Texas has a long tradition of protecting the homestead against creditors, including special protections in the state constitution. It was only ten years ago that Texas put in place a legal structure permitting home-equity loans — and to do so took an amendment to the Constitution.

The political compromise that resulted was a set of constitutional amendments sent to the voters, and approved, in 2003. The amendments were extraordinarily detailed — with the rigidity of statutes or rules rather than the flexibility of most constitutional provisions.

Texas’s banking regulators issued even more specific rules for lenders, embodying their own interpretations of that constitutional language. In this appeal, the Court is asked to review whether some of those rules went too far. (Disclosure: I consulted at an earlier stage of this appeal when I was at the Texas Office of the Solicitor General.)

The opinion

The Court split 8-1 in this case, with one Justice (Justice Johnson) concluding that these plaintiffs did not have a concrete injury to bring a court challenge.

The majority, through Justice Hecht, held that the courts had a role in second-guessing the regulators’ view of the Texas Constitution by reviewing these rules. It also held that, because this was a constitutional question, no deference was due to the regulators’ view of this subject area (as might be proper in a more typical administrative context).

As for the substance, the Court announced that two of the rules were unconstitutional — changing the law that will apply to Texas borrowers going forward: (( The Court also upheld one other commission rule, that for purposes of “12 day” notice requirement, the lender can presume that the borrower received the notice three days after mailing unless contrary evidence is offered. The Court concluded that this was reasonable because it was consistent with the constitutional provision. ))

  • The Court held that the Texas Constitution required a very strict 3% cap on fees other than “interest.” While the commissions had provided a looser rule that allowed other items to be included as “interest” (and thus carved out from the 3% cap), the Court concluded that the only amounts excluded from the 3% cap were true interest (the amount of principal times an interest rate).

    Thus, under the Court’s reading of the Constitution, some fees charged by lenders or their affiliates will not be permitted going forward.

  • The Court also held that the rules permitting a borrower to simply mail in a power-of-attorney form were invalid. The Constitution requires the closing to take place at one of a few designated locations, not the borrower’s home. In the Court’s view, this requirement would be circumvented by allowing the borrower to simply mail in a form.

    That’s because “it is precisely the common use of the mail and powers of attorney in closing transactions that gives rise to the danger of coercion Section 50(a)(6)(N) was intended to prevent.”

The Court’s opinion does not specify an effective date, but the usual rule is that legal holdings take immediate effect. This means that some lenders (in particular those charging higher fees than 3% or whose closing process happens through the mail) may be pausing their Texas loans until they can bring their procedures in line with Texas’s constitutional requirements.