In the Supreme Court of Texas
THE FINANCE COMMISSION OF TEXAS, THE CREDIT UNION
COMMISSION OF TEXAS, AND TEXAS BANKERS ASSOCIATION
ASS’N of COMMUNITY ORGANIZATIONS FOR REFORM NOW, VALERIE
NORWOOD, ELISE SHOWS, MARYANN ROBLES-VALDEZ, BOBBY
MARTIN, PAMELA COOPER, AND CARLOS RIVAS
On Petition for Review from the Third Court of Appeals in Austin, Texas
HOMEOWNERS’ REPLY AND SUR-REPLY BRIEF
Robert W. Doggett Laurie Ratliff
Texas Bar No. 05945650 Texas Bar No. 00784817
Nelson H. Mock IKARD & GOLDEN, P.C.
Texas Bar No. 24003922 400 West 15th St., Ste. 975
email@example.com Austin, Texas 78701
John P. Salmon Fax 512-472-3669
Texas Bar No. 24068914
TEXAS RIOGRANDE LEGAL AID
4920 North I-H 35
Austin, Texas 78751
Attorneys for Respondents/Cross-Petitioners
I. REVIEW IS DE NOVO, AS PETITIONERS’ OWN WORDS SUGGEST
The Commissions correctly assert, “the Borrowers simply disagree with the
substance of the Commissions’ interpretations.” (Commissions’ Reply and Resp. 7
n.1.) That assertion is the crux of this lawsuit and why the Homeowners are
asking this Court to review interpretations that the Commissions have refused to
modify or have not become moot by a change to the constitution. 1 The
Homeowners allege particular interpretations are unconstitutional under de novo
or any standard of review.
The Texas Legislature and voters enacted a constitutional provision that, in
the Commissions’ words, “equates constitutional interpretations promulgated by
the Commissions with those issued by state and federal courts of appeals in
judicial decisions.” (Commissions’ Reply Br. and Resp. 3); TEX. CONST. art. XVI,
§ 50(u). 2 Because appellate court constitutional interpretations are questions of
law, they are subject to de novo, substantive review. See e.g., Harris County
Hosp. Dist. v. Tomball Reg’l Hosp., 283 S.W.3d 838, 842 (Tex. 2009) (asserting
The Commissions voluntarily modified interpretations of TEX. CONST. art. XVI, §§ 50(a)(6)(M)(ii),
50(a)(6)(Q)(i), and 50(a)(6)(Q)(iii). 31 Tex. Reg. 1393 (Mar. 3, 2006); 31 Tex. Reg. 5080 (June 23, 2006).
The constitution was amended in 2007 to moot challenges to interpretations of TEX. CONST. art. XVI, §§
50(a)(6)(M)(i), 50(a)(6)(Q)(v), and 50(t)(3). See Texas Bankers Ass'n v. Ass'n of Cmty. Orgs. for Reform
Now, 303 S.W.3d 404, 412–416 (Tex. App.—Austin 2010, pet. filed).
The text of Section 50(u) provides:
The legislature may by statute delegate one or more state agencies the power to interpret
Subsections (a)(5)-(a)(7), (e)-(p), and (t), of this section. An act or omission does not
violate a provision included in those subsections if the act or omission conforms to an
interpretation of the provision that is:
(1) in effect at the time of the act or omission; and
(2) made by a state agency to which the power of interpretation is delegated as provided
by this subsection or by an appellate court of this state or the United States.
TEX. CONST. art. XVI, § 50(u).
that review of both Texas constitutional and statutory provisions involve matters
of law and are reviewed de novo). The Commissions’ interpretations, like
appellate courts’ interpretations, are subject to the same de novo, substantive
Disregarding the logical conclusion of their claim to parity with appellate
courts, the Commissions argue that their interpretations “must be afforded
substantial deference, if they are subject to substantive judicial review at all.”
(Commissions’ Reply and Resp. 9.) In this Court, the Bankers now agree the
interpretations are subject to judicial review, but do not give a standard of review. 3
(Bankers’ Reply and Resp. 1.) The Commissions’ new position 4 is illogical if the
Commissions are akin to appellate courts—now it is the Commissions who seek
power they were not given. 5
In the Court of Appeals, the Bankers suggested that the interpretations may be immune from substantive
judicial review. (Bankers’ Ct. of Appeals Reply Br. 4–5) (“[T]he law may be that once the Commissions
have exercised their interpretative power, their interpretations are not subject to further review. . . .
[A]rguably, the Commissions’ constitutional interpretative authority is exclusive.”) The Bankers now state
in this Court: “Texas courts, when interpreting the [Texas] Constitution, are to give effect to its plain
language and are not free to question the wisdom of the Constitution or to construe it differently from its
plain meaning to achieve a desired result. Because the Commissions have been charged under the Texas
Constitution with the judicial function of interpreting the Constitution, their interpretations should be
reviewed under the same standard.” (Bankers’ Reply and Resp. 1, citations omitted.)
Only beginning in this Court do the Commissions believe their substantive rulings are above review.
(Commissions’ Reply and Resp. 5, 9.) Now, the Commissions alone argue that the statutes specifically
granting the authority to interpret the constitutional provisions (Sections 11.308 and 15.413 of the Finance
Code) only require the procedures of the APA be followed and do not allow for substantive review.
(Commissions’ Reply and Resp. 4–5.)
The imprudence of granting the Commissions’ wish for un-reviewed interpretation is illustrated by
example in which an “interpretation” substantively changed the constitution and was effectively
challenged. When the home equity amendment was first added to the constitution, it prevented a home-
equity lender from requiring the homeowner to apply the extension of credit to repay another debt except
debt secured by the homestead or debt to another lender. TEX. CONST. art. XVI, § 50(a)(6)(Q)(i). In 2004,
the Commissions’ interpreted Section (Q)(i) stating: “When an owner applies for a debt consolidation loan,
it is the owner, not the lender, that is requiring that proceeds be applied to another debt. If the proceeds of a
home equity loan are used in conformity with owner’s credit application, the limitation of this section do
Contrary to the Commissions’ rhetoric, Section 50(u) creates a safe harbor,
not an insurmountable dilemma. Courts can give effect to both the substantive
home equity provisions in the constitution and the interpretive grant of Section
50(u), providing a safe harbor to a lender who relies on the interpretations in effect
when it makes the loan. The Commissions offer a simple hypothetical, where a
homeowner sues over a loan made in accordance with an interpretation; however,
the homeowner alleges and the reviewing court agrees that the interpretation itself
is erroneous. (Commissions’ Reply and Resp. 9.) The Commissions then claim in
the hypothetical that the reviewing court must choose between “(a) respecting the
safe harbor and enforcing an unconstitutional loan; or (b) invalidating the loan and
vitiating the safe harbor.” Id. The Commissions omit the correct choice: (c) the
lender’s reliance on the safe harbor makes the loan constitutional, so the loan is
valid. The lender made the loan while the interpretation was “in effect,” so the
erroneous interpretation might be subject to challenge, but the safe harbor
provision in the constitution protects the lender and the loans already made from
attack. TEX. CONST. art. XVI, § 50(u). Or simply, loans based on an interpretation
that was valid when the loans were made are safe – thus, “safe harbor”. To choose
otherwise would vitiate the safe harbor and deny due process. See Olszewski v.
not apply.” 7 TEX. ADMIN. CODE § 153.18(3) (2004); 29 Tex. Reg. 96 (Jan. 2, 2004). The trial court held
the Commissions’ initial interpretation invalid, stating in a letter to the parties: “The only reason for this
particular [interpretation] is to allow lenders to have an owner submit an application to consolidate a non-
homestead loan. This is precisely what the Constitution is intended to prevent.” Letter from Jenkins, J. to
Counsel (October 7, 2005) at 3 regarding the analysis of Point 6. (found at Homeowners’ Br. on Merits,
Tab 1) Months after this letter, the interpretation was amended to delete subsection (3). 7 TEX. ADMIN.
CODE § 153.18 (2006); 31 Tex. Reg. 1393 (Mar. 3, 2006); 31 Tex. Reg. 5080 (June 23, 2006).
Scripps Health, 30 Cal. 4th 798, 829 (Cal. 2003) (“retroactive application of a
decision disapproving prior authority on which a person may reasonably rely in
determining what conduct will subject the person to penalties, denies due
process.”); c.f. Michigan v. DeFillippo, 443 U.S. 31, 37–38 (1979) (“A prudent
officer . . . should not have been required to anticipate that a court would later hold
the ordinance unconstitutional.”). Choice (c) gives effect to Section 50(u) in its
entirety, and it does not eliminate interested parties from challenging erroneous
interpretations, just as the Homeowners have done in this case.
In their briefings, the Commissions maintain that the entire point of Section
50(u) was to ease the hesitancy of lenders allegedly “wary” to enter the Texas
home equity lending market. 6 (Commissions’ Reply and Resp. 3.) Choice (c)
completely removes any reason for alleged wariness, unlike any argument the
Commissions offer. Moreover, wariness is not the motivating reasons for the
Bankers’ petition for review. The lenders overridingly seek removal of the home
equity safeguards, not clarity. See TEXAS FINANCE COMMISSION RESEARCH INTO
HOME EQUITY LENDING IN TEXAS: INTERVIEWS WITH KEY DECISION-MAKERS IN
The Finance Commission’s own data hardly shows reluctance from lenders. The first year home equity
loan products were available in 1998, originators made an estimated 114,823 first lien home equity loans
(averaging $93,811 each) -- a number which has yet to be exceeded from available data. OFFICE OF
CONSUMER CREDIT COMMISSIONER, HOME EQUITY LENDING REPORT 3 (2002), available at
http://www.fc.state.tx.us/homeinfo/herptcy02.pdf. The report noted an “initial push” of lending activity
after the creation of Home Equity Lending, then a decrease in activity from 1999 to 2001. Then it noted
that “the data in 2002 reflect a drastically different marketplace” mentioning a 35 percent increase in loan
amounts over the 2001 figures. Id at 1. Notably, this report was created before Section 50(u) was added.
Similar reports are generated annually and do not mention lender wariness or lack thereof in their analysis
of lending activity. Instead the analysis is entirely focused on economic conditions that affect homeowner
attitudes as the primary reason for changes in lending activity (e.g., “Generally, people may have taken
advantage of lower interest rates and the equity in their homes ….”) Id. Older reports are available here:
http://www.fc.state.tx.us/homeinfo/homeindex.htm#studies; and the most recent report here:
91 FINANCIAL INSTITUTIONS AT 27 (1999), available at
http://www.fc.state.tx.us/HEBANKS.PDF (reporting the results of a survey question
asking Texas bankers, “if you could change any aspect of home equity lending
laws in the state of Texas, what changes would you make?”; reporting that the
second most popular, unaided response to this question, with 26.4% of participants
mentioning this response, was removal of the 3% fee limitation; the third most
popular response, with 19.8% mentioning, was removal of the 12-day waiting
period; the fourth most popular response, with 19.8% mentioning, was removal of
the 80% loan to value cap; the seventh most popular response, with 13.2%
mentioning, was removal of court approved foreclosures; and the tenth most
popular response, with only 8.8% mentioning, was more clarity in the regulations).
II. FEE CAP: THE COURT MUST STRIKE AN OVER-EXPANSIVE
INTERPRETATION OF “INTEREST” THAT SUBSTANTIVELY ALTERS
The definition of “interest” controls the breadth of the Section 50(a)(6)(E)
fee cap. An over expansive definition destroys the cap. 7 The term “any” does not
necessarily provide guidance on the appropriate definition of “interest.” (Contra
Bankers’ Reply and Resp. 3; Commissions’ Reply and Resp. 12.) The term “any”
See Tex. Bankers Ass’n, 303 S.W.3d at 412 n.9 (“At the summary-judgment hearing, the Commissions
acknowledged that any fee paid to a lender, other than amounts simply reimbursing the lender for charges
paid to a third party or amounts, such as an application fee, that are charged for a ‘distinct service,’ would
constitute interest under the usury definition and would not be subject to the cap. When the trial court
expressed concern that such a broad definition would allow an origination fee, for example, to be classified
as interest, the Commissions confirmed that such a charge would not be subject to the fee cap as long as it
is paid to the lender.”) (Accord Commissions’ Reply Br. and Resp. 15) (decrying the Homeowners’
“erroneous argument” that “the interpretations exempt all (or most) lender fees from the cap”).
merely conveys that the entire amount of interest, however defined, should be
excluded from the fee cap calculation, as opposed to just some of the interest. The
Commissions’ and Bankers’ focus on the word “any” begs the question—what is
An example demonstrates the point. The Real Estate Settlement
Procedures Act (RESPA) prohibits persons from giving or accepting referral
payments, split fees, or kickbacks in home lending. 12 U.S.C. § 2607. RESPA
provides that, “[a]ny person or persons who violate the prohibitions or limitations
of this section shall be jointly and severally liable to the person or persons charged
for the settlement service involved in the violation in an amount equal to three
times the amount of any charge paid for such settlement service.” Id. at 2607(d)(2)
(emphasis added). Courts differ on what the term “any charge” includes. In Ohio,
for example, “any charge” includes the full price paid for the settlement services
as opposed to just the amount of the overcharge. Pettrey v. Enter. Title Agency,
Inc., 241 F.R.D. 268, 276–277 (N.D. Ohio 2006). In Texas, on the other hand,
“any charge” is not the full charge paid, but is only the amount of the overcharge.
Moore v. Radian Group Inc., 233 F. Supp. 2d 819, 824-26 (E.D. Tex. 2002). The
Texas court examined the purpose of the provision and the legislative history of
the act and stated: “[t]he treble damages provision extends only to that portion of a
settlement service charge that is involved in the RESPA violation.” Id. at 826.
Other courts have agreed. See e.g., Durr v. Intercounty Title Co. of Ill., 14 F.3d
1183 (7th Cir. 1994); Morales v. Attorneys’ Title Ins. Fund, Inc., 983 F. Supp. 1418
(S.D. Fla. 1997). 8
III. THE COMMISSIONS IMPROPERLY ATTEMPT TO REWRITE THE LAW
RELATING TO THE PLACE HOME EQUITY LOAN DOCUMENTS MUST
The Texas Constitution requires, with no exceptions, that a home equity
loan be closed only at the office of a lender, an attorney at law, or a title company.
TEX. CONST. art. XVI, §50(a)(6)(N). The Commissions appropriately define a
closing as “the act of signing the equity loan agreement by each owner and the
spouse of each owner.” 7 TEX. ADMIN. CODE § 153.1(3) (“Rule 153.1(3)”).9
They also define the “equity loan agreement” as “the documents evidencing the
agreement between the parties of an equity loan,” Rule 153.1(8), which would
include not only such documents as the promissory note and deed of trust, but also
the written consent by the homeowner and the homeowner’s spouse, without
which there can be no loan agreement under the constitution. TEX. CONST. art.
XVI, §50(a)(6)(A). Despite this, the Commissions insist, in direct contravention
to the plain language and intent of the constitution, that a homeowner and the
homeowner’s spouse can sign the loan documents at their home or anywhere else.
(Commissions’ Reply and Resp. 23-24, emphasis added).
See also, Folger Adam Sec. Inc. v. DeMatteis/MacGregor, J.V., 209 F.3d 252, 258 (3d Cir. 2000)
(“Courts faced with the task of defining the scope of the term ‘any interest’ [in real estate] have been
unable to provide a precise definition. 3 Collier on Bankruptcy P 363.06. . . . [S]ome courts have
narrowly interpreted that phrase to mean only in rem interests in property, see e.g., In re Fairchild Aircraft
Corp., 184 B.R. 910, 917–19 (Bankr. W.D. Tex. 1995), vacated on other grounds, 220 B.R. 909 (Bankr.
W.D. Tex. 1998) . . . .”).
The Commissions’ interpretations are referenced herein as “Rule 153.[xx].”
The Commissions boldly claim that nothing in the Constitution requires the
homeowner to attend the closing in person. (Commissions’ Reply and Resp. 23-
24.) Yet if a closing includes the signing of the home equity loan agreement, as
the Commissions concede in Rule 151.3, and the closing must occur at a specified
location as required by the constitution, then a homeowner must attend the closing
in person, and a spouse must also give written consent in the specified locations.
Simply put, there is no authority in the constitution that allows an exception to the
requirement of a closing occurring at the office of a lender, attorney at law, or title
company. The Commissions exceeded their authority and simply chose to rewrite
IV. THE COMMISSIONS’ RULES DO NOT ASSURE THAT A HOMEOWNER
RECEIVES NOTICE OF THE TERMS AND CONDITIONS OF THE LOAN,
AS CONSTITUTIONALLY REQUIRED
Article XVI, § 50(g) requires that a lender provide a homeowner with a
written notice of the basic terms and conditions of home equity loans twelve days
before closing. The purpose of this section is to provide Texans with a cooling-off
period, during which they can informatively deliberate whether to encumber their
home. With the enactment of Rule 153.51(1), the Commissions allow lenders to
mail such a notice, but then neglect to require that the homeowner actually receive
it. 10 The rule also creates new law by allowing lenders to rely on an undefined
The Commissions’ rule appears to be an attempt to emulate procedures for foreclosure notices in Texas.
See TEX. PROP. CODE § 51.002. However, even a foreclosure notice is required to be sent by certified mail,
so that there is some proof of mailing and proof of receipt of notice (if it is accepted). TEX. PROP. CODE §
51.002. Also, Rule 21a of the Texas Rules of Civil Procedure provides for service of pleadings by mail,
but only if sent by certified or registered mail. TEX. R. CIV. P. 21a.
“established system of verifiable procedures” to show that they did in fact mail the
notice. 11 Nowhere does the constitution set up such a contrivance for lenders to
prove that they have complied with the very basic requirement of providing
homeowners with a written notice of the basic terms and conditions of these loans.
These interpretations are new law and inconsistent with the role of the
Commissions to only interpret the Texas Constitution.
The Commissions cite Lane v. State, 933 S.W. 2d 504 (Tex. Crim. App.
1996), for the proposition that “Texas courts have also recognized that the term
‘provide’ could equally require ‘actual delivery’ or ‘merely require that [a
person] be given access’ to the relevant material.” (Commissions’ Response Brief
25.) In fact, Lane v. State is very instructive, because the Court of Criminal
Appeals concluded that “provide” means either giving access or actual delivery,
and it left no room for simply sending something without ensuring actual delivery.
Lane, 933 S.W.2d at 514-515. The court also the decided that the term “provide”
was ambiguous, so it looked to factors such as legislative history, the purpose of
the statute, as well the consequences of a statutory interpretation to arrive at its
The Commissions and the Texas Attorney General are currently a part of a 50 state workgroup
investigating another “established system of verifiable procedures”:
It has recently come to light that a number of mortgage loan servicers have submitted
affidavits or signed other documents in support of either a judicial or non-judicial
foreclosure that appear to have procedural defects. In particular, it appears affidavits and
other documents have been signed by persons who did not have personal knowledge of
the facts asserted in the documents. In addition, it appears that many affidavits were
signed outside of the presence of a notary public, contrary to state law. This process of
signing documents without confirming their accuracy has come to be known as
“robosigning.” We believe such a process may constitute a deceptive act and/or an
unfair practice or otherwise violate state laws.
Joint Statement of the Mortgage Foreclosure Multistate Group (October 13, 2010) (emphasis added), found
decision. Id. at 515-516. The court ultimately determined the requirement that the
prosecution “provide” the defendant with recordings was to ensure that the
defendant was not hurt by surreptitious recordings, and because the recordings in
question had been played at a pre-trial hearing and admitted into evidence, such
access to the recordings effectuated the purpose of the law as much as actual
delivery of the recordings. Id. at 516.
In contrast to the law interpreted by the court in Lane, the purpose of the
written notice required by Section 50(g) of the constitution is that homeowners
actually know the contents of the notice (i.e., their rights and responsibilities)
before they risk placing a lien on their home. Unlike Lane, the Commissions’ rule
does nothing to ensure that the homeowners ever actually receive the notice. The
Commissions also erroneously believe that by merely pointing a homeowner to a
website, a lender would be providing the homeowner with the notice pursuant to
Section 50(g). (Commissions’ Reply and Resp. 25.) This does not effectuate the
purpose or intended consequences of Section 50(g), nor does the Commissions’
suggestion that the failure to receive the notice should be relegated to an
affirmative defense long after a homeowner did not receive the notice.
(Commissions’ Reply and Resp. 25-26, citing Wilson v. Aames Capital Corp., No.
14-06-00524-CV, 2007 WL 3072054 (Tex. App.—Houston [14th Dist.] Oct. 23,
2007, no pet.) (mem. op.).)
Apparently the term “provide” can only be combined with “receive” when
it is a homeowner who is required to provide a lender a notice (e.g., when a
homeowner must notify a lender of a violation of the constitution under Section
50(6)(Q)(x)). 7 TEX. ADMIN. CODE §§ 153.92(b), 153.92(a).
PRAYER FOR RELIEF
Wherefore, Respondent Homeowners request this Court:
1. affirm the judgment of the court of appeals in so far as it declared the
following rules invalid: 7 TEX. ADMIN. CODE §§ 153.1(11); 153.5(3), (4),
(6), (8), (9), (12);
2. reverse and render the judgment of the trial court and declare the following
rules invalid: 7 TEX. ADMIN. CODE §§ 153.15(2), (3); 153.51(1), (3); and
3. grant court costs, and any other relief to which Respondents are entitled.
TEXAS RIOGRANDE LEGAL AID
Robert W. Doggett SBN 05945650
Nelson H. Mock SBN 24003922
John P. Salmon SBN 24068914
4920 North I-H 35
Austin, Texas 78751
IKARD & GOLDEN, P.C.
Laurie Ratliff SBN 00784817
400 West 15 St. Ste. 975
Austin, Texas 78701
ATTORNEYS FOR RESPONDENT HOMEOWNERS
Valerie Norwood, Elise Shows, Maryann
Robles-Valdez, Bobby Martin, Pamela Cooper,
and Carlos Rivas
CERTIFICATE OF SERVICE
I certify that on January 28, 2011, a true and correct copy of this
Respondent Homeowners’ Reply and Sur-Reply Brief was served by certified
mail, return receipt requested, to appellate counsel of record in this proceeding as
Craig T. Enoch Evan S. Greene
Alex Valdez OFFICE OF THE ATTORNEY GENERAL
Melissa Prentice Lorber P.O. Box 12548 (MC 059)
Brian T. Morris Austin, Texas 78711-2548
Michael K. O’Neal
401 Congress Ave., Suite 2100
Austin, Texas 78701
John P. Salmon