The Finance Commission of Texas adopts new rule 7 TAC 5.1, concerning required disclosures in connection with certain home loans.

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1 Title 7. Banking and Securities Part I. Finance Commission of Texas Chapter 5. Home Loans 7 TAC 5.1. Required Disclosures in Connection with Certain Home Loans The Finance Commission of Texas adopts new rule 7 TAC 5.1, concerning required disclosures in connection with certain home loans. The purpose of this section is to establish the required disclosures mandated in Senate Bill 1581, 77th Legislature, and to provide the means by which lenders may comply with the notice requirements of the Texas Finance Code, Section Senate Bill 1581 primarily restricts certain mortgage lending practices or requires enhanced disclosure in connection with certain triggering events. There was a general agreement among the parties involved with Senate Bill 1581 that the interim period between the 77th and 78th Legislature would be used to study mortgage lending practices with an emphasis on identifying any types of pattern or practice that might require future legislative action. One benefit of the disclosure required by the rule is that it provides a source for consumers to contact state regulatory agencies to report complaints as well as providing an avenue for general information, housing counseling, and education. The state regulatory agencies may then collect and analyze data related to consumer contacts and complaints and report to the 78th Legislature regarding the effectiveness of the disclosure or identification of potential pattern or practices of concern. By statute the requirement to provide the notice on covered loans expires September 1, Compliance with this section is deemed compliance with these notice requirements. The rule describes the applicability of the notice requirements, the actual content requirements of the notices, provisions relating to timing of delivery of the notice, and provisions relating to record retention. The new rule is adopted with changes to the proposal as published in the July 6, 2001, issue of the Texas Register (26 TexReg 4948). The agency received several comments generally in support of the rule, but raising concerns over individual requirements of the rule proposal. The agency worked to resolve issues by consensus among interested parties; however, a few issues were not able to be resolved through consensus. Due to the limited time for implementation of the required disclosure by the legislation s September 1 effective date, the agency was faced with very little opportunity to work through some of these issues in advance of the initial proposal. In the initial proposal it was

2 the Finance Commission s intent to bring forward all of the various issues and during the comment period the interested parties could work through the issues with an opportunity for some modifications. The interested parties worked on the language and arrived at a draft that addressed many of the concerns of the parties and represented a workable product for the majority of lenders who would be required to distribute the notice. The working group was comprised of representatives of the following organizations: Consumers Union Citifinancial / Travelers Bank & Trust Independent Bankers of Texas Texas Association of Community Development Corporations Texas Association of Mortgage Brokers Texas Bankers Association Texas Financial Services Association Texas Low Income Housing Service Texas Mortgage Bankers Association Texas Savings and Community Bankers Association Texas Department of Banking Texas Office of Consumer Credit Commissioner (OCCC) Texas Savings & Loan Department A comment letter was also received from Bank of America requesting clarification on complying with the provision to distribute a list of HUD-approved counseling agencies and expressing concern over the text and content of the official notice. There were five issues upon which the working group was unable to reach agreement, so the Finance Commission held a special meeting on July 20, 2001, to take testimony and deliberate on the policy issues and merits of the alternatives of these five issues. Members of the working group were present and given the opportunity to provide public comment. The five issues are discussed within the specific subsections of the rule that they affect. Subsection (a) describes the purpose and applicability of the rule. At the Finance Commission July 20, 2001, meeting a representative from the Independent Bankers Association of Texas raised a question concerning the applicability of the section to adjustable rate mortgages. After discussion and deliberation, the Finance Commission made recommended amendments to this section to appropriately describe the types of adjustable rate mortgages that would be covered by the section. The amended language addresses adjustable rate mortgages in two ways: 1) an adjustable rate mortgage that may not initially bear a

3 rate of 12%, but through a series of rates or steps specifies a fixed rate of 12% later in the contract would require disclosure and 2) a variable rate mortgage with a floating index that when applying the maximum margin increases to the floating index base at the time of application results in a rate of 12% or greater would also require disclosure. This method would eliminate the uncertainty surrounding the impact of the future volatility of interest rates in the general economy. This subsection is necessary to advise lenders concerning which mortgages loans are required to receive the notices required under Texas Finance Code Some concern was expressed over the types of transactions covered by this section of the statute and the proposed rule. Section , Texas Finance Code states that: For a home loan with an interest rate of 12 percent or greater a year, when the lender makes the disclosure required under the Real Estate Settlement Procedures Act, as amended, for the good faith estimate, or if that Act does not apply, within three days after the date the application is made, the lender shall provide to the borrower... The statutory language expressly provides that these provisions apply to home loans. One commenter inquired if the disclosure requirements would apply to a retail installment sale of home improvements between a contractor and a home owner. The applicable statutes in the Texas Finance Code provide distinct differences between loans and retail installment sales. The transactions have different legal treatment and basis in statute. The rule does not specifically address or include retail installment sales within its application as the statute is expressly stated to apply to loans and not retail installment sales. Subsection (b) details definitions that are necessary to ensure that terms are uniformly applied and used. The term application was drafted closely following the provisions of the Real Estate Settlement Procedures Act to ensure consistency among lenders in determining the timing of the disclosure the notice required by Texas Finance Code and the delivery of the good faith estimate required under the Real Estate Settlement Procedures Act. Subsection (c) contains the notice requirements. Subsection (c)(1) prescribes the content of the notice. Members of the working group arrived at a consensus on the content of the notice with two exceptions. Members of the working group have expressed strong feelings about the location and layout of the official notice concerning high cost home loans. While the members have agreed on the content of the official notice, there was disagreement about its placement on the disclosure and use of the state seal in the official notice. The Finance Commission took testimony on these items. Consumers Union and Texas Low Income Housing Information Service favored placing the text box with the official notice

4 information at the top of the page. Additionally, they recommended that the state seal accompany the official notice. Representatives from the Texas Bankers Association and the Independent Bankers Association of Texas, as well as other lending industry representatives voiced concern over the placement of the notice at the top and the use of the state seal, recommending placement of the notice at the bottom of the page. In citing their concern, these representatives expressed that the entirety of the disclosure was not an official notice from the Finance Commission. The remainder of the disclosure addresses other statutorily required items of information, such as the availability of housing counseling. The banking representatives stated that they believed the disclosure would be misleading to consumers if the official notice text box were placed at the top of the page. The Finance Commission agrees with reasons stated by the banking representatives and adopts the rule with the official notice text box at the bottom of page. The Finance Commission agrees with the representatives from Consumers Union and Texas Low Income Housing Information Service that an accompanying state seal conveys the importance of the official notice and thus adopts the rule to include the state seal in the official notice text box. Subsection (c)(3) provides that a lender may request an applicant to acknowledge receipt of the disclosure. The proposed rule required the lender to obtain the applicant s signature on the notice. Several parties, including the Texas Bankers Association and the Independent Bankers Association, offered comments in opposition to this section. Generally these commenters believed that the requirement to obtain a signature exceeds the statutory requirement and thus should not be adopted in the rule. The commenters did acknowledge that the practice of obtaining an acknowledgment is a good business practice that many lenders would probably require as part of their loan procedures. The representative from Consumers Union expressed support for the proposed rule as well as an alternative proposed procedure that permitted the lender to obtain a statement acknowledging receipt of the disclosure at closing. The Finance Commission agrees with the comments from the lending industry that the rule should not require an acknowledgment and adopts the rule accordingly. The proposed rule also contained a subsection that required a retention period for authenticated acknowledgments. Since the adopted rule will not require an acknowledgment of the notice, there is no need for a subsection requiring retention of the authenticated acknowledgments. Subsection (c)(4) in the proposed rule required that a lender provide a borrower with a list of the HUD-approved housing counseling agencies located in Texas. The statute requires that a lender distributes a list of the nearest housing counseling agencies. Some lenders expressed concern about the cumbersome

5 nature of distributing the entire list, which at the time of rule proposal consisted of 122 agencies. Other lenders though expressed concern that the lender did not want to determine, with exact precision, which agencies were nearest the applicant s residence. The Finance Commission agrees with both concerns and adopts the rule to permit lender s flexibility in this area by supplementing the proposed rule with another option for providing the borrower with this required information. Subsection (c)(4) was amended to provide an alternative of providing the entire list for Texas or to provide a list of at least five agencies nearest the applicant s residence. The Texas Financial Services Association also suggested that the Office of Consumer Credit Commissioner publish a reformatted list of HUD-approved counselors quarterly, so that lenders have a consistent and concise list. The agency, as a matter of practice, plans to accommodate this request. Additionally, the Texas Financial Services Association suggests that lenders be able to add a disclaimer to the list of counselors. For example, the disclaimer might read: The lender is not affiliated with any of the housing counseling agencies whose names are provided to you with this notice. The lender is not responsible for information or advice given by a housing counseling agency from which you may seek advice. The Finance Commission has no objection to the addition of this disclaimer to the notice, but does not believe that an amendment to the rule is necessary. Subsection (c)(5) requires that a Spanish translation of the notice must be given if the transaction is conducted primarily in Spanish. The Independent Bankers Association, the Texas Bankers Association, and the Texas Mortgage Bankers Association disagree with the adoption of this subsection because they believe it exceeds the statutory authority in Senate Bill The Finance Commission believes that it is the appropriate public policy decision to require the notice to be given in Spanish when the borrower and the lender are conducting the transaction primarily in Spanish. Several provisions were added to the Finance Commission Agencies responsibilities during the Sunset Process in that require the agencies to ensure that contracts and publications are printed in Spanish as well as English. Specifically, Senate Bill 317 requires contracts to be in plain language, whether in English or in Spanish, and requires the Finance Commission to adopt rules providing model contract provisions and disclosures. The Finance Commission will provide the standard Spanish disclosure text. It is important to note that the rule does not prohibit a lender from giving a Spanish disclosure in every transaction, in addition to the English disclosure. Some lenders may choose to implement this type of disclosure with English on one side and Spanish on the other. Use of a disclosure of this type would comply with the rule.

6 Subsection (d) provides the procedures for delivery of the notice. The delivery procedures established in this section parallel the delivery procedures for other types of notices in mortgage loans, such as the good faith estimate or the 12-day notice for home equity loans. Subsection (e) states that this rule will be considered for repeal or amendment in June As stated above, the statute requiring the disclosure expires September 1, Consumers Union and Texas Low Income Housing Information Service expressed a desire to urge the Finance Commission to continue the disclosure requirement beyond September 1, 2003, even if the statute expires. The lending industry groups generally expressed a desire to sunset the rule at the same time as the statute. The language added in this subsection merely informs the reader that the Finance Commission will reconsider this rule and the arguments of these parties in June 2003 rather than at this time. The new section is adopted under the Texas Finance Code , which authorizes the Finance Commission to adopt rules to ensure compliance with Title 4 of the Texas Finance Code and which requires the Finance Commission to promulgate a high cost home loan notice. These rules affect new Chapter 343, Texas Finance Code. 5.1 Required Disclosures in Connection with Certain Home Loans (a) Purpose and Applicability. (1) The purpose of this section is to provide the means by which lenders may comply with the notice requirements of the Finance Code, Section Compliance with this section is deemed compliance with these notice requirements. (2) This section applies to any mortgage application received on or after September 1, 2001, for each home loan that: a year; or (A) is a fixed rate loan that has a contract interest rate of 12% or greater (B) is an adjustable rate loan that: (i) has a maximum fixed rate of interest pursuant to a schedule of steps or tiered rates that is 12% or greater a year; or

7 (ii) has a maximum variable rate of interest that when calculated upon the index s value at the time of application plus maximum margin increases may result in an interest rate of 12% or greater a year. (b) Definitions. (1) Application means the submission of a borrower s financial information in anticipation of a credit decision, whether written or computer generated. If the submission does not state or identify a specific property, the submission is not an application for the purposes of this section. (2) Authenticate means: (A) to sign; or (B) to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record. (3) Home Loan shall have the meaning given in Finance Code (2). (4) Lender means, generally, the secured creditor or creditors named in the debt obligation and document creating the lien. (c) Notice Requirements. (1) Prescribed content. Attach Graphic. The notice must appear on a full, separate page with no text other than that provided in this section. The form of the notice shall be substantially similar to that provided by this section. (2) Notice Requirement. A lender shall deliver a notice for each home loan described in subsection (a)(2) of this section. (3) Acknowledgement. A lender may request that the applicant authenticate the notice acknowledging applicant s timely receipt of the notice. (4) List of housing counseling agencies. (A) A lender must provide the applicant with either:

8 (i) a list of the Texas-located housing counseling agencies approved by the United States Department of Housing and Urban Development ( HUD ); or (ii) a list of at least five HUD-approved housing counseling agencies nearest the applicant s residence. (B) The list provided under subparagraph (A) of this paragraph must contain housing counseling agency information that is not more than 90 days old or if more than 90 days old, is the most recent information available from HUD. (5) Spanish translation. A Spanish translation of the notice, provided by the Finance Commission, is required if the transaction is conducted primarily in Spanish. (d) Delivery of notice. (1) The notice shall be delivered to an applicant: (A) on the date required for delivery of the Good Faith Estimate under the Real Estate Settlement Procedures Act; (B) within three business days after application if the Real Estate Settlement Procedures Act does not apply to the covered mortgage loan; or (C) within three business days of determining that the loan will be covered by this section, if on the date for delivery under subparagraph (A) or (B) of this paragraph the lender after reasonable diligence has not yet determined whether the home loan is a loan as described in subsection (a)(2) of this section. (2) The notice must be delivered to an applicant at least one business day prior to closing. (3) A mortgage broker may deliver the notice for the lender. (4) Mail delivery. The notice may be delivered by placing it in the mail or with an overnight delivery service on the date required for delivery, addressed to the applicant at the given mailing address. An applicant is presumed to have received the notice within three business days of mailing with prepaid first-class postage or within one business day of deposit with an overnight delivery service.

9 (5) Electronic delivery. A lender may provide the required disclosure by electronic communication in compliance with state and federal law governing electronic signatures and electronic transactions [15 U.S.C et seq; TEX. BUS.& COMM. CODE et seq]. A consumer must affirmatively consent to receive the notice electronically. A lender that uses electronic communication to provide the disclosure shall: (A) send the disclosure to the consumer s electronic address; or (B) make the disclosure available at another location such as an Internet website; and (i) alert the consumer of the disclosure s availability by sending a notice to the consumer s electronic address. The notice shall identify the account involved and the address of the Internet website or other location where the disclosure is available; and (ii) make the disclosure available for at least 90 days from the date the disclosure first becomes available or from the date of the notice alerting the consumer of the disclosure, whichever comes later. (6) Denied Applications. If the application is denied before the time for delivery of the notice, the lender need not provide the denied borrower with notice. (7) Multiple Applicants. In the case of multiple applicants for a home loan, it is only necessary for the lender to deliver the notice to one applicant. (e) Sunset provision. This section will be considered for repeal or amendment in June 2003.