DocMagic customers who do not regularly originate Texas second-lien loans are surprised to learn that they can only collect certain fees under certain circumstances. The purpose of this article is to explain under which circumstances the fee restriction would apply and to enumerate the fees that a lender may collect.

A lender may collect fees that are only expressly authorized under Texas statute and regulation if the second-lien loan is a secondary mortgage loan under Chapter 342 of the Texas Finance Code. A "secondary mortgage loan" is defined as a loan with a term greater than 90 days which is:

(1) secured by an interest in real property improved by a dwelling, occupied by four or fewer families; and

(2) subject to one or more prior liens, security interests, mortgages, or deeds of trust.

Secondary mortgage loans are subject to Chapter 342 of the Texas Finance Code if the following apply:

(1) The effective rate of interest is in excess of 10% per year*;

(2) The loan is extended primarily for personal, family, or household use (e.g., principal residence, second home);

(3) The loan is predominantly payable in monthly installments; and

(4) The loan is made by a person engaged in the business of making, arranging, or negotiating a secondary mortgage loan (e.g., licensed lender).

*Includes the contract rate or note rate and all other charges by the lender in connection with the loan that would constitute interest, as defined in Texas Finance Code Section 301.002(4), to mean . . . "compensation for the use, forbearance, or detention of money." For all practical purposes, the DocMagic software uses the annual percentage rate (APR) for the effective rate of interest as many Texas law practitioners do.

Chapter 342 does not permit a fee or charge unless it is expressly authorized. Only the following fees or charges may be collected at closing or included in loan principal:

Reasonable fees or costs for:

• Title examination and preparation of an abstract of title (by an attorney who is not an employee of the lender or a title company or property search company authorized to do business in this state);
• Premiums or fees for title insurance or title search for the benefit of the mortgagee (or, at the mortgagor's option, for the benefit of the mortgagor);
• Document preparation by an attorney who is not a salaried employee of the lender (if the fees are evidenced by a statement for services rendered addressed to the lender);
• Charges prescribed by law that are paid to public officials for determining the existence of a security interest or for perfecting, releasing, or satisfying a security interest (e.g., recording fees);
• Fees for an appraisal of real property offered as security for the loan prepared by a certified appraiser who is not a salaried employee of the lender;
• A credit report;
• A survey of real property offered as security for the loan prepared by a registered surveyor who is not a salaried employee of the lender;
• Premiums received in connection with the sale of credit life insurance, credit accident and health insurance, or other insurance that protects the mortgagee against default by the mortgagor (the benefits of which are applied to reduce or extinguish the loan balance); and
• Fees relating to real property offered as security for the loan incurred to comply with a federally mandated program (if the collection of the fees or the participation in the program is required by a federal agency-e.g., a FHA mortgage insurance premium).

NOTE: Premiums for property insurance requested or required by the lender that meets the requirements of Texas Finance Code Section 342.401 also may be added to the loan contract.

Based on the above, the following fees may NOT be collected at closing or included in the loan principal:

Application Fee		Fee for providing Amortization Schedule
Assignment Fee		Funding Fee
Assumption Fee		Lock In Fee
Closing Agent Fee		Notary Fee
Commitment Fee		State Maximum Prepayment Penalty
Copy Fee		Processing Fee
Credit Investigation Fee		Review Appraisal Fee
Courier Fee		Servicing Release Premium
Disbursement Fee		Tax Service Fee
Document Redraw Fee		Transfer Fee
Fax Fee		Underwriting Fee
Federal Express Fee		Wire Fee

In addition, prepayment penalties are prohibited on Chapter 342 loans.

If you have any questions regarding the contents of this article, please contact DocMagic's Compliance Department.

Edna Guevara is a Paralegal of Document Systems, Inc. and a member of its Compliance Department.