Timothy A. Raty
One of the unique features of Texas home equity loans (besides their uncanny ability to cause headaches for compliance professionals) is the fact that the main laws governing them are set forth in the State’s Constitution (Tex. Const. art. 16, § 50[a]). In order to be an enforceable lien, a long list of criteria need to be met, such as (but not limited to) the principal amount of all indebtedness on the homestead not exceeding 80% of the homestead’s fair market value (Ibid. § 50[a][B]), the homestead may only be foreclosed upon by a court order (Ibid. § 50[a][D]), and the loan may only be closed 12 days or more after receipt of the loan application or a specially-prescribed notice (Ibid. § 50[a][M][i] & [g]).
Now, Texans have a chance to amend these criteria. On May 10, 2017 the Texas Legislature passed Senate Joint Resolution 60, which proposes several amendments to Tex. Const. art. 16, § 50. According to Ibid. art. 17, § 1, any amendments to the Texas Constitution are to be voted on by “qualified voters for statewide offices and propositions” (Ibid. § 1[a]). “If it appears from the returns that majority of the votes cast have been cast in favor of an amendment, it shall become a part of [the Texas] Constitution” (Ibid. § 1[c]). Voting on S.J.R. 60 will happen on November 7, 2017.
Relaxing Fee Exclusions
Currently, a home equity loan cannot be extended unless the owner and the owner’s spouse are not required to pay “in addition to any interest, fees to any person that are necessary to originate, evaluate, maintain, record, insure, or service the extension of credit that exceed, in the aggregate, three percent of the original principal amount of the extension of credit.” (Tex. Const. art. 16, § 50[a][E])
Under the proposed amendments, there is a tradeoff between the percentage cap imposed and the fees which are excluded from such cap. The three percent cap is lowered to two percent; however, the following charges are excluded from the cap:
- Interest (currently excluded);
- Bona fide discount points;
- Fees for an appraisal which is performed by a third-party appraiser;
- Property survey fees, if performed by a state registered or licensed surveyor;
- A state-based premium for a mortgagee policy of title insurance containing endorsements established in accordance with state law; and
- Fees for a title examination report, but only if it costs less that the state-based premium for a mortgagee policy of title insurance without endorsements established in accordance with state law.
Agricultural Lands No Longer Exempt
Currently, a home equity loan cannot be “secured by homestead property that on the date of closing is designated for agricultural use as provided by statutes governing property tax, unless such homestead property is used primarily for the production of milk.” (Tex. Const. art. 16, § 50[a][I]) The proposed amendments will repeal this provision and the exemption it promulgates.
More Home Equity Loan Lenders
A home equity loan may only be currently extended “by one of the following that has not been found by a federal regulatory agency to have engaged in the practice of refusing to make loans because the applicants for the loans reside or the property proposed to secure the loans is located in a certain area: (i) a bank, savings and loan association, savings bank, or credit union doing business under the laws of [Texas] or the United States . . . (vi) a person regulated by [Texas] as a mortgage broker.” (Tex. Const. art. 16, § 50[a][P])
The proposed amendments would expand the categories under Clauses (i) and (vi). Under Clause (i), subsidiaries of “a bank, savings and loan association, savings bank, or credit union” may also make home equity loans.
Under Clause (vi), both a mortgage banker or mortgage company can make these loans, with the term “mortgage broker” being substantively replaced with “mortgage company”. This is because one of the major licensing chapters under Texas law (Tex. Fin. Code ch. 156) used to apply only to mortgage brokers in 1999 (about the time Supra, in its current form, took effect), but was amended in 2011 to apply to mortgage companies (see 2011 Tex. Gen. Sess. Law Serv. ch. 655, § 65[a]).
Once a Home Equity Loan, Always a Home Equity Loan
Once a home equity loan is extended, any subsequent loans which refinance a home equity loan must also be a home equity loan or be a reverse mortgage, due to the following provision:
“A refinance of debt secured by the homestead, any portion of which is an extension of credit described by Subsection (a)(6) of this section, may not be secured by a valid lien against the homestead unless the refinance of the debt is an extension of credit described by Subsection (a)(6) [home equity loan] or (a)(7)[reverse mortgage] of this section.” (Tex. Const. art. 16, § 50[f])
This has led to the catchy phrase, “Once a home equity loan, always a home equity loan.” However, this phrase may go out of style if the proposed amendments are enacted, since new provisions would be added to allow a home equity loan to be refinanced by a no-cash out refinance transaction (i.e. a “Subsection 50[a]” loan), so long as such transaction meets the following criteria:
- It cannot be closed within a year of the closing date of the home equity loan being refinanced;
- It does not include any advance or additional funds, other than for refinancing most loans under Subsection 50(a) or for covering the actual costs/reserves required for the transaction;
- The principal amount of the loan cannot, when added to the aggregate total of the outstanding principal balances of other debts secured by the homestead, exceed 80 percent of the fair market value of the homestead at the time of closing; and
- A particular notice must be provided to the borrower no later than three business days after submission of the loan application and at least twelve days before closing.
(see proposed Tex. Const. art. 16, § 50[f])
The notice required states the following:
YOUR EXISTING LOAN THAT YOU DESIRE TO REFINANCE IS A HOME EQUITY LOAN. YOU MAY HAVE THE OPTION TO REFINANCE YOUR HOME EQUITY LOAN AS EITHER A HOME EQUITY LOAN OR AS A NON-HOME EQUITY LOAN, IF OFFERED BY YOUR LENDER.
HOME EQUITY LOANS HAVE IMPORTANT CONSUMER PROTECTIONS. A LENDER MAY ONLY FORECLOSE A HOME EQUITY LOAN BASED ON A COURT ORDER. A HOME EQUITY LOAN MUST BE WITHOUT RECOURSE FOR PERSONAL LIABILITY AGAINST YOU AND YOUR SPOUSE.
IF YOU HAVE APPLIED TO REFINANCE YOUR EXISTING HOME EQUITY LOAN AS A NON-HOME EQUITY LOAN, YOU WILL LOSE CERTAIN CONSUMER PROTECTIONS. A NON-HOME EQUITY REFINANCED LOAN:
(1) WILL PERMIT THE LENDER TO FORECLOSE WITHOUT A COURT ORDER;
(2) WILL BE WITHOUT RECOURSE FOR PERSONAL LIABILITY AGAINST YOU AND YOUR SPOUSE; AND
(3) MAY ALSO CONTAIN OTHER TERMS OR CONDITIONS THAT MAY NOT BE PERMITTED IN A TRADITIONAL HOME EQUITY LOAN.
BEFORE YOU REFINANCE YOUR EXISTING HOME EQUITY LOAN TO MAKE IT A NON-HOME EQUITY LOAN, YOU SHOULD MAKE SURE YOU UNDERSTAND THAT YOU ARE WAIVING IMPORTANT PROTECTIONS THAT HOME EQUITY LOANS PROVIDE UNDER THE LAW AND SHOULD CONSIDER CONSULTING WITH AN ATTORNEY OF YOUR CHOOSING REGARDING THESE PROTECTIONS.
YOU MAY WISH TO ASK YOUR LENDER TO REFINANCE YOUR LOAN AS A HOME EQUITY LOAN. HOWEVER, A HOME EQUITY LOAN MAY HAVE A HIGHER INTEREST RATE AND CLOSING COSTS THAN A NON-HOME EQUITY LOAN.
Such a loan is presumed to be a “Subsection 50(a)(4)” loan, though a decisive conclusion can be made that it is a “Subsection 50(a)(4)” loan as long as the aforementioned criteria is met, plus the owner (or the owner’s spouse) acknowledge such on an affidavit.
HELOC Criteria Modified
A loan is considered a “home equity line of credit” if it meets certain criteria under Tex. Const. art. 16, § 50(t). Among these criteria is the following:
“A home equity line of credit is a form of an open-end account that may be debited from time to time, under which credit may be extended from time to time and under which:
(6) no additional debits or advances are made if the total principal amount outstanding exceeds an amount equal to 50 percent of the fair market value of the homestead as determined on the date the account is established.”
Under the proposed amendments, this criterion will be repealed, thus making total advances under the HELOC subject to the 80% fair market value criteria under Subsection 50(a)(6)(B).
In addition to the proposed substantive changes listed above, there are two minor, technical changes:
- Revising a citation under Tex. Const. art. 16, § 50(a)(6)(Q)(vi); and
- The text of the “Notice Concerning Extensions of Credit Defined by Section 50(a)(6), Article XVI, Texas Constitution” would be updated to reflect the substantive changes to home equity loans.