Proposition 2 Amendments to Texas Constitution

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 The new § 50(a)(6)(I) simply reads “Repealed.”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.

 § 50(g) - 50(a)(6) Notice: 

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

Alternate Closing Disclosure and HELOCs

QUESTION

We have been using the Alternate Closing Disclosure Form for our refinance transaction. But it does not include a HELOC field for stating draws. By the way, our input is based on the information we put into DU. But what happens if the cash to/from borrower in DU does not match the amount stated on the Alternate Closing Disclosure? We have asked our compliance counsel but they were not sure about how to process the field information onto the form. What scenario can you provide for this situation?

ANSWER

The Alternate Closing Disclosure Form (“ACD”) for refinance transactions unfortunately does not have a field for stating HELOC draws. Generally, it is acceptable if the cash to/from borrower in DU does not match the ACD form. This is due to the fact that the automated engine is programmed to look for the draw amount to be in the Details of Transaction in order to accurately calculate the CLTV. However, the ACD form simply does not have that data stated in its calculation.

There are a few scenarios where this situation plays out in HELOC transactions.

The following five scenarios are applicable.

1) Purchase transaction with a new HELOC (with or without a draw).

• Drawn amount of the HELOC entered in line j of the Details of Transaction (DOT).
• Monthly payment for the amount drawn on the new subordinate lien entered in Section V, Proposed Monthly Housing, Other Financing P&I.
• No draw, enter $0.00.

     2) Refi with a new HELOC (no draw).

• No draw, enter $0.00 on line j of the DOT.

     3) Refi with a new HELOC (draw)

• New draw entered in line j of the DOT.
• Monthly payment for the draw on the new subordinate lien entered in Section V, Proposed Monthly Housing, Other Financing P&I. This scenario is a bit complicated by the fact that the CFPB has indicated they do not want the drawn amount included in the final cash to close; therefore, there will be a discrepancy between the DU/1003 cash to close and the Alternative CD cash to close by the amount of the draw.

     4) Refi with an existing HELOC (no draw)

• As an existing HELOC, DU will produce a transaction report that actually shows it on the credit report and imports the balance into the liabilities section.
• No new draw, so no entry on the DOT is required.
• Monthly payment that shows the outstanding balance of the existing HELOC entered in Section V, Proposed Monthly Housing, Other Financing P&I.

     5) Refi with an existing HELOC (draw)

• Draw is indicated in one of two places:

• Either in line j of the DOT with the remaining balance in liabilities screen,

• Or draw plus the balance stated in liabilities screen.

• If liabilities screen is used, the new draw is stated in Other Liquid Asset to ensure there are credit for the funds.
• Either entry is acceptable, and the CLTV would calculate accurately.
• Monthly payment associated with the new outstanding balance of the existing HELOC entered in Section V, Proposed Monthly Housing, Other Financing P&I.

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Home Equity Line of Credit (HELOC): Disclosures

QUESTION 

We are a broker that frequently takes applications for home equity lines of credit (HELOC) for a lender. Do we have a duty to make disclosures to the applicant? 

ANSWER

Your duty as a broker to make disclosures with respect to a HELOC depends on whether the lender has provided you with both the application and the disclosures. To the extent the lender has not provided the disclosures to you, you, as a third party broker, have no obligation to disclose. However, if the lender provided you with both the applications and disclosures, you do have a duty to disclose. In each instance, you have a duty to provide the consumer with the home equity brochure entitle “What You Should Know About Home Equity Lines of Credit” or a similar brochure.

Pursuant to the Real Estate Settlement Procedures Act (RESPA), with respect to a home equity plan covered under Regulation Z, “a lender or mortgage broker that provides the borrower with the disclosures required by 12 CFR 1026.40 of Regulation Z at the time the borrower applies for such loan shall be deemed to satisfy the requirements of this section”.  [12 CFR 1024.7(h)]

Section 40(c) of Regulation Z addresses the duties of third parties to disclose. “Persons other than the creditor who provide applications to consumers for home equity plans must provide the brochure required under paragraph (e) of this section at the time an application is provided. If such persons have the disclosures required under paragraph (d) of this section for a creditor’s home equity plan, they also shall provide the disclosures at such time.”

The Official Interpretation to Section40(c) makes it clear that a third party has no duty to obtain disclosures about a creditor’s home equity plan or to create a set of disclosures based upon what the third party knows about the creditor’s plan. However, if the creditor provides the third party with disclosures along with the creditor’s application form, the third party must provide those disclosures to the consumer together with the application. If the third party received the application via telephone, the third party may mail the disclosures and brochure within three business days of receipt of the application.  [12 CFR 1026.40(c)]

*Joyce Pollison
Director/Legal and Regulatory Compliance
Lenders Compliance Group