adjustable rate) and the owner therefore by implication has excluded
the non-selected options, the instrument does not contain "blanks left to
be filled in" when the non-selected option is left blank.
§153.22.Copies of Documents: Section 50(a)(6)(Q)(v).
The phrase "documents signed by the owner related to the extension
of credit," as used in Section 50(a)(6)(Q)(v), means documents that are:
(1)
in the lender's actual or constructive possession, custody,
or control;
(2)
signed by the owner as a condition to obtaining the equity
loan; and
(3)
intended either:
(A)
for use in the process of evaluating and underwriting the
equity loan; or
(B)
to create a legal obligation of the owner in favor of the
originator or lender.
This agency hereby certifies that the proposal
has been reviewed by legal counsel and found to be within the agency's legal
authority to adopt.
Filed with the Office of
the Secretary of State on February 17, 2006.
TRD-200600863
Leslie L. Pettijohn
Commissioner
Joint Financial Regulatory Agencies
Proposed date of adoption: April 12, 2006
For further information, please call: (512) 936-7640