Texas Court of Appeals Upholds 3% Cap On All Lenders’ Fees on Home Equity Loans

On January 8, the Texas Court of Appeals upheld a trial court’s ruling that "fees" that are considered "interest" under Texas usury law are subject to the 3% fee cap for home equity loans contained in the Texas constitution. Texas Bankers Ass’n. v. Ass’n. of Community Organizations for Reform Now, No. 03-06-00273-CV, 2010 WL 4587 (Tex. App. Jan. 8, 2010). The case arose after the Finance Commission of Texas and the Credit Union Commission of Texas (collectively, the Commissions) issued a rule interpreting Article 16, section 50(a)(6)(E) of the Texas Constitution. This section restricts the total amount of fees, other than interest, that can be charged on home equity loans to 3%. In interpreting the section, the Commissions stated that the term “interest” mirrored the definition of interest in Texas usury laws. As a result, the Commissions’ regulations permitted certain types of fees to avoid the 3% cap. The Association of Community Organizations for Reform Now (ACORN) challenged the Commissions’ interpretation under the Texas Administrative Procedures Act, arguing that it contradicted the Constitutional provision’s plain meaning. Instead, ACORN advocated a strict definition of interest that would include only the amount of interest described in the promissory note and would exclude fees. Both the trial court and the Texas Court of Appeals agreed. In upholding the lower court, the Court of Appeals reasoned that the Commissions’ interpretation (i) would render the Constitutional cap meaningless, because it would exclude nearly all fees charged by lenders, and (ii) conflicted with legislative intent. As a result, the court affirmed the invalidation of the regulations.