Texas Register, Volume 40, Number 10, Pages 983-1152, March 6, 2015 Page: 1,072
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First, the comments revealed that the property tax loan industry,
unlike the general mortgage lending industry, has no standard
method for calculating the benefit that a borrower receives in ex-
change for discount points. In determining whether charges are
commercially reasonable, Texas courts have looked at whether
a charge is customary and made in conformity with reasonable
commercial practices. See Regal Fin. Co., Ltd. v. Tex Star Mo-
tors, Inc., 355 S.W.3d 595, 601-02 (Tex. 2010); Avia Jet Mgmt
Corp. v. Aeroplace Serv., Inc., 626 S.W.2d 325, 326-37 (Tex.
App.--Tyler 1981, no writ). The comments suggest that stan-
dardized, customary practices for calculating discount points
do not exist in the property tax loan industry. One commenter
stated that "tax transferees do not have the ability to have a
'standard rate' off which discount point can give meaningful
interest reductions. Mortgage rates are determined by national
and international financial forces through large institutions." Two
commenters were property tax lenders that currently charge
discount points, and they provided example calculations that
purportedly showedthe benefits of discount points. However,
it did not appear that either of these commenters used an
industry-standard method for calculating discount points. One
of these commenters apparently calculated the reduced interest
rate based on average rates in the property tax loan industry,
rather than a higher interest rate offered by the commenter. The
other commented provided an example where the borrower pays
2.5% of the loan amount for each percentage point discount in
the interest rate, but it was unclear how the commented arrived
at this calculation. Because there is no standard methodology,
each lender can arbitrarily select its own method for calculating
discount points, with no uniform correspondence between the
amount charged for discount points and the reduction in the
interest rate. This distinguishes the property tax loan industry
from the mortgage industry, which relies on standard rate sheets
in order to calculate discount points, as discussed in one of
the comments. The commission believes that this practice is
unreasonable.
Second, the comments revealed that property tax lenders are
unable to charge discount points in a manner that complies with
the limitation on funds advanced in Texas Tax Code, 32.06(e).
The limitation on funds advanced prohibits lenders from includ-
ing discount points in the principal balance of a property tax loan.
The definition of "funds advanced" in Texas Tax Code, 32.06(e)
provides: "Funds advanced are limited to the taxes, penalties,
interest, and collection costs paid as shown on the tax receipt,
expenses paid to record the lien, plus reasonable closing costs."
In addition, if property tax lenders charge interest on the discount
points, this could lead to a usury violation for charging interest
on interest. See William C. Dear & Assocs., Inc. v. Plastron-
ics, Inc., 913 S.W.2d 251, 254 (Tex. Appn--Amarillo 1996, writ
denied) (interpreting a usury statute to prohibit compounding of
interest where it was not expressly authorized). As re-proposed,
89.601(d)(4) and (5) prohibited property tax lenders from in-
cluding discount points in the principal balance of a property tax
loan, and required any discount points to be paid by the bor-
rower before closing. The comments indicated that property tax
lenders cannot charge discount points in a manner that complies
with this limitation, because borrowers are unable to pay for the
discount points up front. Ten commenters supported the re-pro-
posed rule's prohibition on including discount points in the princi-
pal balance of a property tax loan. For example, one commenter
stated: "ensuring that prepaid interest is kept separate from in-
terest bearing principal to avoid charging property owners inter-
est on the prepaid interest." However, five commenters objected
to the prohibition on including discount points in the principal bal-ance. One commenter stated: "Overwhelmingly, the property
owner who is seeking a tax lien loan is cash strapped. . . . Re-
quiring discount points to be paid in cash takes yet one more op-
tion away from borrowers who have precious few options in the
first place." Furthermore, one commenter who supported pro-
hibiting discount points stated that the rule would substantially
reduce the number of transactions with discount points, stating:
"We have always offered the ability for customers to pay some or
all of the closing costs up front, and they never elect to use this
option. This experience leads me to confidently predict that less
than 1 out of 1,000 tax lien transfer transactions will have a bor-
rower elect to pay upfront for the discount points." Because bor-
rowers in property tax loans are unable to pay discount points up
front, property tax lenders are unable to charge discount points
in a manner that complies with the limitation on funds advanced.
This is another reason why discount points are not a reasonable
charge in connection with property tax loans.
Third, the comments indicated thatscertain property tax lenders
have used discount points as disguised closing costs, rather than
an option to obtain a lower interest rate. For example, one com-
menter expressed concern "that a handful of licensees are at-
tempting to disguise a portion of their closing costsas discount
points. . . . [C]ertain licensees originate transfers but imme-
diately sell them to an unrelated funding company, keeping the
closing costs and 'discount points' as their sole compensation
for each transaction. What this practice has created is a sys-
tem whereby these originators have incentive to charge high dis-
count points, although the rate charged by the licensee actually
funding the loan does not decrease proportionally." Along the
same lines, some comments suggested that certain property tax
lenders currently rely on discount points as a primary source of
funding. For example, one commenter stated: "Without our own
funding capabilities, we rely on the origination fees and discount
points to beable to meet our financial obligations in running our
business." In otherwords, certain property tax lenders are relying
on discount points in order to compensate themfor the costs in-
curred in closing a loan. Discount points should be a method for
providing borrowers with an option to obtain a lower interest rate.
They should not be a method of maximizing profits or charging
disguised closing costs. In order to be legitimate, discount points
must be an option available to the borrower, rather than a fee
necessary to originate the loan. See, e.g., Fin. Comm'n of Tex.
v. Norwood, 418 S.W.3d 566, 596 (Tex. 2013). The comments
did not indicate that any property tax lenders have offered a bor-
rower a clear statement of the option to obtain a higher inter-
est rate, versus a lower rate with discount points. So it is un-
clear whether any of the small number of property tax lenders
that charge discount points are doing so in a legitimate manner.
Therefore, this is another reason that discount points are not a
reasonable charge in connection with a property tax loan.
Fourth, the comments indicated that discount points provide little
benefit to borrowers. Property tax lenders could provide equiv-
alent benefits to borrowers through more transparent, less con-
fusing practices. Some commenters argued that discount points
should be prohibited for property tax loans because they are con-
fusing, and borrowers are unfamiliar with discount points in this
context. One commenter stated: "Approximately half of our cus-
tomers do not have a mortgage and therefore have probably
not been exposed to the concept of discount points." In addi-
tion, due to the relatively short terms of property tax loans, dis-
count points provide little benefit to the consumer. For example,
one commenter stated: "The only way for borrowers to benefit
from discount points is to make regular payments on the mort-40 TexReg 1072 March 6, 2015 Texas Register
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Texas. Secretary of State. Texas Register, Volume 40, Number 10, Pages 983-1152, March 6, 2015, periodical, March 6, 2015; Austin, Texas. (https://texashistory.unt.edu/ark:/67531/metapth606207/m1/90/?q=32+TexReg+3206: accessed July 16, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu; crediting UNT Libraries Government Documents Department.