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Thursday, July 31, 2014

Texas Home Equity Loans


QUESTION
We are going to be offering home equity loans in Texas soon. What are the requirements and restrictions for making a home equity loan in Texas?

ANSWER
The law establishing limitations on home equity lending in Texas is governed by Article XVI, Section 50 of the Texas Constitution. A home equity loan is one of the enumerated permissible purposes for establishing a lien on a homestead. [Tex. Const. art. XVI, § 50 (a)(6)] 

The following are some of the key requirements and restrictions for Texas home equity loans.
  • In Texas, the total mortgage debt, including the amount of any existing mortgages plus the projected home equity lien (whether cash out re-fi or HELOC), cannot exceed 80% of the home's current fair market value at closing. [Tex. Const. art. XVI, § 50 (a)(6)(B)]
  • The outstanding balance on a HELOC may not exceed 50% of the home’s original fair market value. [Tex. Const. art. XVI, § 50 (t)(6)]
  • Lenders may not charge fees for draws on HELOCs. [Tex. Const. art. XVI, § 50 (t)(4)]
  • No home equity loan may close prior to the expiration of 12 calendar days from the date the owner received a written consumer rights disclosure following his/her submission of an application. [Tex. Const. art. XVI, § 50 (a)(6)(M)(i) and (g)] 
  • Owners must be provided with a copy of the executed application and a copy of a HUD-1 Settlement Statement at least one full day prior to closing. [Tex. Const. art. XVI, § 50 (a)(6)(M)(ii)]
  • No blanks may be left in the final loan documents to be filled in with “substantive terms of the agreement.” [Tex. Const. art. XVI, § 50 (a)(6)(Q)(iii)]
  • Owner and lender must sign a written acknowledgment as to the fair market value of the property on the closing date. [Tex. Const. art. XVI, § 50 (a)(6)(Q)(ix)]
  • No recourse in the absence of fraud. [Tex. Const. art. XVI, § 50 (a)(6)(C)]
  • Fees and charges to make the loan (not interest) cannot exceed 3% of the loan amount. [Tex. Const. art. XVI, § 50 (a)(6)(E)] Interest is calculated as “the amount determined by multiplying the loan principal by the interest rate.”  [Finance Comm. of Texas vs. Norwood, No. 10-0121, p.2 (Tex., Jan. 24, 2014) (Supplemental Opinion on Motion for Rehearing)]
  • No cross-default provisions permitted (may not accelerate for default in any loan other than prior lien on the homestead). [Tex. Const. art. XVI, § 50 (a)(6)(J)]
  • Must allow for repayment in substantially equal successive periodic installments, not more often than every 14 days and not less often than monthly, beginning no later than two months from the date the loan is closed. [Tex. Const. art. XVI, § 50 (a)(6)(L)(i)]
  • There can be no prepayment penalties. [Tex. Const. art. XVI, § 50 (a)(6)(G)]
  • Owners are limited to one closed-end home equity loan or HELOC at a time. [Tex. Const. art. XVI, § 50 (a)(6)(K)]
  • Owners with a home equity loan must wait one year from closing to refinance. [Tex. Const. art. XVI, § 50 (a)(6)(M)(iii)]
  • The loan may only be closed in the office of the lender, an attorney, or a title company. [Tex. Const. art. XVI, § 50 (a)(6)(N)]
  • The loan may not require an owner to apply the proceeds to another debt except a debt that is secured by the homestead or owed to another lender. [Tex. Const. art. XVI, § 50 (a)(6)(Q)(i)]
  • The lender forfeits all outstanding principal and interest if:
o   Under §50(a)(6)(Q)(x), a lender fails within 60 days of the consumer’s demand to cure a breach of its obligations by:
a.      returning any overcharge to the owner;
b.      sending to the owner a written acknowledgement that the lien is valid only in the amount that the extension of credit (a) does not exceed 80% of the fair market value of the homestead, or (b) is not secured by certain designated agricultural use property or property other than the homestead;
c.      sending the owner written notice modifying any non-compliant portion of the mortgage documents to make compliant with the home equity requirements;
d.      delivering documents required to be delivered at or prior to closing;
e.      abating all owner’s obligations if another home equity loan was outstanding on the homestead at the time of the loan; and
f.       if the failure to comply cannot otherwise by cured, by refunding or crediting the owner $1,000 and offering the owner the right to refinance the extension of credit with the lender or holder for the remaining term of the loan at no cost to the owner on the same terms, including interest, as the original extension of credit modified to comply with the home equity loan laws; or
o   Under §50(a)(6)(Q)(xi):
- the extension of credit is made by a person not authorized to make home equity loans under §50(a)(6)(P); or
- each owner and each owner’s spouse failed to consent in writing to the loan (unless they subsequently consent).

Brennan Holland
Director/Legal & Regulatory Compliance
Lenders Compliance Group