QUESTION
I know there have been changes to the Texas home equity laws, but do not know the specifics. What has changed?
ANSWER
Proposition 2, passed by Texas voters on November 7, 2017, amends sections 50(a), (f), (g) & (t) of Article 16 of the Texas Constitution, making changes to requirements for Texas home equity loans. These changes are effective for loans or refinancings made on or after January 1, 2018.
Among the significant modifications to § 50 are to the fees associated with the loan, removal of the prohibition on agricultural loans, making lending available to certain bank, savings and loans, savings bank, and credit union subsidiaries, and allowing a home equity loan to be refinanced as a traditional mortgage. The relevant changes are described below.
§ 50(a)(6)(E) - Fees:
The existing cap on fees and charges associated with a home equity loan has been 3%. This has now been changed to 2%. Although this would at first appear to be a win for consumers, the amendment also now excludes from fees (1) third-party appraisals, (2) surveys, (3) title insurance premiums, and (4) title examination reports, unless the cost is equal to, or greater than, the title premium. Because the addition of these fees might otherwise break the 3% cap, it is also a win for lenders.
§ 50(a)(6)(I) - Agricultural Homestead:
The amendment removed the prohibition on home equity mortgages for agricultural homesteads. The new § 50(a)(6)(I) simply reads “Repealed.”
§ 50(a)(6)(P)(i) - Subsidiaries of Certain Financial Institutions:
The new constitutional amendment specifies that subsidiaries of banks, savings and loan associations, savings banks and credit unions, are now permitted to engage in home equity lending.
Changes were made to other portions of Section 50 as well.
§ 50(f) Refinance:
Section 50(f) (“Once a HELOC, Always a HELOC”) has been amended to allow refinances of home equity loans as traditional mortgage refinances with specific conditions:
A. the refinance is not closed before the first anniversary of the date the extension of credit was closed;
B. the refinanced extension of credit only includes the actual costs of refinancing and does not advance the borrower any funds;
C. the refinance does not (with all other loans on the homestead) exceed 80% of the fair market value of the property;
D. the lender provides the owner the specific written notice included in the provision not later than the third business day after the date the owner submits the loan application to the lender and at least 12 days before the date the refinance of the extension of credit is closed.
The Notice under 50(f)(ii)(D) states that the borrower has the option to refinance as either a home equity loan or a non-home equity loan, if available, and contains warnings as to rights which may be waived by refinancing as a non-home equity loan. Specifically, warnings that a non-home equity loan:
(1) WILL PERMIT THE LENDER TO FORECLOSE WITHOUT A COURT ORDER ;
(2) WILL BE WITH 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. HOWEVER, A HOME EQUITY LOAN MAY HAVE A HIGHER INTEREST RATE AND CLOSING COSTS THAN A NON-HOME EQUITY LOAN.
The 12-day notice which is currently required by Section 50(g) has been amended to reflect the fee cap and agricultural homestead changes to 50(a)(6).
§ 50(t)(6) – Repeal of the 50% LTV cap on HELOCs:
The existing constitutional provision prohibited advances on HELOCs if the total principal amount outstanding exceeded 50 percent of the fair market value of the homestead. This provision has been repealed by the new amendment, so that the 80% LTV cap provided in § 50(t)(5) and § 50(g)(6)(B) applies to such advances.
Brennan Holland
Director/Legal & Regulatory Compliance
Lenders Compliance Group
