United States: Texas Voters Consider Big Changes to Home Equity Loan Restrictions

On November 7, Texas voters will have the opportunity to make some significant changes to the state's homestead equity loan restrictions. As summarized below, Texas Proposition 2 will, if approved: (1) revise the strict fee limits for such loans; (2) add to the list of lenders that are authorized to make the loans; (3) eliminate the "once-a-home-equity-loan, always-a-home-equity-loan" rule; (4) allow borrowers to sign an affidavit of compliance regarding certain new refinancings of such loans; and (5) allow advances on lines of credit up to 80% loan-to-value (LTV) ratio.

The Texas Constitution imposes strict limits on the types of loans that validly may be secured by Texas homestead property. For home equity loans (other than purchase-money loans or rate/term refinances), the Texas Constitution imposes a long list of limitations and requirements, the violation of which invalidates the lien and can result in the forfeiture of principal and interest. A lender or holder has an opportunity to cure at least some of those violations. Since the limitations are part of the state constitution, relief can come only through legislative resolutions on which the public must then have the opportunity to vote.

As listed above, one of the biggest changes in Proposition 2 relates to the limit on fees for home equity loans. Currently the lender may charge, in addition to interest, only three percent of the loan amount to "originate, evaluate, maintain, record, insure, or service" a home equity loan. Proposition 2 would clarify that the fee limit does not apply to "bona fide discount points used to buy down the interest rate." Proposition 2 also would allow lenders to exclude amounts for a third-party appraisal, a property survey, lender's title insurance (up to the state base premium), or a title examination report (if less than the state base premium). In exchange, however, the fee cap would be reduced to two percent. Proponents of the measure believe this change would continue to protect Texas homeowners, while addressing lender difficulty in making these loans available.

The proposition also will expand the types of lenders that are authorized to make home equity loans. Currently, a home equity lender generally must either be a depository institution, an FHA-approved mortgagee (other than a loan correspondent), or a licensee under the Texas Regulated Loan Act or Mortgage Broker Act (now called the Residential Mortgage Loan Companies Act). Proposition 2 would expand that list to include registered mortgage bankers, as well as subsidiaries of banks, thrifts, or credit unions.

Further, the Texas Constitution currently provides that once a homeowner takes out a home equity loan, any refinancing of that loan remains a home equity loan, subject to all the tight constitutional restrictions. However, Proposition 2 would allow a homeowner to refinance a home equity loan into a non-home equity loan after one year, so long as there is no advance of additional funds (other than the actual costs of the refinancing), the combined LTV ratio as of the date of the refinancing does not exceed 80%, and the lender provides the homeowner a disclosure about waiving his/her "protections" under the home equity provisions (such as the right to a judicial foreclosure and to escape personal recourse). Proposition 2 would even allow those homeowners to sign an affidavit acknowledging that the non-home equity loan meets the constitutional requirements, offering lenders some degree of comfort with respect to the continuing validity of the lien against the homestead.

Proposition 2 also would allow homeowners under a home equity line of credit to request additional advances under the line even if the line's LTV exceeds 50% at the time of the advance, which currently is prohibited.

Finally, the proposition would allow home equity loans to be secured by homestead property designated for agricultural use, which also is currently prohibited.

If voters approve Proposition 2 on November 7th, these changes will become effective on January 1, 2018, for home equity loans made or refinanced on or after that date.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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