7 TAC §§153.1 - 153.5, 153.7 - 153.18, 153.20, 153.22, 153.24, 153.25, 153.41, 153.51
The Finance Commission of Texas and Texas Credit Union Commission
(the "Commissions") adopt new 7 TAC, Chapter 153, §§153.1-153.5,
153.7-153.18, 153.20, 153.22, 153.24-25, 153.41, and 153.51 applying the administrative
interpretation of subsection (a), Section 50, Article XVI, Texas Constitution,
(the "Home Equity Lending Law") allowed by Senate Joint Resolution 42 ("SJR
42"). The rules are adopted with non-substantive changes to the proposal as
published in the November 7, 2003, issue of the
Texas Register
(28 TexReg 9646).
The Commissions have made, as the result of comments and on their own volition,
non-substantive changes to correct typographical errors, clarify, and simplify
the addressed provisions.
At the public hearing three commenters testified: Karen Neeley of the Independent
Bankers Association of Texas, Jay Beitel, who in his comments stated that
he was representing mortgage lenders, and Robert Doggett, who in his comments
said that he was representing borrowers. One commenter opined that the three
percent fee cap is hardly a cap with all the exceptions. The commenter further
said that discount points should be included in the three percent fee limitation
defined in Section 153.5. The Commissions, however, adopted their interpretation
as proposed because the constitution limits the fees to be included in the
three percent fee limitation to those fees that are 'in addition to any interest.'
Moreover, Texas case law supports this interpretation. That same commenter
also expressed concern over the removal of the Section 153.13 requirement
that the annual percentage rate (APR) be disclosed in the preclosing disclosure.
The commenter stated that he believed that this was a substantive change from
the rule that was proposed and is the one thing in the preclosing disclosure
that borrowers need. The Commissions are deferring their decision on whether
the constitutional language requiring disclosure of "interest," also requires
a disclosure of the "APR." One commenter inquired as to whether Section 50(a)(8)
was purposefully omitted from inclusion in Section 153.41. The Commissions
answered that Section 50(a)(8) was purposefully omitted because they were
granted authority to interpret only Sections 50(a)(5)-(7), (e)-(p), and (t)
of the Constitution. One commenter requested that the language in Section
153.13(6) be changed to reflect that an equity loan can be closed at any time
following one business day after the date that the owner of the homestead
receives the preclosing disclosure. Accordingly, language "and any calendar
day thereafter" has been added to last sentence of Section 153.13(6) and the
word "calendar" has been inserted before the reference to "day" so that it
is clear that it does not have to be a "business day." The Commissions agree
with this proposed clarification and approve this amendment to Section 153.13(6).
The Commissions have received written comments from Mark Morris of JPMorgan
Chase and Company; J Alton Alsup of Brown, Fowler and Alsup; Sam Kelley; David
Dulock of Black, Mann, & Graham; Lorena Rush of Wells Fargo; Everett Ives
for the Texas Association of Mortgage Brokers; Everett Anshutz for Texas Association
of Mortgage Bankers; Larry Young of Hughes, Watters and Askanase, LLP; Michael
Broker of USAA; Ron Brandt of Southwest Bank of Texas; David Ives of Union
Planters Corporation; David Hertzel of Accredited Home Lenders, Inc.; Lawrence
E. Platt of Kirkpatrick and Lockhart LLP; Edward P. Queenan of JPMorgan Chase
Bank; Anne Sutherland of Centex Home Equity Company; Anne C. Canfield of Consumer
Mortgage Coalition; Deborah Goodell Polan for Texas Financial Services Association;
Laura L. Rogers of Bank of America; Suzanne Yashewski for Texas Credit Union
League; Donna L. Radzik of Household; Susan Kelsey of Countrywide Home Loans
Incorporated; and J. Scott Sheehan of McGlinchey Stafford PLLC. Karen Neeley
of Independent Bankers Association of Texas, Eric Sandberg of Texas Savings
and Community Bankers Association, John Heasley for Texas Bankers Association,
and Larry Temple for Texas Mortgage Bankers Association issued a joint letter
of comments.
Section 50, Article XVI, Texas Constitution ("Section 50"), sets out the
only permissible encumbrances on a homestead. Prior to 1998, Section 50 permitted
liens on homestead property for the purposes of purchase money, taxes, an
owelty of partition, the refinance of a lien, including tax liens, and home
improvements. The 75th Legislature, 1997, passed House Joint Resolution 31
("HJR 31"), which was adopted by the voters on November 4, 1997. Effective
January 1, 1998, HJR 31 created two additional categories of authorized liens:
a loan secured by the equity an owner has in a homestead and a reverse mortgage
on a homestead. House Joint Resolution 31 also modified the existing provisions
regarding liens on a homestead for home improvement purposes.
Section 50 addresses only the elements necessary to create a valid lien
on a homestead. Other statutes and constitutional provisions govern the legality
of credit transactions and specifically loans and must be applied in harmony
with Section 50.
After HJR 31 amended the Texas Constitution to allow homeowners to access
the equity in their homestead through a loan, four administrative agencies
joined in signing the October 8, 1998, Regulatory Commentary on Home Equity
Lending (the "Commentary"). The four agencies were: Office of Consumer Credit
Commissioner, Texas Department of Banking, Texas Savings & Loan Department
and the Texas Credit Union Department. Multiple Texas courts have recognized
the Commentary and have used the same reasoning as the Commentary in deciding
the cases before of them. No court that has ruled on an issue addressed in
the Home Equity Lending Law has ruled contrary to the Commentary.
The Texas Legislature has met three times since the agencies published
the Commentary. During the most recent session, the legislature amended Section
50. The legislature was aware of the Commentary on Section 50(a)(6) when the
legislature enacted SJR 42 and Senate Bill 1067 ("SB 1067") enabling the Commissions
to interpret Article XVI, Section 50(a)(5)-(7), (e)-(p), and (t). When the
legislature amended Section 50, it had the opportunity to revise any number
of subsections to show a contrary position to the one taken in the Commentary,
but the legislature chose not to do so.
During the 78th Legislature, 2003, Regular Session, the legislature passed
SJR 42, which when adopted by the voters on September 13, 2003, amended the
constitution effective September 29, 2003. Senate Joint Resolution 42 allowed
the legislature to designate one or more state agencies to provide interpretations
of certain provisions of the Texas constitution. The Texas legislature passed
SB 1067 which amended Chapters 11 and 15 of the Texas Finance Code to empower
the Commissions to interpret Sections 50(a)(5)-(7), (e)-(p), and (t) on the
request of an interested person or on their own motion. The Commissions have
decided to work together in order to achieve the interpretive consistency
required by SB 1067. The Commissions provide this interpretation under Section
11.308, and Section 15.413 of the Texas Finance Code, (as added by Chapter
1207 Acts of the 78th Legislature, Regular Session, 2003).
The constitutional provisions do not detail every aspect of home equity
lending. For example, the provisions use terms that are not defined, even
though definitions are necessary for the provisions to have clear meaning
and consistent application. Additionally, the constitutional provisions are
silent as to the effect of other laws on home equity lending. These interpretations
are intended to not only construe the actual language of the provisions, but
also to provide a practical framework for home equity lending that reflects
the constitutional language and the intent of the legislature and the voters.
For the most part, Chapter 153 is derived, from the Commentary except to
the extent that the Commissions consider it necessary to expound on or clarify
the Commentary. New issues created by SJR 42 are also addressed in Chapter
153. Each section of Chapter 153 corresponds with a discrete and identified
provision of the Texas constitution.
The Commissions have applied Chapter 311, Government Code (Code Construction
Act) in the use of language in Chapter 153. For example, in Chapter 153, 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."
The initial interpretations in Chapter 153 will not preclude future consideration
by the Commissions of additional issues that may or may not be addressed at
this time. Several interested parties have raised issues concerning specific
provisions of the constitution. If an issue is not addressed at this time,
it may be addressed in the future on the request of an interested party or
on the motion of the Commissions.
One commenter expressed support for this joint proposal, stating "(b)y
adopting the proposed rules, the safe harbor interpretations will ultimately
enhance consumer choice by encouraging more lenders to enter the home equity
lending market. The adoption of the proposed rules will also reduce the costly
litigation over ambiguous areas of the Texas Constitution."
Section 153.1 defines the terms and phrases used in the 7 TAC Chapter 153.
The phrase "(a)ny reference to Section 50 in this chapter refers to Article
XVI, Section 50, Texas Constitution" has been moved from the preamble to Section
153.1. The Commissions believe that this reference gives clarity and context
to the interpretation, and can be more easily accessed by interested parties.
One commenter requested a modification of the definition of "balloon payments"
to "a single scheduled installment payment that is required to pay in full
an outstanding obligation, which payment is more than an amount equal to twice
the average of all installments scheduled before that installment." The Commissions
believe that the definition of balloon payments should prohibit any payment
that is more than twice the average of all scheduled installment payments
and not just those that are required to pay in full the outstanding obligation.
The Commissions decline to make this modification.
One commenter expressed concern that federal holidays which may be added
in the future would not be considered under the definition of "business day."
The commenter suggested that the definition be expanded to include any new
federal holiday in the list of federal holidays that are excluded from the
definition of "business day." In the rare event that Congress creates a new
federal holiday, the Commissions will consider amending the definition of
"business day" as applicable. The Commissions decline to amend the rule as
suggested.
One commenter requested that the definition of "closed or closing" be modified.
The commenter stated that the requirement that each owner and each owner's
spouse sign the "equity loan agreement" could be interpreted to require the
signature of all owners and owners' spouses on the promissory note. The commenter
stated that this would be inappropriate in a number of circumstances. The
commenter suggested that the definition read: "the date when each owner and
the spouse of each owner signs those respective documents which are required
to sign in connection with evidencing an equity loan." The Commissions believe
that section 153.2(2) makes it clear that all owners and owners' spouses are
not always required to sign all documents at closing. The Commissions decline
to make this modification.
The Commissions have corrected the typographical inconsistency and have
changed the phrase "Cross-default provisions" to "Cross-default provision"
in Subsection 153.1(5).
One commenter requested further clarification in the definition of "equity
loan." The commenter stated that "the definition does not provide needed guidance
with regard to the specific features that bring the extension of credit within
the purview of Section 50(a)(6)." The definition of "equity loan" is intended
to inform the reader that when the phrase is used it is in reference to a
Section 50(a)(6) loan. The Commissions believe that the interpretation of
each component of a Section 50(a)(6) equity loan is clarified in the corresponding
interpretation section.
One commenter suggested that the definition of "equity loan" be amended
to exclude home equity lines of credit under Section 50(t). The term "equity
loan" in Chapter 153 includes home equity lines of credit, unless specifically
excluded. The Commissions believe that this definition is appropriate as proposed
and declines to amend.
The Commissions have amended the interpretation to define of "Fair Market
Value" as "the term 'fair market value' is the fair market value of the homestead
as determined on the date the loan is closed." The Commissions believe that
this definition is necessary to further aid in clarification and understanding
of the interpretations. The definition will eliminate unnecessary repetition
of the phrase "fair market value of the homestead on the date the loan is
closed" within the chapter.
One commenter expressed doubt that a single owner could convey a homestead
without joinder of the other owners. The Texas Family Code provides that a
spouse may not "sell, convey, or encumber (a) homestead without the joinder
of the other spouse." Texas courts have determined that any conveyance under
these circumstances would be inoperable while the property continues to be
a homestead. The commenter suggests that the additional phrase "or in conjunction
with the other owner convey the property" be added to the end of the definition.
The Commissions have considered this request and have modified Section 153.1(13)
to incorporate this comment.
One commenter suggested that the definition of "owner" be limited to owners
with record title and should not include a nontitled spouse of the owner.
Under Texas law a person does not have to record title to be a valid owner
and a nontitled spouse may acquire ownership rights under community property
principles. The Commissions decline to amend the definition.
One commenter suggested that the definition of "owner" include the trustee
of a revocable trust. The Commissions understand that there are many different
kinds of ownership structures in the transfer of homestead interests. The
Commissions' definition of "owner" does not necessarily exclude nontraditional
forms of homestead interest. The suggested modification could result in a
definition that is either too broad or too restrictive thereby prohibiting
equity loans for other types of homestead interests. The Commissions therefore
decline to amend the definition.
Section 153.2 interprets Section 50(a)(6)(A), clarifying that the lien
must be voluntary and with the written consent of each owner and owner's spouse.
One commenter requested that the phrase "security instrument" in subsection
153.2(2) be substituted for the phrase "mortgage instrument." The Commissions
believe that the phrase "mortgage instrument" appropriately describes the
intended instruments and decline to modify this section.
The Commissions changed the language in Section 153.2(2) from "(a)n owner
or an owner's spouse who is not a maker of the note may consent to the lien
by executing written consent to the mortgage instrument," to "(a)n owner or
an owner's spouse who is not a maker of the note may consent to the lien by
signing a written consent to the mortgage instrument." The Commissions believe
that the use of the plain word "signing" is more easily understood than the
word "executing."
One commenter expressed concern over the requirement in Section 153.2 that
each owner and each owner's spouse agree to the lien, but the corresponding
notice provision in Section 50(g) requires that each owner and each owner's
spouse must agree to the loan. The commenter requested that the interpretation
include an acknowledgment of the effect, if any, of these sections upon each
other. The Commissions considered this recommendation. The language in the
two sections of the Constitution is inconsistent. However, the Texas Supreme
Court has opined that "(S)ection 50(g)'s notice provisions do not independently
establish rights or obligations for the extension of credit." Although the
Commissions do not believe that constitution Section 50(g) creates a new obligation
beyond what is required in Section 153.2, the Commissions have added a subsection
to Section 153.3 which states, "The lender, at its option, may require each
owner and each owner's spouse to consent to the equity loan. This option is
in addition to the consent required for the lien." The Commissions believe
that this addition will resolve any confusion over the discrepancies between
these sections of the constitution.
One commenter suggested that the consent to the lien must be included in
the mortgage instrument and that the reference to a separate document be deleted.
While it may be a prudent business practice to require consent to the deed
of trust, under Texas law it is legal to obtain the consent in another manner.
The interpretation as proposed provides the greatest flexibility. If the consent
is obtained in a separate document, that document should reasonably inform
consenting parties of it affects on their right and responsibilities. The
Commissions decline to modify the interpretation.
Section 153.3 interprets Section 50(a)(6)(B), limiting the principal amount
of the loan to eighty percent of the market value of the homestead.
The Commissions have rephrased the example in Section 153.2 for greater
clarity. The example was changed from "(f)or example, on a property with a
fair market value of $100,000 and existing debt on the property of $30,000,
the maximum amount of debt against the property could be $80,000. Subtracting
the outstanding debt of $30,000, the maximum amount of the equity loan debt
would be $50,000 on the date the loan is made," to "(f)or example, on a property
with a fair market value of $100,000, the maximum amount of debt against the
property permitted by Section 50(a)(6)(B) is $80,000. Assuming existing outstanding
debt of $30,000, the maximum amount of the equity loan debt is $50,000."
The wording in Section 153.3(1) was changed from "(t)he limitation on the
amount of an equity loan in Section 50(a)(6)(B)," to "(t)he principal amount
of an equity loan," The Commissions believe that this new language more accurately
reflects the intent in the constitution. The amount of the cash advance and
the charges at the inception of the equity loan financed in the principal
amount of the loan in Section 153.3(1)(A) and (B), equal the principal amount
of the equity loan, but may not be the maximum limit of that loan.
For clarity, the first sentence of Section 153.3(2) has been changed from
"(t)he maximum principal amount of an equity loan is based upon the principal
balance outstanding on the date the extension of credit is made," to "(t)he
principal balance of all outstanding debt secured by the homestead on the
date the extension of credit is made determines the maximum principal amount
of an equity loan."
The remainder of Section 153.3(2) has been assigned to new Section 153.3(3).
To better clarify components that are not included in an equity loan, the
language has been changed from "the maximum principal amount," to "the principal
amount of an equity loan."
Section 153.3(3) has been reassigned as Section 153.3(4). The statement
"closed-end multiple advance loan" has been changed to "closed-end multiple
advance equity loan," for clarification.
Section 153.4 interprets Section 50(a)(6)(C), dealing with the requirements
that the loan must be without recourse for personal liability against the
owner or owner's spouse unless the extension of credit was obtained by actual
fraud. This section also explains the difference between "actual fraud" and
"constructive fraud."
One commenter requested clarification of the reference to the term "cosigners"
stating that "the use of the term 'cosign' usually indicates a type of guarantee
by the cosigner, and would be prohibited under the Constitution as additional
collateral." The Commissions believe that the use of the term "cosigns" in
Subsection 153.4(1) is appropriate and clear, and decline to make this modification.
Section 153.4(2) has been changed from "A lender is prohibited from pursuing
a deficiency except when the borrower or owner has committed actual fraud,"
to "A lender is prohibited from pursuing a deficiency except when the owner
or owner's spouse has committed actual fraud in obtaining the equity loan,"
to more closely track the language in the constitution.
Section 153.5 interprets Section 50(a)(6)(E), dealing with the three percent
origination fee limitation and delineating which amounts are fees included
in the three percent fee limitation, and which are not.
Two commenters expressed support for the three percent fee limitation interpretation.
The commenters recognized that Texas case law has consistently interpreted
points to be interest, not fees. One commenter expressed that the Commentary
has been relied on by "industry and practitioners," has been a "useful guide
for the courts," and has been "ratified as a practical matter by three sessions
of the Texas legislature." The commenters opined that discount points should
not be subject to the 3% fee limit.
One commenter expressed concern over the effect of the itemization of fees
in the HUD-1 on the three percent fee limitation. To the extent the commenter
is requesting that the Commissions specify which itemized fee on the HUD-1
are included and which fees are excluded, the Commissions believe that the
interpretation gives clarity to the fees included and excluded from the three
percent fee limitation. The Commissions believe that specific delineations
for each named fee could result in the inclusion or exclusion of appropriate
fees from the three percent fee limitation.
One commenter expressed concern that the interpretation does not specifically
enumerate the charges that constitute interest for the purposes of the three
percent limitation. One commenter, who expressed support for the interpretation
and analysis in Section 153.5 excluding interest from the 3 percent fee limitation,
pointed out that "(t)he constitution itself limits those fees that are 'in
addition to any interest'." The commenter recognized that "Texas case law
is replete with illustrations of the proposition in Texas that the name of
a particular fee or charge is irrelevant. The true inquiry must be whether
or not the item constitutes interest. If it is in fact interest, the name
is of no consequence." The Commissions therefore decline to modify this section
of the interpretation.
Three commenters suggested that the section addressing interest be modified
to define "discount points" and specify that discount points and origination
fees paid to the lender are excluded from the 3% limitation. The section as
proposed specifies that costs that constitute interest under Texas law are
not included under the 3 percent limitation. The Commissions believe that
the section as proposed is appropriate as it relies on existing statutory
and case law in arriving at the interpretation. The Commissions may consider
enumerating the components of interest as determined by these authorities
in a future interpretation.
One commenter also suggested that the phrase "or an owner's spouse" be
deleted in subsection (3). While the Commissions understand the import of
the statutory definition of "obligor" and that only an obligor pays interest
from the isolated reading of the statute (Texas Finance Code Section 301.002(13)),
the phrase "or an owner's spouse" comes directly from the constitutional provision
stating that an equity loan "does not require an owner or an owner's spouse
to pay, in addition to any interest, fees to any person that are necessary
to originate, evaluate, maintain, record, insure, or service the extension
of credit that exceed in the aggregate, three percent of the original principal
amount of the extension of credit." The Commissions believe that the phrase
"or an owner's spouse" must be maintained in the proposed interpretation to
be consistent with the provisions of the constitution.
To the extent one commenter expressed concern over the categorization of
lender credit and the effect such a credit would have on the three percent
fee limitation, the Commissions believe that this situation is addressed in
Section 153.5(5) and the additional language it added in Section 153.5(7).
In subsection (5), one commenter suggested the language be expanded to
also include charges absorbed or paid by a third party other than the borrower
or the borrower's spouse. The Commissions agree that certain interested third
parties may absorb costs that would not be restricted to the three percent
limitation. The Commissions have accordingly modified Subsection (7) to recognize
this. Accordingly, Subsection (7) now includes the language "Charges those
third parties absorb, and do not charge an owner or an owner's spouse that
the owner or owner's spouse might otherwise be required to pay are unrestricted
and not fees subject to the three percent limitation."
Most of the comments we received expressed concern over the requirement
that fees "contracted for" at the time of the closing of the equity loan are
to be included in the three percent fee limitation in Section 153.5(9) and
(12). Some commenters stated that the use of the phrase "contracted for" was
contrary to the language used in the Commentary, and that this change would
affect practice and case-law in effect since the inception of the Commentary.
The commenters stated that this requirement will cause the lender to "calculate
or guess at such fees over the life of the loan. or else exclude them from
the contract all together." One commenter explained "it matters not that the
lender does not actually charge them later in the life of the contract when
the 3% fee cap might be exceeded. They would still count against the 3% fee
cap if they are in the contract at all." The commenters explained that the
amount of charges contracted for at the time of the closing could never be
certain and could subject lenders to abuse because consumers could "frequently
request items for which there would otherwise be a charge if the charge was
provided for in the contract." A commenter stated that lender could exceed
the three percent fee limitation twenty years after the loan and that the
value of money is likely to change over the life of the loan. Another commenter
stated that "a 0.25% annual servicing fee that, if the loan paid off within
the normal term, would not cause the fees on the loan to exceed 3% of the
balance at origination, but, if the loan paid off over a longer period of
time. . . would cause the fees on the loan to exceed the 3% cap." The Commissions
have carefully considered this issue and have deleted the phrase "contracted
for" in subsections (9) and (12). The examples in subsection (9) were also
deleted and a sentence was added to both subsections (9) and (12) (the second
sentence of each subsection) thereby clarifying and retaining the original
intent of the phrase "contracted for." One commenter suggested this additional
sentence.
In subsection (13), one commenter suggested a clarification by adding the
phrase "made under Chapter 342 of the Texas Finance Code." While the Commissions
do not believe that the phrase is necessary because the whole subsection relates
to secondary mortgage loans made under Chapter 342, the Commissions agree
to add the phrase in the interest of clarity.
Section 153.7 interprets Section 50(a)(6)(G), explaining that a lender
may not charge a prepayment penalty or include a lock out provision in the
contract.
Section 153.8 interprets Section 50(a)(6)(H) explaining the requirement
that an equity loan not be secured by additional real or personal property.
This section states that escrow reserves are not considered additional real
or personal property.
One commenter expressed support for the interpretation and description
of items which are included as part of the homestead in Section 153.8. The
commenter explained that "(b)ecause these are either appurtenant to the homestead
or a substitution for the homestead, they are in fact homestead property and
not additional collateral." The commenter requested that fixtures also be
included in the list. The Commissions have considered this request and agree
to include fixtures in the items not considered to be additional property
in Subsection (1)(E).
Two commenters requested a modification to expand the description of items
which are included as part of the homestead in Section 153.8 by including
easements as additional items that would not be considered as additional property.
The commenter also requested that the interpretation specify that the easement
acreage be excluded from the homestead acreage calculation. The Commissions
agree to modify the interpretation to include easements necessary or beneficial
to the use of the homestead, such as access easements in Subsection (1)(F);
however, the Commissions decline to offer an interpretation concerning whether
any easement is included to determine the homestead acreage limitations under
Section 51, Article XVI, Texas Constitution.
One commenter expressed concern over a perceived inconsistency between
the prohibition of the right to offset against escrow funds in Section 153.5
and the lenders right to acquire an interest in escrow reserves in Section
153.8. The commenter asked "(Can a bank) take a security interest in the escrow
account, but can only enforce it as a part of a foreclosure of other judicial
proceeding? After default, can the account be frozen even if it cannot be
offset?" The prohibition against contracting for the offset of escrow reserves
in Section 153.5 is consistent with this statement in §153.8. A lender
is precluded from contracting for the offset of escrow reserves because it
could create a personal liability, which is prohibited by the constitution.
However, a security interest in escrow reserves does not create the potential
for personal liability because a judicial foreclosure, without personal recourse,
is necessary to foreclose on the security.
Section 153.9 interprets Section 50(a)(6)(J), explaining the prohibition
on acceleration of the loan amount for diminution of the fair market value.
One commenter recommends amending section 153.9(2) to permit a cross-default
clause for a second lien home equity loan with a superior lien secured by
the homestead. The Commissions agree with the recommendation and have amended
the interpretation accordingly.
Section 153.10 interprets Section 50(a)(6)(K), limiting the number of equity
loans on a specific homestead at any one time.
The Commissions added the phrase "for purposes of Section 50(a)(6)(K)"
to Section 153.10(2), for clarification.
One commenter expressed support for the interpretation clarifying the number
of home equity loans in Section 153.10. The commenter stated "it is self-evident
that if a person or family acquires a new homestead, the property that was
formerly a homestead loses that character. If the property loses the homestead
character, then the lending transaction secured by that property is no longer
a home equity loan." Because the interpretation "does not attempt to explain
events that would cause a property to cease to be a homestead of the owners,
(the commenter) believe(s) that this does not create any significant interpretative
authority issue."
Section 153.11 interprets Section 50(a)(6)(L), dealing with the requirements
on the repayment schedule and amount of a home equity loan.
One commenter expressed concern over the constitutional requirement that
the first period installment be no later than two months from the date the
equity loan is made. The commenter requested that the interpretation "permit
the first installment to be scheduled the first day of the second month in
which the loan is funded to avoid short-pay situations when the loan closes
at the end of a month and, due to the rescission period, funding occurs the
next month." The commenter requested that the Commissions add the following
language to the interpretation "(f)or purposes of this section only, 'the
date the extension of credit is made' shall mean the date of the funding."
The Commissions believe that the constitution is clear in this requirement
that the equity loan is to be repaid "beginning no later than two months from
the date the extension of credit is made." Home equity lines of credit are
excluded from this interpretation because funding and repayment options under
home equity lines of credit are distinguishable from closed-end equity loans.
The Commissions decline to modify this section.
One commenter expressed concern over the requirement that all scheduled
payments must amortize the loan. The commenter believed that it should be
permissible to allow "interest only payments for a time period, then convert
to an amortization schedule." The Commissions believe that it is impossible
for a fixed rate equity loan that has interest only payments to comply with
the constitutional requirement in Section 50(a)(6)(L)(i) that the loan be
repaid "in substantially equal successive periodic installments."
Section 153.12 interprets Section 50(a)(6)(M)(i), dealing with the requirement
that a loan may not be closed before the 12th calendar day after the date
the owner submits an application or the date that the lender provides the
owner with a copy of the required disclosure, whichever is later.
Two commenters expressed concern over the restriction that, for purposes
of delivery of the twelve day notice by a broker, the broker must be an agent
of the lender. The Commissions believe that the broker must be an agent of
a lender to give the twelve day notice the effect intended in the Constitution.
This does not prohibit a lender from meeting the twelve day notice requirement
by sending the notice to the borrower by delivering it to the borrower's broker.
The phrase "and does not have to be in writing" has been removed from Section
153.12(2). The Commissions believe that by stating that the application can
be given orally or electronically, it is unnecessary to state that the application
does not have to be in writing.
Section 153.13 interprets Section 50(a)(6)(M)(ii), dealing with the requirement
of a preclosing disclosure. This section allows modifications to the preclosing
disclosure on the day of the closing in cases of a bona fide emergency or
other good cause, if the lender obtains the written consent of the owner.
This provision also protects an owner from situations where financial hardship
would occur if the closing were rescheduled. With the intent to protect the
owner, the Commissions have specified that de minimus variances between the
amounts on a preclosing disclosure and a modified disclosure on the day of
the closing are an example of good cause if the owner consents. This specification
protects the parties where the variance between the disclosures given is minute.
The good cause examples provided are not intended to be exclusive. The Commissions
have based the interpretation of the term "bona fide emergency" on the interpretation
of that phrase in 12 CR 226 (Regulation Z). The emergency must be significant
to qualify as a bona fide emergency.
Eight commenters requested that the Commissions eliminate the requirement
that documentation of the annual percentage rate (APR) be provided in order
to satisfy the preclosing disclosure requirement in Section 153.13(a)(1).
The commenters argued that the APR is not interest charged at the closing
and therefore, the constitution does not require this information to be in
the preclosing disclosure. Some commenters also expressed a practical concern
about difficulty they would experience if they were required to determine
the APR a day prior to closing. The Commissions have carefully considered
this issue and have determined to further study the implications of requiring
the APR disclosure. The requirement has been removed from the interpretation
pending further consideration of the subject.
One commenter suggested that the Commissions clarify Section 153.13(1).
The commenter requested "that it be made clear that lenders may use an alternative
to (the HUD-I and HUD-1A,) provided it contains the information required by
the Constitution." The Commissions believe that the interpretation is clear
on this issue. The interpretation states that the HUD-1 and HUD-1A "may" satisfy
the disclosure requirement. There is nothing in the interpretation that requires
either of these documents or prohibits that use of other documentation meeting
the constitutional requirements. The Commissions decline to make this modification.
Two commenters suggested that the constitution does not require each owner
to receive the preclosing disclosure in Section 153.13, and that this should
be specifically stated in the interpretation. The Commissions have considered
this suggestion and decline to make this change. The Commissions believe that
the language in the constitution is clear in stating that the preclosing disclosure
must be received by the owner, and not "each owner."
Three commenters requested a clarification of the term "fees and charges"
in Section 153.13, to specify that fees and charges in this section include
only amounts charged to the owner at the time of the closing, and not amounts
required to be paid by the lender outside of closing or to other creditors
for other purposes. The Commissions have considered this suggestion and decline
to add this definition. The Commissions believe that the interpretation gives
clarification and context to the term "fees and charges" as used in Section
153.13.
Two commenters requested the elimination of the APR tolerance as a component
of the
de minimus
variance test for good cause
in Section 153.13(a)(4). The commenters stated that this clause is not necessary
because Section 153.13 should not require the preclosing disclosure to contain
the APR information. Because the requirement that the APR be disclosed in
the preclosing disclosure has been deferred by the Commissions, the APR tolerance
has been removed from the de minimus variance test pending further consideration
of the issue.
Six commenters expressed concern that the term "one business day" is not
defined as used in Section 153.13. One commenter requested additional examples
of delivery to clarify the timing requirement. Some commenters maintained
that "one business day" should be interpreted to mean that the loan may be
closed on the first business day after the calendar day on which the preclosing
disclosure is received by the owner, as opposed to requiring that one full
business day or 24 hours to lapse between the day the preclosing disclosure
is given and the day of the closing. The Commissions considered this request
and agree that the term "one business day" should be clarified in the section.
Accordingly, Section 153.13(a)(6) has been added to the interpretation stating:
"An equity loan may be closed at any time during normal business hours on
the next business day following the calendar day on which the owner receives
the preclosing disclosure or any calendar day thererafter."
One commenter expressed concern over hardship which might be caused by
a delay in the closing by one day. The Commissions believe that the explanation
of one business day as the next business day following the receipt of the
preclosing disclosure minimizes any hardship that might be caused by the delay
of the closing due to an accounting variance.
Two commenters requested that the preclosing disclosure provision in Section
153.13(a)(4)(C) be amended to allow that the total sum of the fees and charges
be equal to or less than the initial preclosing disclosure. The Commissions
considered this request and have declined to make this change. The Commissions
determined that the preclosing disclosure is acceptable only if one or more
items included in the preclosing disclosure are less than reported in the
initial disclosure. A requirement that the sum total of all of the items in
the disclosure be less than or equal to the disclosed rate could result in
many preclosing disclosed items varying greatly from the initial disclosure,
yet when added together result in a sum less than that reported in the initial
disclosure. The preclosing disclosure is intended to give the borrower an
accurate representation of the fees and charges associated with the loan and
should not have substantial variations, both in amount and number.
One commenter requested that the de minimus tolerances in the interpretation
be adjusted to coincide with the tolerances in the Truth in Lending Act. The
Commissions believe that the tolerances in the interpretation have been established
at levels that are reasonable, attainable, and most beneficial to the parties
involved. The Commissions decline to make this modification.
One commenter expressed concern that the de minimus variance "can be good
cause," and requested that this language be changed to "is good cause," to
definitively state that a "de minimus variance is a safe circumstance." The
Commissions purposefully used the language "can be good cause" to allow a
borrower relief in the event of a miscalculation or error in the variance.
The Commissions decline to make this modification.
Three commenters requested that the interpretation in Section 153.13 expressly
allow for the electronic delivery of the preclosing disclosure by email or
facsimile if the owner gives written consent to the electronic delivery and
the receipt of the preclosing disclosure is acknowledged by all owners at
the closing. The Commissions considered this request and determined that it
is not necessary to delineate specific acceptable methods of delivery. The
Commissions believe that lenders should have flexibility in the methods of
delivering the preclosing disclosure. Accordingly, the Commissions have not
strictly proscribed the means of delivery. A lender is not prohibited from
sending the preclosing disclosure by electronic means and may require acknowledgment
of the receipt of the disclosure at the closing, if it desires to further
protect its interests.
Two commenters requested an allowance in Section 153.13 that per diem interest
charges disclosed in the preclosing disclosure could be considered accurate
if the per diem interest charges are correct at the time of the preclosing
disclosure, but become inaccurate when the closing is postponed to a later
date. The Commissions have declined to accept this suggestion. If a per diem
interest charge is correct at the time of the preclosing disclosure, but becomes
incorrect because the date of the closing changes, a new corrected preclosing
disclosure is necessary. The Commissions believe that this interpretation
more accurately reflects the intent in the constitution.
Section 153.14 interprets Section 50(a)(6)(M)(iii), clarifying that an
equity loan may not be closed or refinanced before the first anniversary of
another equity loan secured by the same owner of the same homestead property.
The Commissions added the phrase "except a refinance described by Section
50(a)(Q)(x)(f)" to Section 153.14 and subsection (1)(A). This constitutional
language was inadvertently omitted in the drafting of the proposed interpretation.
One commenter urges that section 153.14(1)(B) be deleted and substitute
language be adopted to permit a borrower to obtain a second equity loan on
the same homestead property within the one year limitation if the borrower
has paid off an existing equity loan. The Commissions believe that this suggestion
is contrary to the plain language of the constitution and decline to modify
the section.
Section 153.15 interprets Section 50(a)(6)(N), specifying the location
of the closing of an equity loan and prohibiting the closing at the place
of the homestead. This section specifies that an equity loan must be closed
at the office of the lender, attorney, or title company. This provision was
intended to prohibit the coercive closing of an equity loan at the home of
the owner. The requirement that the closing occur at the physical address
of the lender, attorney, or title company eliminates the possibility of the
closing occurring at the residence of the owner, and also eliminates confusion
on the part of the owner who wishes to rescind an equity loan.
One commenter expressed support for the interpretation clarifying the location
of the closing in Section 153.15, and appreciation that "the lender may accept
a properly executed power of attorney allowing an Attorney-in-Fact to execute
closing documents on behalf of the owner." The commenter pointed out that
"(t)his comports with other Texas law and provides much needed flexibility
for those situations in which one spouse may not be able to attend a closing
due to work, travel, or illness." Another commenter suggested that this section
be amended to restrict the closing locations to attorneys who are licensed
in Texas and to specify that closing locations for title companies be permitted
within or outside the state of Texas. The Commissions do not believe that
attorneys must be licensed in Texas to close equity loans. The Commissions
agree that closings may occur within or outside the state. The Commissions
do not believe that the interpretation requires modification and thus decline
to modify the section.
One commenter expressed a need for clarification of the location for delivery
of the consent in Section 153.15(3). The Commissions agree that Section 153.15(3)
requires clarification and modified the last sentence to make it clear that
the consent may be received at any physical location authorized for closing
of the loan.
One commenter expressed support for the ability of lenders to accept properly
executed powers of attorney. The commenter requested clarification as to whether
a power of attorney may be used for other documents when the owner may not
be available, such as the consumer disclosure and preclosing disclosure. The
Commissions believe that the interpretation is clear in allowing powers of
attorney to "execute closing documents on behalf of the owner," and decline
to modify this section.
Section 153.16 interprets Section 50(a)(6)(O), dealing with the rate of
interest a lender may contract for and receive under the statute. This section
requires that a home equity loan be repaid in substantially equal successive
periodic installments which equal or exceed the amount of accrued interest.
Because the law prohibits balloon payments, the corresponding provision of
the interpretation requires that payments amortize and pay down the principal.
One commenter expressed concern over the permissible rates of interest
in Section 153.16. The commenter acknowledged that any rate of interest authorized
under statute was permitted, but suggested that the National Bank Act provision
at 12 USC §85 be specifically included in the interpretation. The Commissions
believe that the interpretation allows for the application of the National
Bank Act provision at 12 USC §85. The interpretation provides: "(a)n
equity loan that provides for interest must comply with constitutional and
applicable law." The Commissions do not believe that it is necessary to list
each statute that could apply and the statutes which are listed are not exclusive.
One commenter suggested a modification to subsection (4) to permit installments
that are substantially equal between payment change dates. Another commenter
expressed concern over the requirement that all scheduled payments must amortize
the loan. That commenter believed that it should be permissible to allow "interest
only payments for a time period, then convert to an amortization schedule."
Inherent in this interpretation is the prohibition on balloon payments and
negative amortization. The Commissions believe that the payments must be substantially
equal between each interest rate adjustment and may not vary more frequently
than each installment. The Commissions decline to interpret the constitution
in this manner.
One commenter expressed concern over the requirement in Section 153.16(3)
that variable loans' rates of interest be based on an external index. The
commenter did not object to this interpretation, but stated that it is not
clear that the Commissions have the authority to specify this requirement.
The Commissions believe that they have authority under the constitution for
this interpretation and decline to modify.
Section 153.17 interprets Section 50(a)(6)(P), delineating the categories
of lenders authorized to make a home equity loan.
Section 153.18 interprets Section 50(a)(6)(Q)(i), explaining that a lender
may not restrict the use of the proceeds or require an owner to use the proceeds
in a certain way.
One commenter expressed support for the interpretation of the limitation
on application of proceeds in Section 153.18, in allowing the lender to require
that other debts be paid off with the proceeds of the equity loan, since the
lender may conclude that some debts need to be paid off in order for the borrower
to qualify for the equity loan.
Section 153.20 interprets Section 50(a)(6)(Q)(iii), dealing with the requirement
that the contract should not be signed if there are blanks left to be filled
in. Where there is a choice of options in a contract, some unselected options
may be left blank. The Commissions have interpreted this provision to mean
that no applicable or substantive contract terms should be left blank at the
time the owner signs the contract.
One commenter expressed support for the interpretation of Section 153.20
pertaining to the restriction on blank spaces in the loan agreement, pointing
out that "it would be silly to require each of those blanks that are not selected
to be filled in with a 'N/A' or some other indication to reflect that they
are not being left blank in violation of the Constitution." The commenter
also acknowledged that the interpretation comports with the long history found
in the Texas Credit Code since the late 1960's. Another commenter requested
an amendment to acknowledge that the omitted contract terms do not include
blank signature blocks that must be signed to execute the document. The Commissions
recognize that all signatures may not be obtained at the same time. The Commissions
believe that the phrase "omitted contract terms" is clear and that signature
blocks plainly must be executed and cannot be left blank for the execution
to be effective.
Section 153.22 interprets Section 50(a)(6)(Q)(v), dealing with the requirement
that a lender must provide the owner a copy of all documents that are signed
at the closing.
One commenter expressed support for the clarification in the interpretation
of the required copies of documents at closing in Section 153.22. The commenter
requested that the interpretation specify that copies of tax returns and other
similar documents which might be signed or authenticated at closing do not
have to be copied since they are underwriting documents, not equity loan documents.
The Commissions have considered this recommendation and have chosen to defer
this issue for future consideration.
Section 153.24 interprets Section 50(a)(6)(Q)(vii), requiring that a lender
cancel and return the note to the owner without charge and give the owner
a release of lien within a thirty days after the termination or full payment
of the loan.
Section 153.25 interprets Section 50(a)(6)(Q)(viii) dealing with the rights
of the owner and owner's spouse to rescind the loan agreement within three
days after the extension of credit is made.
Section 153.41 interprets Section 50(e), dealing with the prohibition on
refinancing of a debt with the advance of additional funds except in certain
circumstances.
The Commissions corrected the typographical error in the title of Section
153.41 changing the reference to "Section 50(f)" to the correct "Section 50(e)."
Two commenters requested clarification of reasonable costs, and enumeration
of the costs permissibly refinanced, including the permissibility of refinancing
closing costs, taxes and insurance escrow in Section 153.41. The Commissions
have considered this request and decline to enumerate these costs. The constitution
allows refinancing of "reasonable costs necessary to refinance the debt."
Whether a cost is reasonable and necessary to refinance a debt is a question
of fact. Closing costs, taxes and insurance escrow may be reasonable and necessary
fees which can be refinanced. The Commissions do not believe that the interpretation
should specifically delineate costs that are considered reasonable or necessary.
The interpretation allows for the inclusion of all reasonable costs allowed
by law and the interpretation adequately addresses this issue. Another commenter
expressed support for the interpretation concerning the refinancing of a debt
secured by a homestead in Section 153.41, stating that "(t)he new interpretation
is extremely helpful in clarifying Section 50(e). Certainly, in Texas first
lien mortgages sometimes have certain closing costs rolled into the refinancing.
So long as these are a part of that transaction and are reasonable, this should
not be treated as a home equity loan."
Section 153.51 interprets Section 50(g), dealing with the requirement that
a lender wait twelve days after providing the owner with the required disclosure
to close.
For purposes of clarity, the Commissions have changed the phrase "legal
holidays" to "federal legal public holidays."
One commenter suggested that the constitution does not require each owner
to receive the consumer disclosure in Section 153.51 and that this should
be specifically stated in the interpretation. The Commissions have considered
this suggestion and decline to make this change. The Commissions believe that
the language in the constitution is clear in stating that the consumer disclosure
must be received by the owner, and not "each owner."
One commenter requested that the interpretation contain a statement as
to whether the written acknowledgment of the fair market value of the homestead
required in Section 50(a)(6)(Q)(ix) must be sworn to by both the owner and
the lender. The Commissions do not believe that the constitution requires
the written acknowledgment of the fair market value of the homestead be sworn.
If this higher degree of acknowledgment were required, the Commissions believe
that the constitutional language would have used the phrase "sworn affidavit"
or similar language.
The interpretations are adopted under the provisions of Senate
Joint Resolution 42 and Senate Bill 1067, which authorize the Commissions
to adopt interpretations of Sections 50(a)(5)-(7), (e)-(p), and (t), Article
XVI, Texas Constitution.
The constitutional provisions addressed by the interpretations are Sections
50(a)(6), (e), and (g), Article XVI, Texas Constitution.
§153.1.Definitions.
Any reference to Section 50 in this interpretation refers to Article
XVI, Texas Constitution, unless otherwise noted. These words and terms have
the following meanings when used in this section, unless the context indicates
otherwise:
(1)
Balloon--an installment that is more than an amount equal
to twice the average of all installments scheduled before that installment.
(2)
Business Day--All calendar days except Sundays and these
federal legal public holidays: New Year's Day, the Birthday of Martin Luther
King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
(3)
Closed or closing--the date when each owner and the spouse
of each owner signs the equity loan agreement or the act of signing the equity
loan agreement by each owner and the spouse of each owner.
(4)
Consumer Disclosure--The written notice contained in Section
50(g) that must be provided to the owner at least 12 days before the date
the extension of credit is made.
(5)
Cross-default provision--a provision in a loan agreement
that puts the borrower in default if the borrower defaults on another obligation.
(6)
Date the extension of credit is made--the date on which
the closing of the equity loan occurs.
(7)
Equity loan--An extension of credit as defined and authorized
under the provisions of Section 50(a)(6).
(8)
Equity loan agreement--the documents evidencing the agreement
between the parties of an equity loan.
(9)
Fair Market Value--the fair market value of the homestead
as determined on the date that the loan is closed.
(10)
Force-placed insurance--insurance purchased by the lender
on the homestead when required insurance on the homestead is not maintained
in accordance with the equity loan agreement.
(11)
Interest--interest as defined in the Texas Finance Code §301.002(4)
and as interpreted by the courts.
(12)
Lockout provision--a provision in a loan agreement that
prohibits a borrower from paying the loan early.
(13)
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.
(14)
Preclosing Disclosure--The written itemized disclosure
required by Section 50(a)(6)(M)(ii).
(15)
Three percent limitation--the limitation on fees in Section
50(a)(6)(E).
§153.2.Voluntary Lien: Section 50(a)(6)(A).
An equity loan must be secured by a voluntary lien on the homestead
created under a written agreement with the consent of each owner and each
owner's spouse.
(1)
The consent of each owner and each owner's spouse must
be obtained, regardless of whether any owner's spouse has a community property
interest or other interest in the homestead.
(2)
An owner or an owner's spouse 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.
(3)
The lender, at its option, may require each owner and each
owner's spouse to consent to the equity loan. This option is in addition to
the consent required for the lien.
§153.3.Limitation on Equity Loan Amount: Section 50(a)(6)(B).
An equity loan must be of a principal amount that when added to the
aggregate total of the outstanding principal balances of all other indebtedness
secured by valid encumbrances of record against the homestead does not exceed
80 percent of the fair market value of the homestead on the date the extension
of credit is made. For example, on a property with a fair market value of
$100,000, the maximum amount of debt against the property permitted by Section
50(a)(6)(B) is $80,000. Assuming existing debt of $30,000, the maximum amount
of the equity loan debt is $50,000.
(1)
The principal amount of an equity loan is the sum of:
(A)
the amount of the cash advanced; and
(B)
the charges at the inception of an equity loan to the extent
these charges are financed in the principal amount of the loan.
(2)
The principal balance of all outstanding debt secured by
the homestead on the date the extension of credit is made determines the maximum
principal amount of an equity loan.
(3)
The principal amount of an equity loan does not include
interest accrued after the date the extension of credit is made (other than
any interest capitalized and added to the principal balance on the date the
extension of credit is made), or other amounts advanced by the lender after
closing as a result of default, including for example, ad valorem taxes, hazard
insurance premiums, and authorized collection costs, including reasonable
attorney's fees.
(4)
On a closed-end multiple advance equity loan, the principal
balance also includes contractually obligated future advances not yet disbursed.
§153.4.Nonrecourse: Section 50(a)(6)(C).
An equity loan must be without recourse for personal liability against
each owner and the spouse of each owner, unless the owner or spouse obtained
the extension of credit by actual fraud.
(1)
If an owner or the spouse of an owner cosigns an equity
loan agreement or consents to a security interest, the equity loan must not
give the lender personal liability against an owner or an owner's spouse.
(2)
A lender is prohibited from pursuing a deficiency except
when the owner or owner's spouse has committed actual fraud in obtaining an
equity loan.
(3)
To determine whether a lender may pursue personal liability,
the borrower or owner must have committed "actual fraud." To obtain personal
liability under this section, the deceptive conduct must constitute the legal
standard of "actual fraud." Texas case law distinguishes "actual fraud" from
"constructive fraud." "Actual fraud" encompasses dishonesty of purpose or
intentional breaches of duty that are designed to injure another or to gain
an undue and unconscientious advantage.
§153.5.Three percent fee limitation: Section 50(a)(6)(E).
An equity loan must not require the owner or the owner's spouse to
pay, in addition to any interest, fees to any person that are necessary to
originate, evaluate, maintain, record, insure, or service the extension of
credit that exceed, in the aggregate, three percent of the original principal
amount of the extension of credit.
(1)
Optional Charges. Charges paid by an owner or an owner's
spouse at their sole discretion are not fees subject to the three percent
fee limitation. Charges that are not imposed or required by the lender, but
that are optional, are not fees subject to the three percent limitation. The
use of the word "require" in Section 50(a)(6)(E) means that optional charges
are not fees subject to the three percent limitation.
(2)
Optional Insurance. Insurance coverage premiums paid by
an owner or an owner's spouse that are at their sole discretion are not fees
subject to the three percent limitation. Examples of these charges may include
credit life and credit accident and health insurance that are voluntarily
purchased by the owner or the owner's spouse.
(3)
Charges that are Interest. Charges an owner or an owner's
spouse is required to pay that constitute interest under the law, for example
per diem interest and points, are not fees subject to the three percent limitation.
(4)
Charges that are not Interest. Charges an owner or an owner's
spouse is required to pay that are not interest are fees subject to the three
percent limitation.
(5)
Charges Absorbed by Lender. Charges a lender absorbs, and
does not charge an owner or an owner's spouse that the owner or owner's spouse
might otherwise be required to pay are unrestricted and not fees subject to
the three percent limitation.
(6)
Charges to Originate. Charges an owner or an owner's spouse
is required to pay to originate an equity loan that are not interest are fees
subject to the three percent limitation.
(7)
Charges Paid to Third Parties. Charges an owner or an owner's
spouse is required to pay to third parties for separate and additional consideration
for activities relating to originating a loan are fees subject to the three
percent limitation. Charges those third parties absorb, and do not charge
an owner or an owner's spouse that the owner or owner's spouse might otherwise
be required to pay are unrestricted and not fees subject to the three percent
limitation. Examples of these charges include attorneys' fees for document
preparation and mortgage brokers' fees to the extent authorized by applicable
law.
(8)
Charges to Evaluate. Charges an owner or an owner's spouse
is required to pay to evaluate the credit decision for an equity loan, that
are not interest, are fees subject to the three percent limitation. Examples
of these charges include fees collected to cover the expenses of a credit
report, survey, flood zone determination, tax certificate, title report, inspection,
or appraisal.
(9)
Charges to Maintain. Charges paid by an owner or an owner's
spouse at the inception of an equity loan to maintain the loan that are not
interest are fees subject to the three percent limitation. Charges that are
not interest that an owner pays at the inception of an equity loan to maintain
the equity loan, or that are customarily paid at the inception of an equity
loan to maintain the equity loan, but are deferred for later payment after
closing, are fees subject to the three percent limitation.
(10)
Charges to Record. Charges an owner or an owner's spouse
is required to pay for the purpose of recording equity loan documents in the
official public record by public officials are fees subject to the three percent
limitation.
(11)
Charges to Insure an Equity Loan. Premiums an owner or
an owner's spouse is required to pay to insure an equity loan are fees subject
to the three percent limitation. Examples of these charges include title insurance
and mortgage insurance protection.
(12)
Charges to Service. Charges paid by an owner or an owner's
spouse at the inception of an equity loan for a party to service the loan
that are not interest are fees subject to the three percent limitation. Charges
that are not interest that an owner pays at the inception of an equity loan
to service the equity loan, or that are customarily paid at the inception
of an equity loan to service the equity loan, but are deferred for later payment
after closing, are fees subject to the three percent limitation.
(13)
Secondary Mortgage Loans. A lender making an equity loan
that is a secondary mortgage loan under Chapter 342 of the Texas Finance Code
may charge only those fees permitted in TEX. FIN. CODE, §§342.307,
342.308, and 342.502. A lender must comply with the provisions of Chapter
342 of the Texas Finance Code and the constitutional restrictions on fees
in connection with a secondary mortgage loan made under Chapter 342 of the
Texas Finance Code.
(14)
Escrow Funds. A lender may provide escrow services for
an equity loan. Because funds tendered by an owner or an owner's spouse into
an escrow account remain the property of the owner or the owner's spouse those
funds are not fees subject to the three percent limitation. Examples of escrow
funds include account funds collected to pay taxes, insurance premiums, maintenance
fees, or homeowner's association assessments. A lender must not contract for
a right of offset against escrow funds pursuant to Section 50(a)(6)(H).
(15)
Subsequent Events. The three percent limitation pertains
to fees paid or contracted for by an owner or owner's spouse at the inception
or at the closing of an equity loan. On the date the equity loan is closed
an owner or an owner's spouse may agree to perform certain promises during
the term of the equity loan. Failure to perform an obligation of an equity
loan may trigger the assessment of costs to the owner or owner's spouse. The
assessment of costs is a subsequent event triggered by the failure of the
owner's or owner's spouse to perform under the equity loan agreement and is
not a fee subject to the three percent limitation. Examples of subsequent
event costs include contractually permitted charges for force-placed homeowner's
insurance costs, returned check fees, debt collection costs, late fees, and
costs associated with foreclosure.
(16)
Property Insurance Premiums. Premiums an owner or an owner's
spouse is required to pay to purchase homeowner's insurance coverage are not
fees subject to the three percent limitation. Examples of property insurance
premiums include fire and extended coverage insurance and flood insurance.
Failure to maintain this insurance is generally a default provision of the
equity loan agreement and not a condition of the extension of credit. The
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 owner, the lender must comply with applicable law concerning
the sale of insurance in connection with a mortgage loan.
§153.7.Prohibition on Prepayment Penalties: Section 50(a)(6)(G).
An equity loan may be paid in advance without penalty or other charge.
(1)
A lender may not charge a penalty to a borrower for paying
all or a portion of an equity loan early.
(2)
A lockout provision is not permitted in an equity loan
agreement because it is considered a prepayment penalty.
§153.8.Security of the Equity Loan: Section 50(a)(6)(H).
An equity loan must not be secured by any additional real or personal
property other than the homestead. The definition of "homestead" is located
at Section 51 of Article XVI, Texas Constitution, and Chapter 41 of the Texas
Property Code.
(1)
A lender and an owner or an owner's spouse may enter into
an agreement whereby a lender may acquire an interest in items incidental
to the homestead. An equity loan secured by the following items is not considered
to be secured by additional real or personal property:
(A)
escrow reserves for the payment of taxes and insurance;
(B)
an undivided interest in a condominium unit, a planned
unit development, or the right to the use and enjoyment of certain property
owned by an association;
(C)
insurance proceeds related to the homestead; or
(D)
condemnation proceeds;
(E)
fixtures; or
(F)
easements necessary or beneficial to the use of the homestead,
including access easements for ingress and egress.
(2)
A guaranty or surety of an equity loan is not permitted.
A guaranty or surety is considered additional property for purposes of Section
50(a)(6)(H). Prohibiting a guaranty or surety is consistent with the prohibition
against personal liability in Section 50(a)(6)(C). An equity loan with a guaranty
or surety would create indirect liability against the owner. The constitutional
home equity lending provisions clearly provide that the homestead is the only
allowable collateral for an equity loan. The constitutional home equity provisions
prohibit the lender from contracting for recourse of any kind against the
owner or owner's spouse, except for provisions providing for recourse against
the owner or spouse when the extension of credit is obtained by actual fraud.
(3)
A contractual right of offset in an equity loan agreement
is prohibited.
(4)
A contractual cross-collateralization clause in an equity
loan agreement is prohibited.
(5)
Any equity loan on an urban homestead that is secured by
more than ten acres is secured by additional real property in violation of
Section (50)(a)(H).
§153.9.Acceleration: Section 50(a)(6)(J).
An equity loan may not be accelerated because of a decrease in the
market value of the homestead or because of the owner's default under other
indebtedness not secured by a prior valid encumbrance against the homestead.
(1)
An equity loan agreement may contain a provision that allows
the lender to accelerate the loan because of a default under the covenants
of the loan agreement. Examples of these provisions include a promise to maintain
the property or not remove improvements to the property that indirectly affects
the market value of the homestead.
(2)
A contractual cross-default clause is permitted only if
the lien associated with the equity loan agreement is subordinate to the lien
that is referenced by the cross default clause .
§153.10.Number of Loans: Section 50(a)(6)(K).
An equity loan must be the only debt secured by the homestead at the
time the extension of credit is made unless the other debt was made for a
purpose described by Section 50(a)(1)-(a)(5) or (a)(8).
(1)
Number of Equity Loans. An owner may have only one equity
loan at a time, regardless of the aggregate total outstanding debt against
the homestead.
(2)
Loss of Homestead Designation. If under Texas law the property
ceases to be the homestead of the owner, then the lender, for purposes of
Section 50(a)(6)(K), may treat what was previously a home equity mortgage
as a non-homestead mortgage.
§153.11.Repayment Schedule: Section 50(a)(6)(L)(i).
Unless an equity loan is a home equity line of credit under Section
50(a)(6)(t), the loan must be scheduled to be repaid in substantially equal
successive periodic installments, not more often than every 14 days and not
less often than monthly, beginning no later than two months from the date
the extension of credit is made, each of which equals or exceeds the amount
of accrued interest as of the date of the scheduled installment.
(1)
For a closed-end equity loan to have substantially equal
successive periodic installments, some amount of principal must be reduced
with each installment. This requirement prohibits balloon payments.
(2)
Section 50(a)(6)(L)(i) does not preclude a lender's recovery
of payments as necessary for other amounts such as taxes, adverse liens, insurance
premiums, collection costs, and similar items.
§153.12.Closing Date: Section 50(a)(6)(M)(i).
An equity loan may not be closed before the 12th calendar day after
the later of the date that the owner submits an application for the loan to
the lender or the date that the lender provides the owner a copy of the required
consumer disclosure. For purposes of determining the earliest permitted closing
date, the next succeeding calendar day after the date the lender provides
the owner a copy of the required consumer disclosure is the first day of the
12-day waiting period. The equity loan may be closed at any time on or after
the 12th calendar day after the date the consumer disclosure is provided to
the owner.
(1)
Submission of a loan application to an agent acting on
behalf of the lender is submission to the lender.
(2)
A loan application may be given orally or electronically.
§153.13.Preclosing Disclosures: Section 50(a)(6)(M)(ii).
An equity loan may not be closed before one business day after the
date that the owner of the homestead receives a final itemized disclosure
of the actual fees, points, interest, costs, and charges that will be charged
at closing. If a bona fide emergency or another 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 date of closing.
(1)
A lender may satisfy the disclosure requirement of this
section by delivery to the borrower of a properly completed Department of
Housing and Urban Development (HUD) disclosure Form HUD-1 or HUD-1A.
(2)
An owner may consent to receive the preclosing disclosure
on the date of closing in the case of a bona fide emergency occurring before
the date of the extension of credit. An equity loan secured by a homestead
in an area designated by Federal Emergency Management Agency (FEMA) as a disaster
area is an example of a bona fide emergency if the homestead was damaged during
FEMA's declared incident period.
(3)
To modify timing of the disclosure, the lender should obtain
written consent from the owner that:
(A)
describes the emergency;
(B)
specifically states that the owner consents to receive
the preclosing disclosure on the date of closing; and
(C)
bears the signature of all of the owners entitled to receive
the preclosing disclosure.
(4)
A de minimus variance can be good cause at the owner's
option. An owner who has received a preclosing disclosure may consent to receive
a subsequent or modified preclosing disclosure on the date of closing under
the good cause standard if:
(A)
the actual disclosed fees, costs, points and charges on
the date of closing do not vary from the initial preclosing disclosure by
more than the greater of:
(i)
$100 of the amount charged at closing or
(ii)
0.125 percent of the principal amount of the equity loan
at closing; or
(B)
one or more items in subparagraph (A) of this paragraph
is less than the disclosed rate or amount on the initial preclosing disclosure.
(5)
An owner may consent to receive the preclosing disclosure
or a modification of the preclosing disclosure on the date of closing if another
good cause exists. A condition that would cause the owner substantial financial
hardship if the equity loan were not allowed to close on the scheduled date
of closing is an example of other good cause.
(6)
An equity loan may be closed at any time during normal
business hours on the next business day following the calendar day on which
the owner receives the preclosing disclosure or any calendar day thereafter.
§153.14.One Year Prohibition: Section 50(a)(6)(M)(iii).
An equity loan may not be closed before the first anniversary of the
closing date of any other equity loan secured by the same homestead property.
An equity loan may be refinanced any time after the first anniversary of the
loan's closing date.
(1)
Section 50(a)(6)(M)(iii) prohibits an owner who has obtained
an equity loan from:
(A)
refinancing the equity loan before one year has elapsed
since the loan's closing date; or
(B)
obtaining a new equity loan on the same homestead property
before one year has elapsed since the previous equity loan's closing date,
regardless of whether the previous equity loan has been paid in full.
(2)
Section 50(a)(6)(M)(iii) does not prohibit modification
of an equity loan before one year has elapsed since the loan's closing date.
A modification is a transaction in which one or more terms of an existing
equity loan is modified, but the note is not satisfied and replaced.
(A)
A modification of an equity loan must be agreed to in writing
by the borrower and lender, unless otherwise required by law. An example of
a modification that is not required to be in writing is the modification required
under the Soldiers' and Sailors' Civil Relief Act.
(B)
The advance of additional funds to a borrower is not permitted
by modification of an equity loan.
(C)
A modification of an equity loan may not provide for new
terms that would not have been permitted by applicable law at the date of
closing of the extension of credit.
§153.15.Location of Closing: Section 50(a)(6)(N).
An equity loan may be closed only at an office of the lender, an attorney
at law, or a title company. The lender is anyone authorized under Section
50(a)(6)(P) that advances funds directly to the owner or is identified as
the payee on the note.
(1)
An equity loan must be closed at the permanent physical
address of the office or branch office of the lender, attorney, or title company.
The closing office must be a permanent physical address so that the closing
occurs at an authorized physical location other than the homestead.
(2)
A lender may accept a properly executed power of attorney
allowing the attorney-in-fact to execute closing documents on behalf of the
owner.
(3)
A lender may receive consent required under Section 50(a)(6)(A)
by mail or other delivery of the party's signature to an authorized physical
location and not the homestead.
§153.16.Rate of Interest: Section 50(a)(6)(O).
A lender may contract for and receive any fixed or variable rate of
interest authorized under statute.
(1)
An equity loan that provides for interest must comply with
constitutional and applicable law. Interest rates on certain first mortgages
are not limited on loans subject to the federal Depository Institutions Deregulation
and Monetary Control Act of 1980 and the Alternative Mortgage Transaction
Parity Act. Chapter 342 of the Texas Finance Code provides for a maximum rate
on certain secondary mortgage loans. Chapter 124 of the Texas Finance Code
and federal law provide for maximum rates on certain mortgage loans made by
credit unions. These statutes operate in conjunction with Section 50(a) and
other constitutional sections.
(2)
An equity loan must amortize and contribute to amortization
of principal.
(3)
The lender may contract to vary the scheduled installment
amount when the interest rate adjusts on a variable rate equity loan. A variable-rate
loan is a mortgage in which the lender, by contract, can adjust the mortgage's
interest rate after closing in accordance with an external index.
(4)
The scheduled installment amounts of a variable rate equity
loan must be:
(A)
substantially equal between each interest rate adjustment;
and
(B)
sufficient to cover at least the amount of interest scheduled
to accrue between each payment date and a portion of the principal.
(5)
An equity loan agreement may contain an adjustable rate
of interest that provides a maximum fixed rate of interest pursuant to a schedule
of steps or tiered rates or provides a lower initial interest rate through
the use of a discounted rate at the beginning of the loan.
§153.17.Authorized Lenders: Section 50(a)(6)(P).
An equity loan must be made by one of the following that has not been
found by a federal regulatory agency to have engaged in the practice of refusing
to make loans because the applicants for the loans reside or the property
proposed to secure the loans is located in a certain area: a bank, savings
and loan association, savings bank, or credit union doing business under the
laws of this state or the United States; a federally chartered lending instrumentality
or a person approved as a mortgagee by the United States government to make
federally insured loans; a person licensed to make regulated loans, as provided
by statute of this state; a person who sold the homestead property to the
current owner and who provided all or part of the financing for the purchase;
a person who is related to the homestead owner within the second degree of
affinity and consanguinity; or a person regulated by this state as a mortgage
broker.
(1)
An authorized lender under Chapter 341, Texas Finance Code,
must meet both constitutional and statutory qualifications to make an equity
loan.
(2)
A HUD-approved mortgagee is a person approved as a mortgagee
by the United States government to make federally insured loans. Approved
correspondents to a HUD-approved mortgagee are not authorized lenders of equity
loans unless qualifying under another section of (a)(6)(P).
(3)
A non-depository lender or broker that makes, negotiates,
arranges, or transacts a secondary mortgage loan that is governed by Chapter
342, Texas Finance Code, must comply with the licensing provisions of Chapter
342, Texas Finance Code.
(4)
A lender who does not meet the definition of Section 50(a)(6)(P)(i),
(ii), (iv), (v), or (vi), must obtain a regulated loan license under Chapter
342 of the Texas Finance Code to meet the provisions of subsection (iii).
§153.18.Limitation on Application of Proceeds: Section 50(a)(6)(Q)(i).
An equity loan must be made on the condition that the owner of the
homestead is not required to apply the proceeds of the extension of credit
to repay another debt except debt secured by the homestead or debt to another
lender.
(1)
An owner may use the proceeds of an equity loan for any
purpose. An owner is not precluded from voluntarily paying off a debt that
is owed to the same lender.
(2)
The lender may not require an owner to repay a debt owed
to the lender, unless it is a debt secured by the homestead. The lender may
require debt secured by the homestead or debt to another lender or creditor
be paid out of the proceeds of an equity loan. The lender may not otherwise
specify or restrict the use of the proceeds.
(3)
When an owner applies for a debt consolidation loan, it
is the owner, not the lender, that is requiring that proceeds be applied to
another debt. If the proceeds of a home equity loan are used in conformity
with owner's credit application, the limitations of this section do not apply.
§153.20.No Blanks in the Equity Loan Agreement: Section 50(a)(6)(Q)(iii).
The "blanks that are left to be filled in" referenced in Section 50(a)(6)(Q)(iii)
refers to omitted contract terms in the equity loan agreement.
§153.22.Copies of Documents: Section 50(a)(6)(Q)(v).
At closing, the lender must provide the owner with a copy of all documents
that are signed at closing in connection with the equity loan. The lender
is not required to give the owner copies of documents that were signed by
the owner prior to closing, such as those signed during the application process.
Because of their nature some documents, for example, a notification of the
election of an owner or an owner's spouse not to rescind under the right of
rescission must be signed after the date of closing. The lender must provide
the owner copies of documents signed after the date of closing within three
business days.
§153.24.Release of Lien: Section 50(a)(6)(Q)(vii).
The lender must cancel and return the note to the owner and give the
owner a release of lien or a copy of an endorsement and assignment of the
lien to another lender refinancing the loan within a reasonable time after
termination and full payment of the loan. The lender or holder, at its option,
may provide the owner a release of lien or an endorsement and assignment of
the lien to another lender refinancing the loan.
(1)
The lender will perform these services and provide the
documents required in 50(a)(6)(Q)(vii) without charge.
(2)
This section does not require the lender to record or pay
for the recordation of the release of lien.
(3)
Thirty days is a reasonable time for the lender to perform
the duties required under this section.
(4)
An affidavit of lost 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.
§153.25.Right of Rescission: Section 50(a)(6)(Q)(viii).
The owner of the homestead and any spouse of the owner may, within
three days after the extension of credit is made, rescind the extension of
credit without penalty or charge.
(1)
This provision gives the owner's spouse, who may not be
in record title or have community property ownership, the right to rescind
the transaction.
(2)
The owner and owner's spouse may rescind the extension
of credit within three calendar days. If the third calendar day falls on a
Sunday or federal legal public holiday then the right of rescission is extended
to the next calendar day that is not a Sunday or federal legal public holiday.
(3)
A lender must comply with the provisions of the Truth-in-Lending
Act permitting the borrower three business days to rescind a mortgage loan
in applicable transactions. Lender compliance with the right of rescission
procedures in the Truth-in-Lending Act and Regulation Z, satisfies the requirements
of this section if the notices required by Truth-in-Lending and Regulation
Z are given to each owner and to each owner's spouse.
§153.41.Refinance of a Debt Secured by a Homestead: Section 50(e).
A refinance of debt secured by a homestead and described by any subsection
under Subsections (a)(1)-(a)(5) of Section 50 of the Texas Constitution that
includes the advance of additional funds may not be secured by a valid lien
against the homestead unless: (1) the refinance of the debt is an extension
of credit described by Subsection (a)(6) or (a)(7) of Section 50 of the Texas
Constitution; or (2) the advance of all the additional funds is for reasonable
costs necessary to refinance such debt or for a purpose described by Subsection
(a)(2), (a)(3), or (a)(5) of Section 50 of the Texas Constitution.
(1)
Reasonableness and necessity of costs relate to the type
and amount of the costs.
(2)
In a secondary mortgage loan, reasonable costs are those
costs which are lawful in light of the governing or applicable law that authorizes
the assessment of particular costs. In the context of other mortgage loans,
reasonable costs are those costs which are lawful in light of other governing
or applicable law.
(3)
Reasonable and necessary costs to refinance may include
reserves or impounds (escrow trust accounts) for taxes and insurance, if the
reserves comply with applicable law.
§153.51.Consumer Disclosure: Section 50(g).
An equity loan may not be closed before the 12th day after the lender
provides the owner with the consumer disclosure on a separate instrument.
(1)
If a lender mails the consumer disclosure to the owner,
the lender shall allow a reasonable period of time for delivery. A period
of three calendar days, not including Sundays and federal legal public holidays,
constitutes a rebuttable presumption for sufficient mailing and delivery.
(2)
Certain provisions of the consumer disclosure do not contain
the exact identical language concerning requirements of the equity loan that
have been used to create the substantive requirements of the loan. The consumer
notice is only a summary of the owner's rights, which are governed by the
substantive terms of the constitution. The substantive requirements prevail
regarding a lender's responsibilities in an equity loan transaction. A lender
may supplement the consumer disclosure to clarify any discrepancies or inconsistencies.
(3)
A lender may rely on an established system of verifiable
procedures to evidence compliance with 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 December 19, 2003.
TRD-200308714
Leslie L. Pettijohn
Commissioner
Joint Financial Regulatory Agencies
Effective date: January 8, 2004
Proposal publication date: November 7, 2003
For further information, please call: (512) 936-7640