Legal Ease
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Legal Ease is the weekly Q&A from the IBAT Bottom Line.
Latest Additions to Legal Ease:
Lending, Home Equity: Points and Origination Fees
Printer-friendly VersionQuestion:
I have a home equity application and I have a state law question as well as a fair lending question.
1) I'm checking to see if we are able to charge a 1% point on a 2nd lien home equity? The loan officer says the fee is because we aren't going to make any money off the loan - loan is $33,000 and our origination charge is normally $185. The applicant plans to pay this off in April, so it's only supposed to be on the books a few months, although it's being booked as a normal 15 year home equity loan to keep the payments down.
Based on what I've read, I believe we can charge it so long as we are still within the 3% cap.
2) I think I'm more concerned about the fair lending implications of this since it's not a fee we normally charge on home equity loans.
1) I'm checking to see if we are able to charge a 1% point on a 2nd lien home equity? The loan officer says the fee is because we aren't going to make any money off the loan - loan is $33,000 and our origination charge is normally $185. The applicant plans to pay this off in April, so it's only supposed to be on the books a few months, although it's being booked as a normal 15 year home equity loan to keep the payments down.
Based on what I've read, I believe we can charge it so long as we are still within the 3% cap.
2) I think I'm more concerned about the fair lending implications of this since it's not a fee we normally charge on home equity loans.
Answer:
If the fee is to buy down the interest rate, then it doesn’t count toward the 3% fee cap. If it doesn’t buy it down, then it would count against the 3% fee cap.
However, if it doesn’t buy down the interest rate, then it isn’t points and isn’t an allowable fee under the Finance Code. Remember, the Finance Code is pretty specific when it comes to fee. In almost all cases, the Finance Code either specifically allows a fee or that fee is disallowed. So, you can charge the 1% fee provided it is “points” and used to buy down the interest rate, but you can’t charge it if you call it an “origination fee” and it is not used to buy down the interest rate. If you treat it as an “origination fee” it would be considered additional interest, might make the interest rate go over 18%, and it would certainly make the interest rate not competitive. You could charge the allowable administrative fee instead. This would be different for a first lien mortgage as they aren’t regulated by Texas law. In some courts what you call a charge matters.
As for the fair lending issue, you always run the risk of running afoul of fair lending laws when you do something on an inconsistent basis. Certainly if it is a fee you don’t normally charge, and the loan was to a protected class, it would be reasonably easy to say it was discriminatory. If you are stepping outside your policy and procedures, and your actual practice, because the loan officer says you “…aren’t going to make any money off the loan…” you can quickly get into trouble.
However, if it doesn’t buy down the interest rate, then it isn’t points and isn’t an allowable fee under the Finance Code. Remember, the Finance Code is pretty specific when it comes to fee. In almost all cases, the Finance Code either specifically allows a fee or that fee is disallowed. So, you can charge the 1% fee provided it is “points” and used to buy down the interest rate, but you can’t charge it if you call it an “origination fee” and it is not used to buy down the interest rate. If you treat it as an “origination fee” it would be considered additional interest, might make the interest rate go over 18%, and it would certainly make the interest rate not competitive. You could charge the allowable administrative fee instead. This would be different for a first lien mortgage as they aren’t regulated by Texas law. In some courts what you call a charge matters.
As for the fair lending issue, you always run the risk of running afoul of fair lending laws when you do something on an inconsistent basis. Certainly if it is a fee you don’t normally charge, and the loan was to a protected class, it would be reasonably easy to say it was discriminatory. If you are stepping outside your policy and procedures, and your actual practice, because the loan officer says you “…aren’t going to make any money off the loan…” you can quickly get into trouble.
Lending, Flood Insurance: Elevated Structures
Printer-friendly VersionQuestion:
We have a customer that wants to build down by the river. The lot is in the Special Flood Hazard Area (SFHA), but the borrower is going to build his home on walls or pilings above the Base Flood Elevation (BFE). Our question is, does the property still require flood insurance since the living space will be above the SFHA?
Answer:
Yes! Elevating a structure above the BFE may reduce the cost of flood insurance for the borrower, but it does not exempt the property from flood insurance requirements. The first link below has some helpful information entitled “How to Raise Your House Up-And Out of Harm's Way” on the FEMA website, and the second link is to the mandatory purchase guidelines that address the subject of elevated structures.
http://www.fema.gov/news/newsrelease.fema?id=10679
http://www.fema.gov/government/grant/mitmeasures/elevate.shtm
From Page 17 of the Mandatory Purchase Flood Insurance:
A unique situation arises when a building is initially constructed at a level below the BFE in an SFHA, and its lowest floor is subsequently elevated or raised above the BFE by supporting walls or pilings. Such a structure is then considered an elevated building by the NFIP.
In this situation, there is no basis for the issuance of either a LOMA or LOMR-F. The building is still in the designated SFHA, and its foundation, supporting walls, and pilings can come into direct contact with floodwaters. When an owner of property below the BFE elevates a building so that the lowest floor is above the BFE, the flood insurance purchase requirement continues to
apply. Insurance is required because the foundation on which the house is elevated is still below the BFE, where it remains
exposed to the action of floodwaters. However, because of its reduced exposure to damage, the newly elevated building will be subject to a lower insurance rate and premium.
January - 2012
http://www.fema.gov/news/newsrelease.fema?id=10679
http://www.fema.gov/government/grant/mitmeasures/elevate.shtm
From Page 17 of the Mandatory Purchase Flood Insurance:
A unique situation arises when a building is initially constructed at a level below the BFE in an SFHA, and its lowest floor is subsequently elevated or raised above the BFE by supporting walls or pilings. Such a structure is then considered an elevated building by the NFIP.
In this situation, there is no basis for the issuance of either a LOMA or LOMR-F. The building is still in the designated SFHA, and its foundation, supporting walls, and pilings can come into direct contact with floodwaters. When an owner of property below the BFE elevates a building so that the lowest floor is above the BFE, the flood insurance purchase requirement continues to
apply. Insurance is required because the foundation on which the house is elevated is still below the BFE, where it remains
exposed to the action of floodwaters. However, because of its reduced exposure to damage, the newly elevated building will be subject to a lower insurance rate and premium.
January - 2012
Deposit Accounts, Business Accounts: Annual Request for Information
Printer-friendly VersionQuestion:
Does the Texas Finance Code require that we request current information from business account holders? I remember a provision that required the bank, at least annually, to request to provide notice to business account holders asking if their information was correct.
Answer:
Yes – that remains a requirement for Texas banks.
Sec. 277.002. ACCOUNT INFORMATION REQUIRED. (a) A financial institution shall require, as a condition of opening or maintaining a business checking account, that the applicant or account holder provide:
(1) if the business is a sole proprietorship:
(A) the name of the business owner;
(B) the physical address of the business;
(C) the home address of the business owner; and
(D) the driver's license number of the business owner or the personal identification card number issued to the business owner by the Department of Public Safety; or
(2) if the business is a corporation or other legal entity, a copy of the business's certificate of incorporation or a comparable document and an assumed name certificate, if any.
(b) The financial institution shall request that the account holder inform the institution at least annually of any changes in the information the institution is required to obtain under Subsection (a).
Added by Acts 1999, 76th Leg., ch. 998, Sec. 1, eff. Sept. 1, 1999.
BTW:
Sec. 277.001. DEFINITIONS. In this chapter:
(1) "Business" means a legal entity, including a corporation, partnership, or sole proprietorship, that is formed for the purpose of making a profit.
(2) "Business checking account" means an account at a financial institution from which withdrawals may be made by a business by check or draft. The term includes a money market account, a negotiable order of withdrawal account, or other account at a financial institution in which the account holder has check writing privileges.
(3) "Financial institution" means a state or national bank, state or federal savings and loan association, state or federal savings bank, or state or federal credit union doing business in this state.
You should be able to accomplish this with a simple statement stuffer.
Sec. 277.002. ACCOUNT INFORMATION REQUIRED. (a) A financial institution shall require, as a condition of opening or maintaining a business checking account, that the applicant or account holder provide:
(1) if the business is a sole proprietorship:
(A) the name of the business owner;
(B) the physical address of the business;
(C) the home address of the business owner; and
(D) the driver's license number of the business owner or the personal identification card number issued to the business owner by the Department of Public Safety; or
(2) if the business is a corporation or other legal entity, a copy of the business's certificate of incorporation or a comparable document and an assumed name certificate, if any.
(b) The financial institution shall request that the account holder inform the institution at least annually of any changes in the information the institution is required to obtain under Subsection (a).
Added by Acts 1999, 76th Leg., ch. 998, Sec. 1, eff. Sept. 1, 1999.
BTW:
Sec. 277.001. DEFINITIONS. In this chapter:
(1) "Business" means a legal entity, including a corporation, partnership, or sole proprietorship, that is formed for the purpose of making a profit.
(2) "Business checking account" means an account at a financial institution from which withdrawals may be made by a business by check or draft. The term includes a money market account, a negotiable order of withdrawal account, or other account at a financial institution in which the account holder has check writing privileges.
(3) "Financial institution" means a state or national bank, state or federal savings and loan association, state or federal savings bank, or state or federal credit union doing business in this state.
You should be able to accomplish this with a simple statement stuffer.
Lending, TUTMA: TUTMA CD Securing Loan
Printer-friendly VersionQuestion:
We have a loan that one of our loan officers made that is secured by a TUTMA CD. The loan review picked it up and wanted some clarification on if it is permissible? Are there any instances where this is permissible? If it was for benefit of the child is it permissible?
Answer:
Usually in a fiduciary relationship the custodian has what is called “naked possession”. That means that the custodian has possession of the asset but not ownership and to pledge as security takes ownership. If have a loan secured by an TUTMA account you have an unsecured loan. The specifics are in the Texas Property Code Chapter 141.
Legal Ease Archive
Comments & Questions
If you would like to comment on legal topics or if you have questions please Shannon Phillips at (800) 749-4228 or e-mail sphillips@ibat.org.