Texas Register, Volume 40, Number 10, Pages 983-1152, March 6, 2015 Page: 1,075
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erty tax lenders relies exclusively on closing costs and discount
points to compensate the lenders for all origination costs. These
lenders will have to adjust their pricing practices in order to com-
ply with the rule and with Texas Tax Code, 32.06(e). The pri-
mary impact will be on lenders whose closing costs currently in-
clude costs that are unrelated to closing (such as advertising
and overhead), as well as lenders that charge discount points.
Ultimately, however, the commission estimates that the impact
on these lenders will be minimal, because they should be able
to recoup these costs through other methods, such as charg-
ing a higher interest rate and ensuring that they are able to re-
tain a portion of that interest rate. Because many small lenders
currently operate without charging closing costs over $900 and
without charging discount points, the commission believes that
the segment of small property tax lenders referenced earlier will
be able to adjust their practices to comply with the rule.
In the original proposal of these rules in October 2014, as well as
the re-proposal as published in the December 26, 2014, issue of
the Texas Register (39 TexReg 10122, 10128), the preamble ex-
plained that the agency was not aware of any adverse economic
impact on small businesses, but the agency invited comments on
the effects that the rules would have on small businesses. After
the re-proposal, five commenters argued that as re-proposed,
the rules would disproportionately affect small businesses. One
commenter stated: "As a small originator in an extremely com-
petitive market, it is necessary for [the commenter], and many
other small originators, to utilize investment capital from larger
firms to offer flexible property tax loans to homeowners so they
will not lose their homes. Without our own funding capabilities,
we rely on the origination fees and discount points to be able
to meet our financial obligations in running our businesses." An-
other commenter stated: "As a small business that depends on
origination profits we are unable to originate loans at a loss un-
like large players in the marketplace . . . which in some cases
are publicly held companies that are happy to originate loans at a
loss and then make up for it in profits from the interest rate spread
they enjoy from those assets." Another commenter stated: "Ev-
idence shows that competition has lowered the average closing
costs to a level that is below the true cost of origination. It is
one thing for a business to choose to take a loss on origination
(at least for a time) for a competitive advantage. It is quite an-
other to force all originators to operate at a loss in originations.
To do so will drive most originators out of business who do not
meet a certain business profile, i.e. large, established origina-
tors with access to institutional or extremely cheap financing who
originate and own their own loans. Such an originator is able to
capitalize their losses in their origination arm and make it up in
the interest rate spread over the life of the loan. A small origina-
tor without access to cheap investment capital or who sells their
loans must make a profit at origination or they will be forced to
close their doors."
These commenters have stated that they rely on closing costs
and discount points to compensate them for the costs of origi-
nation. But closing costs and discount points are not intended
to cover all costs of origination. Closing costs are intended to
cover costs that arise between the loan application and closing,
and discount points, in transactions where they are permitted,
should be an optional offset that enables a borrower to obtain
a lower interest rate than the standard par rate offered by the
lender. Therefore, in order to comply with the rule as adopted,
these lenders may have to adjust their pricing practices. These
lenders may have to recoup their origination costs by charging
a higher interest rate and ensuring that they are able to retain aportion of that higher interest rate. It appears that there is room
for them to do so; two of the commenters stated that they charge
fixed interest rates between 9.90% and 10%, well below the 18%
maximum. After making this adjustment, these small lenders
will still be able to recover their costs and effectively receive the
same stream of payments, but the amounts they charge for clos-
ing costs will more accurately reflect costs actually related to
closing. The commission disagrees with the contention that the
rule will force lenders to operate at a loss.
Some commenters emphasized that the combination of a $900
closing cost cap and a prohibition on discount points would put
certain small property tax lenders out of business. For exam-
ple, one commenter stated: "Lowering origination fees to $900
and in effect eliminating discount points would put us out of busi-
ness." Another commenter stated that "to further reduce origina-
tion fees beyond the current well thought out guidelines and to,
in effect, eliminate discount points, will create an injustice to the
property owners by putting them more at risk in the long run with
fewer options to assist them with their property taxes which will
increase their cost and risk of losing their property." Again, the
commission disagrees with the contention that the rule will force
lenders to operate at a loss, because of the alternative pricing
structures available to lenders.
The commission believes that small-business-related excep-
tions to the rule would-be legally infeasible. Creating a higher
alternative closing cost cap for small businesses would be
infeasible because it would mean that the cap would include
costs that are not related to closing (such as advertising and
overhead). In addition, exempting small businesses from the
prohibition on discount points would fail to ensure that these
small businesses impose reasonable charges and comply with
the limitation on funds advanced in Tax Code, 32.06(e). The
commission also considered the rule as re-proposed in De-
cember, which allowed legitimate discount points but prohibited
including them in the principal balance of a property tax loan.
However, after reviewing the comments, the commission has
determined that this would be infeasible because property tax
lenders are unable to charge discount points in a manner that
complies with the prohibition on financing discount points, and
because this would fail to ensure that property tax lenders im-
pose reasonable charges in connection with property tax loans.
The agency does not know exactly how many small and mi-
cro-businesses will be affected by the adopted rules, because
it does not know how many small and micro-businesses engage
in the practice described earlier (i.e., relying on closing costs and
discount points to compensate the lender for all origination costs,
and assigning the loan to another party). The agency estimates
that five property tax loan companies engage in this practice.
This estimate is based on the number of property tax lenders
that filed an annual report in 2014 stating that they made loans
but did not have any loan receivables. If these lenders are charg-
ing closing costs that exceed the limitations specified in adopted
89.601(c), or if they are charging discount points, then they will
have to amend their pricing practices in order to comply with the
rule.
The precise amount of the rule's economic impact on small busi-
nesses is difficult to estimate, and depends partly on informa-
tion that the agency does not have. For example, the agency
does not know how many secondary-market participants will be
willing to purchase loans from small originators on terms that
comply with the adopted rule. Nonetheless, the commission be-
lieves that the impact on small businesses will be minimal. AsADOPTED RULES March 6, 2015 40 TexReg 1075
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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/m1/93/?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.