TITLE 7.BANKING AND SECURITIES

Chapter 91. CHARTERING, OPERATIONS, MERGERS, LIQUIDATIONS

Subchapter J. CHANGES IN CORPORATE STATUS

The Credit Union Commission adopts the repeal of §91.1004, concerning conversion of charter. The repeal is adopted without changes to the proposal as published in the March 10, 2006, issue of the Texas Register (31 TexReg 1552).

This rule is being replaced by §§91.1005, 91.1006, 91.007, and 91.1008 which update the rule and divide the rule into four distinct rules for ease of use and clarity.

No written or oral comments were received on the proposed repeal.

The repeal is adopted under the provision of the Texas Finance Code, §15.402, which authorizes the Commission to adopt reasonable rules for administering Title 2, Chapter 15 and Title 3, Subchapter D of the Texas Finance Code and under Texas Finance Code §123.003, which allows a credit union to engage in any activity or exercise any power it could if it were operating as a federal credit union; §122.201, which authorizes the Commission to adopt rules regarding conversions to a federal credit union; §122.202, which authorizes the Commission to adopt rules regarding conversions to an out-of-state credit union; and §122.203, which authorizes the Commission to adopt rules regarding conversions to a state credit union.

The specific sections affected by the repeal are Texas Finance Code, §§123.003, 122.201, 122.202, and 122.203.

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 June 12, 2006.

TRD-200603173

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 2, 2006

Proposal publication date: March 10, 2006

For further information, please call: (512) 837-9236

7 TAC §91.1005

The Credit Union Commission adopts new §91.1005, concerning conversion to a Texas credit union, with no changes to the proposed text as published in the March 10, 2006, issue of the Texas Register (31 TexReg 1553).

The new rule updates and replaces a portion of §91.1004, concerning conversion of charter. Recently there had been some controversy surrounding two credit union conversions to mutual savings institutions, and the Commission's Legislative Advisory Committee directed the Department to seek input from interested parties and develop a more comprehensive and reasoned proposal regarding charter conversions. The Department participated in six private meetings with over 50 credit union presidents, conducted a public forum for credit unions and their members, and held a public hearing for all interested persons. Section 91.1004 addressed five different types of conversions. The Commission believes that greater clarity and ease of use could be achieved if the existing §91.1004 were separated into four distinct rules. Accordingly, new §91.1005 is being adopted to deal exclusively with conversions to a state credit union.

Written comments in support of the proposal were received from Suzanne Yashewski on behalf of the Texas Credit Union League. No oral comments were received on the proposal.

The specific section affected by the new rule is Texas Finance Code, §122.203.

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 June 12, 2006.

TRD-200603176

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 2, 2006

Proposal publication date: March 10, 2006

For further information, please call: (512) 837-9236

7 TAC §91.1006

The Credit Union Commission adopts new §91.1006, concerning conversion to a federal or out-of-state credit union, with no changes to the proposed text as published in the March 10, 2006, issue of the Texas Register (31 TexReg 1554).

The new rule updates and replaces a portion of §91.1004, concerning conversion of charter. Recently there had been some controversy surrounding two credit union conversions to mutual savings institutions, and the Commission's Legislative Advisory Committee directed the Department to seek input from interested parties and develop a more comprehensive and reasoned proposal regarding charter conversions. The Department participated in six private meetings with over 50 credit union presidents, conducted a public forum for credit unions and their members, and held a public hearing for all interested persons. Section 91.1004 addressed five different types of conversions. The Commission believes that greater clarity and ease of use could be achieved if the existing §91.1004 were separated into four distinct rules. Accordingly, new §91.1006 is being adopted to deal exclusively with conversions to a federal or out-of-state credit union.

Written comments in support of the proposal were received from Suzanne Yashewski on behalf of the Texas Credit Union League. No oral comments were received on the proposal.

The specific sections affected by the new rule are Texas Finance Code, §122.201 and §122.202.

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 June 12, 2006.

TRD-200603171

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 2, 2006

Proposal publication date: March 10, 2006

For further information, please call: (512) 837-9236

7 TAC §91.1007

The Credit Union Commission adopts new §91.1007, concerning conversion to a mutual savings institution, with no changes to the proposed text as published in the March 10, 2006, issue of the Texas Register (31 TexReg 1555).

The new rule updates and replaces a portion of §91.1004, concerning conversion of charter. Recently there had been some controversy surrounding two credit union conversions to mutual savings institutions, and the Commission's Legislative Advisory Committee directed the Department to seek input from interested parties and develop a more comprehensive and reasoned proposal regarding charter conversions. The Department participated in six private meetings with over 50 credit union presidents, conducted a public forum for credit unions and their members, and held a public hearing for all interested persons. Section 91.1004 addressed five different types of conversions. The Commission believes that greater clarity and ease of use could be achieved if the existing §91.1004 were separated into four distinct rules. Accordingly, new §91.1007 is being adopted to deal exclusively with conversions to a mutual savings institution.

New §91.1007 adds a requirement that the credit union provide members with certain information about a conversion to a mutual savings institution and give them an opportunity to provide comments prior to the credit union board's final vote on a conversion proposal. The new rule also increases the adoption threshold of the board of directors for a conversion proposal from a majority to two-thirds vote.

Written comments generally in support of the proposal were received from Suzanne Yashewski, on behalf of the Texas Credit Union League, and Leon Ewing, on behalf of FirstMark Credit Union. Written comments against the proposal were received from John Lederer, as an individual, and Robert L. Freedman on behalf of Silver, Freedman & Taft, L.L.P. No oral comments were received on the proposal.

One commenter stated that the requirement to post the information about the conversion proposal on the credit union's website should be expanded to require that it be posted "in a prominent position on the website." The Commission reviewed the provision and thought that it was adequate as written and declined to make the suggested revision.

One commenter stated that he did not believe the Commission had the authority to adopt a rule regulating conversions to mutual savings institution under §123.003 (the parity provision) of the Texas Credit Union Act which requires additional disclosures not required by the National Credit Union Administration (NCUA) rules. The commenter also claimed that the Commission does not have the authority to require more than a majority vote of the board of directors to propose a conversion since the Federal Credit Union Act and the NCUA rules require only a majority vote for federal credit unions.

The Commission disagrees with this commenter. Although §123.003 provides credit unions with some very important competitive flexibility, it is not wholly unlimited and must be read in conjunction with the rest of the Texas Credit Union Act, particularly §§15.102, 15.402, 121.0011 and 121.004. The Legislature has clearly bestowed upon the Commission the power to regulate credit unions, and there is no discernable intention on the part of the Legislature to strip the Commission of authority it has traditionally exercised in all other forms of corporate restructuring. Consequently, it is inappropriate to construe that the purpose of §123.003 is to limit, in any way, the authority of the Commission to reasonably regulate the method or manner by which a credit union exercises its rights and privileges if the rules are adopted after due consideration of the factors listed in §15.402. Accordingly, the Commission maintains that the Texas Credit Union Act gives the Commission sufficient authority to provide a system of state regulation that differs from the regulatory scheme imposed on federal credit unions under federal law.

Two commenters stated that requiring an additional disclosure over and above the three disclosures currently required by the NCUA, would cause the credit union to incur additional expense and "create more member confusion" because the disclosure required by the new rule might be different from NCUA's required disclosures. One commenter went on further to say that if proposed §91.1008 were adopted, it would also "require full [NCUA] disclosures, not partial [as set out in the proposed rule], would not ... be productive, and is merely an attempt by conversion opponents to have more time to attack an already lengthy and over regulated process."

Two other commenters applauded the new rule's requirement of early notice to members that the board is considering a conversion. "It is important that members have the opportunity to voice their opinions to the board early in the process." "It is important that members are notified of a possible conversion prior to the final vote of the board. This allows board members time necessary to thoughtfully consider member's thoughts or concerns on the issue. I support the inclusion of a clear explanation of the differences between and similarities of a credit union and a mutual savings institution as well as plain language disclosures of material facts surrounding the conversion."

The Commission agrees that clear and concise disclosures to the members and an opportunity to be heard early in the process are beneficial and therefore declines to delete the provision requiring notice to members prior to a final vote on the conversion proposal. The Commission does not believe that credit unions will be required to give the full disclosure currently required by NCUA at this preliminary stage. NCUA's authority over the disclosure process becomes effective only after the board has voted to adopt a conversion proposal. In addition, the notice that is required by the new rule does not have to be sent in a separate mailing, adding additional expense. It can be sent electronically or included in monthly statements or newsletters.

The specific section affected by the new rule is Texas Finance Code, §123.003.

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 June 12, 2006.

TRD-200603177

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 2, 2006

Proposal publication date: March 10, 2006

For further information, please call: (512) 837-9236

7 TAC §91.1008

The Credit Union Commission adopts new §91.1008, concerning conversion voting procedures and restrictions; filing requirements, with no changes to the text as published in the March 10, 2006, issue of the Texas Register (31 TexReg 1556).

The new rule updates and replaces a portion of §91.1004, concerning conversion of charter. Recently there had been some controversy surrounding two credit union conversions to mutual savings institutions, and the Commission's Legislative Advisory Committee directed the Department to seek input from interested parties and develop a more comprehensive and reasoned proposal regarding charter conversions. The Department participated in six private meetings with over 50 credit union presidents, conducted a public forum for credit unions and their members, and held a public hearing for all interested persons. Section 91.1004 addressed five different types of conversions. The Commission believes that greater clarity and ease of use could be achieved if the existing §91.1004 were separated into four distinct rules. Accordingly, new §91.1008 is being adopted to address the vote procedures, restrictions, and filing requirements for all conversions.

New §91.1008 specifies that the ballot must include certain information, including a statement that a "yes" vote means that the credit union will become [insert conversion entity type] and a "no" vote means it will stay a credit union. The new rule also adds a vote certification requirement.

One commenter stated that the new rule should include a provision that "prohibits credit unions from using paid incentives to attract member votes." The Commission previously discussed this provision and declined to make the suggested revision because the incentives could encourage greater voter turnout and, if properly described in the disclosures, the benefit of having more members vote on the proposed conversion outweighed the detriment of the perception of possible swaying members' votes. It should be noted that the new rule is neutral on this issue and the board of each credit union desiring to convert can decide whether incentives to get more members to vote is the proper course of action for its credit union.

One commenter stated that he did not believe the Commission had the authority to adopt a rule regulating conversions to mutual savings institution under §123.003 (the parity provision) of the Texas Credit Union Act and that the National Credit Union Administration only had that authority. He suggested that a provision should be added to the new rule that, in regards to votes on conversions to a mutual savings institution, "compliance with NCUA's voting procedures constitutes full compliance with the requirements of the state rule."

The new rule is adopted under the provision of the Texas Finance Code, §15.402, which authorizes the Commission to adopt reasonable rules for administering Title 2, Chapter 15 and Title 3, Subchapter D of the Texas Finance Code and under Texas Finance Code §123.003, which allows a credit union to engage in any activity or exercise any power it could if it were operating as a federal credit union; §122.201, which authorizes the Commission to adopt rules regarding conversions to a federal credit union; §122.202, which authorizes the Commission to adopt rules regarding conversions to an out-of-state credit union; and 122.203, which authorizes the Commission to adopt rules regarding conversions to a state credit union.

The specific sections affected by the new rule are Texas Finance Code, §§122.201, 122.202, 122.203, and 123.003.

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 June 12, 2006.

TRD-200603172

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 2, 2006

Proposal publication date: March 10, 2006

For further information, please call: (512) 837-9236

Chapter 93. ADMINISTRATIVE PROCEEDINGS

Subchapter B. GENERAL RULES

7 TAC §93.214

The Credit Union Commission adopts a new §93.214 concerning recovery of Department costs, without changes to the text as published in the March 10, 2006, issue of the Texas Register (31 TexReg 1557).

The new rule authorizes the Administrative Law Judge to allocate the costs of an administrative hearing among the parties. The Commission believes that there is a need for a rule to more equitably allocate the costs of an administrative hearing. Currently, with the exception of the costs for transcribing the hearing and preparing the original transcript, the Department and the State must cover the expenses incurred in conducting the hearing. Since the Department does not receive appropriations to pay these costs, the new rule authorizes the Administrative Law Judge to determine an appropriate allocation of costs among the parties.

No written or oral comments were received on the proposal.

The specific sections affected by the new rule are Texas Finance Code, §§122.006, 122.007, 122.153, 122.259, 126.105.

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 June 12, 2006.

TRD-200603175

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 2, 2006

Proposal publication date: March 10, 2006

For further information, please call: (512) 837-9236

Subchapter C. APPEALS OF PRELIMINARY DETERMINATIONS ON APPLICATIONS

7 TAC §93.301

The Credit Union Commission adopts an amendment to §93.301, concerning finality and request for SOAH hearing, with changes to the text published in the March 10, 2006, issue of the Texas Register (31 TexReg 1558).

The amendment adds a provision which makes the Commissioner's preliminary decision final where there is no modification and no protest or comment was received on the application.

No written or oral comments were received on the proposal.

The amendment is adopted under the provision of the Texas Finance Code, §15.402, which authorizes the Commission to adopt reasonable rules for administering Title 2, Chapter 15 and Title 3, Subchapter D of the Texas Finance Code.

The specific sections affected by the amendment are Texas Finance Code, §§122.006, 122.007, 122.153, 122.259, 126.105.

§93.301.Finality and Request for SOAH Hearing.

(a) Except as provided otherwise by this chapter, the preliminary decision of the commissioner becomes final 20 days from the date of service, unless prior thereto, an applicant or protestant files with the commissioner a written request for hearing. In the event that a timely written request for hearing is filed by any party, the commissioner's preliminary decision is withdrawn. The commissioner may, at the commissioner's sole discretion, refer any matter to SOAH for hearing prior to entering a preliminary decision.

(b) Notwithstanding subsection (a) of this section, if an application is approved without modification and neither a protest or comment was received during the notice period, the commissioner, in the exercise of discretion, may determine that the preliminary decision should become final upon the issuance of the preliminary decision.

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 June 12, 2006.

TRD-200603174

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 2, 2006

Proposal publication date: March 10, 2006

For further information, please call: (512) 837-9236

Part 8. JOINT FINANCIAL REGULATORY AGENCIES

Chapter 153. HOME EQUITY LENDING

7 TAC §§153.13, 153.18, 153.20

The Finance Commission of Texas and the Texas Credit Union Commission ("commissions") jointly adopt the repeal of §§153.13, 153.18, and 153.20 relating to home equity lending under Texas Constitution, Article XVI, §50(a)(6). The commissions have proposed changes to these interpretations in the form of new interpretations which appeared in the March 3, 2006, issue of the Texas Register (31 TexReg 1393). Therefore, the repeal of these interpretations is adopted without changes to the proposal published in the March 3, 2006, issue of the Texas Register (31 TexReg 1393).

The commissions received no written comments on the repeal proposal of these interpretations.

The interpretation repeals are adopted pursuant to Texas Finance Code, §11.308 and §15.413 (as added by Acts 2003, 78th Legislature, Chapter 1207, §2), 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 adopted interpretations.

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 June 9, 2006.

TRD-200603138

Leslie Pettijohn

Commissioner

Joint Financial Regulatory Agencies

Effective date: June 29, 2006

Proposal publication date: March 3, 2006

For further information, please call: (512) 936-7622

7 TAC §§153.13, 153.18, 153.20

The Finance Commission of Texas and the Texas Credit Union Commission ("commissions") jointly adopt new interpretations §§153.13, 153.18, and 153.20 relating to home equity lending under Texas Constitution, Article XVI, §50(a)(6). Existing companion interpretations §§153.13, 153.18, and 153.20 are repealed in this issue of the Texas Register . The interpretations are adopted with non-substantive changes to the proposal as published in the March 3, 2006, issue of the Texas Register (31 TexReg 1393).

The commissions received ten written comments on the proposed new interpretations. The following commenters generally supported adoption, but also requested clarifications or recommended modifications: Karen Neeley on behalf of Independent Bankers Association of Texas; John Heasley on behalf of Texas Bankers Association; Suzanne Yashewski on behalf of Texas Credit Union League; Eric Sandberg on behalf of Texas Savings and Community Bankers Association; Larry Temple on behalf of Texas Mortgage Bankers Association; and Lorena Rush of Wells Fargo & Company. The following commenters only requested clarifications or recommended modifications: David F. Dulock, Attorney at law of Black, Mann & Graham, L.L.P.; Cherie A. Arruda of Bank of America; J. Alton Alsup of Brown, Fowler, Alsup, PC; Mark Morgan of JPMorgan Chase Bank; James L. Robertson, President of the Texas Association of Mortgage Attorneys; Doug Crowell of Wells Fargo Financial, Inc.; Ron Walker of Texas Association of Realtors; and Karen A. Schoenbucher of Southwest Bank.

No comments were received from individuals or any consumer advocacy organization.

Notice of a public meeting, for receipt of any oral comments on the proposed interpretations, was published in March 10, 2006, issue of the Texas Register (31 TexReg 1815). The meeting was held as scheduled, on April 6, 2006, but no one offered oral comments.

Texas Constitution, Article XVI, §50 (Section 50) limits the nature and type of liens that can be imposed on a Texas homestead by identifying and conditioning the specific purposes for which such secured financing may be used. Because of the significantly adverse consequences that can befall a lender who violates a provision of Section 50, clear and unambiguous guidance regarding the meaning of such provisions supports the stability of the credit markets and ensures that home equity loans are as widely available to Texas homeowners as possible. (Because Section 50 primarily addresses only the elements necessary to create a valid lien on a homestead, other statutes and constitutional provisions must also be consulted to fully evaluate the legality under Texas law of credit transactions involving the homestead.)

Concerns have been raised that several previously adopted interpretations are potentially ambiguous. The commissions are determined to address these concerns, and therefore jointly proposed to clarify these interpretations to better state the commissions' views.

Section 153.13

The Texas Constitution protects owners seeking home equity loans by requiring the lender to disclose to the owner all fees, costs, and charges associated with making the equity loan one day prior to closing (Section 50(a)(6)(M)(ii)). The one-day notice avoids surprise to the owner at closing and allows the owner time to reassess the equity loan if the associated costs of the loan are higher than expected. The Constitution recognizes that there are instances where it may be appropriate to make an exception to the one-day waiting period between the disclosure of fees and the closing of the equity loan. In practice, lenders may experience difficulty in accurately predicting the exact amount of costs incurred in making an equity loan that are outside of the lender's control. For example property tax accruals are often disclosed imprecisely. Determining accurate accruals is further complicated when a closing date changes. Delay in closing may also be detrimental to the borrower. For these reasons the Constitution allows the owner to consent to a modified disclosure or receipt of a disclosure on the date of closing. This may occur if a bona fide emergency or other good cause exists and the owner concludes that the best alternative is to waive the one-day waiting period.

The commissions interpreted Section 50(a)(6)(M)(ii) by adopting existing §153.13 to clarify the terms "bona fide emergency" and "other good cause" in a way that preserves the constitutional protections for the owner without subjecting the owner to unnecessary regulatory burdens. The commissions developed existing §153.13 in light of the existing Texas law that recognizes the principles of reasonableness, wisdom, and common sense.

Although the commissions believe existing §153.13 is a valid and consistent interpretation of §50(a)(6)(M)(ii), concerns were raised that this interpretation could allow for a substantial increase in total closing costs if each fee increases by a small amount. Theoretical concerns were also raised that this interpretation could inadvertently allow for any fee to increase so long as one fee decreases. Following the case In Re Box , 342 B.R. 290 (Bankr. S.D. Tex. 2005) (holding that a signed document alone was not sufficient to evidence owner consent), lenders may need to further document an owner's consent. Therefore, the commissions are repealing existing §153.13 and adopting new §153.13.

Seven written comments were received on this proposed new interpretation making specific suggestions to modify the language or clarify concepts. The commissions made non-substantive changes to clarify and simplify the addressed provisions as the result of comments.

Adopted new §153.13 clarifies "bona fide emergency" and "other good cause" by setting out principles and examples for these terms. The commissions base the interpretation of the term "bona fide emergency" on the meaning and use of that phrase in 12 C.F.R. Part 226 (Regulation Z). Under this interpretation, only a significant emergency qualifies as a bona fide emergency. The commissions base the definition of good cause on both the common meaning and the legal definition of that term; however, because the definition of this term could be construed broadly, the commissions offer additional guidance for owners and lenders under this standard. The examples provided to illustrate good cause are not intended to be exclusive.

One commenter suggested that an owner may consent to receive the preclosing disclosure or a modification of the preclosing disclosure on the date of closing if another good cause exists. Good cause to receive the preclosing disclosure or a subsequent disclosure modifying the preclosing disclosure on the date of closing may only be established by the owner. The commissions agree with the commenter, but believe this to be self-evident from the current language of the constitution. No changes have been made in response to this comment.

One commenter was concerned that the language of proposed §153.13 appeared to allow the borrower to accept only a modification of the preclosing disclosure statement in the case of either a "bona fide emergency or other good cause." The commenter interpreted the language of the proposed interpretation to limit the owner's ability to consent to receipt of the preclosing disclosure on the date of closing only to cases of "bona fide emergency" (but not "other good cause.")

The commissions reviewed the language in question and agreed with the commenter. The commissions modified the language as suggested by the commenter. The revised language also improves internal consistency of the language of §153.13.

The commissions' interpretation further offers a presumption that a de minimis increase in the costs, fees, and charges may qualify as good cause with the owner's consent. The commissions base this presumption on the doctrine of de minimis non curat lex--the law does not concern itself with very small or trifling matters. The doctrine is well established in Texas law and has been applied in the context of consumer credit cases Gawlik v. Padre Staples Auto Mart, Inc. , 666 S.W.2d 161 (Tex. App. - Corpus Christi 1983, writ ref'd n.r.e); HSAM, Inc. v. Gatter , 814 S.W.2d 887 (Tex. App. - San Antonio 1991, writ dism'd by agr. ).

This doctrine protects the parties where the variance between the disclosures is minute. It seems unlikely that a law designed to protect an owner would require an owner to postpone a closing because of very small variances from previously disclosed costs, especially when the owner desires to proceed with closing. The commissions articulate the boundaries of the de minimis presumption in §153.13. The interpretation is analogous to the standards of accuracy for disclosure in 12 C.F.R. §226.22(a)(2) (Regulation Z), which provides that the disclosed charges are treated as accurate if the amount "is not more than 1/8 of 1 percentage point above or below" the disclosed amount. In the interpretation the de minimis threshold is set at 1/8 of 1 percent of the principal amount of the loan. On an equity loan with an $80,000 principal amount, the 1/8 of 1 percent threshold would be $100. Occasionally, unanticipated additional fees arise in an equity loan transaction shortly before closing. For example, the invoice for a courier or delivery fee may not arrive in time for the preclosing disclosure, and including the fee in the final documents could force a delay in closing the equity loan. This provision recognizes that postponing the date of closing may adversely affect the owner more than the amount of variance between disclosed and actual closing costs. It also allows the owner to decide if hardship would result from postponing the closing for de minimis variances in costs. Additionally, adopted new §153.13 would allow the lender to reduce fees or closing costs by any amount without postponing the date of closing.

Adopted new §153.13 lists the types of fees charged at closing that must be disclosed to the owner. These are "actual fees, points, interests, costs, and charges." The commissions use the word points as described in Texas law: points are prepaid interest and points are the types of prepaid interest that are charged at closing. The interest rate that is contracted to be charged on the principal amount of the loan transaction is not considered interest charged at closing.

One commenter noted that the word "interest" appeared to be missing from (2)(B)(iv), (3)(B)(iii) and (iv), and (3)(C)(iv), and (4)(A). The commenter implied that by not including the word "interest," the commissions had failed to fully interpret §50(a)(6)(M)(ii), which includes that word.

The commissions have reviewed §153.13 and have concluded that the word "points" encompasses the concept of interest and is well-defined in Texas law. The commissions have determined that the addition of the word "interest" would not add further clarity to the interpretation. The commissions believe that the use of the word "points" fully addresses the concept of interest in §50(a)(6)(M)(ii).

One commenter requested clarification that payoffs of the homeowner's existing debts are not "fees. . .and charges" that must be disclosed under this interpretation. The commenter also stated that these payoffs are covered by a HUD-1 Settlement Statement and disclosed in accordance with RESPA requirements, and are therefore outside of the scope of §153.13.

The commissions agree with the commenter, but believe this to be self-evident from the current language of §153.13. No changes have been made in response to this comment.

One commenter also suggested that "fees, points, interest, costs, and charges" for the purpose of disclosure do not include amounts paid by the lender to third-party service providers outside of closing or amounts required to be paid by the owner to other creditors to payoff and discharge existing liens on the homestead or unsecured debts that are to be consolidated by the equity loan even if itemized on the Form HUD-1 or HUD-1A settlement statements. The commissions do not believe the commenter's suggested change is necessary because the Constitution requires the disclosure of the actual fees, points, interest, costs and charges to the borrower as the result of making the home equity loan. Only the costs and charges that will be charged at the closing of the home equity loan are required to be included in the disclosure. No further interpretation is required. In practice, payoff amounts to creditors would generally be included in this disclosure if they are being paid directly through closing with loan proceeds.

Adopted new §153.13 also protects lenders and owners by offering additional guidelines to address the documentation that should be obtained to support an emergency or other good cause modification. The commissions intend the documentation requirement to ensure true informed consent on the part of the owner and that the standard of a bona fide emergency or other good cause has been met.

Two commenters agreed with the general concept of the de minimis standard of good cause embodied in §153.13. It has become an important safe harbor for lenders as well as a way to empower consumers to decide if a very small difference between previously disclosed and actual costs should merit postponement of the closing date for their loans.

Seven commenters suggested that because the doctrine of "de minimis non curat lex" protects the parties where the variance between the disclosures is minute, it is unnecessary to have the additional requirements that involve a material adverse financial consequence and an adverse consequence to the good cause standard. Two commenters challenged the language of §153.13(B)(v)(I) and (II) which appeared to require determinations of whether fees were unanticipated or accidental, and whether a lender had control systems in place to prevent errors. The commenters suggested that these determinations would be too fact specific to make with certainty. The commenters recommended that the interpretation be revised to eliminate this language and require the lender only to meet the tolerance provisions of (B)(iii) and the materiality standard of (B)(i).

Five commenters recommended that subsection (3)(B)(v)(II) be revised to be an independent de minimis good cause standard. These commenters also recommended that the $100 floor for a de minimis good cause standard be reinstated because it would be consistent with the tolerance in §226.18(d)(1)(i) of Regulation Z for disclosure of the finance charge and is found in the existing interpretation.

The commissions have reviewed §153.13 and agree with the commenters. The commissions have omitted §153.13(B)(v)(I) and (II) as unnecessary in light of the de minimis good cause standard established in §153.13(B)(i) - (iv) and maintain the $100 floor that is found in the existing interpretation.

Two commenters agreed with the statement in the proposed preamble to §153.13 that would allow the lender to reduce fees or closing costs by any amount without postponing the date of closing. However, one commenter was concerned that with the removal of subsection (4)(B), there would be no express interpretative authority as to the effect of a decrease in fees or closing costs. The commenter recommended that the commissions add an interpretive statement to §153.13 saying that a reduction in one or more fees or closing costs by any amount is permissible without the owner's consent, does not require compliance with the bona fide emergency or good cause requirements, and will not postpone the date of closing.

While the commissions agree with the commenters' statements that a reduction in fees would not trigger the need for an owner's consent to forego a delay in the closing date, the commissions conclude that this is self-evident from the language of the interpretation. A small increase in cost clearly must be analyzed to determine whether it meets the requirements of the de minimis good cause standard (including owner consent to receipt of the preclosing disclosure or a modified disclosure on the same day as the closing). Although a strict reading of the language of the Constitution would also require this analysis in the case of cost reductions, it would be absurd to do so. Reduced costs benefit the borrower, so no analysis of a change that lowers loan costs is necessary to protect their interests. The addition of language stating this in the body of the §153.13 would serve no purpose, therefore the commissions decline to follow the commenter's suggestion.

Two commenters noted that the word "de minimis" was also spelled "de minimus" in the text of proposed §153.13. In response to these comments, the commissions have changed the spelling to consistently spell the word as "de minimis."

One commenter noted that the de minimis good cause standard is applicable only when there is a difference between the preclosing disclosure and the closing disclosure. Therefore, subsection (3)(C)(ii) would not be applicable to a de minimis good cause standard. The commenter recommended that the subsection be revised to read, "(ii) specifically states that the owner consents to receive a subsequent or modified preclosing disclosure on the date of closing." The commissions agree with the commenter and modified the language of §153.13 as suggested. This modification clarifies the application of subsection (3)(C)(ii), as well as improving the internal consistency of the interpretation.

Three commenters requested that "normal business hours" be more completely defined. One commenter recommended that "normal business hours" be defined as those of the closing office conducting the closing in accordance with §153.15(1) of the interpretations. One commenter also recommended clarification that the restriction of closing to "normal business hours" would only apply if the closing was conducted on the first business day after disclosure, not if the closing was conducted on any business day thereafter. The commissions have reviewed the concept of "normal business hours" in the context of §153.13 and decline to modify the interpretation. What constitutes normal business hours is a fact-specific question. This issue is most appropriately raised in a court of law, and is not the subject of the commissions' interpretations.

Section 153.18

Section 50(a)(6)(Q)(i) of the Constitution provides that an owner can not be required to apply the proceeds of an equity loan to repay another debt except debt secured by the homestead or debt to another lender. The commissions proposed a new interpretation regarding this constitutional provision which deleted a prior subsection stating that this restriction did not apply when an owner applied to her current lender for a debt consolidation loan. This provision was deleted due to a current court case which held that even though the owner applied for a debt consolidation loan, and signed documents that he voluntarily applied for the loan, that doesn't mean that the lender did not require that the home equity loan be used to repay debts owed to that same lender. The proposed interpretation also reversed the order of the first two paragraphs to better stress the importance of the lender prohibition and a sentence was added to the second paragraph clarifying that whether the act of the owner was voluntary when paying off debt owed to the home equity lender was a fact question.

The commissions received seven comment letters on this proposed interpretation. Two of the commenters felt that the deleted provision regarding debt consolidation should be reinstated because, among other things, In Re Box , 324 B.R. 290 (Bankr. S.D. Tex. 2005) did not apply. Both argued that the loan in the In Re Box case was closed prior to the interpretation being adopted and is not binding on the commission. "Unless the commissions are independently persuaded by the analysis of that federal court, they should not discard an interpretation they had carefully created after extensive public comment until after a court from the state of Texas has reached a similar conclusion." In the alternative, these same commenters requested that the commissions allow a written affidavit by the owner to be prima facia evidence that she acted voluntarily in paying off debt to the home equity lender. Three additional commenters also requested that the commissions set forth criteria for an affidavit or "some indicia of voluntariness" "that would lead a fact finder toward a conclusion that a given situation evidences independent free will. . ."

The commenters set forth mostly policy arguments in support of their requested revisions: "The proposed interpretation would make it virtually impossible for any owner to obtain a debt consolidation loan from her own lender. At the same time, it does not effectively protect the homestead from undue burden because any lender can pressure the owner to consolidate other debt." "Very few borrowers who wish to consolidate debt have sufficient income to pay both the debt they wish to consolidate AND a new loan or line (of credit) in the same amount; therefore (financial institutions) would be forced to turn down the consumer's request. As a result, her only option would be to go to another lender, with whom she does not have a relationship." "Under this interpretation, a lender should absolutely never consider that proceeds of the loan would be used to pay off debt to it. Unfortunately for the owner, this impacts the underwriting. It may increase the cost of credit to a borrower who is excessively leveraged."

The court's analysis in In Re Box demonstrated to the commissions that whether the borrower's repayment of debt to the home equity lender was voluntary, turned on fact questions. There could be many different scenarios and many different facts for each case and there is no way that an interpretation by the commissions could encompass or anticipate all of them. Further, a United States District Court for the Southern District of Texas recently affirmed the court's decision in In Re Box (2006 WL 626219 (S.D.Tex.)), and, since the date of the publication of the proposed new §153.18, a District Court in Travis County, Texas has ruled that the debt consolidation exception set out in existing §153.18(3) is invalid.

Although the commissions understand the policy arguments made by the lenders and that there are situations where debt consolidation with the same lender could be beneficial to the owner, the commissions do not believe their interpretative authority extends to creating evidentiary guidelines for the courts. The United States District Court in affirming the In Re Box case stated, "The result reached in this case is based on the literal text and plain language of the constitutional provision at issue. The Bank's policy arguments are best addressed by revising the text and language, which cannot be done by federal bankruptcy or district courts." The Commission's interpretative authority is likewise limited. Therefore, the commissions decline to reinstate the debt consolidation provision or to provide criteria for an affidavit which evidences "voluntariness."

Another commenter pointed out that the last sentence added to subsection (2) stating that whether the owner's act is voluntary is a question of fact, should be deleted since it "adds nothing to the interpretation, except to state the obvious and it may invite legal challenges to voluntary payments." The commissions agree with this comment and have deleted the last sentence of subsection (2).

Two commenters suggested that the last sentence of subsection (1), "The lender may not otherwise specify or restrict the use of the proceeds" should be deleted. Both commenters questioned whether the constitution supports this restriction as "there are situations, such as the payoff of contractors and subcontractors who have lien rights, where the lender will legally be in a position to specify the use of proceeds." The same reasoning could be used if an owner applied for a home equity loan to pay off a medical or educational debt. The commissions agree with this comment and have deleted the last sentence of subsection (1). In addition, to be consistent, the commissions have revised the first sentence of subsection (2) from "An owner may use the proceeds of an equity loan for any purpose" to "An owner may apply for an equity loan for any purpose." The commissions believe that these revisions provide an interpretation that is closer to the plain language reading of the applicable constitutional provision.

Section 153.20

Adopted new §153.20 defines the term "instrument," and revises the interpretation to more clearly identify what blanks constitute "blanks left to be filled in" as that phrase is used in the Constitution. The interpretation defines instrument to mean a document that creates or alters an obligation of a party to an equity loan. A required disclosure is not an instrument if the disclosure does not create or alter the obligation of a party. The interpretation further provides that when the selection of one of several options constitutes by implication the exclusion of the non-selected options, the instrument does not contain blanks to be filled in when the non-selected option is left blank.

One commenter submitted a comment which was also adopted by referenced by another commenter. The commenter pointed out that the proposed interpretation contained a potential ambiguity in subsection (b) because in the first sentence "instrument" is defined as "a document or record which creates a legal obligation of an owner," but in the second sentence a disclosure is excluded "if the disclosure does not create or alter a legal obligation of a party." The commissions agree that the two sentences should be harmonized, and therefore revised the section so that both phrases read "create or alter a legal obligation of a party." The commenter further suggested language that the definition of instrument should be limited to those documents which create or alter the legal obligation of an owner in favor of an originator or lender. The commissions believe that this language is too narrow and that the term "instrument" should include all documents or records in which a legal obligation of either the consumer or the lender or originator is created or altered.

One commenter suggested that the proposed definition substitute the words "define" or "describe" a legal obligation for the phrase "create or alter." The commenter further opined that the proposed definition inappropriately relied on the description of instrument as used in Finance Code §342.454. The commenter further suggested that by excluding disclosures there could be the inadvertent consequence of excusing a lender from failing to properly complete a disclosure. The commissions disagree. Whether or not a lender has properly completed disclosures is a matter controlled by the specific statutory and regulatory provisions governing the disclosure.

It would be inappropriate for the commissions to adopt an interpretation that would potentially be in conflict with the specific requirements relating to the disclosures. This is especially so for those disclosures required under federal law. The commissions continue to believe that the proposed definition most closely aligns with the term "instrument" as that term is used in statutory provisions under Texas law.

The commissions have made non-substantive grammatical changes to the proposed interpretation and have also substituted numerals for letters to identify subsections.

Each commission is separately and independently authorized to issue interpretations of the provisions in Section 50, see Texas Finance Code, §11.308 and §15.413 (as added by Acts 2003, 78th Legislature, Chapter 1207, §2), and the Texas Constitution, Article XVI, §50(u). The commissions seek to jointly exercise their authority to interpret Section 50 in order to promote consistency and better support the confidence of homeowners and lenders transacting home equity loans in compliance with Section 50. In addition, the commissions interpret the extent of their interpretive authority to include not only determinations of the explicit meaning of words and terms in Section 50, but also to encompass "filling in the gaps" with respect to material matters that are inadequately addressed in Section 50, including possible addition of further details to the extent the commissions believe this to be necessary to fully implement the intents and purposes of Section 50.

§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 or a modification of 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 a bona fide 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 or a modification of 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 the owner's right to receive a final itemized disclosure containing all actual fees, points, costs, and charges one day prior to closing.

(3) Good cause. An owner may consent to receive the preclosing disclosure or a modification of the preclosing disclosure on the date of closing if another good cause exists.

(A) Good cause to modify the preclosing disclosure or to receive a subsequent disclosure modifying the preclosing 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) At the owner's election, a good cause to modify the preclosing disclosure may be established if:

(I) the modification does not create a material adverse financial consequence to the owner; or

(II) a delay in the closing would create an adverse consequence to the owner;

(iii) The term "de minimis" as used in this section means a very small or insignificant amount.

(B) At the owner's election, a de minimis good cause standard may be presumed if:

(i) the total actual disclosed fees, costs, points, and charges on the date of closing do not exceed in the aggregate more than the greater of $100 or 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; or

(ii) each itemized fee, cost, point, or charge does not exceed more than the greater of $100 or 0.125 percent of the principal amount of the loan than the amount disclosed in the initial preclosing disclosure.

(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;

(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 the owner's right to receive a final itemized disclosure containing all fees, costs, points, or charges one day prior to 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.

(2) An owner may apply for 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.

§153.20.No Blanks in Any Instrument: Section 50(a)(6)(Q)(iii).

A home equity loan must be made on the condition that the owner of the homestead not sign any instrument in which blanks are left to be filled in.

(1) 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.

(2) As used in this Section, the term instrument means a document or record that creates or alters a legal obligation of a party. 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.

(3) 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.

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 June 9, 2006.

TRD-200603137

Leslie Pettijohn

Commissioner

Joint Financial Regulatory Agencies

Effective date: June 29, 2006

Proposal publication date: March 3, 2006

For further information, please call: (512) 936-7622