I. Home Equity Loans Generally
§ 11.1Home Equity Loan General Considerations
Article XVI, section 50, of the Texas Constitution allows a lien on homestead property to secure a home equity loan. In a departure from prior Texas practice, the validity of such a lien is generally not dependent on the use to which the loan proceeds are applied. Constitutional provisions authorizing home equity lending continue, however, to reflect a strong public policy solicitous of the homestead as the last shield against destitution. Home equity loans are authorized only on satisfaction of a number of significant constitutional safeguards and restrictions aimed at protecting homestead owners.
These restrictions are nonseverable and nonwaivable. Each must be satisfied to create a valid lien. Strict compliance with the requirements of the Texas Constitution is required. See Toler v. Fertitta, 67 S.W.2d 229, 230 (Tex. Comm’n App. 1934, holding approved).
Regulatory Commentary: Regulations and official commentary pertaining to home equity lending are available from the following different sources.
1.Interpretive rules of Finance Commission and Credit Union Commission: The constitution authorizes the legislature to delegate the authority to issue interpretations of the home equity lending provisions of the constitution. See Tex. Const. art. XVI, § 50(u). The legislature, acting pursuant to this amendment, delegated interpretive authority over the home equity provisions to the Finance Commission of Texas and the Texas Credit Union Commission, which in turn have jointly issued interpretations of home equity lending law. See Tex. Fin. Code §§ 11.308, 15.413. The interpretive rules are codified in 7 Tex. Admin. Code ch. 153, which may be accessed at https://texreg.sos.state.tx.us/public/readtac$ext.ViewTAC?tac_view=4&ti=7&pt=8&ch=153&rl=Y. See 7 Tex. Admin. Code §§ 153.1–.96.
Lenders authorized by the constitution to make home equity extensions of credit are afforded substantial protections when relying on these interpretations. No act or omission is deemed to violate a home equity constitutional provision if the act or omission conforms to an interpretation of the provision that is in effect at the time of the act or omission and made by a state agency to which the power of interpretation is delegated or by an appellate court of this state or the United States. Tex. Const. art. XVI, § 50(u). However, the validity of certain of the interpretations has been successfully attacked in Texas Bankers Ass’n v. Ass’n of Community Organizations for Reform Now (ACORN), 303 S.W.3d 404 (Tex. App.—Austin 2010, pet. granted). As a result, 7 Tex. Admin. Code §§ 153.1(11), 153.5(3) (defining interest) and § 153.5(4), (6), (8), (9), (12) (incorporating that definition) have been held constitutionally invalid, and 7 Tex. Admin. Code §§ 153.13, 153.18, 153.20, 153.22, 153.84 have been revised by the commissions to rectify invalid provisions found by the lower court. The Supreme Court of Texas granted a petition for review of the decision to determine (1) whether deference to agency interpretations should be the standard for appellate review when state agencies, in this case the Finance Commission of Texas and the Credit Union Commission, have been delegated the authority to interpret constitutional home equity provisions by the constitution and statutes of this state; (2) whether the Finance Code’s definition of “interest” was properly applied in agency interpretations for purposes of determining the constitutional 3 percent fee cap; and (3) whether agency interpretations should be upheld that allow the signing of an equity loan by power of attorney instead of a required signing by homeowners at locations specified by the constitution. On unopposed motion, the court also ordered ACORN dismissed as a party because of its intervening dissolution and ordered the style of the cause corrected to read Finance Commission of Texas et al. v. Valerie Norwood et al., No. 10-0121, 54 Tex. Sup. Ct. J. 1077 (Tex. Feb. 25, 2011). In an opinion issued on June 21, 2013, the Texas Supreme Court decided (1) that agency interpretations are subject to the same standard of review as courts of appeals, which are reviewed, as a matter of law, de novo; (2) that the agency interpretation of the 3 percent fee cap, tying it to the meaning of the Finance Code definition of “interest,” was invalid (“interest” as used in that provision means the amount determined by multiplying the loan principal by the interest rate); and (3) that execution of a power of attorney used in an equity loan transaction must occur only at the office of a lender, an attorney at law, or a title company. Finance Commission of Texas v. Norwood, 418 S.W.3d 566 (Tex. 2013). On January 24, 2014, on a motion for rehearing filed by the Texas Bankers Association, a supplemental opinion was issued to clarify that per diem interest and discount points were not subject to the 3 percent fee cap and to reaffirm the court’s decision relating to the execution of a power of attorney used in an equity loan transaction. Finance Commission of Texas, 418 S.W.3d at 595–97.
2.1998 OCCC Commentary: On October 7, 1998, the Office of the Consumer Credit Commissioner (OCCC), the Texas Department of Banking, the Savings and Loan Department, and the Credit Union Department issued their joint Regulatory Commentary on Equity Lending Procedures to provide initial guidance to lenders and consumers concerning the regulatory views of the participating agencies. This regulatory commentary is referred to in this chapter as the “1998 OCCC Commentary.” Though the 1998 OCCC Commentary has been supplanted by title 7, chapter 153, of the Texas Administrative Code (Home Equity Lending) (see 29 Tex. Reg. 84 (2004)), it retains vitality by helping practitioners understand home equity lending restrictions. The 1998 OCCC Commentary is accessible on the OCCC website at https://occc.texas.gov.
3.Department of Insurance procedural rules: The Texas Department of Insurance adopted title insurance coverages specifically for home equity loans along with accompanying procedural rules: (1) Equity Loan Mortgage Endorsement (T-42) and accompanying Procedural Rule P-44 and (2) Supplemental Coverage Equity Loan Mortgage Endorsement (T-42.1) and accompanying Procedural Rule P-47. These endorsements and procedural rules provide underwriting guidelines that interpret the constitutional requirements for a home equity lien.
Limitation of Chapter: The commentary and forms in this chapter are applicable to a first-lien home equity loan. Texas Finance Code chapter 342 imposes additional duties, prohibitions, and disclosure requirements in connection with secondary mortgage loans. Attorneys are cautioned that some forms in this chapter may require modification for use with a secondary mortgage loan transaction.
The checklist in this chapter (form 11-10) is included for practical guidance and to identify issues for attorneys reviewing Texas home equity transactions. Lenders and investors may impose their own requirements for Texas home equity reviews. Attorneys are cautioned to follow the lender and investor guidelines applicable to their specific Texas home equity transaction.
Model Forms and Regulations: Home equity loans regulated by the OCCC must be written in plain language designed to be easily understood by the average consumer and must be printed in an easily readable font and type size. Tex. Fin. Code § 341.502(a). The Finance Commission has adopted rules governing loan contracts subject to Texas Finance Code section 341.502, including model loan contracts that in certain cases may be required for use. See 7 Tex. Admin. Code ch. 90. Home equity loans that are regulated by the OCCC and therefore subject to these plain language and model form requirements include only loans that (1) provide for an interest rate exceeding 10 percent a year, (2) are extended primarily for personal, family, or household use, (3) are a secondary mortgage loan, and (4) are made by a person engaged in the business of making such loans licensed by the OCCC (other than a bank, savings and loan, or credit union). Tex. Fin. Code §§ 341.101–.103, 342.005; Tex. Att’y Gen. Op. No. JC-0513 (2002). These requirements do not apply to first-lien home equity loans or home equity loans made by traditional lenders.
§ 11.2Home Equity Loans Closed before January 1, 2018
The rules governing home equity loans changed significantly on January 1, 2018. Where applicable, this chapter will identify provisions affected by the changes. The laws in effect at the time the home equity loan was closed govern the validity of the home equity loan. If an existing home equity loan is being analyzed for compliance, the closing date should be noted and the corresponding rules applied to the analysis. The January 1, 2018, changes are summarized below:
1.For home equity loans closed prior to January 1, 2018, closing costs should not exceed 3 percent of the loan amount. The January 1, 2018, amendments reduced the fee limitation to 2 percent but excluded some of the most expensive fees of a typical closing from the fees included in the limitation: appraisal fees, title fees, and survey fees. For a detailed analysis of which fees are included in the constitutional fee limitation, see section 11.6 below.
2.Before January 1, 2018, a home equity loan could not be secured by a homestead with an agricultural use tax exemption, unless the tract was used primarily for the production of milk. The 2018 amendments removed this restriction, and home equity loans closed on or after January 1, 2018, may be secured by homesteads with an agricultural use tax exemption.
3.Before January 1, 2018, if a new mortgage loan was made and any portion of the loan proceeds were used to extinguish an existing home equity loan, the new loan had to be a home equity loan or a reverse mortgage. The 2018 amendments created a new procedure by which lenders may refinance an existing home equity loan with a conventional mortgage. Beginning January 1, 2018, a home equity loan may now be refinanced into a conventional loan if (a) at least one year has elapsed since the home equity loan was closed; (b) there is no advance of new money (except closing costs); (c) the new principal loan balance does not exceed 80 percent of the property’s fair market value on the day of refinance; and (d) the owner is provided with a new disclosure twelve days before closing, advising owner of the risks of refinancing into a non–home equity loan.
4.For a home equity line of credit (HELOC) originated prior to January 1, 2018, there is a loan-to-value restriction on additional advances: no advances after the initial advance at closing may be made if the sum of all indebtedness secured by the homestead exceeds 50 percent of the fair market value of the property at the time the HELOC was closed. For HELOCs originated on or after January 1, 2018, the loan-to-value limit on additional advances is 80 percent.
The seven categories of lenders that may make home equity loans are—
1.a bank, savings and loan association, savings bank, or credit union doing business under Texas or federal law, including a subsidiary of a bank, savings and loan association, savings bank, or credit union;
2.a federally chartered lending instrumentality;
3.a person approved as a mortgagee by the United States government to make federally insured loans;
4.a person licensed to make regulated loans under Texas law;
5.a seller financing all or part of the homestead purchase;
6.a person related to the borrower within the second degree of affinity or consanguinity; or
7.a person regulated under Texas law as a mortgage banker or mortgage company.
Tex. Const. art. XVI, § 50(a)(6)(P). To qualify as a mortgage company under category 7 above, a lender must obtain a license under Texas Finance Code chapter 156, the Residential Mortgage Loan Company Licensing and Registration Act. To qualify as a mortgage banker under category 7 above, a lender must obtain a license under Texas Finance Code chapter 157, the Mortgage Banker Registration and Residential Mortgage Loan Originator License Act. 7 Tex. Admin. Code § 153.17(3).
§ 11.3:1Financial Institutions
Some questions remain regarding the eligibility of a financial institution chartered in a foreign state to make a home equity loan. Such institutions are generally considered to be exempt from Texas usury law under 12 U.S.C. § 1831d. Such institutions may make loans to Texas residents under the usury laws of their home states. The 1998 OCCC Commentary recognizes that a financial institution chartered and doing business in a foreign state is not subject to licensure as a Texas-regulated lender but offers no direct opinion on whether such an institution would be recognized under the Texas Constitution as an authorized home equity lender. 1998 OCCC Commentary, at 9.
§ 11.3:2HUD-Approved Mortgagees
A person approved by the United States government as a mortgagee to make federally insured loans is an authorized home equity lender. The Department of Housing and Urban Development (HUD) approves lenders to make federally insured loans. Federal Housing Administration (FHA) and HUD direct endorsement or nonsupervised mortgagees are eligible to make home equity loans. Correspondents to a HUD-approved mortgagee are not authorized to make home equity loans unless they qualify under another category of authorized lender. 7 Tex. Admin. Code § 153.17(2). Unless a HUD-approved mortgagee is also a bank, savings and loan association, or credit union, the mortgagee must obtain a license from the Office of Consumer Credit Commissioner to make junior-lien home equity loans. Tex. Fin. Code §§ 124.005, 339.005, 341.103–.104, 342.051.
§ 11.3:3State-Regulated Lenders
A lender authorized under Texas Finance Code chapter 341 must still meet both constitutional and statutory qualifications to make a home equity loan. Generally, a nondepository lender that makes, negotiates, arranges, or transacts a secondary mortgage loan governed by Finance Code chapter 342 must comply with the licensing provisions of that chapter. See 7 Tex. Admin. Code § 153.17(1), (3). Residential mortgage loan originators licensed under chapter 156 of the Finance Code, federal and state banks, savings banks, and savings and loan associations are expressly exempt from the licensing requirements of chapter 342. See Tex. Fin. Code § 342.051(c)(1), (f). Exempt lenders are nevertheless thought to be subject to the substantive provisions of that chapter applicable to secondary mortgage loans. However, chapter 342 and other chapters of subtitle B, title 4, of the Finance Code do not apply to a credit union’s extension of credit unless the agreement that evidences the transaction specifically provides otherwise. See Tex. Fin. Code § 124.005.
§ 11.3:4Mortgage Banker or Mortgage Company
A person regulated by the state of Texas as a mortgage banker or mortgage company is authorized by the constitution to make a home equity loan. Tex. Const. art. XVI, § 50(a)(6)(P)(vi).
A person related to the borrower within the second degree of affinity or consanguinity may make a home equity loan. Tex. Const. art. XVI, § 50(a)(6)(P)(v). The Texas Government Code gives instructions for computing degrees of affinity and consanguinity. See Tex. Gov’t Code §§ 573.021–.025. Individuals also are exempt under licensing and registration requirements of Texas Finance Code chapter 180 when offering or negotiating a residential mortgage loan with, or on behalf of, an immediate family member of the individual. See Tex. Fin. Code § 180.003(a)(2). An “immediate family member” for this purpose means the spouse, child, sibling, parent, grandparent, or grandchild of an individual. The term also includes a stepparent, stepchild, and step-sibling and a relationship established by adoption. See Tex. Fin. Code § 180.002(8).
§ 11.3:6Redlining Restrictions
A lender otherwise authorized to make a home equity loan is ineligible to make such a loan if found by a federal regulatory agency to have engaged in the practice of refusing to make loans because the debtor resides or the property is located in a certain area. Tex. Const. art. XVI, § 50(a)(6)(P). No provision is made in the constitution to rehabilitate or requalify lenders who were once found to have done this.
§ 11.4Restriction on Loan-to-Value Ratio
The principal amount of a home equity loan when added to the aggregate total of all other indebtedness secured by a lien against the homestead may not exceed 80 percent of the fair market value of the homestead on the date that the extension of credit is made. Tex. Const. art. XVI, § 50(a)(6)(B). For the purpose of this calculation, the principal amount of a home equity loan is the sum of cash advances and charges made at the inception of the loan to the extent that the charges are financed in the principal amount of the note. 7 Tex. Admin. Code § 153.3(1). The 80 percent limit applies to the principal balance of all outstanding debt secured by the homestead on the date that the extension of credit is made. 7 Tex. Admin. Code § 153.3(2). The principal amount of a home equity loan does not include interest accrued after the date that the extension of credit is made (other than any interest capitalized and added to the principal balance on the date that the extension of credit is made) or amounts advanced by the lender after closing as the result of default, including, for example, ad valorem taxes, hazard insurance premiums, and authorized collection costs, including attorney’s fees. 7 Tex. Admin. Code § 153.3(3). With a closed-end multiple advance loan, the principal balance includes contractually obligated future advances not yet disbursed. 7 Tex. Admin. Code § 153.3(4).
Valuation: The lender and owner must sign a written acknowledgment of the fair market value of the homestead property on the date that the extension of credit is made. Tex. Const. art. XVI, § 50(a)(6)(Q)(ix). A lender may sign the written acknowledgment before or at closing. 7 Tex. Admin. Code § 153.26(2). An authorized agent may sign the written acknowledgment on behalf of the lender. 7 Tex. Admin. Code § 153.26(3). A lender or assignee for value may conclusively rely on the fair market value established by this written acknowledgment if that value is established by appraisal or evaluation prepared in accordance with any applicable state or federal requirement and the lender or assignee has no actual knowledge at the time that the loan is made that the fair market value established by the written acknowledgment is incorrect. Tex. Const. art. XVI, § 50(h). The appraisal or evaluation should be attached to the written acknowledgement of value executed by the borrower at closing. See Procedural Rule P-47, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
Federal banking regulators have issued regulations establishing the minimum criteria for valuations of real estate. An “appraisal” by a state certified or licensed appraiser is generally required for transactions valued at more than $400,000. An “evaluation” is required for transactions of $400,000 and less. See 12 C.F.R. §§ 34.43(a), (b), 225.63(a), (b), 323.3(a), (b), 564.3(a), (b).
Federal Financial Institutions Examination Council Interagency Appraisal Evaluation Guidelines issued by federal banking regulators provide further specifications for an evaluation. The evaluation must (1) be written; (2) include the preparer’s name, address, signature, and date of the evaluation; (3) describe the collateral, its condition, and its current and projected use; (4) describe the source of information used in the analysis; (5) describe the analysis and supporting information; and (6) provide an estimate of the real estate’s market value, with any limiting conditions. Interagency Appraisal and Evaluation Guidelines in Commercial Real Estate and Construction Lending, Comptroller’s Handbook, Appendix E (Comptroller of the Currency, November 1995), available at www.occ.gov/publications-and-resources/publications/comptrollers-handbook/index-comptrollers-handbook.html. Qualifying evaluations and appraisals may be performed by lender employees or agents as long as the appraiser or evaluator is independent from the loan decision. Home equity loans made by FDIC-insured institutions must be supported by an appraisal or evaluation complying with these federal requirements.
In some cases, constitutional restrictions against additional collateral for home equity loans may require the partition, subdivision, and replatting of a tract into separate homestead and nonhomestead parcels. The proper apportioning of value between the homestead tract and the nonhomestead tract is essential to compliance with loan-to-value limits. This apportionment of value should take into account that the partitioned unsecured tract may have critical value to the homestead because it provides access to a public street or, conversely, it may have no value save in conjunction with the disposition of the entire property. See In re Tinsley, 217 B.R. 188 (Bankr. N.D. Tex. 1997).
§ 11.5Restrictions on Open-End Credit
A home equity loan must be for a definite original principal amount. The credit may not be in the form of an open-end account that may be debited from time to time or from which credit may be extended from time to time unless the open-end account qualifies as a home equity line of credit. Tex. Const. art. XVI, § 50(a)(6)(F).
The 1998 OCCC Commentary provides that open-end credit is defined by Tex. Rev. Civ. Stat. art. 5069–1B.002(14) (since codified as Tex. Fin. Code § 301.002(a)(14)) as an account under a written contract between a creditor and an obligor in connection with which—
1.the creditor reasonably contemplates repeated transactions and the obligor is authorized to make purchases or borrow money;
2.interest may be charged from time to time on an outstanding unpaid balance; and
3.the amount of the credit that may be extended during the term of the account is generally made available to the extent that any outstanding balance is repaid.
1998 OCCC Commentary, at 5.
The 1998 OCCC Commentary provides that amounts advanced by the lender after closing as a result of default for ad valorem taxes, hazard insurance premiums, and authorized collection costs, including reasonable attorney’s fees, are not contemplated repeated transactions that render the loan an open-end account. 1998 OCCC Commentary, at 5.
Home Equity Line of Credit (HELOC): A home equity loan may be of the open-end account type if it qualifies as a home equity line of credit or HELOC. Tex. Const. art. XVI, § 50(a)(6)(F). A HELOC is a form of open-end account that may be debited from time to time, under which credit may be extended from time to time, and under which the borrower requests advances, repays money, and reborrows money. 7 Tex. Admin. Code § 153.82. To qualify as a HELOC, a home equity loan must meet eight additional constitutional requirements:
1.Borrower-Requested Advances. With a HELOC, credit may be extended to the borrower from time to time. However, any advances must be borrower-requested. Tex. Const. art. XVI, § 50(t)(1). Only a borrower named in the HELOC may request an advance. An owner may request an advance only if also named as a borrower. A HELOC may contain provisions that restrict which borrowers may request an advance or may require that all borrowers consent to the advance. 7 Tex. Admin. Code § 153.82.
2.Minimum Advances. No single debit or advance on a HELOC may be for less than $4,000. Tex. Const. art. XVI, § 50(t)(2).
3.Restriction against Credit/Debit Cards or Preprinted Checks Not Solicited by Borrower. Advances on a HELOC may not be made by credit card, debit card, or similar device or by preprinted check unsolicited by a borrower. Tex. Const. art. XVI, § 50(t)(3). A borrower may from time to time specifically request preprinted checks for use in obtaining a HELOC advance but may not request the lender to periodically send preprinted checks to the borrower. A borrower may use a check reorder form, which may be included with preprinted checks, as a means of requesting a specific number of preprinted checks. 7 Tex. Admin. Code § 153.84(2).
A lender may offer one or more nonprohibited devices or methods for a borrower to request a HELOC loan advance. 7 Tex. Admin. Code § 153.84(1). The request may be made in person, but this is not required. 7 Tex. Admin. Code § 153.84(3). Permissible advance requests may be made by contacting the lender directly, by telephonic fund transfers, and by electronic fund transfers. Examples of devices to obtain a HELOC advance that are not “prohibited similar devices” to those specifically prohibited by the constitution include prearranged drafts, preprinted checks requested by the borrower, or written transfer instructions. 7 Tex. Admin. Code § 153.84(1).
4.Restriction on Fees. The restriction on closing expenses generally applicable to home equity loans is equally applicable to HELOCs. All such fees must be charged or collected only at the time of the initial extension of credit. No fee may be charged or collected in connection with any subsequent debit or advance. Tex. Const. art. XVI, § 50(t)(4). For the purpose of this restriction, the date of the initial extension of credit is the closing date of the HELOC. 7 Tex. Admin. Code § 153.85(b).
5.Restriction on Loan-to-Value Ratio. The 80 percent restriction on loan-to-value generally applicable to home equity loans also applies to HELOCs. The maximum principal amount that may be extended under the line of credit, when added to the aggregate total of the outstanding principal balances of all indebtedness secured by the homestead on the date of the extension of credit, may not exceed the 80 percent loan-to-value limit. Tex. Const. art. XVI, § 50(t)(5). The maximum principal amount that may be outstanding on a HELOC at any time is determined as of the date of loan closing and does not change during the term of the HELOC. 7 Tex. Admin. Code § 153.86(3). The following amounts, when added together, must be equal to or less than 80 percent of the fair market value of the property: (1) the amount of the advance; (2) the principal amount of the HELOC at the time of the advance; and (3) the principal balance outstanding on all other debts secured by the homestead calculated as of the date of closing of the HELOC. 7 Tex. Admin. Code § 153.86(1), (4).
6.Loan-to-Value Limit on Additional Advances. For HELOCs closed before January 1, 2018, no additional advances may be 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 of the original extension of credit. Tex. Const. art. XVI, § 50(t)(6) (repealed Jan. 1, 2018); 7 Tex. Admin. Code § 153.87, repealed by 43 Tex. Reg. 1839, 1839 (2018). To calculate the total principal amount outstanding for the purposes of determining the 50 percent threshold, the following amounts are added: (1) the principal amount of the HELOC at the time of the proposed advance and (2) the principal balance outstanding on all other debts secured by the homestead calculated as of the date of closing of the HELOC. 7 Tex. Admin. Code § 153.86(1), (4). If the total principal amount of the HELOC exceeds the 50 percent limitation but then is paid down to an amount equal to or less than 50 percent of the fair market value, subsequent advances are permitted subject to all other HELOC restrictions (for example, minimum advance limit and loan-to-value limit). For HELOCs closed on or after January 1, 2018, an 80 percent loan-to-value restriction applies to additional advances. Tex. Const. art. XVI, § 50(t)(5); 7 Tex. Admin. Code § 153.86.
7.Restriction against Unilateral Lender Amendments. A lender or holder of a HELOC may not unilaterally amend the extension of credit. Tex. Const. art. XVI, § 50(t)(7).
8.Restriction on Amortization. A HELOC must be repayable in regular periodic installments. The installments must be repayable not more often than every fourteen days and not less often than monthly. The installments must commence not later than two months from the date of the extension of credit. During the period in the loan term during which the borrower may request advances, the amount of each installment must be at least equal to the accrued interest on the loan. During the period in the loan term after which the borrower may not request additional advances, the amount of the installments must be substantially equal and sufficient to retire the indebtedness over the remaining term of the loan. Tex. Const. art. XVI, § 50(t)(8).
While installments on a HELOC are required to begin not later than two months from the date of the extension of credit, this does not apply when no advance is made at the time of closing. If no advance is made at closing, the repayment period is not required to begin until after the first advance. 7 Tex. Admin. Code § 153.88(b). While HELOC borrowers cannot be required to make loan installments more frequently than every fourteen days, this does not prohibit a borrower from voluntarily making payments on a schedule that is more frequent than that required by the lender. 7 Tex. Admin. Code § 153.88(c).
For home equity loans closed on or after January 1, 2018, closing expenses, other than interest or bona fide discount points used to buy down the interest rate, may not exceed 2 percent of the original principal amount of the loan. Loan closing expenses subject to this restriction include any fees paid to anyone to originate, evaluate, maintain, record, insure, or service the extension of credit, excluding fees for:
(i)an appraisal performed by a third party appraiser;
(ii)a property survey performed by a state registered or licensed surveyor;
(iii)a state base premium for a mortgagee policy of title insurance with endorsements established in accordance with state law; or
(iv)a title examination report if its cost is less than the state base premium for a mortgagee policy of title insurance without endorsements established in accordance with state law.
Tex. Const. art. XVI, § 50(a)(6)(E).
For home equity loans closed before January 1, 2018, closing expenses, other than interest, may not exceed 3 percent of the original principal amount of the loan. Appraisal fees, survey fees, title insurance premiums, and title search fees are included in the 3 percent loan fee calculation.
The 2 percent (3 percent for pre-2018 loans) fee limit applies only to charges, other than interest, that are required by the lender to be paid by the borrower or the borrower’s spouse at the inception of the loan. Charges after loan closing for such matters as contractually permitted force-placed insurance premiums, returned check fees, late fees, and debt collection and foreclosure costs are subsequent events that are not subject to the fee limitation. See 7 Tex. Admin. Code § 153.5(19).
Interest is specifically excluded from the fee limitation. Tex. Const. art. XVI, § 50(a)(6)(E). “Interest” had been interpreted by the Texas Finance Commission and Credit Union Commission in 2004 for purposes of the fee limitation to mean interest as defined by Tex. Fin. Code § 301.002(a)(4) and as interpreted by Texas courts. See 7 Tex. Admin. Code §§ 153.1(11), 153.5(3). Finance Code section 301.002, which is located in the subtitle of the Code governing usury, defines interest in pertinent part as “compensation for the use, forbearance, or detention of money.” See Tex. Fin. Code § 301.002(a)(4). However, the supreme court invalidated this broad interpretation of interest as contrary to the intent and meaning of the constitution in Finance Commission of Texas v. Norwood, 418 S.W.3d 566 (Tex. 2013). The case reached the supreme court on petition for review of Texas Bankers Ass’n v. Ass’n of Community Organizations for Reform Now (ACORN), 303 S.W.3d 404 (Tex. App.—Austin 2010, pet. granted), which was so styled and popularly referred to as the “ACORN” case before the supreme court ordered ACORN to be dismissed as a party because of its intervening dissolution and the style of the cause corrected to read Finance Commission of Texas et al. v. Valerie Norwood et al., No. 10-0121, 54 Tex. Sup. Ct. J. 1077 (Tex. Feb. 25, 2011).
By adopting a definition of interest that is tied to a statute that can be amended by the legislature from time to time, the supreme court found that the commission’s interpretation “utterly defeats the clear purpose of constitutionalizing it, which was to place the [fee] limitation beyond the Legislature’s power to change without ratification by the voters.” Finance Commission of Texas, 418 S.W.3d at 587. Moreover, the supreme court found implausible that the legislature intended that the same definition of interest that applies to and strengthens the consumer protections of usury would be applied to determining the constitutional fee limitation, which it weakens, although both are intended as consumer protections. Instead, the court adopted what it characterized as a narrower and “well-understood meaning of ‘interest’: the amount equal to the loan principal multiplied by the interest rate.” Finance Commission of Texas, 418 S.W.3d at 587. The court concluded that “consistent with the [legislative] history, purpose, and text of Section 50(a)(6)(E), ‘interest’ as used in that provision means the amount determined by multiplying the loan principal by the interest rate.” Finance Commission of Texas, 418 S.W.3d at 588. The court noted, however, that “this narrower definition of interest does not limit the amount a lender can charge for a loan, [but instead] limits only what part of the total charge can be paid in front-end fees rather than interest paid over time.” Finance Commission of Texas, 418 S.W.3d at 588 n.104.
Per diem interest and discount points are considered “interest” and not subject to the constitutional fee limitation. Finance Commission of Texas, 418 S.W.3d at 596; 7 Tex. Admin. Code § 153.1(11). Discount points, to be excluded from the fee limitation, must truly correspond to a reduced interest rate. 7 Tex. Admin. Code § 153.5(3)(B).
§ 11.6:2Voluntary Optional Fees
Optional charges not required by the lender but paid at the sole discretion of the borrower are not fees subject to the fee limitation. 7 Tex. Admin. Code § 153.5(1). If the borrower chooses to pay premiums for certain insurance coverage (for example, credit life, credit accident, or health insurance coverage), the premiums are excluded from the fee limitation. 7 Tex. Admin. Code § 153.5(2) If the lender required these same coverages, the premiums would be included in the fee limitation.
Fees to originate a home equity loan are subject to the fee limitation. 7 Tex. Admin. Code § 153.5(6). Fees required to be paid by the borrower to third parties for separate and additional consideration for activities relating to originating the loan are fees subject to the limit. Attorney’s fees for document preparation and broker’s fees are considered fees to originate a loan. However, charges for loan origination that third parties absorb and do not require the borrower or borrower’s spouse to pay are not fees subject to the limit. 7 Tex. Admin. Code § 153.5(7).
§ 11.6:4Fees Absorbed by Lender
Charges that the lender absorbs that might otherwise be paid by the borrower or borrower’s spouse are not fees subject to the limitation. 7 Tex. Admin. Code § 153.5(5).
Fees to evaluate the credit decision for a home equity loan are subject to the fee limitation. This includes fees collected to cover the expenses of a credit report, flood zone determination, tax certificate, or inspection. 7 Tex. Admin. Code § 153.5(8).
For home equity loans closed on or after January 1, 2018, appraisal fees, survey fees, and title report fees are excluded from the 2 percent fee limit. Tex. Const. art. XVI, § 50(a)(6)(E)(i)–(a)(6)(E)(iv). For home equity loans closed before January 1, 2018, appraisal fees, survey fees, and title report fees are included in the 3 percent fee limit.
Fees to maintain a home equity loan are subject to the fee limitation. Fees paid at the inception of the loan as compensation for performing a service for the life of the loan (for example, flood zone determination fee or tax service fee) are subject to the limit. Also included in the limit are fees to maintain the loan customarily paid at the inception of the home equity loan but deferred for later payment. 7 Tex. Admin. Code § 153.5(9).
Fees paid to public officials and others for the purposes of recording public documents evidencing the lien are fees subject to the fee limit. 7 Tex. Admin. Code § 153.5(10).
For home equity loans closed on or after January 1, 2018, a mortgagee’s title insurance premium with endorsements is excluded from the 2 percent fee limit. Tex. Const. art. XVI, § 50(a)(6)(E)(iii).
For home equity loans closed before January 1, 2018, premiums to insure a home equity loan (for example, title insurance) are fees subject to the 3 percent limit.
Premiums that the borrower or borrower’s spouse are required to pay to purchase homeowner’s insurance are not fees subject to the fee limitation. This includes fire and extended coverage insurance and flood insurance. Though the failure to maintain insurance is generally an event of default on the home equity loan, it is not a condition to the extension of the credit. A lender may collect and escrow premiums for this insurance and include the premium in the periodic payment amount or principal amount. If the lender sells insurance to the borrower, the lender must also comply with all applicable law concerning the sale of insurance in connection with a mortgage loan. 7 Tex. Admin. Code § 153.5(20).
Any fee charged to or paid by an owner at the inception of the loan transaction to service a home equity loan is a fee subject to the fee limitation. Also, subject to the limit are fees to service a loan customarily paid at the inception of the home equity loan but deferred for later payment. 7 Tex. Admin. Code § 153.5(12).
A lender may provide escrow services in a home equity loan transaction. Funds deposited by the borrower into the escrow account for the payment of taxes, insurance premiums, maintenance or homeowners’ association assessments, or similar purposes remain the property of the borrower and are not considered fees subject to the fee limitation. However, a lender must not contract for a right of offset against escrow funds. This would result in a violation of prohibitions against additional collateral. 7 Tex. Admin. Code § 153.5(18).
§ 11.6:11Fees to Subdivide or Replat
In some situations constitutional restrictions against additional collateral for a home equity loan may require the subdivision or replatting of a tract into separate homestead and nonhomestead parcels. Fannie Mae policy for the purchase of home equity loans suggests that all lender-required costs incurred by the borrower to resurvey, subdivide, or replat the property are fees subject to the fee limitation. Fannie Mae Lender Letter LL02-98 (May 28, 1998).
The fee limitation applies only to fees contracted for or paid by an owner or owner’s spouse at the inception of the loan. If the owner fails to perform covenants in the credit documents resulting in the lender’s later assessment of costs to the owner, such postclosing costs are not subject to the limit. Examples of these costs include lender-acquired homeowner’s insurance, late charges, returned check fees, collection costs, and foreclosure costs. 7 Tex. Admin. Code § 153.5(19). However, if the loan is subsequently modified, the original loan and its subsequent modification are regarded as a single transaction for purposes of calculating the fee limitation (that is, any fees paid in connection with the loan modification when added to fees charged at loan closing cannot exceed the applicable fee limitation). A modification for this purpose occurs when one or more terms of the loan are amended by written agreement between the lender and owner in which the original promissory note is not satisfied and replaced with a new debt instrument. See 7 Tex. Admin. Code § 153.14(2)(D).
§ 11.6:13Secondary Mortgage Loans
A secondary mortgage loan as defined by Tex. Fin. Code § 342.001(4) is subject to certain statutory fee limitations. See Tex. Fin. Code §§ 342.307, 342.308, 342.502. A home equity loan also constituting a secondary mortgage loan must comply with both the constitutional and statutory fee limitations. 7 Tex. Admin. Code § 153.5(13).
§ 11.7Restriction against Recourse Debt
A home equity loan must be a nonrecourse loan with no personal liability against the owner or the owner’s spouse. Tex. Const. art. XVI, § 50(a)(6)(C). The lender may look to recover only against the homestead property and not pursue a deficiency judgment against any owner or any owner’s spouse. 7 Tex. Admin. Code § 153.4(2). If the owner or the spouse of the owner cosigns the home equity loan or consents to the home equity lien, the loan must not give the lender personal recourse against either the owner or the spouse. 7 Tex. Admin. Code § 153.4(1). Lenders may report delinquent loan payments to credit reporting agencies without violating the prohibition against personal liability. Melton v. CU Members Mortgage, 586 S.W.3d 26 (Tex. App.—Austin 2019, pet. denied).
Fraud: The lender may have recourse against the owner or owner’s spouse if the owner or spouse obtains the extension of credit by actual fraud. Tex. Const. art. XVI, § 50(a)(6)(C). Actual fraud requires a showing of dishonesty of purpose or intentional breach of duty that is designed to injure another or to gain an undue or unconscientious advantage. 7 Tex. Admin. Code § 153.4(3).
§ 11.8Restriction against Prepayment Penalties
Home equity loans must be capable of being paid in advance without penalty or other charge. Tex. Const. art. XVI, § 50(a)(6)(G). A lockout provision in a loan contract prohibiting a buyer from paying early is considered a prepayment penalty. 7 Tex. Admin. Code § 153.7(2).
There is no express constitutional prohibition against note provisions applying principal prepayment to the last of the principal payments becoming due or providing that any partial prepayment would not alter the amount or timing of scheduled monthly payments. 1998 OCCC Commentary, at 5.
§ 11.9Restriction against Additional Collateral
The homestead is the only collateral that may secure a home equity loan. The constitution expressly prohibits the credit from being secured by any other real or personal property. See Tex. Const. art. XVI, § 50(a)(6)(H).
A lender and an owner may enter into an agreement whereby a lender may acquire a security interest in items “incidental” to the homestead collateral. Items not considered additional real or personal property collateral are—
1.escrow funds for the payment of taxes and insurances;
2.an undivided interest in a condominium unit, a planned unit development, or the right to use and enjoy certain property owned by an association;
3.insurance proceeds related to the homestead;
4.condemnation proceeds;
5.fixtures; or
6.easements necessary or beneficial to the use of the homestead including access easements for ingress and egress.
7 Tex. Admin. Code § 153.8(1).
A guaranty or obligation of a cosigner or surety is considered additional collateral not permissible in connection with a home equity loan. A guaranty of a home equity loan is also deemed inconsistent with Tex. Const. art. XVI, § 50(a)(6)(C) (prohibition against personal recourse). 7 Tex. Admin. Code § 153.8(2). This prohibition against guaranties prevents borrowers from obtaining a home equity loan through the U.S. Department of Veterans Affairs cash-out refinance program, which provides a guaranty by the federal government. Tex. Att’y Gen. Op. No. KP-0183 (2018).
§ 11.9:3Cross-Collateral Provisions
If the borrower has other loans with the home equity lender secured by nonhomestead property (for example, a loan to purchase a car or boat), the security documents on these other loans may sometimes provide that this other collateral secures all debt of the borrower with that lender. Such a cross-collateral provision violates the constitutional prohibition against other collateral for a home equity loan. 7 Tex. Admin. Code § 153.8(4).
A contractual right of offset is prohibited additional collateral to a home equity loan. 7 Tex. Admin. Code § 153.8(3).
§ 11.9:5Undivided Interest in Tenancy in Common
A debtor’s undivided interest in a tenancy in common will sustain a homestead claim. See Laster v. First Huntsville Properties Co., 826 S.W.2d 125, 131 (Tex. 1991).
§ 11.9:6Homestead Exceeding Maximum
An urban homestead consists of not more than ten contiguous acres of land located in a city, town, or village, together with improvements thereon. Rural homesteads may be up to one hundred acres for single adults and two hundred acres for a family. Tex. Const. art. XVI, §§ 50, 51; Tex. Prop. Code § 41.002. For a homestead established on a tract that exceeds the maximum allowable land area, the excess is considered additional real property, which may not secure a home equity loan. 7 Tex. Admin. Code § 153.8(5).
The inclusion of nonhomestead acreage may invalidate a home equity lien. Tex. Const. art. XVI, § 50(a)(6)(H). Procedural Rule P-47 requires as a condition to insuring a home equity lien against invalidity for inclusion of additional collateral that each owner execute an affidavit stating that (1) all the property is the homestead of the owner and owner’s spouse; (2) no portion of the property is nonhomestead; and (3) the owner and spouse claim no other property as homestead except as described in the affidavit. Procedural Rule P-47, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
There is no provision in Tex. Const. art. XVI, § 50, upholding the validity of a home equity lien if the collateral includes only de minimus acreage in excess of the maximum acreage. Procedural Rule P-47 requires, as a condition to insuring against invalidity for inclusion of excess acreage, that the insured obtain a surveyor’s certificate or letter stating the exact acreage or square footage of the collateral or that a computation of the acreage be made by a software program designed to compute acreage and generate drawings of land from the entry of boundary description calls.
If the home equity lien extends to the maximum permitted acreage, lenders may risk invalidating the lien by taking an option to purchase an adjacent property deemed necessary to realize full value for the collateral. Fannie Mae policy for the purchase of home equity loans prohibits the lender taking such an option on adjacent acreage under circumstances in which such an interest could be construed as additional collateral. Fannie Mae Lender Letter LL02-98 (May 28, 1998).
§ 11.9:8Distinguishing Rural and Urban Homestead
A home equity loan secured by property exceeding ten acres must be secured by a rural homestead. The proper classification of the homestead as rural or urban in certain cases is critical to the validity of the home equity lien.
Whether a homestead is urban or rural is a question of fact. The Texas legislature in 1999 enacted a detailed test for classifying homesteads as urban or rural. Tex. Prop. Code § 41.002(c). If a homestead does not meet the statutory definition of urban, it is classified as rural. The statute is the exclusive vehicle for distinguishing between rural and urban homesteads. In re Bouchie, 324 F.3d 780 (5th Cir. 2003).
A homestead is considered to be urban if, at the time the designation is made, the property is—
(1)located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and
(2)served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality:
(A) electric;
(B) natural gas;
(C) sewer;
(D) storm sewer; and
(E) water.
§ 11.9:9Distinguishing Family and Single Adult Homestead
A rural single adult homestead is limited to one hundred acres. A rural family homestead may include up to two hundred acres. Tex. Const. art. XVI, §§ 50, 51; Tex. Prop. Code § 41.002. Thus, a home equity loan secured by property exceeding one hundred acres may be secured by a family rural homestead only. The proper classification of the property in such cases as a family or single adult homestead is critical to the validity of the home equity lien.
No definition of the word family is supplied by the constitution. Case authorities provide that a family consists of (1) a group of people having the social status of a family living subject to one domestic government; (2) with the head of the family legally or morally obligated to support at least one other family member; and (3) a corresponding dependence by the other family members for this support. NCNB Texas National Bank v. Carpenter, 849 S.W.2d 875, 879–80 (Tex. App.—Fort Worth 1993, no writ).
A married person with a living spouse can have only a family homestead interest. The spouses in a marriage together enjoy the benefits of the family homestead exemption. The constitution gives each spouse a separate and undivided possessory interest in the homestead, which may be lost only by death or abandonment and may not be compromised by either his heirs or the other spouse. Abandonment by one spouse of his homestead interest does not affect the character of the property as family homestead or the protection of the family homestead from judgment creditors as long as the other spouse occupies the property as a home. Salomon v. Lesay, 369 S.W.3d 540 (Tex. App.—Houston [1st Dist.] 2012, no pet.).
§ 11.10Restriction on Number of Home Equity Loans
There may be only one home equity loan or reverse mortgage on the owner’s homestead at any given time regardless of the aggregate total outstanding debt against the homestead. There is no corresponding restriction on the number of purchase-money, improvement, tax, or owelty liens on the same homestead. Tex. Const. art. XVI, § 50(a)(6)(K); 7 Tex. Admin. Code § 153.10(1). If the property ceases to be the homestead of the owner, the lender may treat a previous home equity lien as a nonhomestead lien for the purposes of this restriction. 7 Tex. Admin. Code § 153.10(2).
§ 11.11Restriction on Frequency of Home Equity Loans
Home equity loans cannot be closed more frequently than one year after the closing date of the last such loan made on the same property. Tex. Const. art. XVI, § 50(a)(6)(M)(iii). A home equity loan cannot be refinanced until the expiration of one year after its original closing date. 7 Tex. Admin. Code § 153.14(1)(A). A new home equity loan cannot be made before the expiration of one year even if the previous home equity loan has been paid in full. 7 Tex. Admin. Code § 153.14(1)(B).
Effect of State of Emergency: A home equity loan may be closed before the first anniversary date of a prior home equity loan on the same property if the owner on oath requests an earlier closing due to a state of emergency that (1) has been declared by the President of the United States or governor as provided by law and (2) applies to the area where the homestead is located. Tex. Const. art. XVI, § 50(a)(6)(M)(iii). A state of emergency includes a national emergency declared by the president of the United States under the National Emergencies Act, 50 U.S.C. §§ 1601–1651. 7 Tex. Admin. Code § 153.14(3)(A). A state of emergency also includes a state of disaster declared by the governor of Texas under Texas Government Code chapter 418. 7 Tex. Admin. Code § 153.14(3)(B).
Modification of Home Equity Loans: A home equity loan may be modified before the expiration of one year from the date of the original closing. A modification is a transaction in which one or more terms of the home equity loan are modified but the note is not satisfied and replaced. 7 Tex. Admin. Code § 153.14(2). Any modification of a home equity loan must be agreed to in writing by both the borrower and lender unless the law otherwise requires. An example of a modification that is not required to be in writing is the modification required under the Servicemembers Civil Relief Act. 7 Tex. Admin. Code § 153.14(2)(A). Any modification of a home equity loan may not include the advance of additional funds nor include new terms that would not have been permitted by applicable law on the date of the original loan closing. 7 Tex. Admin. Code § 153.14(2)(B), (2)(C). Any fees paid by the borrower for the modification are fees subject to the fee limitation. 7 Tex. Admin. Code § 153.14(2)(D).
§ 11.12Restriction on Amortization of Home Equity Loans
No balloon payments are allowed with closed-end home equity loans. The loan must be scheduled at closing to be repaid in substantially equal periodic installments. The installments must be payable not more often than every fourteen days or any less often than monthly. The installments must begin no later than two months from the date the extension of credit is made. The date the extension of credit is made refers to the closing date, or the date the borrower signs the loan documents, not the date the loan is funded. 7 Tex. Admin. Code § 153.11(2)–(3). Each installment payment must equal or exceed the amount of accrued interest on the note as of the date of that installment and contribute to the repayment of some amount of principal. A home equity loan may not contain a “negative amortization” feature, in which scheduled payments in the early years of the loan are in an amount less than the accruing interest and the resulting interest deficits are capitalized into the loan principal. Tex. Const. art. XVI, § 50(a)(6)(L); 7 Tex. Admin. Code §§ 153.11, 153.16(2).
There are special amortization rules for home equity loans qualifying as a home equity line of credit. See Tex. Const. art. XVI, § 50(a)(6)(L)(ii). See section 11.5 above.
The constitutional restriction does not prohibit a lender from agreeing with the borrower to modify an equity loan if the modification does not satisfy and replace the original equity loan and does not create a new extension of credit. The modification may include a deferment of the borrower’s original obligation, and may include amounts that are past due under the equity loan (e.g., accrued but unpaid interest, taxes, and insurance). 7 Tex. Admin. Code § 153.11(1). However, the first payment must begin within two months of closing, notwithstanding any allowable payment deferral. 7 Tex. Admin. Code § 153.11(2). The constitutional restriction on amortization does not preclude a lender’s recovery of amounts made necessary by the borrower’s failure to perform loan covenants such as taxes, adverse liens, insurance premiums, collections costs, and similar items. 7 Tex. Admin. Code § 153.11(5).
Scheduled periodic payments must begin no later than two months from the date that the extension of credit is made. This effectively limits prepaid interest to a maximum of one period’s interest (first scheduled periodic payment would include interest in arrears for the preceding period). Tex. Const. art. XVI, § 50(a)(6)(L). Nothing in this provision limits or otherwise affects a lender’s ability to charge or collect mortgage discount points with a corresponding interest rate reduction.
§ 11.13Restriction on Interest
Interest on a home equity loan may be for any fixed or variable rate authorized by statute. Tex. Const. art. XVI, § 50(a)(6)(O).
A home equity loan may be made on a variable interest rate tied to an external index. 7 Tex. Admin. Code § 153.16(3). If a variable interest rate is used, payment adjustments must be regularly made in amounts sufficient to fully amortize the outstanding loan balance in substantially equal successive payments between interest rate adjustments. 7 Tex. Admin. Code § 153.16(4)(A). The scheduled payment amount between each payment change date should be substantially equal and the amount of the payment should equal or exceed the amount of interest scheduled to accrue between each payment date and retire a portion of the principal. 7 Tex. Admin. Code § 153.16(4)(B). A home equity loan may contain an adjustable rate of interest that provides a maximum fixed interest rate pursuant to a schedule of stepped or tiered rates or provides a lower initial interest rate through the use of a discounted rate at the beginning of the loan. 7 Tex. Admin. Code § 153.16(5).
Interest rates on home equity loans must comply with all applicable constitutional and statutory provisions. 7 Tex. Admin. Code § 153.16(1). Tex. Const. art. XVI, § 11, permits interest rates of 10 percent or less on credit transactions unless alternative interest rates are specified by the legislature by statute. Interest rates of first-lien mortgages are nominally controlled by Tex. Fin. Code tit. 4, subtit. A. However, Congress by the enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980 (12 U.S.C. § 1735f–7a) and the Alternative Mortgage Transaction Parity Act (12 U.S.C. §§ 3801–3806) preempted state interest rate limitations on first-lien residential mortgage loans. Secondary mortgage loans that exceed the constitutional rate of 10 percent are controlled by Texas Finance Code chapter 342, subchapter G. Chapter 124 of the Code and federal law provide for maximum rates on certain loans by credit unions. See 7 Tex. Admin. Code § 153.16(1).
§ 11.14Restriction on Basis for Acceleration
The maturity of a home equity loan may not be accelerated because of a decrease in the market value of the homestead or the owner’s default under some other indebtedness not secured by a prior valid encumbrance against the homestead. Tex. Const. art. XVI, § 50(a)(6)(J).
The constitution does not prohibit the acceleration of a home equity loan because of a default by the owner of covenants contained in the loan, including covenants not to commit waste or remove property that indirectly bears on the market value of the homestead. 7 Tex. Admin. Code § 153.9(1).
A home equity loan can contain a cross-default provision only if the lien associated with the home equity loan is subordinate to the lien that is referenced by the cross-default clause. 7 Tex. Admin. Code § 153.9(2).
§ 11.15Restriction against Confession of Judgment or Waiver of Citation
A home equity borrower may not be required to sign any confession of judgment or power of attorney allowing a confession of judgment or appearance for the debtor by a third party in a judicial proceeding. Tex. Const. art. XVI, § 50(a)(6)(Q)(iv); Tex. Civ. Prac. & Rem. Code § 30.001.
§ 11.16Restriction against Assignment of Wages
A borrower may not be required to make an assignment of wages as security for a home equity loan. Tex. Const. art. XVI, § 50(a)(6)(Q)(ii).
§ 11.17Restriction against Same Creditor Payoffs
A lender may not require a borrower to apply the loan proceeds of a home equity loan to pay off any other extension of credit by that same lender except one already validly secured by the homestead. Tex. Const. art. XVI, § 50(a)(6)(Q)(i). This provision precludes a creditor from demanding a security interest in the debtor’s homestead as a condition for granting a forbearance, rearrangement, or recasting of an indebtedness not already secured by the homestead.
§ 11.17:1Required Payment of Debt Secured by Homestead
A lender may require a debt secured by the homestead to be paid by the proceeds of a home equity loan. 7 Tex. Admin. Code § 153.18(2).
§ 11.17:2Payoffs of Other Creditors
An owner is generally entitled to use the loan proceeds of a home equity loan for any lawful purpose at the owner’s discretion. The lender may require that the loan proceeds be used to pay off, prepay, or reduce existing debt to another lender (for example, if underwriting guidelines based on earnings require that the debtor’s monthly obligations be reduced to qualify for a loan). See 7 Tex. Admin. Code § 153.18(2).
§ 11.17:3Other Restrictions Prohibited
Other than requiring loan proceeds to be paid on debt secured by the homestead or requiring payment of debt to another lender, the home equity lender may not otherwise specify or restrict the use of the loan proceeds. 7 Tex. Admin. Code § 153.18(1).
§ 11.17:4Voluntary Payoffs to Same Creditor
The constitution prohibits the home equity lender only from requiring the debtor to pay off existing nonhomestead debt to that same lender. An owner is not precluded from voluntarily paying off existing nonhomestead debt to the home equity lender. 7 Tex. Admin. Code § 153.18.
§ 11.18Required Preloan Disclosures
§ 11.18:1Twelve-Day Disclosure for Home Equity Loans
The Texas Constitution requires a preloan disclosure specifying certain restrictions on home equity lending. Tex. Const. art. XVI, § 50(g). The required disclosure is reproduced as form 11-1 in this chapter. The text of the preloan disclosure is intended as a summary of the borrower’s rights under the constitution. In case of any conflict between the substantive provisions of Tex. Const. art. XVI, § 50, and the text of the preloan disclosure, the substantive provisions are controlling. A lender may supplement the consumer disclosure to clarify any discrepancies or inconsistencies. Tex. Const. art. XVI, § 50(g); 7 Tex. Admin. Code § 153.51(2).
A home equity loan may not be closed before the twelfth calendar day after the later of the date that the borrower submits a loan application to the lender or the date that the lender provides all owners with a preloan disclosure in a separate instrument. Tex. Const. art. XVI, § 50(g); 7 Tex. Admin. Code §§ 153.12, 153.51. One copy of the required consumer disclosure may be provided to married owners. 7 Tex. Admin. Code § 153.12.
If the discussions with the borrower are conducted primarily in a language other than English, the lender must provide the borrower with an additional copy of the notice, before the loan closing, that is translated in the written language in which the discussions were conducted. Tex. Const. art. XVI, § 50(g). The Office of the Consumer Credit Commissioner has provided a Spanish language translation of the notice on its website at https://occc.texas.gov.
If the owner has executed a power of attorney in the manner described by title 7, section 153.15(2), of the Texas Administrative Code, then the lender may provide the consumer disclosure to the attorney-in-fact instead of providing it to the owner. 7 Tex. Admin. Code § 153.51(5).
Computation of Time: In computing the expiration of the twelve-day cooling-off period, the date that the disclosure is made is not counted. The twelve-day cooling-off period commences on the day after the lender provides the required preloan disclosure. The loan may be closed at any time on the twelfth day of the notice period. 7 Tex. Admin. Code § 153.12. The lender may establish verifiable procedures to ensure that the owner receives the required notice within the required time frame. 7 Tex. Admin. Code § 153.51(3).
The constitution does not prohibit the required notice being delivered by mail. Government regulations adopted a “mailbox rule.” If a lender mails the notice to the borrower, a reasonable period of time should be allowed for delivery. A three-calendar-day period not including Sundays and federal legal public holidays constitutes a rebuttable presumption for sufficient mailing and delivery. 7 Tex. Admin. Code § 153.51(1).
Loan Application: An application is sufficient if submitted to an agent acting on behalf of a lender. 7 Tex. Admin. Code § 153.12(1). An application may be taken orally or electronically. It does not have to be in writing. 7 Tex. Admin. Code § 153.12(2).
A home equity loan must not be closed until one business day after the owner of the homestead receives a copy of the final loan application, if not previously provided, and a final itemized disclosure of the actual fees, points, interest, costs, and charges that will be charged at closing. Tex. Const. art. XVI, § 50(a)(6)(M)(ii). The home equity loan may be closed at any time during normal business hours on the next business day following the calendar day on which the borrower receives the one-day preloan disclosure or any date thereafter. 7 Tex. Admin. Code § 153.13(6). A lender may satisfy this disclosure requirement by delivery to the borrower of a properly completed closing disclosure for a closed-end home equity loan. 7 Tex. Admin. Code § 153.13(3)(A). For an HELOC, a lender may satisfy this disclosure requirement by delivery to the borrower of a properly completed account-opening disclosure under Regulation Z. 12 C.F.R. § 1026.6(a). 7 Tex. Admin. Code § 153.13(3)(B).
If a bona fide emergency or other good cause exists and the lender obtains the written consent of the owner, the lender may provide the documentation to the owner or the lender may modify previously provided documentation on the day of closing. Tex. Const. art. XVI, § 50(a)(6)(M)(ii). The bona fide emergency must occur before the closing date. A home equity loan secured by a homestead in an area designated by the Federal Emergency Management Agency (FEMA) as a disaster area is an example of a bona fide emergency if the homestead is damaged during FEMA’s declared incident period. 7 Tex. Admin. Code § 153.13(4).
A condition that would cause the owner “financial impact or an adverse consequence” is an example of other good cause that would allow the required one-day preloan disclosure to be given or modified on the day of closing. 7 Tex. Admin. Code § 153.13(5)(A)(i). Another example of good cause occurs when the modified disclosure contains only a de minimus variance from the prior disclosure. To qualify as a de minimus variance, one or more of the actual disclosed fees, costs, points, and charges must be less than the initial preloan disclosure or, if greater than the amounts given in the initial preloan disclosure, not vary by the greater of $100 or 0.125 percent of the principal amount of the home equity loan at closing. 7 Tex. Admin. Code § 153.13(5)(B)(i).
§ 11.19Borrower’s Right of Rescission
The homestead owner or the owner’s spouse may rescind a home equity loan transaction without penalty or charge within three days after the date that the extension of credit is made. Tex. Const. art. XVI, § 50(a)(6)(Q)(viii). The borrower’s spouse has this right of rescission even if the spouse has no record title to or community property interest in the homestead. 7 Tex. Admin. Code § 153.25(1). Funding of a home equity loan should be delayed until after the expiration of the rescission period.
§ 11.19:1Calculation of Rescission Period
The rescission period begins at closing (the signing of the loan documents) and continues for three calendar days. If the third calendar day falls on a Sunday or federal legal public holiday, the right of rescission is extended to the next calendar day that is not a Sunday or a federal legal public holiday. 7 Tex. Admin. Code § 153.25(2). Loan proceeds may be disbursed on the day following the expiration of the rescission period.
A home equity loan transaction may be subject to the provisions of the Truth in Lending Act and Regulation Z, which permit the borrower three business days to rescind a mortgage loan in applicable transactions. For a complete discussion of right of rescission procedures under the Truth in Lending Act and Regulation Z, see chapter 12 in this manual. A lender’s compliance with the right of rescission procedures of the Truth in Lending Act and Regulation Z will satisfy the requirements of the constitution for a home equity loan if the notices are given to all owners of the homestead and to each spouse of an owner. 7 Tex. Admin. Code § 153.25(3).
§ 11.20Requirements for Loan Documents
§ 11.20:1Written Contract Required
A home equity lien must be a voluntary lien created under a written agreement. Tex. Const. art. XVI, § 50(a)(6)(A).
Plain Language and Font Requirements: A home equity loan contract for a home equity loan regulated by the Office of the Consumer Credit Commissioner (OCCC) must be written in plain language designed to be easily understood by the average consumer and must be printed in an easily readable font and type size. See the discussion in section 11.1 above.
Model Forms: In addition to requiring plain-language contracts, the Finance Code empowers the Finance Commission to adopt rules governing loan contracts subject to that section and to adopt model loan contracts. Tex. Fin. Code § 341.502(b). A lender may use either a model contract or its own nonstandard contract if the nonstandard contract has been submitted to, but not disapproved by, the OCCC. See the discussion in section 11.1 above.
§ 11.20:2Required Loan Conditions
The constitution states that a home equity loan is an extension of credit made on specified conditions. Some of the conditions are self-actuating. See Tex. Const. art. XVI, § 50(a)(6)(Q). Tex. Const. art. XVI, § 50(a)(6)(Q)(vi), requires that “the security instruments securing the extension of credit contain a disclosure that the extension of credit is the type of credit defined by Section 50(a)(6), Article XVI, Texas Constitution.” Practitioners differ as to whether the remaining conditions listed at Tex. Const. art. XVI, § 50(a)(6)(Q), must be included in the home equity loan documents. The home equity extension of credit, form 11-2 in this chapter, includes the conditions. In the absence of definitive authority on this question, the attorney is cautioned to exercise professional judgment regarding the inclusion of these conditions. If the conditions are included in the home equity extension of credit, the conditions may affect the negotiability of the instrument under chapter 3 of the Texas Business and Commerce Code. However, there is some dated authority that a nonrecourse note is by its very nature nonnegotiable. Hinckley v. Eggers, 587 S.W.2d 448, 450 (Tex. App.—Dallas 1979, writ ref’d n.r.e.).
The security documents for a home equity loan must disclose that the credit is an equity loan subject to Tex. Const. art. XVI, § 50(a)(6). This disclosure should appear in the mortgage instrument bold-faced, capitalized, underlined, or otherwise conspicuously set out from the surrounding material. 1998 OCCC Commentary, at 10.
§ 11.20:4Restriction against Blanks Left in Instruments
The borrower in a home equity loan transaction may not sign any instrument in which blanks for substantive terms of agreement are left to be filled in. Tex. Const. art. XVI, § 50(a)(6)(Q)(iii). The prohibited blanks refer to loan contract terms and not signature blocks that must be signed to execute the document. 7 Tex. Admin. Code § 153.20. No guidance is provided regarding blanks for recording information unknown at the time of closing.
The constitution does not specify the instruments to which this restriction applies. Procedural Rule P-47 requires, as a condition to insuring a home equity lien against invalidity for impermissible blanks, that no such blanks appear in (1) the written acknowledgement of the fair market value, (2) the insured mortgage, (3) the promissory note, or (4) any affidavits of compliance with Tex. Const. art. XVI, § 50(a)(6). See Procedural Rule P-47, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
The borrower at closing must receive a copy of the final loan application and all executed documents signed by the borrower at closing and related to the extension of credit. Tex. Const. art. XVI, § 50(a)(6)(Q)(v). It is not required that signed copies be provided as long as the copies accurately reflect the documents that the borrower actually signed at closing. Pelt v. U.S. Trust N.A., 359 F.3d 764, 768 (5th Cir. 2004).
Except for the requirement that the borrower receive a copy of the final loan application, the constitution does not require the lender to provide copies of documents signed by the borrower before closing but related to the extension of credit. See 7 Tex. Admin. Code § 153.22.
A written instrument creating a home equity lien must be signed by each owner and each owner’s spouse (regardless of whether the spouse claims ownership or other interest in the property or is liable on the debt). Tex. Const. art. XVI, § 50(a)(6)(A). A spouse or owner who is not a maker of the note may consent to the lien by signing a written consent to the mortgage instrument. The consent may be included in the mortgage instrument or a separate document. 7 Tex. Admin. Code § 153.2(2).
A lender, at the lender’s option, may require each owner and each owner’s spouse to consent to the home equity loan. This is in addition to the consent required for the lien. 7 Tex. Admin. Code § 153.2(3).
A trustee may sell or encumber a homestead property for which the trustee holds title in a “qualifying trust” without the joinder of either spouse with a beneficial interest in the trust unless expressly prohibited by the instrument or court order creating the trust. A married person who transfers homestead property to the trustee of a qualifying trust, however, must comply with the requirements relating to the joinder of the person’s spouse as provided by chapter 5 of the Texas Family Code. Tex. Prop. Code § 41.0021.
§ 11.20:7Junior-Lien Requirements
If a home equity loan is subordinate to another lien on the property, the loan may also be governed by Texas Finance Code chapter 342 unless the interest rate is 10 percent per year or less. See Tex. Fin. Code §§ 342.001(4), 342.005. The loan documents must comply with the requirements applicable to secondary mortgage loans. 1998 OCCC Commentary, at 4–5. If the mortgagee has a license from the Office of Consumer Credit Commissioner, both the home equity extension of credit (promissory note) (form 11-2 in this chapter) and deed of trust (home equity loan) (form 11-3) must contain the name, mailing address, and telephone number of the OCCC. Tex. Fin. Code § 14.104. See clause 8-9-24 in this manual for an example of such a disclosure. Additionally, the printed language in the home equity extension of credit and the deed of trust must be modified slightly. In the deed of trust, in paragraph B.4., the phrase “in a form acceptable to Lender” must be struck so that the obligation reads “maintain an insurance policy that . . . .” This change is necessary because Finance Code sections 342.404, 342.405, and 342.413 prohibit a lender from approving the selection of insurance. See Tex. Fin. Code §§ 342.404, 342.405, 342.413. Also, Finance Code section 342.404 provides that if insurance is required in connection with a loan made under that chapter, the lender must furnish the borrower a statement like clause 11-4-8, which may be added to the home equity deed of trust as a numbered paragraph under “General Provisions.” See Tex. Fin. Code § 342.404.
The same chapter imposes other requirements if the mortgagee sells or procures insurance related to the loan at a rate not fixed or approved by the State Board of Insurance. See Tex. Fin. Code § 342.405.
Finance Code section 342.307 limits the enforcement fees that may be included in secondary mortgage loan documents. To comply with this section for a home equity loan that is also a secondary mortgage loan, in the home equity extension of credit (promissory note) (form 11-2), the alternative indicated attorney’s fee provision should be used. In the deed of trust (form 11-3), in paragraph E.10., after the words “an attorney” add “who is not an employee of Lender.”
If the prior lien instrument contains a due-on-sale clause, the home equity deed of trust may violate the due-on-sale clause.
A home equity loan may also be subject to the requirements of Texas Finance Code chapter 343, regulating certain types of “home loans.” See section 10.14 in this manual.
§ 11.21Restriction on Place of Closing
A home equity loan may be closed only at the offices of the lender, an attorney at law, or a title company. Tex. Const. art. XVI, § 50(a)(6)(N). The place of closing must be the permanent physical address of the office or branch office of the lender, attorney, or title company so that the closing occurs in an authorized physical location other than the homestead. 7 Tex. Admin. Code § 153.15(1). The closing may occur in any area located at the permanent physical address of the lender, attorney, or title company (e.g., indoor office, parking lot). 7 Tex. Admin. Code § 153.15(1). This provision is intended to protect homeowners from coercive conduct in an equity loan closing conducted at the “kitchen table” of one’s home.
“Closing” as construed by the Texas Supreme Court in Finance Commission of Texas v. Norwood, 418 S.W.3d 566 (Tex. 2013), is a process that includes not just the final action of executing documents and funding the loan but also the initial action of obtaining required consents. Accordingly, the supreme court concluded that a homeowner’s executing a required consent or a power of attorney is part of the closing process and also must occur only at one of the locations authorized by Tex. Const. art. XVI, § 50(a)(6)(N). Finance Commission of Texas, 418 S.W.3d at 588; see also 7 Tex. Admin. Code § 153.15(3). The court further concluded that the commission’s interpretations of section 50(a)(6)(N) (which in part authorized a lender to accept a properly executed power of attorney allowing the attorney-in-fact to execute loan documents on behalf of the homeowner or to receive consents of the homeowner required under section 50(a)(6)(A) by mail or other delivery of the homeowner’s signature) contradict the intent and purpose of the text of the provision and are therefore invalid. Finance Commission of Texas, 418 S.W.3d at 588–89. Although Fannie Mae generally allows a duly appointed attorney-in-fact to sign the security instrument or note on the borrower’s behalf when certain conditions are met, its Selling Guide has been updated with respect to loans purchased on or after February 1, 2014, to prohibit the use of a power of attorney in cash-out refinance transactions and other transactions in connection with Texas section 50(a)(6) mortgage loans. See Fannie Mae, Selling Guide Announcement SEL-2013-08 (Oct. 22, 2013).
A home equity loan may not be closed in the offices of a mere loan broker. To qualify as a lender, the party must advance funds directly to the borrower or be identified as the payee of the note. 7 Tex. Admin. Code § 153.15.
§ 11.21:2Offices of Title Company
The offices of a title company include the leased or owned Texas office location of a title insurance company or (1) a direct operation, (2) a title insurance agent, or (3) an attorney conducting the attorney’s business in the name of the title insurance company, direct operation, or title insurance agent (if the attorney or the attorney’s bona fide employees are escrow officers under Tex. Ins. Code § 2501.003(4)). Procedural Rule P-44, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas. The phrase title company refers to an agent of a title insurance company. A company merely performing title abstractions is not within the definition of a title company. Rooms With A View, Inc. v. Private National Mortgage Ass’n, 7 S.W.3d 840, 846–47 (Tex. App.—Austin 1999, pet. denied).
§ 11.22Restriction on Release or Transfer of Note
Within a reasonable time after repayment of a home equity loan, the lender must cancel and return the promissory note to the borrower and deliver in a recordable form a release of lien. If the loan is being refinanced, a lender may deliver an endorsement and assignment of the lien. Tex. Const. art. XVI, § 50(a)(6)(Q)(vii). The lender is required to provide these copies without charge. 7 Tex. Admin. Code § 153.24(1). The lender is not required, however, to record or pay for the recording of the release of lien. 7 Tex. Admin. Code § 153.24(2). Thirty days is a reasonable time for the lender to perform the duties required by this section. 7 Tex. Admin. Code § 153.24(3). An affidavit of lost note or imaged note, or equivalent, may be returned to the owner in lieu of the original note if the original note has been lost or imaged. 7 Tex. Admin. Code § 153.24(4).
§ 11.23Restriction on Refinancing
The refinancing of a debt, any portion of which is secured by a home equity lien, may be made only by an extension of credit meeting all of the constitutional requirements of a home equity loan or reverse mortgage, unless the refinancing meets all of the following conditions of Tex. Const. art. XVI, § 50(f)(2):
1.One-Year Prohibition. The refinance is not closed before the first anniversary of the date the extension of credit was closed. Tex. Const. art. XVI, § 50(f)(2)(A).
2.Prohibition on Additional Funds. The refinanced extension of credit does not include the advance of any additional funds other than (a) funds advanced to refinance a debt described by Tex. Const. art. XVI, § 50(a)(1)–(a)(7); or (b) actual costs and reserves required by the lender to refinance the debt.
3.Eighty Percent Loan-to-Value Limitation. The refinance is of a principal amount that, when added to the aggregate total of all indebtedness secured by the homestead, does not exceed 80 percent of the fair market value of the homestead on the date of the refinance.
4.Twelve-Day Notice. The lender provides the owner the notice contained in form 11-8 of this chapter within three business days of loan application and at least twelve days before the refinance is closed. Tex. Const. art. XVI, § 50(f)(2)(D).
5.Affidavit of Compliance. An affidavit executed by the owner or the owner’s spouse acknowledging that the requirements of Tex. Const. art. XVI, § 50(f)(2) have been met conclusively establishes that the requirements of Tex. Const. art. XVI, § 50(a)(4) have been met. See form 11-9 for a sample affidavit.
Additionally, any refinance of a debt against homestead to secure a debt for purchase money, taxes, owelty of partition, federal tax lien, or improvements that includes the advance of additional funds may not be secured by a valid lien against the homestead unless (1) the additional funds advanced are to pay taxes, an owelty of partition, or improvements; (2) the new loan is made as a home equity loan or reverse mortgage; or (3) the additional funds are for reasonable costs necessary to refinance such debt. Tex. Const. art. XVI, § 50(e); see 7 Tex. Admin. Code § 153.41.
Constitutional provisions for home equity lending contain a forfeiture provision for loans failing to meet constitutional requirements. If a lender or holder fails to comply with the lender’s or holder’s constitutionally mandated obligations within sixty days after notice of the violation by the borrower, the lender or holder forfeits all principal and interest on the note. Tex. Const. art. XVI, § 50(a)(6)(Q)(x). Only a violation of a constitutionally mandated provision in the extension of credit will trigger a forfeiture. Vincent v. Bank of America, 109 S.W.3d 856 (Tex. App.—Dallas 2003, no pet.) (citing an earlier version of Tex. Const. art. XVI, § 50(a)(6)(Q)(x)).
If a lender fails to comply with constitutional restrictions on home equity lending, the lender may avoid a forfeiture of all principal and interest and enforce an otherwise invalid lien by timely curing the failure in the manner specified by the Texas Constitution. Constitutional curative measures are equally available to cure lender noncompliance in an original home equity loan or in the refinance of a home equity loan. Tex. Const. art. XVI, § 50(a)(6)(Q)(x); 7 Tex. Admin. Code § 153.95(a); In re Adams, 307 B.R. 549, 553–54 (Bankr. N.D. Tex. 2004). Cure procedures are specific to certain identified home equity lending violations.
§ 11.25:1Violation of Restriction on Fees, Restriction on Prepayment Penalties, or Restriction on Interest
In the event of a violation of the constitutional restrictions found at Tex. Const. art. XVI, § 50(a)(6)(E) (restriction on fees), Tex. Const. art. XVI, § 50(a)(6)(G) (restriction on prepayment penalties), or Tex. Const. art. XVI, § 50(a)(6)(O) (restriction on interest), the lender may cure the violation by refunding the borrower the amount of any overcharge. See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(a). The cure is effective when the lender credits the borrower’s account with a refund, places the refund in the mail or other delivery carrier, or delivers the refund in person. A cure may also be made using any other delivery method agreed to by the borrower in writing after the lender receives notice of the lender’s failure to comply. 7 Tex. Admin. Code § 153.94(a).
§ 11.25:2Violation of Restriction on Loan-to-Value Ratio
In the event of a violation of the constitutional restriction found at Tex. Const. art. XVI, § 50(a)(6)(B) (restriction on loan-to-value ratio), the lender may cure the violation by sending the borrower written acknowledgment that the lien is valid only to the extent that the loan amount does not exceed the loan-to-value restriction. See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(b). The cure is effective when the lender places the acknowledgment in the mail or other delivery carrier or delivers the acknowledgment in person. A cure may also be made using any other delivery method that the borrower agrees to in writing after the lender receives notice of the lender’s failure to comply. 7 Tex. Admin. Code § 153.94(a).
§ 11.25:3Violation of Restriction against Additional Collateral or Restriction on Qualifying Agricultural Homestead (for Pre-2018 Loans)
In the event of a violation of the constitutional restrictions found at Tex. Const. art. XVI, § 50(a)(6)(H) (restriction against additional collateral), or Tex. Const. art. XVI, § 50(a)(6)(I) (restriction on qualifying agricultural homestead), the lender may cure the violation by sending the borrower an acknowledgment that the home equity loan is not secured by the prohibited additional collateral or nonqualifying agricultural property (for pre-2018 loans). See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(b). The cure is effective when the lender places the acknowledgment in the mail or other delivery carrier or delivers the acknowledgment in person. A cure may also be made using any other delivery method that the borrower agrees to in writing after the lender receives notice of the lender’s failure to comply. 7 Tex. Admin. Code § 153.94(a).
§ 11.25:4Violation of Restriction against Prohibited Amount, Percentage, Term, or Other Provision
In the event of a violation involving some other prohibited amount, percentage, term, or other provision, the lender may cure the violation by sending written notice to the borrower amending the prohibited provision and adjusting the account of the borrower to ensure that the borrower is not required to pay more than an amount permitted by the constitution or that the borrower is not subject to any other term or provision prohibited by the constitution. See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(c). The cure is effective when the lender makes the necessary adjustment to the borrower’s account and places the required notice in the mail or other delivery carrier or personally delivers the notice to the borrower. A cure may also be made using any other delivery method agreed to by the borrower in writing after the lender receives notice of the lender’s failure to comply. 7 Tex. Admin. Code § 153.94(a).
§ 11.25:5Violation of Requirement for Delivery of Documents
In the event of a violation of the constitutional restriction found at Tex. Const. art. XVI, § 50(a)(6)(Q)(v) (requirement for delivery to the borrower of copies of all documents signed by the borrower), the lender may cure the violation by delivering the required documents to the borrower. See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(d). The cure is effective when the lender delivers the required documents by placing them in the mail or other delivery carrier or by personally delivering the documents to the borrower. A cure may also be made using any other delivery method agreed to by the borrower in writing after the lender receives notice of the lender’s failure to comply. 7 Tex. Admin. Code § 153.94(a).
§ 11.25:6Violation of Requirement for Acknowledgment of Fair Market Value of Homestead
In the event of a violation of the constitutional restriction found at Tex. Const. art. XVI, § 50(a)(6)(Q)(ix) (requirement that lender and borrower sign a written acknowledgment of the fair market value of the homestead), the lender may cure the violation by obtaining the appropriate signatures on the required acknowledgment of fair market value. See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(d).
§ 11.25:7Violation of Restriction on Number of Home Equity Loans
In the event of a violation of the restriction found at Tex. Const. art. XVI, § 50(a)(6)(K) (antistacking provision allowing only one home equity loan on a homestead at a time), the lender may cure the violation by sending the borrower a written acknowledgment that the accrual of interest and all of the borrower’s obligations under the extension of credit are abated while any prior lien remains secured by the homestead. See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(e). The cure is effective when the lender places the acknowledgment in the mail or other delivery carrier or personally delivers the acknowledgment to the debtor. A cure may also be made using any other delivery method agreed to by the borrower in writing after the lender receives notice of the lender’s failure to comply. 7 Tex. Admin. Code § 153.94(a).
§ 11.25:8“Catch-All” Cure Provision
In the event of a violation of constitutional restrictions on home equity lending that cannot be cured by any of the above cure provisions, the lender may cure the violation by refunding or crediting the borrower $1,000 and offering to refinance the extension of credit for the borrower for the remaining term at no cost to the borrower, on the same terms, including interest, as the original extension of credit together with any modifications necessary to comply with the constitution. See Tex. Const. art. XVI, § 50(a)(6)(Q)(x)(f). The lender must make a $1,000 refund or give a $1,000 credit. 7 Tex. Admin. Code § 153.96(b)(1). Additionally, the lender must either modify or refinance. If modification is elected, the modification may be made without completing the requirements of a refinance. If a refinance is elected, the refinance must meet all constitutional requirements for a home equity loan. 7 Tex. Admin. Code § 153.96(b).
The catch-all cure provision presupposes the debtor’s compliance and cooperation with the lender’s attempted cure. The debtor may not block the lender’s cure by the debtor’s refusal to cooperate. The cure protection afforded the lender is complete on the refund or credit of the $1,000 and the timely delivery of an offer to modify or refinance. 7 Tex. Admin. Code § 153.96; In re Adams, 307 B.R. 549, 560 (Bankr. N.D. Tex. 2004). The offer to modify or refinance is delivered by placing the offer in the mail or with other delivery carriers or by personal delivery to the borrower. 7 Tex. Admin. Code § 153.96(a)(2). After the borrower accepts an offer to modify or refinance, the lender or holder must complete, or make a good-faith effort to complete, the modification or refinance with a reasonable time not to exceed ninety days. 7 Tex. Admin. Code § 153.96(d).
§ 11.25:9Noncurable Violations
Any violation of Tex. Const. art. XVI, § 50(a)(6)(P) (prohibition against home equity loans made by an unauthorized lender), or Tex. Const. art. XVI, § 50(a)(6)(A) (requirement that home equity liens be created by written agreement with the consent of each owner and each owner’s spouse), are noncurable and result in the forfeiture of all principal and interest on the home equity loan. An exception to this rule applies in the case in which one spouse fails to consent by signature to the home equity loan but subsequently does consent. See Tex. Const. art. XVI, § 50(a)(6)(Q)(xi).
§ 11.25:10Burden of Proof to Show Cure
The lender bears the burden of showing the lender’s compliance with any cure provision relied on by the lender to cure a violation. 7 Tex. Admin. Code §§ 153.94(b), 153.96(c).
To timely cure a violation of a home equity lending restriction, the lender must comply with the cure provisions within sixty days after the lender is notified of the violation by the borrower. Tex. Const. art. XVI, § 50(a)(6)(Q)(x). The sixty-day cure period begins the day after the lender or holder receives the borrower’s notification to the lender or holder. If the borrower mails the notification to the lender or holder, a rebuttable presumption arises that the delivery date is the date indicated on the certified mail receipt or other carrier-delivery receipt signed by the lender or holder. This does not preclude other methods of delivering the notification. However, with other methods of delivery, the borrower has the burden of proving delivery. See 7 Tex. Admin. Code §§ 153.92, 153.93. After the commencement of the sixty-day cure period, all calendar days are counted up to day sixty. If day sixty falls on a Sunday or a federal legal public holiday, the cure period is extended to include the next day that is not a Sunday or a federal legal public holiday. 7 Tex. Admin. Code § 153.92(a). If a borrower provides inadequate notice of the alleged violation, the sixty-day cure period does not begin to run. 7 Tex. Admin. Code § 153.92(b).
If a lender or holder appropriately cures the violation before receiving notice of the violation from the borrower, the cure is as effective as if the lender or holder had timely cured the violation after receiving notice from the borrower. 7 Tex. Admin. Code § 153.95(b).
§ 11.25:12Requirements for Borrower’s Notification of Lender’s Failure to Comply
The borrower notifies the lender or holder of an alleged failure to comply with an obligation by taking reasonable steps to give notice of the failure. The notification must include an identification of the borrower, an identification of the loan, and a description of the alleged failure to comply. The notice need not cite the section of the constitution allegedly violated. 7 Tex. Admin. Code § 153.91.
To designate a point of contact for receipt of notice of failure to comply, the lender or holder may make at closing a reasonably conspicuous designation in writing of a location where the borrower may deliver written or oral notice of violation of home equity restrictions. The designation may include a mailing address, a physical address, telephone number, e-mail, or other point of contact. The lender or holder may change this point of contact by conspicuous written notice to the borrower. The change is effective when sent by the lender or holder. 7 Tex. Admin. Code § 153.93.
§ 11.25:13Statute of Limitations
The Texas Supreme Court ruled in 2016 that the four-year residual limitations period of Tex. Civ. Prac. & Rem. Code § 16.051 does not apply to constitutional infirmities under Tex. Const. art. XVI, § 50(a)(6). Wood v. HSBC Bank USA, N.A., 505 S.W.3d 542 (Tex. 2016). Consequently, a borrower may bring an action against his home equity lender for constitutional violations at any time during the life of the loan if the lender fails to correct the alleged defects after notification of the defect. This Texas Supreme Court decision reversed the precedent set in Priester v. JP Morgan Chase Bank, 708 F.3d 667 (5th Cir. 2013), which applied the four-year residual limitations period to home equity loan violations.
§ 11.25:14Equitable Subrogation
Even if a lender fails to timely cure a constitutional defect, rendering its lien invalid, a lender may still rely on the doctrine of equitable subrogation to reduce their loss to the extent home equity loan proceeds were used to extinguish a valid lien. A lender who discharges a prior, valid lien on the borrower’s homestead property is entitled to subrogation, even if the lender failed to correct a curable defect in the loan documents. Federal Home Loan Mortgage Corp. v. Zepeda, 601 S.W.3d 763, 769 (Tex. 2020).
§ 11.26Nonseverability Provision
Home equity lending is authorized only on condition that none of the constitutional restrictions ever be preempted by federal law. To this end, Tex. Const. art. XVI, § 50(j), contains a “poison pill” provision that all home equity provisions are nonseverable and that none would have been enacted without the other. If any home equity provision is held to be preempted by federal law, all home equity lending provisions are rendered invalid. In such a case, a savings provision upholds the validity of home equity loans made before the decision holding any aspect of home equity lending preempted by federal law. Tex. Const. art. XVI, § 50(j).
A home equity loan may be subject to the Truth in Lending Act and its accompanying Regulation Z. See the discussion of this subject in section 11.19:2 above and chapter 12 in this manual.
[Sections 11.28 through 11.30 are reserved for expansion.]
§ 11.31Overview of Reverse Mortgage Loans
Reverse mortgage loans secured on Texas homestead properties were first authorized by constitutional amendment effective January 1, 1998. Tex. Const. art. XVI, § 50(a)(7), authorizes reverse mortgages, and Tex. Const. art. XVI, § 50(k)–(r), (v), defines and governs them. There are currently no enabling statutes that implement these constitutional provisions or interpretive rule making, although the power to interpret constitutional reverse mortgage provisions has been expressly delegated to the Texas Finance Commission and the Texas Credit Union Commission. See Tex. Fin. Code §§ 11.308, 15.413.
Reverse mortgages are a type of home equity loan for which only senior homeowners, age sixty-two or older, are eligible. Tex. Const. art. XVI, § 50(k)(2). The loans are meant to provide senior homeowners the resources needed to remain in their homes for their remaining lives, if they so desire, by converting their home equity into annuity-like periodic payments, or advances, to the homeowners for life (referred to as a “tenure” option) or, if preferred, a term of years (referred to as a “term” option) that may be used to pay for housing costs, medical care, and other costs of living. A homeowner under a reverse mortgage may also elect to receive a single advance at loan settlement (referred to as a “lump sum” option) or multiple unscheduled advances under a line of credit. Tex. Const. art. XVI, § 50(p).
A reverse mortgage is a nonrecourse obligation generally based on an owner’s equity in the owner’s homestead property, and the owner is not required to demonstrate general creditworthiness or a source of income or other assets with which to repay the loan. Any Texas resident age sixty-two or older who owns and occupies as a principal dwelling a single-family home, a qualified condominium unit or townhouse, or a permanently attached and qualified manufactured home in which there is sufficient appraised home equity should qualify for a reverse mortgage. See Tex. Const. art. XVI, § 50(k)(2), (k)(4). Home equity means the appraised market value of the homestead property minus the outstanding balance of all mortgages and liens secured on the homestead property. See Tex. Const. art. XVI, § 50(a)(6)(B).
An owner generally is not obligated to make any repayments of principal or interest during the term of a reverse mortgage as long as the owner continues to occupy the home as a principal residence and keeps property tax and insurance payments current. Tex. Const. art. XVI, § 50(k)(6). Advances made to a homestead owner under a reverse mortgage accrue interest, including interest on interest, until the occurrence of a maturity event, when the full loan balance of principal and interest is repaid to the lender in one final lump-sum payment, typically from sales proceeds when the homestead property is sold by the owner or by the owner’s estate after the owner dies. Maturity events are strictly limited by the constitution. A reverse mortgage generally cannot be called due and payable until (1) the homeowner sells or transfers the homestead property; (2) the homeowner permanently abandons the property for twelve consecutive months without obtaining the lender’s prior approval or, if the loan is used for the purchase of a homestead property, the borrower fails to timely occupy the homestead property as the borrower’s principal residence within a specified period after loan closing stipulated in the written loan agreement; or (3) the homeowner (or, if married, the last of the homeowners) dies. Tex. Const. art. XVI, § 50(k)(6)(A)–(k)(6)(C). The lender in some cases may, however, call the loan due if discovering the owner has committed actual fraud in obtaining the loan; has defaulted on contractual obligations in the deed of trust to repair and maintain, pay taxes and assessments on, or insure the homestead property; or has failed to maintain the lender’s first-lien priority on the homestead property. Tex. Const. art. XVI, § 50(k)(6)(D).
Texas procedural rules provide the authority for title insurance companies to insure the validity of reverse mortgage liens and for lenders to foreclose reverse mortgage liens under conditions permitted by the Texas Constitution. Specifically, the Texas Commissioner of Insurance has adopted a reverse mortgage endorsement (T-43) to the standard mortgagee’s form of title insurance policy in Procedural Rule P-45, and the Supreme Court of Texas has adopted revisions to rules 735 and 736 of the Texas Rules of Civil Procedure to provide for an expedited procedure for foreclosing reverse mortgage loans requiring a court order as a condition to foreclosure. See Tex. R. Civ. P. 735–736; Procedural Rule P-45, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
Although the Texas reverse mortgage is a particular type of home equity loan, it is important to note that the numerous conditions imposed on home equity loans under section 50(a)(6) described in part I. of this chapter are inapplicable to reverse mortgages authorized by section 50(a)(7). The limitations under section 50(a)(6), for example, restricting the permitted loan-to-value ratio (80 percent) and fees and charges (3 percent) and imposing cooling off and rescission rights and numerous other conditions, are not carried over to the reverse mortgage provisions. Reverse mortgages nevertheless have their own subset of consumer protections spelled out in subsections 50(k)–(p) and 50(v), all of which must be strictly observed to create a valid and enforceable lien on a homestead property.
§ 11.32Consensual Homestead Lien by Senior Homeowner and Spouse
A reverse mortgage loan may be made only to, and only with the consent of, a person who is, or whose spouse is, sixty-two years of age or older. It may be secured by only a voluntary lien on the owner’s homestead property created by a written agreement between the lender, each owner of the homestead property, and the spouse of each owner. Each owner’s spouse must consent to the lien securing a reverse mortgage regardless of whether the spouse claims an ownership interest in the property or is an applicant for, or obligor on, the debt. Any homestead property, urban or rural, is eligible as security for a reverse mortgage (with no disqualifying exception for homestead property designated for agricultural use for property tax purposes, unlike Tex. Const. art. XVI, § 50(a)(6), home equity loans). Tex. Const. art. XVI, § 50(k)(1), (k)(2).
A reverse mortgage must be made without recourse for personal liability against any owner or the spouse of any owner. Tex. Const. art. XVI, § 50(k)(3). A reverse mortgage is typically repaid from sales proceeds on the sale of the homestead property by the borrower or the sale by the borrower’s estate after the borrower, or the last of the borrowers, dies. If a reverse mortgage is not paid when due, the lender or note holder must look to recovery against the homestead property under its security interest as its exclusive remedy. The homeowner, therefore, will never owe more than the loan balance or the value of the homestead property, whichever is less, and no assets other than the homestead property may be used to repay the debt. Neither the borrower’s estate nor the heirs of the estate have any liability for any deficiency that may result from the sale of the homestead property. Tex. Const. art. XVI, § 50(k)(3).
§ 11.34Advances Based on Equity in Homestead
Advances under a reverse mortgage must be based on the equity in the owner’s homestead property or the equity the owner will invest when purchasing a homestead property that the borrower will occupy as a principal residence. Tex. Const. art. XVI, § 50(k), was amended effective January 1, 2014, to authorize a reverse mortgage to be used to finance the purchase of a Texas homestead, and thereby to qualify Texas homeowners for the first time to participate in the Federal Housing Administration’s “HECM for Purchase” loan program. See Tex. S.J. Res. 18, 83d Leg., R.S., 2013 Tex. Gen. Laws Pamph. 3, at A-7. Owners are not disqualified for a reverse mortgage because they lack income or other assets for repaying the loan. Tex. Const. art. XVI, § 50(k)(4). For purposes of determining eligibility under any state statute relating to payments, allowances, benefits, or services on a “means-tested” basis (including expressly supplemental security income, low-income energy assistance, property tax relief, medical assistance, and general assistance), reverse mortgage advances made to the borrower are considered loan proceeds and not income, and undisbursed funds under a reverse mortgage loan are considered equity in the home and not loan proceeds. Tex. Const. art. XVI, § 50(o).
§ 11.35No Repayment Until Maturity Event Occurs; Grounds for Foreclosure
The borrower must have no legal obligation to repay a reverse mortgage, or any portion of its principal or interest, until the loan balance is due on the occurrence of one of the following maturity events: (1) the last surviving borrower dies, (2) the homestead property is sold or transferred, or (3) all borrowers cease occupying the homestead property as their principal residence for twelve consecutive months (without the lender’s prior written approval) or, if the loan is used for the purchase of a homestead property, the borrower fails to timely occupy the homestead property as the borrower’s principal residence within a specified period after loan closing stipulated in the written agreement creating the lien on the property. The lender may also require payment of all principal and interest if the borrower commits actual fraud in connection with the loan; defaults on an obligation provided for in the loan documents to repair and maintain, pay taxes and assessments on, or insure the homestead property; or fails to maintain the priority of the lender’s lien on the homestead property. Tex. Const. art. XVI, § 50(k)(6)(A)–(k)(6)(D).
A reverse mortgage debt may be accelerated and declared due and payable only after the occurrence of one of the foregoing constitutional grounds for foreclosure, notice by the lender to the borrower of a claimed ground for foreclosure, and an opportunity for the borrower to remedy the claimed ground for foreclosure in the manner and within a period stipulated by the Texas Constitution. The lender must first give written notice to the borrower that one of these grounds for foreclosure exists and give the borrower an opportunity to cure the ground for foreclosure. Notice must be given in the same manner provided for a notice by mail related to the foreclosure of liens for home equity loans under section 50(a)(6). The owner must be given at least thirty days to either (1) remedy the condition creating the ground for foreclosure, (2) pay the reverse mortgage debt secured by the homestead property from proceeds of the sale of the homestead property or from any other sources, or (3) convey the homestead property to the lender by deed in lieu of foreclosure. A cure period of only twenty days must be given the owner if the claimed ground for foreclosure is a failure of the borrower to maintain the priority of the reverse mortgage lien under section 50(k)(6)(D)(iii). Tex. Const. art. XVI, § 50(k)(10).
§ 11.36Permitted Uses of Loan Funds
Proceeds from a reverse mortgage may be used by senior homeowners for any purpose, although most often loan proceeds are regarded as a supplement to Social Security benefits and pension payments and used by homeowners to maintain their homes in a good state of repair, pay property taxes and insurance when due, and defray medical and other ordinary costs of living. Significantly, advances under a reverse mortgage are not taxable as income and generally do not affect senior homeowners’ eligibility for Social Security or Medicare benefits. See Tex. Const. art. XVI, § 50(o). (However, senior homeowners electing a lump-sum advance of proceeds should seek counseling regarding their continued eligibility for Medicaid benefits if retaining the advance as a liquid asset.)
§ 11.37Foreclosure under Power of Sale and by Court Order
Foreclosure based on either of the grounds set out in Tex. Const. art. XVI, § 50(k)(6)(A), (k)(6)(B), that all borrowers have died or that the homestead property securing the loan has been sold or otherwise transferred, may be carried out under the power of sale contained in the deed of trust securing the loan and the requirements of section 51.002 of the Texas Property Code, pertaining to contractual liens. Tex. Const. art. XVI, § 50(k)(11).
If the foreclosure is for any other ground, however, a reverse mortgage lien may be foreclosed on only by court order pursuant to rules 735 and 736 of the Texas Rules of Civil Procedure. Tex. Const. art. XVI, § 50(k)(11). Rule 735 provides several judicial foreclosure options for a lender foreclosing a reverse mortgage on grounds other than under section 50(k)(6)(A) or (k)(6)(B). Under rule 735, the lender may file (1) a suit seeking judicial foreclosure, (2) a suit or counterclaim seeking a final judgment that includes an order allowing foreclosure under the security instrument, or (3) an application for an order allowing foreclosure under rule 736 pertaining to expedited foreclosure proceedings. Tex. R. Civ. P. 735. Under the expedited procedures of rule 736, a lender may file a verified application in the district court of the county in which the homestead property is located seeking a court order allowing a foreclosure in accordance with the power of sale under the security instrument and section 51.002 of the Property Code. Under the rule, if no response is timely made, the court must grant the application without further notice or hearing if the application complies in form and content with the requirements of the rule and a copy of the notice and certificate of service has then been on file with the clerk of the court for at least ten days. If a response is made, however, a hearing on the application must be set promptly after reasonable notice to the parties and, in any case, not later than ten business days after a request for hearing by either party. The rule calls for a streamlined hearing in which no discovery is allowed and the court’s action in granting or denying the order may not be appealed. On hearing, if the court determines that the applicant has proved that a valid debt exists that is secured by a valid lien on the homestead property created under Texas Constitution, article XVI, section 50(a)(7), the court must grant the application and issue an order to proceed with foreclosure pursuant to the power of sale. Tex. R. Civ. P. 736.
A four-year limitations period applies to actions to foreclose a reverse mortgage lien on a homestead property once a ground for foreclosure has occurred. On the expiration of the four-year limitations period, the real property lien and a power of sale to enforce it become void. See Tex. Civ. Prac. & Rem. Code § 16.035(a), (d). Practitioners are cautioned that the accrual date for such an action is not the date that the reverse mortgage debt is accelerated and declared due and payable, but instead the lender’s cause of action to enforce a reverse mortgage lien accrues when one or more of the constitutional conditions to foreclosure has occurred. If the ground for foreclosure is the death of the last surviving borrower, the cause of action accrues on the date of that death—a fact that could be undiscovered by the lender for some extended period of time. See Financial Freedom Senior Funding Corp. v. Horrocks, 294 S.W.3d 749 (Tex. App.—Houston [14th Dist.] 2009, no pet.).
§ 11.38No Closing until Delivery of Twelve-Day Consumer Notice and Certification of Required Counseling
A reverse mortgage may not be closed before the twelfth calendar day after the date the lender provides to the prospective borrower a statutory notice on a separate instrument, which the lender or originator and the borrower must sign for the notice to take effect. See form 11-7 in this chapter for the text of the notice.
Furthermore, a reverse mortgage may not be closed until the prospective borrower and the spouse of the prospective borrower attest in writing that the prospective borrower and the spouse of the prospective borrower received counseling regarding the advisability and availability of reverse mortgages and other financial alternatives that was completed not earlier than the 180th day nor later than the fifth day before the date the extension of credit is closed. See Tex. Const. art. XVI, § 50(k)(8), (k)(9).
§ 11.39Advances According to Authorized Payment Plan (Including Line-of-Credit Method)
The proceeds of a reverse mortgage must be disbursed to the borrower in one or more payments of principal, generally referred to as advances, according to an agreed payment plan. The total loan obligation, generally referred to as the balance, is the sum of all advances due at loan maturity (including any amounts advanced to cover closing and other costs) plus accrued interest, including interest on interest, and other finance charges, such as mortgage insurance premiums and servicing fees. Line-of-credit advances under a Texas reverse mortgage were first authorized effective November 8, 2005. Tex. S.J. Res. 7, 79th Leg., R.S., 2005 Tex. Gen. Laws Pamph. 1, at A-1. As amended, Tex. Const. art. XVI, § 50(p), expressly permits a line-of-credit method of advances in which an initial advance may be made at any time and future advances may be made at times and in amounts requested by the borrower until the credit limit established by the loan documents is reached (and, thereafter, subsequent advances may be made at times and in amounts requested by the borrower to the extent that the outstanding balance is repaid). Tex. Const. art. XVI, § 50(p)(2)–(p)(4).
In addition, if the borrower fails to timely pay any of the following for which the borrower is obligated under the loan documents, the lender may at any time, to the extent necessary to protect the lender’s interest in or the value of the homestead property, advance amounts on behalf of the borrower to pay (1) property taxes, (2) assessments, (3) insurance, (4) costs of repairs and maintenance (when performed by persons who are not employed by or affiliated with the lender), or (5) any lien that has or may obtain priority over the reverse mortgage lien. Tex. Const. art. XVI, § 50(p)(6).
§ 11.40Prohibitions against Use of Credit Cards and Similar Devices, Transaction Fees, and Unilateral Amendments of Terms
A reverse mortgage must provide that (1) an owner may not use a credit card, debit card, preprinted solicitation check, or similar device to obtain an advance; (2) a lender may not charge a transaction fee after closing solely in connection with any debit or advance; and (3) a lender or holder of the reverse mortgage may not unilaterally amend the terms of the extension of credit. Tex. Const. art. XVI, § 50(v).
§ 11.41Future Advances; Priority of Lien
Advances made and to be made in the future under a recorded reverse mortgage, and interest on those advances, have lien priority over any subsequently filed lien. Therefore, future advances under a reverse mortgage recorded in the real property records of the county in which the homestead property is located will have lien priority over any other lien filed for record after the reverse mortgage instrument has been recorded. Tex. Const. art. XVI, § 50(l).
§ 11.42Interest; Shared Appreciation
Interest may be charged on a reverse mortgage loan at any fixed or adjustable rate that the parties may agree on (and which, if secured by other than a first lien, does not exceed the maximum lawful rate under the Texas Finance Code), and interest may accrue and be compounded during the term of the loan according to the terms of the loan agreement. Furthermore, interest expressly may be contingent on appreciation in the fair market value of the homestead property, apparently allowing for lenders to charge “equity share” fees based on the appreciation of appraised value of the homestead when the loan matures. Tex. Const. art. XVI, § 50(m).
§ 11.43Reducing or Failing to Make Advances; Forfeiture
If an adjustable rate of interest is charged, the lender under a reverse mortgage is expressly prohibited from reducing the amount or number of advances made to the borrower because of an adjustment in the interest rate. Tex. Const. art. XVI, § 50(k)(5). The lender is obligated to make loan advances as required by the loan documents under the penalty of forfeiture. If the lender fails for any reason to make loan advances according to the terms of the loan documents and, after notice from the borrower, fails to cure the default as required in the loan documents, the constitution provides that the lender forfeits all principal and interest on the reverse mortgage. This forfeiture provision does not apply, however, when a governmental agency, such as the Federal Housing Administration under its Home Equity Conversion Mortgage reverse mortgage insurance, takes an assignment of the loan to cure the default. Tex. Const. art. XVI, § 50(k)(7).
Texas reverse mortgage law as authorized and effected by the constitution expressly supersedes any statutes, including the Texas Property Code, that purport to limit encumbrances that may be fixed on homestead property. Furthermore, a reverse mortgage may be made without regard to any other conflicting state law, including any purported limitations on future advances; any requirement that a maximum loan amount be stated in the reverse mortgage loan documents or that a percentage of reverse mortgage proceeds be advanced before the assignment of the reverse mortgage; or any prohibition on balloon payments, compound interest or interest on interest, or contracting for, charging, or receiving any rate of interest authorized by Texas law. Tex. Const. art. XVI, § 50(q).
§ 11.45Title Insurance Considerations
The Texas Reverse Mortgage Endorsement (T-43) and Procedural Rule P-45, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas, insure against claims of lien invalidity of a covered reverse mortgage arising out of a lender’s failure to satisfy certain of the constitutional conditions. See Procedural Rule P-45, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
The Texas Reverse Mortgage Endorsement (T-43) to the Mortgagee Policy of Title Insurance (T-2) excludes from coverage any loss or damage based on usury or on any consumer credit protection or truth-in-lending law or violation of any subsections of Tex. Const. art. XVI, § 50(k)(3)–(k)(11), (m), (p), (v), and any regulatory or statutory requirements for a mortgage made pursuant to Tex. Const. art. XVI, § 50(a)(7), except as expressly provided in paragraph 3 of the endorsement. Form T-43, in paragraphs 1 and 2, insures the validity of future advances made under a reverse mortgage, with certain exceptions, up to the outstanding aggregate amount of loan proceeds actually disbursed and the amount of its unpaid, accrued interest as of the time a loss occurs under the policy. In paragraph 3, form T-43 expressly insures against loss sustained by the lender under the mortgagee policy because of invalidity or unenforceability of the reverse mortgage lien by reason of any of the following: (1) the failure of the insured mortgage to be created under a written agreement with the consent of each owner of the insured homestead property and each owner’s spouse; (2) the failure of the insured mortgage to be made to a person who is, or whose spouse is, sixty-two years of age or older; (3) the failure of the written document purporting to be made pursuant to Tex. Const. art. XVI, § 50(k)(8), to be executed by the homeowner on the date that the insured mortgage and promissory note it secures are executed by the owner (provided that the policy does not insure that the document itself complies with section 50(k)(8)); and (4) the failure of the title company or its agents to furnish the homeowner a copy of written notice purporting to be made pursuant to Tex. Const. art. XVI, § 50(k)(9), on the date that the owner executed the insured mortgage and promissory note it secures (provided that the policy does not insure that the written document itself complies with section 50(k)(9)).
While attachment of the T-43 endorsement to any mortgagee policy of title insurance issued in connection with a reverse mortgage loan is mandatory, under Procedural Rule P-45 the issuing agency may delete any of these four subdivisions of paragraph 3 if it does not consider the additional risk insurable and must delete all four subdivisions if the promissory note and the insured mortgage instrument for the loan are not executed by the borrower at the office of the title company. Furthermore, the insuring agency must delete the second subdivision of paragraph 3 if the age of the owner or spouse is not verifiable “with government issued photographic identification” furnished the title agency and must delete the second and fourth subdivisions if the related documents furnished by the insured are not executed by the homeowner at the office of the title company on the date that the insured mortgage and promissory note it secures are executed. Procedural Rule P-45, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
§ 11.46Truth-in-Lending Disclosure Considerations
Reverse mortgage loans are subject to the federal Truth in Lending Act, 15 U.S.C. §§ 1601–1667f, and its Regulation Z, 12 C.F.R. pt. 1026. In addition to other consumer disclosures required under the Truth in Lending Act, the lender in a reverse mortgage is required to provide the borrower written disclosures under 12 C.F.R. § 1026.33 of the total annual loan cost of credit in the form of appendix K, paragraph (d), of Regulation Z. Generally referred to as the “Total Annual Loan Cost Rate Disclosure,” or “TALC,” this disclosure contains (1) a statement that the borrower is not obligated to complete the transaction merely because the borrower has received the disclosures or has signed an application for a reverse mortgage loan; (2) a good-faith projection of the total cost of the credit expressed as a table of “Total Annual Loan Cost Rates,” using that term, that reflects (a) costs and charges to the borrower, (b) payments (advances) to, or for the benefit of, the borrower, (c) additional compensation to the lender (such as shared appreciation the lender is entitled to), (d) any limitations on the borrower’s liability (such as nonrecourse limits), (e) assumed appreciation rates for the dwelling securing the loan at rates of 0 percent, 4 percent, and 8 percent, and (f) assumed loan periods, alternatively, of two years, the actuarial life expectancy of the borrower (or youngest of the borrowers), and that same life expectancy multiplied by a factor of 1.4 and rounded to the nearest full year (and, at the option of the borrower, that same actuarial life expectancy multiplied by a factor of 0.5 and rounded to the nearest full year); (3) an itemization of loan terms, charges, the age of the youngest borrower, and the appraised property value; and (4) an explanation of the total annual loan cost rates as provided in the model form. 12 C.F.R. § 1026.33, pt. 1026 app. K(d).
§ 11.47Federal Home Equity Conversion Mortgage (HECM) Loan Program
More than 90 percent of all reverse mortgage loan originations nationwide are made under the Home Equity Conversion Mortgage (HECM) program insured by the Federal Housing Administration (FHA) under the Department of Housing and Urban Development (HUD). The HECM program in Texas is regulated by HUD Handbook 4235.1 Rev-1, as supplemented and amended from time to time, and mortgagee letters ML 00-09 and ML 00-10, each dated March 8, 2000; ML 00-34, dated August 30, 2000 (supplementing ML 00-09); ML 00-39, dated November 7, 2000 (supplementing ML 00-09, ML 00-10, and ML 00-34); and ML 06-06, dated March 17, 2006 (in part replacing the guidance set out in ML 00-09, ML 00-34, and ML 00-39). Regulations for the HECM program are codified in 24 C.F.R. pt. 206. Effective January 1, 2014, Tex. Const. art. XVI, § 50(k), was amended to authorize a reverse mortgage also to be used to finance the purchase of a Texas homestead. Texas homeowners are now able to participate in the FHA’s “HECM for Purchase” loan program for the first time. See Tex. S.J. Res. 18, 83d Leg., R.S., 2013 Tex. Gen. Laws Pamph. 3, at A-7.
Model forms set out in full and attached to ML 00-39 replaced earlier versions of Texas model forms published in ML 00-09 and ML 00-34, which at that time constituted the only forms approved by HUD for use to document an HECM loan in Texas. These model forms included Texas forms of a home equity conversion loan agreement, an adjustable rate deed of trust, an adjustable rate note, an adjustable rate second deed of trust, an adjustable rate second note, and a repair rider. With the adoption of the 2005 constitutional amendment authorizing line-of-credit advances under a Texas reverse mortgage loan, however, HUD chose not to publish revised model forms and instead imposed on approved mortgagees the obligation, in consultation with their attorneys, to adapt all forms to ensure compliance with FHA requirements and the Texas Constitution and statutes. These requirements are set forth in ML 06-06, issued March 17, 2006, which authorizes Texas borrowers to choose a line-of-credit payment option, a modified tenure option (a combination of tenure and line-of-credit payment options), or a modified term option (a combination of term and line-of-credit payment options) and provides guidance regarding such matters as the adaptation and preparation of the form of loan documents, including the repair rider, the timing of loan closings and disbursements by the lender, the conditions under which the loan may be accelerated under applicable Texas law, and procedures to be followed under Texas law to conduct foreclosures. ML 06-06 expressly replaces guidance previously issued in ML 00-09, ML 00-34, and ML 00-39 on the same topics.
Model Texas forms were set out as attachments to HUD ML 00-39, dated November 7, 2000, with such adaptations by counsel as may be necessary to conform the instruments to state or local requirements. When adapting these model forms to Texas law and practices, counsel must consult the footnotes to each model form regarding state-specific modifications; instructions in chapter 6 to Handbook 4235.1 Rev-3; Handbook 4165.1 Rev-1 Chg-3, issued November 30, 1995, regarding model mortgage and note forms; ML 97-15; ML 00-09 regarding Texas modifications of the loan agreement form and repair rider; and ML 06-06 regarding line-of-credit terms and other provisions of the 2005 constitutional amendment.
[Sections 11.48 through 11.50 are reserved for expansion.]
III. General Instructions for Completing Forms
§ 11.51Introduction to Form General Instructions
For information about completing forms generally, see chapter 3 in this manual. In most forms the information that the attorney must provide is listed at the beginning of the form. Of course, the attorney may add other specific provisions, references, exhibits, and riders as necessary for each specific transaction.
The forms in this chapter are applicable to a first-lien home equity loan. Tex. Fin. Code ch. 342 imposes additional duties, prohibitions, and disclosure requirements in connection with secondary mortgage loans. Attorneys are cautioned that some forms in this chapter may require modification for use with a secondary mortgage loan transaction.
A home equity loan transaction may require documentation in addition to that provided by this chapter. For example, a “loan agreement” as defined in Texas Business and Commerce Code section 26.02 requires the notice prescribed therein. Form 10-14 in this manual, notice of final agreement, may be modified for use in a home equity transaction. Each transaction is unique, and the practitioner must use individual judgment in ensuring that all required documentation has been adequately prepared.
A home equity loan transaction must be closed at the offices of the lender, an attorney at law, or a title company. Tex. Const. art. XVI, § 50(a)(6)(N). The owner may not be required to sign any instrument in which blanks are left to be filled in. Tex. Const. art. XVI, § 50(a)(6)(Q)(iii). The lender must provide copies of all instruments related to the loan to the homestead owner at the time of closing. Tex. Const. art. XVI, § 50(a)(6)(Q)(v).
§ 11.52Instructions for Completing Notice Concerning Extensions of Credit
The notice concerning extensions of credit (form 11-1 in this chapter) defined by section 50(a)(6), article XVI, of the Texas Constitution is the preloan disclosure required to be given to the homestead owner under Tex. Const. art. XVI, § 50(g). The home equity loan cannot be closed until the twelfth day after the notice is given. If discussions with the borrower are conducted primarily in a language other than English, the lender must provide the owner with an additional copy of the notice translated into the written language in which discussions were conducted. The Office of the Consumer Credit Commissioner has provided a Spanish language translation of the notice on its website at https://occc.texas.gov. No foreign-language translations of forms are included in this manual.
§ 11.53Instructions for Completing Home Equity Extension of Credit (Promissory Note)
The form for the home equity extension of credit (form 11-2 in this chapter) is principally adapted from form 6-1 (promissory note) in this manual and is redesignated to conform with the terminology used in Tex. Const. art. XVI, § 50(a)(6). The attorney is referred to chapter 6 in this manual for general commentary and instructions for completing promissory notes.
Note that the extension of credit makes no provision for late charges. The attorney is referred to section 6.4:3 and the clauses referenced therein for commentary and instructions on late charges.
As reflected in the “Terms of Payment” paragraph, the home equity extension of credit must be repaid in substantially equal successive periodic installments. Tex. Const. art. XVI, § 50(a)(6)(L). The installments must begin not later than two months from the date of the instrument. Each installment must equal or exceed the amount of accrued interest as of the date of the scheduled installment.
The home equity extension of credit can be converted for a variable rate of interest by deleting the heading for “Annual Interest Rate” and modifying the heading “Terms of Payment” to read “Terms of Payment, Including Variable Interest Rate on Unpaid Principal.” A variable rate interest clause appears at clause 6-2-18.
The security for payment for a home equity extension of credit is fixed by Tex. Const. art. XVI, § 50(a)(6)(A), (a)(6)(H). The home equity extension of credit may be secured only by a lien on the borrower’s homestead. Additional collateral is prohibited. The home equity extension of credit has no provision referring to a guaranty or guarantor. A guaranty is construed as prohibited additional collateral.
As required by Tex. Const. art. XVI, § 50(a)(6)(C), the home equity extension of credit is a nonrecourse obligation. In addition, the home equity extension of credit contains many other limitations and restrictions unique to home equity lending and required by Tex. Const. art. XVI, § 50(a)(6). These restrictions are discussed in detail in the commentary in this chapter. A lender forfeits all principal and interest if the lender fails to cure a failure to comply with constitutional restrictions on home equity lending after sixty days’ notice of the violation given by the borrower. Tex. Const. art. XVI, § 50(a)(6)(Q)(x). These cure provisions are discussed in detail in section 11.25 above.
If the lender of a home equity extension of credit has a license from the Office of Consumer Credit Commissioner, the home equity extension of credit must contain the name, mailing address, and telephone number of the OCCC. Tex. Fin. Code § 14.104. Additionally, if the home equity loan is a secondary mortgage loan, the alternative attorney’s fee provision should be used. See section 8.4 for a discussion of secondary mortgage loans and see the discussion in section 11.20:7 above concerning alternative provisions.
§ 11.54Instructions for Completing Deed of Trust (Home Equity Loan)
The form for the deed of trust (form 11-3 in this chapter) is adapted from form 8-1 in this manual. The attorney is referred to chapter 8 for general commentary and instructions for completing deeds of trust.
A lien securing a home equity loan may be foreclosed only after court order. Tex. Const. art. XVI, § 50(a)(6)(D). The power of sale of the deed of trust (home equity loan) is conditioned on the lender obtaining a court order allowing foreclosure under any proceeding authorized by the Texas Rules of Civil Procedure and other applicable law.
A question remains whether the assignment of rents in a deed of trust securing a home equity loan constitutes prohibited additional collateral under Tex. Const. art. XVI, § 50(a)(6)(H). The deed of trust (home equity loan) does not contain an assignment of rents clause. In the absence of definitive authority on this question, the attorney is cautioned to exercise professional judgment regarding this provision.
If the home equity extension of credit is a junior lien and if the lender is a bank, savings and loan association, credit union, or lender with a license from the Office of Consumer Credit Commissioner, the deed of trust (home equity) should be modified as discussed in section 11.20:7 above to comply with requirements applicable to secondary mortgage loans governed by Texas Finance Code chapter 342.
The deed of trust (home equity loan) also contains a notice of confidentiality rights as required by Tex. Prop. Code § 11.008(b). See section 3.16 in this manual.
§ 11.55Instructions for Completing Home Equity Certificate and Agreement
The home equity certificate and agreement contains a written acknowledgment of the fair market value of the homestead as required by Tex. Const. art. XVI, § 50(a)(6)(Q)(ix). The acknowledgment of value is necessary to assure compliance with the 80 percent loan-to-value restriction of Tex. Const. art. XVI, § 50(a)(6)(B). The acknowledgment is conclusive evidence of the fair market value of the homestead if the acknowledgment is made under the conditions set out at Tex. Const. art. XVI, § 50(h). To comply with restrictions against additional collateral, the home equity compliance certificate and agreement (form 11-5 in this chapter) contains a waiver by the lender of cross-collateral provisions contained in other debt instruments. In addition, the form contains other representations and warranties to be made by the borrower at closing, evidencing compliance with certain constitutional requirements for creating a valid home equity lien.
The home equity certificate and agreement must be signed on the date that the extension of credit is made. Tex. Const. art. XVI, § 50(a)(6)(Q)(ix).
§ 11.56Instructions for Completing Election Regarding Right of Rescission
The election regarding right of rescission (form 11-6 in this chapter) confirms the borrower’s election to rescind or decline to rescind the home equity extension of credit under Tex. Const. art. XVI, § 50(a)(6)(Q)(viii). For married couples, a separate notice of right of rescission should be given by each spouse. Funding of the home equity loan should be delayed until the rescission period has expired.
§ 11.57Instructions for Completing Notice Concerning Refinance of Existing Home Equity Loan
The notice concerning refinance of an existing home equity loan (form 11-8 in this chapter) is the preloan disclosure required to be given to the homestead owner under Tex. Const. art. XVI, § 50(f)(2), when an existing home equity loan will be refinanced into a conventional mortgage. The refinance disclosure must be given not later than the third business day after the date the owner submits the loan application and at least twelve days before the refinance is closed. The refinance disclosure must be given to all owners within the prescribed time limits. One copy of the refinance disclosure may be provided to married owners. 7 Tex. Admin. Code § 153.45(4).
§ 11.58Instructions for Completing Affidavit of Compliance
The affidavit of compliance (form 11-9 in this chapter), if signed by the owner or owner’s spouse, provides conclusive proof that all requirements of Tex. Const. art. XVI, § 50(f)(2), have been met. The affidavit of compliance should be signed by the owner or owner’s spouse at closing.
[Sections 11.59 and 11.60 are reserved for expansion.]
Alsup, J. Alton. “Documenting Compliance with the New Texas Home Equity Reform Amendment.” In Advanced Real Estate Drafting Course, 2005. Austin: State Bar of Texas, 2005.
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