Practical Real Estate Texas

Practical Insight and Commentary on Texas Commercial and Residential Real Estate Law

Introduction to Home Equity Lending: Texas Is Special

 

Texas Protects the Home 

In Texas, we value our homesteads. This tradition dates back to the initial colonization of the state. When Stephen F. Austin recognized that many immigrants to Texas were fleeing creditors, he encouraged the legislature to create Texas as a legal refuge where the colonists’ homes would be protected from seizure by foreign creditors. Coahuila y Tejas Decree No. 70 provided: 

The lands acquired by virtue of colonization law … shall not be subject to the payment of debts contracted previous to the acquisition of said lands, from whatever the source the said debts originate or proceed. 

With this decree, the principle of Texas homestead protection was formed. Although Decree No. 70 was repealed in 1831, the protection of the homestead was revived in 1836 when Texas declared its independence from Mexico. Specifically, The Texas Act of 1839 provided that homesteads were exempt from writ or execution from judgments. 

This protection was added into the Texas Constitution when it was annexed in 1845, seceded from the Union, and in the current constitution when it reentered the United States.

Now, Article 16, Section 50(a) of the Texas Constitution provides the same homestead protection. This provision includes eight exceptions to the prohibition of establishing a lien against a homestead in Texas:  

  1. Purchase money mortgage (your loan to acquire the property) 
  2. Taxes due on the homestead 
  3. Owelty of partition (this includes debts between spouses arising out of a divorce proceeding when one spouse receives the home) 
  4. Refinance of a lien against the homestead (this includes federal tax liens) 
  5. Work and materials for new improvements or repair or renovation for existing improvements 
  6. Home equity lending 
  7. Reverse mortgages 
  8. Conversion and refinance of personal property lien secured by manufactured home to real estate lien  

What Is a Homestead?  

To establish a “homestead,” a person or family must show a combination of both an intent to owner occupy the property as a permanent residence and some overt act in the use of the property in the intended manner. The tax code allows for tax exemptions for our homestead property. 

However, the presence of a tax exemption (or the lack of one) is not the final determination of whether a property is considered a homestead. The owners’ intent and actions will still be considered.  

Homesteads can be rural or urban. An urban homestead is limited to 10 acres and is included within the limits of a municipality, its extra territorial jurisdiction, or a platted subdivision. Additionally, the area must be serviced by policy protection, paid or volunteer fire protection, and receive some city services. (See Texas Property Code § 41.002(c)). 

A rural homestead consists of not more than 200 acres of land which may be on one or more parcels. There is no definition of a rural homestead in the Property Code. As such, if a property does not qualify as urban, then by default it is rural.  

Let’s Pull Some Equity 

In 1997, the Texas Legislature and 59.6% of Texas voters approved an amendment to allow home equity lending in Texas. As such, starting January 1, 1998, Texas residents were allowed to take loans against the equity in their homes. However, in allowing homeowners to access this equity, the Texas Legislature placed many consumer protection restrictions on the lending practice. 

Commentators have noted that: “Texas is the only state with a regulation limiting home equity lending… Rules governing home equity borrowing are not uniform across the U.S. and Texas’ rules are significantly more stringent.” (Kumar, Anil and Skelton, Edward. Did Home Equity Restrictions Help Keep Texas Mortgages from Going Underwater? Southwest Economy, Federal Reserve Bank of Dallas (3Q 2013).  

The limitations/consumer protection restrictions are included in Article 16, Section 50(a)(6) of the Texas Constitution. If a lender violates one of these restrictions and fails to cure it within 60 days of notice from the borrower, that lender faces stiff consequences. The entire lien may be forfeited — including all principal and interest paid by the borrower during the life of the loan.  

Requirements of a Home Equity Loan 

  1. 50(a)(6)(A)Is secured by a voluntary lien on the homestead created under a written agreement with the consent of each owner and each owner’s spouse;
  2. 50(a)(6)(B): Is an amount that when added to aggregate of all debts against the homestead does not exceed 80% of the fair market value of the homestead at the time of closing;
  3. 50(a)(6)(C): Is without personal recourse except for fraud;
  4. 50(a)(6)(D): Is secured by a lien that may only be foreclosed by Court order;
  5. 50(a)(6)(E): Does not require the owner or spouse to pay, in addition to interest, fees that exceed 3% of the original principal amount;
  6. 50(a)(6)(F): If the loan is an open-end account, it must be a Home Equity Line of Credit;
  7. 50(a)(6)(G): Is payable in advance without penalty or charge;
  8. 50(a)(6)(H): Is not secured by any additional real or personal property other only than the homestead;
  9. 50(a)(6)(I): Is not secured by property with Agricultural property tax designation (unless that property is used primarily for milk production);
  10. 50(a)(6)(J): May not be accelerated because of decrease in market value or default in other debt not secured by prior lien on homestead;
  11. 50(a)(6)(K): Is the only home equity loan on the property;
  12. 50(a)(6)(L)(i): Is scheduled to be repaired in “substantially equal successive periodic payments” not more often than every 2 weeks and not less often than monthly, beginning no later than 2 months from closing, “each of which equals or exceeds the amount of accrued interest as of the date of the scheduled installment.”
  13. 50(a)(6)(L)(ii): If it is a home equity line of credit, the periodic payments also must be regular installments payable not more often than every 14 days and not less often than monthly, beginning not later than 2 months from closing;
  14. 50(a)(6)(M)(i): Is not closed before the 12th day after owner submits the loan application and lender provides the Home Equity Notice;
  15. 50(a)(6)(M)(ii): Is not closed for at least 1 business day after the owner received a copy of the loan application (if not previously received) and a finalized itemized closing statement. If there is a “bona fide emergency or other good cause” and the lender obtains the “written consent of the owner,” documentation may be provided on the date of closing;
  16. 50(a)(6)(M)(iii): Is not closed before the closing of any other home equity loan on the property unless the “owner on oath” requests an earlier closing because of an emergency that is declared by the president of the United States or the governor and applies to the area where the homestead is located;
  17. 50(a)(6)(N): Is closed only at the office of the lender, an attorney, or a title company;
  18. 50(a)(6)(O): Permits a fixed or variable rate of interest;
  19. 50(a)(6)(P): Is made by one of the following lenders:
    1. A bank, savings and loan association, savings bank, or credit union doing business under Texas or federal law;  
    2. A federally chartered lending instrumentality or a person approved to make federally insured loans;  
    3. A person licensed in Texas to make regulated loans;  
    4. A person who sold the homestead property to the current owner and who provided all or part of the financing for the purchase;  
    5. A person who is related to the owner within the second degree of affinity or consanguinity; or  
    6. A person regulated by the state as a mortgage broker;
  20. 50(a)(6)(Q): Is made on the condition that:  
    1. The owner is not required to use loan proceeds to pay non-homestead debt to the lender;  
    2. Owner has not assigned wages as security; 
    3. Owner has not signed document with blanks for the “substantive terms”; 
    4. Owner has not signed a confession of judgment or power of attorney to the lender or a third person to confess judgment or to appear for the owner in a judicial proceeding;  
    5. At closing, owner receives a final loan application and all executed documents;  
    6. Deed of trust discloses that it is a home equity loan;  
    7. Within a “reasonable time” after the loan is paid off, the lender must cancel and return the promissory note and provide a recordable release of lien to the owner or a copy of the assignment of the lien to a lender who is refinancing the home equity loan;  
    8. The owner and “any spouse of the owner” may rescind the home equity loan within 3 days after closing “without penalty or charge”; 
    9. The owner and lender sign a written acknowledgement as to the fair market value of the property on the date the home equity loan is made; and
  21. 50(a)(6)(Q)(x): The Lender and any holder of the note “shall forfeit all principal and interest [of the Home Equity Loan] if the lender or holder fails to comply” with the obligations imposed and “fails to correct the failure to comply not later than the 60th day after the date the lender or holder is notified of the lender’s failure to comply by:”  
    1. Lender pays owner any overcharge; 
    2. Lender sends owner a written notice that lien is valid only in the amount that the loan does not exceed the 80% limit or is secured by ineligible property;  
    3. Lender sends owner written notice that modifies any provision of the note in violation of this section and adjusts the borrower’s account to comply;  
    4. Lender delivers the required documents to borrower or obtains any required signatures;  
    5. If there is another home equity loan on the property, then the lender sends a written notice to the borrower that interest and all other obligations under the note are abated until the other home equity lien is released; 
    6. If the violations cannot be cured, then lender gives/credits owner with $1,000 and offers to refinance the loan with the same rate and at no costs to owner in order to comply with law;
  22. 50(a)(6)(xi): The lender and holder of the note “shall forfeit all principal and interest” if the lender is not an authorized home equity lender or if the lien was created without the consent of all owners and all owners’ spouses (unless the owners and spouses subsequently consent).  

Application of These Rules 

As with any system that has many rules and regulations, there will be questions about what the regulations really mean and how they should be applied. The area of home equity lending is still evolving; lenders and title companies may make mistakes in closing these loans. 

These mistakes lead to litigation that helps to interpret these rules. While numerous questions can be asked about home equity lending, the first one to address should be the statute of limitations. 

Because the lender has much to lose if the loan does not comply, the lender has an interest in cutting off the time at which the borrower can complain of non-compliance. Specifically, can the borrower delay in notifying the lender of a non-compliant loan and, if the lender fails to comply, take advantage of the forfeiture provisions?

A recent opinion from the Texas Supreme Court addresses this very question; we will talk about that in the next blog post.  

In the meantime, know that there are many limitations imposed on home equity loans. Lenders, borrowers, and title companies must be aware of these obligations and ensure strict compliance.  

Cassie McGarvey

Cassie McGarvey