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Fifth Circuit Holds Variable Rate Home Equity Loan Did Not Violate Texas Constitution
On July 22, the U.S. Court of Appeals for the Fifth Circuit affirmed a decision by a Texas district court finding that the terms of an adjustable rate home equity loan did not violate the Texas Constitution. Cerda v. 2004-EQR1 L.L.C., No. 09-50619, 2010 WL 2853651 (5th Cir. July 22, 2010). In response to a foreclosure proceeding, the plaintiff borrowers in Cerda alleged that the terms of a 2002 home equity loan refinance violated the Texas Constitution because (i) it was issued in violation of a mandated waiting period of 12 days between submission of an "application" and closing, (ii) it called for monthly payments that were not "substantially equal," and (iii) it required the payment of fees in excess of a 3% cap. The district court rejected these arguments and, following a bench trial, granted judgment to the defendants. The Fifth Circuit affirmed in all respects. First, the court held that an oral application, which the borrowers indisputably made over the telephone more than 12 days before the loan closed, was sufficient to commence the required waiting period. Second, with respect to the Texas Constitution’s requirement that scheduled payments on home equity loans be "substantially equal" in amount, the Fifth Circuit recognized that the provision was "in some tension with" a separate provision explicitly permitting "variable rate[s] of interest." The Fifth Circuit reconciled the provisions by holding that, in combination, the provisions merely required that home equity loans fully amortize - i.e., that installments extinguish principal and interest over the life of the loan - and, in addition, that there be no final, "balloon" payment. Because the plaintiffs’ loan comported with these requirements, the Fifth Circuit held that the "substantially equal" provision had not been violated. Third, the Fifth Circuit held that the loan did not exceed a 3% cap on fees, reasoning that the yield spread premium on the loan was not a "fee" because it was paid by the lender - not the borrower - to the broker, and that discount points are properly considered to be interest rather than a fee subject to the cap. As the Fifth Circuit noted, its rulings were based on the Texas Constitution as of 2002. Since that time, certain provisions at issue in this case have been amended.
Arkansas Increases Usury Limit
Arkansas residents recently voted to increase the maximum allowable rate of interest on all loans or other financing transactions entered into within the state. The maximum allowable rate, which is set out in the state constitution, had recently been below 6% per year. Fearful that such low rates chilled business in the state, the voters approved an amendment to the Arkansas constitution that raises the maximum lawful rate of interest for federally insured depository institutions to that which is set out at 12 U.S.C. § 1831u and 17% for all other institutions. The changes become effective January 1, 2011
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.
Maine Federal Court Finds Maine Data Collection Law Likely Violates First Amendment
On September 9, the U.S. District Court for the District of Maine held that a recently passed Maine Act requiring parental consent for the collection of health-related information from a minor is likely overbroad and thus could violate the First Amendment. Maine Independent Colleges Ass’n v. Baldacci, No. CV-09-396 (D. Me. Sept. 9, 2009). As reported in InfoBytes, Aug. 7, 2009, the Act makes it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” On August 26, four plaintiffs, including the Maine Independent Colleges Association, challenged the constitutionality of the law, scheduled to take effect on September 12, 2009. On September 9, the court issued a stipulated order of dismissal by both parties. According to the dismissal order, the Maine Attorney General “has committed not to enforce” the Act, and the Maine legislature will reconsider the statute. The dismissal order further notes that the private right of action availed under the Act “could suffer from the same constitutional infirmities.”