Home Equity Lending in Texas: Are Loan Origination Fees Interest?

The constitutional amendment did not define what constituted a fee for purposes of a home equity loan, and this ambiguity has created much concern among lenders. This Comment argues that a loan origination fee charged by a lender in a home equity transaction should be considered interest and not a fee for purposes of the three percent fee limitation. Part II of this Comment will discuss homestead protection in Texas and the 1997 constitutional amendment authorizing home equity lending. Specifically, Part II will discuss the three percent fee limitation, the forfeiture and cure provisions contained in the constitutional amendment, and the problems inherent in interpreting what constitutes a fee for purposes of the cap on fees. Part III will discuss the potential charges to a borrower in a hypothetical home equity transaction by defining and describing the varying lender and non-lender charges. Part IV will discuss how interest and fees have historically been defined under Texas law. Part V will discuss whether the legislature intended a different definition of interest and fees for purposes of the three percent cap on fees. Part V will also examine the language of the pertinent section of the constitutional amendment, applying the rules of statutory construction in Texas, and will discuss how Texas regulatory agencies interpret the amendment. Part VI will discuss four recent judicial interpretations of the constitutional amendment relative to the classification of points and/or origination fees in Texas home equity transactions. Part VI will also discuss a recent decision by the Texas Supreme Court interpreting the cure provision contained in the constitutional amendment and its application to a violation of section 50(a)(6)(E). In addition, Part VI will provide a summary of recent home equity cases. Part VII will discuss the relevant policy considerations in classifying interest and fees for purposes of home equity lending in Texas and lender options for dealing with the problem created by the uncertainty of whether a loan origination fee constitutes interest or a fee. Part VII will also discuss the 2003 amendment to the Texas Constitution on home equity lending, to the extent that the amendment addresses the problem of interpretation and the process by which a lender or note holder may cure a violation of the home equity law. Finally, Part VIII will summarize why loan origination fees should be considered interest and not fees for purposes of home equity lending in Texas