TITLE 7.BANKING AND SECURITIES

Chapter 91. CHARTERING, OPERATIONS, MERGERS, LIQUIDATIONS

The Credit Union Commission adopts amendments to §91.801 concerning investments in CUSOs without changes to the text published in the March 4, 2005, issue of the Texas Register (30 TexReg 1211).

The amendments clarify the investment limits for a credit union in CUSOs, require that separate corporate existence between the credit union and the CUSO be clearly maintained, and require that the CUSO be bonded or insured for its operations and obtain an annual opinion audit.

No comments were received on the proposal.

The amendment is adopted under the provision of the Texas Finance Code, §124.352 which provides the Credit Union Commission with the authority to adopt rules limiting investments; and under the Texas Finance Code, §15.402, which authorizes the Commission to adopt reasonable rules for administering Title 2, Chapter 15 and Title 3, Subchapter D of the Texas Finance Code.

The specific section affected by the amendment is Texas Finance Code, §124.352.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on June 20, 2005.

TRD-200502530

Harold E. Feeney

Commissioner

Credit Union Department

Effective date: July 10, 2005

Proposal publication date: March 4, 2005

For further information, please call: (512) 837-9236

Part 8. JOINT FINANCIAL REGULATORY AGENCIES

Chapter 152. REPAIR, RENOVATION, AND NEW CONSTRUCTION ON HOMESTEAD PROPERTY

7 TAC §§152.1, 152.3, 152.5, 152.7, 152.15

The Finance Commission of Texas and the Texas Credit Union Commission ("Commissions") jointly adopt new 7 TAC §§152.1, 152.3, 152.5, 152.7, and 152.15, concerning interpretations related to a lien on a homestead for home improvement under Texas Constitution, Article XVI, §50(a)(5) (Section 50(a)(5)). The new sections are adopted with non-substantive changes to the proposal as published in the February 25, 2005, issue of the Texas Register (30 TexReg 955).

The Commissions made non-substantive changes to clarify and simplify the addressed provisions as the result of comments.

The Commissions received one written comment. The following commenter only requested clarifications or recommended modifications: David F. Dulock, Black, Mann & Graham, L.L.P., Attorneys at Law. Notice of a public meeting, for receipt of any oral comments on the proposed new sections, was published in the February 25, 2005, issue of the Texas Register (30 TexReg 955). The meeting was held as scheduled, on March 24, 2005, but no one offered oral comments.

Texas Constitution, Article XVI, §50 (Section 50) limits the nature and type of liens that can be imposed on a Texas homestead by identifying and conditioning the specific purposes for which such secured financing may be used. Because of the significantly adverse consequences that can befall a lender who violates a provision of Section 50, clear and unambiguous guidance regarding the meaning of such provisions supports the stability of the credit markets and ensures that home equity loans are as widely available to Texas homeowners as possible. (Because Section 50 primarily addresses only the elements necessary to create a valid lien on a homestead, other statutes and constitutional provisions must also be consulted to fully evaluate the legality under Texas law of credit transactions involving the homestead.)

Each Commission is separately and independently authorized to issue interpretations of certain provisions in Section 50, see Texas Finance Code, §11.308 and §15.413 (as added by Acts 2003, 78th Legislature, Chapter 1207, §2), and the Texas Constitution, Article XVI, §50(u). The Commissions seek to jointly exercise their authority to interpret Section 50 in order to promote consistency and better support the confidence of homeowners and lenders transacting home equity loans in compliance with Section 50. In addition, the Commissions interpret the extent of their interpretive authority to include not only determinations of the explicit meaning of words and terms in Section 50, but also to encompass "filling in the gaps" with respect to material matters that are inadequately addressed in Section 50, including possible addition of further details to the extent the Commissions believe this to be necessary to fully implement the intent and purposes of Section 50.

Section 50(a)(5) provides exceptions from the protections from forced sale of the homestead of a family or of a single adult person for payment of the following two debts when they meet certain requirements:

(1) work and material used in constructing new improvements on the homestead; and

(2) work and material used to repair or renovate existing improvements on the homestead.

Section 50(a)(5) does not define any of its terms. When interpreting our state Constitution, we rely heavily on its literal text and give effect to its plain language. Republican Party of Texas v. Deitz , 940 S.W.2d 86, 89 (Tex. 1997). We presume the language of the Constitution was carefully selected, and we interpret words as they are generally understood. City of Beaumont v. Boullion , 896 S.W.2d 143 (Tex. 1995). In the case of Aerospace Optimist Club v. Texas , 886 S.W.2d 556, 559 (Tex. App. - Austin 1994, no writ), the court used the Webster's Dictionary definition of the word "proceeds" because it was not defined. When a term is not defined in Section 50(a)(5), we have given it its ordinary meaning.

The language of Section 50(a)(5) raises a question as to whether Section 50(a)(5)(A) - (D) apply to "work and material used to repair and renovate existing improvements" alone or also to "work and material used in constructing new improvements." The Texas Supreme Court held "that a plain-language reading of Texas Constitution Article XVI, Section 50(a)(5) dictates that the protections in Section 50(a)(5)(A) - (D) apply only to 'work and material used to repair or renovate existing improvements' on homestead property, and not to 'work and material used in constructing new improvements'." Spradlin v. Jim Walters Homes , 34 S.W.3d 578, 580 (Tex 2000).

The Texas Supreme Court followed the doctrine of last antecedent that a qualifying phrase in a statute or the Constitution must be confined to the words and phrases immediately preceding it to which it may, without impairing the meaning of the sentence, be applied. The Texas Supreme Court concluded that, "'work and material used to repair or renovate existing improvements' constitutes the entire phrase to which Section 50(a)(5)(A) - (D) apply because applying Section 50(a)(5)(A) - (D) to 'work and material used in constructing new improvements' would impermissibly impair the meaning of the provision as a whole. This reading is supported by use of the disjunctive conjunction 'or' between the two phrases, which signifies a separation between two distinct ideas." The Commissions adopt the Texas Supreme Court's holding and reasoning in reaching the holding.

Accordingly, under Section 50(a)(5), the homestead is not protected from forced sale for the payment of debts for "work and material used in constructing new improvements" on the homestead if the work and material are contracted for in writing. Under Section 50(a)(5)(A) - (D), the homestead is not protected from forced sale for the payment of debts "for work and material used to repair or renovate existing improvements" on the homestead if the requirements of Section 50(a)(5)(A) - (D) are complied with.

To determine whether to apply Section 50(a)(5)(A) - (D) to a debt under Section 50(a)(5), a determination must be made as to whether the work and material used are for "constructing new improvements" on the homestead or "repairing or renovating existing improvements" on the homestead. To make this determination, the Commissions concluded that "new improvements" and "existing improvements" must be defined. The plain language of Section 50(a)(5) dictates that "new improvements" are additions to real property that do not exist on the real property prior to entering into a contract for home improvements and construction of the additions will not involve work or material being physically attached to an existing improvement. The plain language of Section 50(a)(5) further dictates that "existing improvements" are additions to real property that are physically attached to the real property prior to entering into a contract for home improvements. For example, a pool cabana could be constructed separate from all other pre-existing improvements; this would be construed to be new improvements as the construction would not be physically attached to any pre-existing improvements. A pool cabana could also share a wall with an existing garage; this would be construed to be existing improvements as the cabana would be physically connected or attached to the pre-existing garage. The phrases "existing improvements" and "new improvements" are defined at Section 152.1(2) and (3), respectively.

Work and material used to construct improvements on a homestead that already has "existing improvements" on it are considered "work and material used in constructing new improvements" so long as work is not performed on and material are not physically attached to the existing improvements. Work that is performed on or material that are in any way physically attached to existing improvements are considered "work and material used to repair or renovate existing improvements" on the homestead, and Section 50(a)(5)(A) - (D) must be complied with to establish a lien on the homestead.

The commenter suggested that the introductory sentence to §152.1 be amended to reflect that the definitions apply to words in Article XVI, Texas Constitution, Section 50. Although, applying the definitions to Section 50 may be consistent with the interpretations, the definitions were drafted to only apply to the interpretations of Section 50(a)(5). The Commissions are concerned about unintended consequences of extending the definitions to apply to words and phrases in Section 50. Therefore, the Commissions decline to make this suggested modification.

The proposed definition of "application" in §152.1(1) defined the term as an application of credit for work and material to repair or renovate existing improvements or to construct new improvements. The definition further clarifies that the term does not refer to the use of a previously established credit line.

The commenter questioned the need for a definition of "application" because Section 50(a)(5) already requires a written application. Alternatively, the commenter suggested that the definition of "application" exclude closed-end home equity loans used for home improvement. The Commissions agree with the commenter that the definition is unnecessary because Section 50(a)(5) requires a written application and federal disclosure regulations already have definitions of application. The Commissions will not adopt a definition of "application."

Proposed §152.1(2) defined a "constitutional lien" as a lien created and made enforceable against a homestead by the lienholder's compliance with the appropriate section of the Texas Constitution.

The commenter asserted that there is no authority for creating a "constitutional lien" without also complying with the enabling statutory requirements of §53.254 of the Property Code. The Commissions agree with the commenter. The Commissions removed the definition of "constitutional lien" and deleted the phrase from §152.3(b) and §152.5(b).

The deletion of the proposed definitions of "application" and "constitutional lien" and the addition of the definition of "physically attach" necessitated renumbering the remaining paragraphs of §152.1.

The definition of "contract" in §152.1(1) is provided solely to provide a shorthand version of the phrase "contract for work and material;" the definition allows the interpretations to use the term "contract" instead of the phrase "contract for work and material." The commenter suggested that the definition of contract include a requirement that it create a lien in accordance with constitutional and statutory requirements in order to clarify that the term pertains only to contracts that are enforceable against Texas homesteads and to avoid confusion with contract documents signed between owner and contractor that do not meet constitutional and Property Code homestead contract requirements. The Commissions amended the definition to require that the contract comply with the Texas Constitution and Texas Property Code.

The definition of "existing improvement" in §152.1(2) and the definition of "new improvement" in §152.1(3) are discussed above. The commenter pointed out that the definition of "new improvement" did not contain the requirement that the improvement be "physically attached" to the homestead. The Commissions agree that this was an oversight. Section 152.1(3) was amended grammatically and to clarify that "new improvements" must be physically attached to the homestead.

The definition of "material" in §152.1(4) clarifies that material become a part of improvements once physically attached to the improvement, whether in the construction of new improvements or the repair or renovation of existing improvements.

For consistency, the Commissions proposed a definition of "owner" in §152.1(5) that is the same as the definition in §153.1(13). The commenter asserted that this definition would require compliance with Section 50(a)(5)(B) - (D) for nonhomestead owners, thereby expanding Texas homestead law beyond protecting only homestead interests in property. Further, the commenter stated that this definition conflicts with §152.7(b), which makes joinder by nonhomestead owners optional. In the absence of legislative history or clear intent in the Constitution, the Commissions cannot define "owner" differently for each subsection of Section 50 in an attempt to avoid some particular consequence. The Commissions decline to modify the definition of "owner."

The commenter suggested that the Commissions define "physically attach" or "physically attached" to clarify what the term means. Commissions did not include a definition of "physically attach" in its proposed interpretations, but have decided that a definition would avoid confusion. Section 152.1(6) defines "physically attach."

Section 152.1(7) defines "repair or renovate" and clarifies that only existing improvements can be repaired or renovated. Section 152.1(7) describes the kind of "work and material" that are considered repairs and renovations and provides examples.

Section 152.1(7)(A) provides that replacing material with the same or similar material on existing improvements is a repair or renovation. "Repair or renovation," as defined in §152.1(7)(B), includes attaching material to existing improvements where the same or similar material were not attached to the existing improvements when the repair or renovation began. Section 152.1(7)(C) makes it clear that the work performed does not have to physically attach material to the homestead to be considered a repair or renovation. Section 152.1(7)(C) additionally includes in the definition of "repair or renovate" work and material used where material are actually removed from the homestead, but not thereafter replaced by material of any kind.

The definition of "title company" in §152.1(8) is consistent with the definition given by the court in Rooms with a View, Inc. v. Private National Mortgage Association, Inc. , 7 S.W.3d 840 (Tex. App. - Austin 1999), which includes an agent of a title insurance company. This definition, along with the Rooms with a View decision should remove the uncertainty that precipitated the Rooms with a View case.

Section 152.3 explains that the only requirement in Section 50(a)(5) for establishing a lien on a homestead for a debt incurred for "work and material used in constructing of new improvements" is that the "work and material used in constructing new improvements" be "contracted for in writing." In Texas, there may be both a constitutional and a statutory lien. The requirements to establish a statutory lien are in Property Code §53.001 et seq. ; however, this interpretation does not address the Property Code requirements. As stated above, this interpretation is supported by the Texas Supreme Court in its decision in Spradlin , 34 S.W.3d at 580.

The commenter recommended that the phrase "Except as provided in §152.5(c) of this chapter" be deleted from §152.3(a) because the commenter believes that §152.5(c) is contrary to the decision in Spradlin and should be deleted. Section 152.5(c) provides that a single contract pertaining to constructing new improvements and repairing or renovating existing improvements must comply with Section 50(a)(5)(A) - (D) to establish a lien on the homestead. The commenter contended that Spradlin holds "that a plain language reading of Texas Constitution Article XVI, Section 50(a)(5) dictates that the protections in its subparts (A) - (D) apply only to 'work and material used to repair or renovate existing improvements' on homestead property and not to 'work and material used in constructing new improvements'."

The fact that a contract contains both (1) work and material used to construct new improvements and (2) work and material to repair or renovate existing improvements does not change the fact that the contract requires work and material used to repair or renovate existing improvements and is subject to Section 50(a)(5)(A) - (D). Spradlin made a distinction between contracts for work and material used to construct new improvements and contracts for work and material used to repair or renovate existing improvements, but it did not address contracts containing both. The Commissions are confident that this interpretation, as proposed, is consistent with the Spradlin decision because the contract is in part for work and material used to repair and renovate existing improvements. The Commissions decline to modify Section 152.3(a) and §152.5(c).

Section 152.3(b) provides that a homestead is not protected from forced sale by Section 50 once a lien is established for debt incurred for work and material used in constructing new improvements. The commenter pointed out that the phrase "constitutional lien" used in proposed §152.3(b) was a misstatement because a lien is the right under which a forced sale is conducted and cannot, itself, be subject to a forced sale. The Commissions agree with the commenter and have modified §152.3(b) to reflect that it is the homestead, rather than the constitutional lien, that is not protected from forced sale.

Section 152.5(a) explains that Section 50(a)(5)(A) - (D) apply only to work and material used to repair or renovate existing improvements. This interpretation is also supported by the Texas Supreme Court in Spradlin .

Section 152.5(b) provides that to establish a lien for a debt incurred for work and material used to repair and renovate existing improvements, there must be compliance with Section 50(a)(5)(A) - (D).

The Commissions recognize that parties may reach an agreement to construct new improvements and repair or renovate existing improvements in the same contract. The Commissions, in §152.5(c), provide that a single contract pertaining to both must comply with Section 50(a)(5)(A) - (D) to establish a lien on the homestead.

Section 152.7 interprets the consent requirement in Section 50(a)(5)(A) as meaning the joinder requirement in Texas Property Code, §5.001 (Section 5.001). In the case of a family homestead, Section 50(a)(5)(A) requires the "consent of both spouses" to the contract for work and material, "given in the same manner as is required in making a sale and conveyance of the homestead." The Commissions could not find a "consent" requirement with respect to the sale and conveyance of a homestead; however, Section 5.001, provides that: "Whether the homestead is the separate property of either spouse or community property, neither spouse may sell, convey, or encumber the homestead without the joinder of the other spouse except as provided in this chapter or by other rules of law." The Commissions believe that although Section 5.001 uses the term "joinder" rather than "consent," the joinder in Section 5.001 is what the drafters were most likely referring to when they required "consent of both spouses. . .in the same manner as is required in making a sale and conveyance of the homestead."

In keeping with Spradlin , §152.15(a) limits the requirements of Section 50(a)(5)(D) to repairs or renovations of existing improvements. The phrase "The owner and, if married, the owner's spouse" that was in proposed §152.15(a) has been modified to "The person granting or acknowledging the encumbrance of their homestead interest" to reflect that anyone granting or acknowledging the encumbrance must execute the contract at the places named in §152.15(a)(1) - (3). The Commissions modified §152.15(a) to avoid unintentionally requiring owners to sign the contract when they are not required to do so by the constitution.

The commenter pointed out that although the constitution limits the lender to a third party making the extension of credit for the work and material, proposed §152.15(a)(1) did not. The Commissions have modified §152.15(a)(1) to conform to the constitution.

The commenter recommended that, because of frequent complexities in home improvement lending, the attorney's office authorized by §152.15(a)(2) for execution of a home improvement contract should be limited to the office of an attorney licensed to practice in Texas. The commenter does not assert that this restriction is in the constitution and the Commissions do not find it in the constitution; thus, the Commissions refuse to make this modification.

Section 152.15(b) makes it clear that the requirements of Section 50(a)(5)(D) are not fulfilled by executing contracts at a mobile office of the lender, an attorney at law, or a title company, unless the mobile office is located at a permanent address of the lender, an attorney at law, or a title company.

Finally, the Commissions emphasize that the Code Construction Act (Texas Government Code, Chapter 311) applies to 7 TAC Chapter 152. For example, words used in the singular include the plural and the plural includes the singular, the heading of a title, subtitle, chapter, subchapter, or section does not limit or expand the meaning of an interpretation, and the use of the word "include" means "including but not limited to." A reference in 7 TAC Chapter 152 to "Section 50" refers to the Texas Constitution, Article XVI, §50, unless otherwise noted.

The new sections are adopted pursuant to Texas Finance Code, §11.308 and §15.413 (as added by Acts 2003, 78th Legislature, Chapter 1207, §2), which separately and independently authorize each Commission to issue interpretations of the Texas Constitution, Article XVI, §50(a)(5) - (7), (e) - (p), (t), and (u), subject to Texas Government Code, Chapter 2001.

The Texas Constitution, Article XVI, §50(a)(5) is affected by the adopted new sections.

§152.1.Definitions.

Any reference to Section 50 in this interpretation refers to Article XVI, Texas Constitution, Section 50. Words and terms have these meanings when used in this chapter, unless the context indicates otherwise:

(1) Contract--A contract for work and material, that complies with the Texas Constitution and the Texas Property Code, used to:

(A) construct new improvements;

(B) repair or renovate existing improvements; or

(2) Existing improvements--A pre-existing addition to a homestead that is physically attached to the homestead.

(3) New improvements--An addition physically attached to a homestead:

(A) that does not exist on the homestead prior to the commencement of the use of work and material to physically attach the new improvements to the homestead under Section 50(a)(5); and

(B) the construction of which will not involve:

(i) work on existing improvements

(ii) the use of material on existing improvements; or

(iii) physically attaching material to existing improvements.

(4) Material--Material used in constructing new improvements or repairing or renovating existing improvements. Material alone is not improvements. Material used to construct new improvements becomes a part of the new improvements once physically attached to the new improvements. Likewise, material used to repair or renovate existing improvements becomes a part of the existing improvements once physically attached to the existing improvements.

(5) Owner--A person who has the right to possess, use, and convey, individually or with the joinder of another person, all or part of the homestead.

(6) Physically attach--To permanently attach, affix, add to, or fasten onto.

(7) Repair or Renovate--Work and material used to:

(A) replace material physically attached to existing improvements whether or not the new material is similar to or the same as the material being replaced (examples include replacing flooring, roofing, built-in appliances, siding, windows, or other material that is attached to existing improvements);

(B) physically attach material to existing improvements where there is no previously attached material being replaced that is the same as or similar to the material being attached (examples include attaching to existing improvements a new room, a built-in cabinet, or a second story); and

(C) mend, remedy or upgrade all or a portion of existing improvements without adding or replacing material to the existing improvements (examples include restoring wood flooring or woodwork of an existing improvement where the work does not include physically attaching material to the existing improvements, and removing flooring to expose flooring underneath).

(8) Title company--A title insurance company or an agent of a title insurance company.

§152.3.Requirements for Construction of New Improvements: Section 50(a)(5).

(a) Except as provided in §152.5(c) of this chapter, Section 50(a)(5)(A) - (D) does not apply to the construction of new improvements on a homestead.

(b) A valid lien, under Section 50(a)(5), may be created on a homestead if the debt for the work and material used for new improvements is contracted for in writing. Once the lien is created, the homestead is not protected by Section 50 from forced sale for the payment of the debt.

§152.5.Requirements for Work and Material Used to Repair or Renovate: Section 50(a)(5)(A) - (D).

(a) Section 50(a)(5)(A) - (D) applies only to contracts and applications for work and material used to repair or renovate existing improvements.

(b) If debt is incurred for work and material used to repair or renovate existing improvements and the requirements of Section 50(a)(5)(A) - (D) have been met, a lien is established on the homestead of a family, or of a single adult person, and it is not protected by Section 50 from forced sale for the payment of the debt.

(c) If the application and contract are for both work and material used to repair or renovate existing improvements and for work and material used in constructing new improvements, the entire transaction is considered a contract to repair and renovate existing improvements and compliance with the constitutional requirements of Section 50(a)(5)(A) - (D) is required to establish a lien on the homestead.

§152.7.Consent of Spouses in the Case of Family Homestead: Section 50(a)(5)(A).

(a) In the case of a family homestead, both spouses must consent in writing to the contract for repair or renovation of existing improvements, regardless of whether the spouse has a community property interest or other ownership interest in the homestead.

(b) In addition to the consent of both spouses of a family homestead, the lender or contractor, at its option, may also require all other owners and their spouses to consent to the contract.

§152.15.Place for Execution of Contract for Work and Material: Section 50(a)(5)(D).

(a) The persons granting or acknowledging the encumberance of their homestead interest must execute the contract for work and material used to repair or renovate existing improvements at the permanent physical address of:

(1) the office or branch office of a third-party lender making an extension of credit for the work and material;

(2) an attorney at law; or

(3) a title company.

(b) Execution of the contract may not occur at a mobile office located at:

(1) the homestead; or

(2) any other place not permitted by subsection (a) of this section.

This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on June 17, 2005.

TRD-200502512

Leslie L. Pettijohn

Commissioner

Joint Financial Regulatory Agencies

Effective date: July 7, 2005

Proposal publication date: February 25, 2005

For further information, please call: (512) 936-7640