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Home Equity Report
The first prohibition on the forced sale of homesteads in Texas appeared in Texas statutes in 1839, before the state joined the union. This statute was adopted in reaction to a nationwide economic depression which became known as the Panic of 1837, when many families lost their farms and homes through foreclosure.
In various forms, this protection from foreclosure has been retained in Texas law and now resides in Texas' constitution in what is termed Texas' homestead law. Under the Texas Constitution, a lender may force the sale of a Texas homestead only for non-payment of the mortgage used to initially purchase the property, non-payment of a loan made to pay taxes on the homestead, or non-payment of a loan made to physically improve the property. (1)
It is important not to confuse the homestead protection offered by the constitution with the homestead exemption from property taxes offered by many local taxing jurisdictions. The homestead protection embedded in Texas' constitution prescribed the limited conditions under which a lender may foreclose on a Texas homestead. The homestead exemption merely reduces the taxable value of Texas homesteads and is not a provision in the constitution.
Today, because of changes in federal tax law and banking practices, Texas' constitutional homestead protection provision also limits access to low cost and tax deductible financing options for both Texas consumers and small businesses.
If Texas were to change this provision to allow businesses and consumers access to the accumulated equity in Texas' homesteads, consumers could save as much as $225 million in annual interest payments. In addition, because home mortgage loan interest is tax deductible, they would also be able to reduce their federal taxes by as much as $99 million per year. Interest costs to businesses would fall by $58 million annually and small businesses would gain access to $373 million in loans to found and expand entrepreneurial activity.
If the average Texas homeowner were to just replace existing borrowing needs for new cars, trucks, boats, educational and medical expenses with home equity financed borrowing, they would save as much as $490 in interest costs and $360 in federal income taxes annually.
Accumulated equity in homes in Texas is one of the largest components of the wealth of Texans. In 1990, it is estimated that the value of owner-occupied housing in Texas reached $220.4 billion, or 4.7 percent of the total value of owner-occupied housing in the nation. Some of this value actually represents existing mortgage debt, and not equity.
Because Texas' population is somewhat younger than that of the nation and has therefore had less time to pay down mortgages, mortgage debt in Texas amounts to an estimated 44.0 percent of the value of homes in the state, somewhat higher than the 36.7 percent for the nation. Interestingly, according to the U.S. Department of Commerce, about one-third of the owner-occupied housing units in Houston in 1991 had no outstanding mortgage owed, indicating 100 percent equity.(2) Table 1 indicates that total home equity in Texas in 1990 amounted to $123.4 billion.
But this store of wealth in Texas differs from many other assets in that it cannot be readily tapped to underwrite loans, to purchase goods or services or to repay other debt. Under the Texas constitution, a homeowner's residence cannot be mortgaged for purposes other than financing the purchase of the home, paying property taxes due on the homestead, or financing permanent improvements to the property.
Because of this limitation, Texas is the only state in the nation in which financial institutions cannot offer consumers the option of tapping into their home equity to pay for educational expenses, medical costs, consolidation of other debts or the myriad other uses found for home equity loans in the other 49 U.S. states. In these states home equity is widely accepted as collateral, and in recent years homeowners have raised substantial funds by borrowing against the equity in their homes.
According to the Federal Reserve Board, the total value of home equity loans reached $255 billion in 1993, without substantial participation from Texas homeowners.
The growth of home equity credit in the U.S. gained momentum in the mid-1980s with a boost from the Tax Reform Act of 1986. Importantly, this change in federal tax law mandated the phase-out of federal income tax deductions for interest paid on non-mortgage consumer debt, such as car loans, educational loans and other debt. This change in federal tax law enhanced the attractiveness of using debt secured by homes to fund expenditures that consumers had previously financed by other forms of consumer credit.
In a 1993-94 survey conducted by the Federal Reserve Board of the use of home equity loans (3), about one-third of homeowners cited its favorable tax treatment as an advantage over other types of loans. Nearly 13 percent of all homeowners in the U.S. held some form of home equity credit in 1993, up from 11 percent in 1988 and only 6.8 percent in 1983.
Largely as a result of the changing tax advantages, a new type of home equity loans instrument has seen substantial recent growth. The traditional home equity loan is a closed-end loan that generally requires repayment of interest and principle in equal monthly installments, typically with an interest rate that is fixed for the life of the loan. The percentage of homeowners with traditional home equity loans declined from 5.4 percent in 1988 to 4.9 percent in 1993-94.
Taking up the slack, however, has been the increased use of home equity lines of credit (HELOC). A home equity line of credit is a revolving account that permits borrowing from time to time, at the homeowner's discretion, up to the amount of the credit line. HELOCs also typically have more flexible repayment schedules than a traditional home equity loan and often are based on a variable interest rate pegged to an index such as the prime rate. An estimated 8.3 percent of U.S. homeowners held a home equity line of credit in 1993-94, up from 5.7 percent in 1988.
The principle uses for both types of home equity credit have been to finance home improvements or to repay other debts. Using these loans to purchase vehicles, for educational and medical expenses, and for business uses are also important markets for home equity borrowers, but more so for credit line borrowers than for users of traditional home equity loans.
Other innovative financial instruments have also been developed in the recent past which tap home equity to meet specific needs. For example, "reverse mortgages" or reverse annuities allow a (typically elderly) homeowner to essentially sell their residence back to a financial institution but retain use of it and receive regular payments from the financial institution (usually to cover living expenses and home maintenance costs). The financial institution then has a valid claim on the property which is usually repaid by the borrower's heirs after the homeowner has died and the house is sold.
Interestingly, the payments received from reverse mortgages are considered loan advances and not income. As such, these payments are not subject to federal income tax nor do they affect Social Security or Medicare eligibility.
Although reverse mortgages are not considered second mortgages, they are not available in Texas because this purpose is not one of the enumerated exceptions in the Texas Constitution to the ban on the forced sale of a borrower's homestead.
Allowing more widespread use of home equity loans in Texas would boost the disposable income of Texans because interest payments on such loans are deductible from federal incomes taxes. In addition, more widespread use of home equity loans would boost the purchasing power of consumers and small businesses because home equity loans typically carry lower interest rates than other types of consumer credit and lower than unsecured credit lines used to fund entrepreneurial activity. This boost would come at the expense of lower profit margins at lending institutions and from tax payments currently made by Texans to the federal government.
Increased use of home equity loans can be expected to displace other forms of consumer credit rather than greatly increase indebtedness. This would occur because the types of individuals that would qualify for home equity loans (typically those with stable and somewhat higher income along with some equity built up in their home) undoubtedly are not now blocked from credit markets. The issue facing this group is one of the price of, not access to, personal loans.
The use of home equity loans as a financing source for small business is probably somewhat different. Several studies have observed a positive relationship between investment and internal cash flow which may relate strongly to imperfections in capital markets. For example, in evaluating new issues of stock, potential shareholders may feel that they have poorer information about the firm's prospects than does the firm's management. These shareholders would therefore be unwilling to purchase the stock without also receiving some "premium" in return, such as a discount from the going price.
From the firm's point of view this type of behavior by potential investors increases the cost of raising capital, especially with respect to other alternatives, such as financing investments from increased cash flow. As a result, internal funds may effectively constrain capital spending if information is asymmetric.(4) This implies that there are some barrier effects to consider in the case of the use of home equity lending or business purposes.
As a result of these considerations, it is reasonable to assume that more widespread availability of home equity loans in Texas would have three distinct economic effects. First, in consumer markets, home equity loans would displace other types of consumer credit. These loans would save consumers interest expenses and be tax deductible, but they would not greatly increase overall indebtedness.
On the other side, greater access to home equity loans to support entrepreneurial activity should generate some new loan activity and some additional indebtedness because access to capital sources is a constraint to business borrowing. Also, to the extent that businesses use home equity loans to displace higher-cost unsecured loans, small business would gain from lower interest costs.(5)
The total value of savings to consumers and businesses in the state depends on the volume of home equity loans that would be generated within the state should expanded use of this financing source become possible. To estimate this volume, it is assumed that Texas would general home equity loans in rough proportion to the amount of net homestead equity contained in the state--4.2 percent. But, 4.2 percent of what?
As previously mentioned the total national market for home equity loans in 1993 was $255 billion, split between traditional home equity loans ($145 billion) and HELOCs ($110 billion). Because these national figures reflect the current situation in which Texans can only participate to a limited degree in home equity lending, a change in Texas lending would certainly affect national totals.
First, since Texans cannot now access HELOCs under any circumstances, it is assumed that the $110 billion national figure underestimates the "true" national market by 4.2 percent, indicating a potential market of $114.8 billion, of which Texas could be assumed to account for 4.2 percent or $4.8 billion.
On the other hand, traditional home equity lending for the purposes of home improvement is allowed in Texas. From national surveys it is estimated that 38 percent of traditional home equity loans are used for home improvement. This implies that the "untapped" portion of traditional home equity lending in the state could amount to 2.6 percent of the national market for these types of home equity loans (38 percent less than 4.2 percent). This implies that the national total of $145 billion underestimates the national potential market for these loans by 2.6 percent, indicating a total size of $148.8 billion, of which Texas would account for 2.6 percent, or $3.8 billion.
Accordingly, the total potential untapped home equity loan market in Texas is an estimated $8.6 billion. Finally, assuming that Texas uses of these loans would parallel national trends, 18 percent or $1.5 billion of this potential would be used for business purposes while the remaining $7.1 billion would be used by consumers.
How would opening access to home equity loans affect consumer credit? Several variables are involved, but some estimates are possible. Table 2 compares the annual interest costs of various types of consumer credit loans based on an initial loan value of $30,000 and a four-year pay back period. This amount was chosen because, over the life of the loan, the average outstanding loan value (in column five) is about equal to the national average value of the outstanding balance on home equity loans.
As is detailed in this table, tax-deductible home equity loans present real savings over other forms of consumer credit, even in instances in which the home equity loan carries a higher interest rate.
For example, consumer could save nearly $230 annually by financing a $30,000 educational loan as a home equity loan, even though the professional education loan carries an interest rate of 7.43 percent, lower than the 8.25 percent rate available on home equity loans. Clearly, all of these savings come from reduced federal income tax payments.
This benefit increases as other, more costly types of consumer credit are compared to home equity loans. Annual savings on car loans are, in this example$383. The consumer can reap more than $1,160 annually by using home equity loans rather than unsecured personal loans, and more than $1,600 annually over financing on credit card debts.(6)
On a statewide basis, the net savings attributable to the use of home equity loans for non-home improvement purposes would depend on the "mix" of loans that were displaced, the number of loans generated and the degree to which taxpayers itemized deductions on federal income tax returns.
Indicated in Table 2 is the distribution of the various types of consumer debt in 1992. This mix of debt can be used to estimate a weighted average interest rate on non-home equity consumer loans which, using rates in effect in January 1996, is 11.36 percent.
The average monthly interest cost of a 4-year home equity loan at an annual interest rate of 8.25 percent is $106.73. In contrast the same loan with an annual interest rate of 11.36 percent requires an average monthly interest payment of $147.57, or an additional $40.84 a month. Based on an average outstanding balance of $15,478.56 over the life of the lower cost home equity loan, the total $7.1 billion in expected consumer loans indicates a total of 458,700 such loans would be generated statewide. On an annualized basis this amounts to an interest cost savings of $224.8 million.
Assuming that the average Texan using a home equity loan pays a marginal federal income tax rate of 28 percent, the "true" interest cost of the home equity loan is actually $76.85 monthly or an additional savings of $29.88 monthly. On the basis of 458,700 loans, tax deductibility of these interest costs could yield tax savings of $164.4 million annually if all Texas taxpayers itemized deductions. However, based on the profile of federal taxpayers in Texas who would likely utilize home equity loans, it is expected that only about 60 percent would take advantage of this tax savings, indicating a statewide savings of $98.7 million.
In total, the average home owner in Texas that currently itemizes deductions on their federal income tax could save as much as $849 annually by substituting the average home equity loan for existing consumer credit.
From national surveys of the usage of home equity loans, about 25 percent of the respondents cited the ease of obtaining a home equity loan as the prime attraction of these loans. One interpretation of this response is that for this group of users, the availability of home equity loans significantly lowered the barriers to credit. This gives a reasonable approximation to the possible size of the new business loan activity the could be expected from expanded use of home equity lending. It is estimated that $375 million in new business loan activity could be expected to result from expanded access to home equity lending. This infusion of capital and any resulting economic activity could be expected to be a one-time occurrence.
The remaining 75 percent of the estimated $1.5 billion in business loan activity would benefit from lower interest costs. From Table 2, unsecured personal loans, a primary avenue for small business loans outside of home equity lending, carried an annual interest rate of 13.33 percent. Again considering a $30,000 4-year loan, this implies an average monthly interest payment of $173.57, or $66.84 more than the average monthly interest payment on the same sized home equity loan.
In turn, this implies that the $1.125 billion in business loans that could be replaced by home equity loans would generate annual interest cost savings of $58.3 million.
During the 1980s and 1990s, repeated legislative attempts have been made to broaden home equity lending in Texas. The form these attempts have taken are instructive in pointing out the issues and problems surrounding expending the use of home equity lending beyond its current constitutionally limited areas.
It appeared briefly in 1994, that this whole issue was moot when the U.S. Circuit Court of Appeals ruled that federal banking statutes and regulations preempted the Texas homestead law. The U.S. Supreme Court let the ruling stand in October 1994, but Congress later approved an interstate banking bill that superseded the court ruling.
In 1994 and 1995, the Texas Senate Interim Committee on Home Equity Lending proposed changes to the Texas Constitution.(7) First, over concern that completely eliminating the consumer protection afforded in the constitution would not be appropriate, instead of simply repealing the homestead protection, it was proposed to extend the cases for which a forced sale would be allowed to include "equity loans," limited to home equity loans, second mortgages and reverse annuity mortgages.
To diffuse criticism that equity loans could cause massive defaults during recessions or that unduly burdening property with debt would cause a slow-down in real estate turnover, the committee proposed capping the total amount of equity that could be pledged in support of loans to 90 percent of the home's fair market value. Lower percentages were discussed, but not adopted.
To answer the concerns of consumer groups that bankers or other lenders could put undue pressure on borrowers, particularly on seniors, the implementing legislation included a 15-day cooling-off period after requesting a loan and a three-day period after the signing of the loan papers during which the borrower could withdraw the application. Moreover, loan documents could only be signed at the office of the lender, a title company or an attorney, and not at the borrower's home.
To address the concerns of rural residents that lenders could begin requiring them to take use home equity loans to secure other loans, such as those for planting crops or operating ranches, conditions were included prohibiting a lender from requiring a homestead as collateral on any other form of loan or requiring a borrower to use an equity loan to repay another loan.
There were also some special provisions on the use of reverse mortgages to provide additional consumer protection. Other restrictions that were considered would have prohibited equity loans on agricultural homesteads, limited the use of loans to medical or educational expenses, and, except for reverse mortgages, prohibited issuing a home equity loan to anyone over 65.
In total, the interest cost and tax savings to Texas consumers from wider access to home equity loans could reach $323.5 million annually once the advantages of these new types of loans become widely known in the marketplace. In addition, the interest cost savings to small businesses in the state would raise this annual total impact to an estimated $381.8 million. The $375 million in new small business borrowing estimated to result from wider access to home equity loans would be a one-time infusion of new business spending into the state's economy.
Home Equity
CONSUMER PROTECTIONS 
A JOINT RESOLUTION
| 1-1 proposing a constitutional amendment permitting an encumbrance 1-2 against homestead property for certain extensions of equity credit. 1-3 BE IT RESOLVED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-4 SECTION 1. Section 50, Article XVI, Texas Constitution, is 1-5 amended to read as follows: 1-6 Sec. 50. (a) The homestead of a family, or of a single 1-7 adult person, shall be, and is hereby protected from forced sale, 1-8 for the payment of all debts except for: 1-9 (1) the purchase money thereof, or a part of such 1-10 purchase money; 1-11 (2)[ 1-12 (3)[ 1-13 entirety of the property by a court order or by a written agreement 1-14 of the parties to the partition, including a debt of one spouse in 1-15 favor of the other spouse resulting from a division or an award of 1-16 a family homestead in a divorce proceeding; 1-17 (4)[ 1-18 including a federal tax lien resulting from the tax debt of both 1-19 spouses, if the homestead is a family homestead, or from the tax 1-20 debt of the owner; 1-21 (5)[ 1-22 new improvements thereon, if contracted for in writing, or work and 1-23 material used to repair or renovate existing improvements thereon 1-24 if: 2-1 (A) [ 2-2 and material are contracted for in writing, with the consent of 2-3 both spouses, in the case of a family homestead, given in the same 2-4 manner as is required in making a sale and conveyance of the 2-5 homestead; 2-6 (B) the contract for the work and material is 2-7 not executed by the owner or the owner's spouse before the 12th day 2-8 after the owner makes written application for any extension of 2-9 credit for the work and material, unless the work and material are 2-10 necessary to complete immediate repairs to conditions on the 2-11 homestead property that materially affect the health or safety of 2-12 the owner or person residing in the homestead and the owner of the 2-13 homestead acknowledges such in writing; 2-14 (C) the contract for the work and material 2-15 expressly provides that the owner may rescind the contract without 2-16 penalty or charge within three days after the execution of the 2-17 contract by all parties, unless the work and material are necessary 2-18 to complete immediate repairs to conditions on the homestead 2-19 property that materially affect the health or safety of the owner 2-20 or person residing in the homestead and the owner of the homestead 2-21 acknowledges such in writing; and 2-22 (D) the contract for the work and material is 2-23 executed by the owner and the owner's spouse only at the office of 2-24 a third-party lender making an extension of credit for the work and 2-25 material, an attorney at law, or a title company; 2-26 (6) an extension of credit that: 2-27 (A) is secured by a voluntary lien on the 3-1 homestead created under a written agreement with the consent of 3-2 each owner and each owner's spouse; 3-3 (B) is of a principal amount that when added to 3-4 the aggregate total of the outstanding principal balances of all 3-5 other indebtedness secured by valid encumbrances of record against 3-6 the homestead does not exceed 80 percent of the fair market value 3-7 of the homestead on the date the extension of credit is made; 3-8 (C) is without recourse for personal liability 3-9 against each owner and the spouse of each owner, unless the owner 3-10 or spouse obtained the extension of credit by actual fraud; 3-11 (D) is secured by a lien that may be foreclosed 3-12 upon only by a court order; 3-13 (E) does not require the owner or the owner's 3-14 spouse to pay, in addition to any interest, fees to any person that 3-15 are necessary to originate, evaluate, maintain, record, insure, or 3-16 service the extension of credit that exceed, in the aggregate, 3-17 three percent of the original principal amount of the extension of 3-18 credit; 3-19 (F) is not a form of open-end account that may 3-20 be debited from time to time or under which credit may be extended 3-21 from time to time; 3-22 (G) is payable in advance without penalty or 3-23 other charge; 3-24 (H) is not secured by any additional real or 3-25 personal property other than the homestead; 3-26 (I) is not secured by homestead property 3-27 designated for agricultural use as provided by statutes governing 4-1 property tax, unless such homestead property is used primarily for 4-2 the production of milk; 4-3 (J) may not be accelerated because of a decrease 4-4 in the market value of the homestead or because of the owner's 4-5 default under other indebtedness not secured by a prior valid 4-6 encumbrance against the homestead; 4-7 (K) is the only debt secured by the homestead at 4-8 the time the extension of credit is made unless the other debt was 4-9 made for a purpose described by Subsections (a)(1)-(a)(5) of this 4-10 section; 4-11 (L) is scheduled to be repaid in substantially 4-12 equal successive monthly installments beginning no later than two 4-13 months from the date the extension of credit is made, each of which 4-14 equals or exceeds the amount of accrued interest as of the date of 4-15 the scheduled installment; 4-16 (M) is closed not before: 4-17 (i) the 12th day after the later of the 4-18 date that the owner of the homestead submits an application to the 4-19 lender for the extension of credit or the date that the lender 4-20 provides the owner a copy of the notice prescribed by Subsection 4-21 (g) of this section; and 4-22 (ii) the first anniversary of the closing 4-23 date of any other extension of credit described by Subsection 4-24 (a)(6) of this section secured by the same homestead property; 4-25 (N) is closed only at the office of the lender, 4-26 an attorney at law, or a title company; 4-27 (O) permits a lender to contract for and receive 5-1 any fixed or variable rate of interest authorized under statute; 5-2 (P) is made by one of the following that has not 5-3 been found by a federal regulatory agency to have engaged in the 5-4 practice of refusing to make loans because the applicants for the 5-5 loans reside or the property proposed to secure the loans is 5-6 located in a certain area: 5-7 (i) a bank, savings and loan association, 5-8 savings bank, or credit union doing business under the laws of this 5-9 state or the United States; 5-10 (ii) a federally chartered lending 5-11 instrumentality or a person approved as a mortgagee by the United 5-12 States government to make federally insured loans; 5-13 (iii) a person licensed to make regulated 5-14 loans, as provided by statute of this state; 5-15 (iv) a person who sold the homestead 5-16 property to the current owner and who provided all or part of the 5-17 financing for the purchase; or 5-18 (v) a person who is related to the 5-19 homestead property owner within the second degree of affinity or 5-20 consanguinity; and 5-21 (Q) is made on the condition that: 5-22 (i) the owner of the homestead is not 5-23 required to apply the proceeds of the extension of credit to repay 5-24 another debt except debt secured by the homestead or debt to 5-25 another lender; 5-26 (ii) the owner of the homestead not assign 5-27 wages as security for the extension of credit; 6-1 (iii) the owner of the homestead not sign 6-2 any instrument in which blanks are left to be filled in; 6-3 (iv) the owner of the homestead not sign a 6-4 confession of judgment or power of attorney to the lender or to a 6-5 third person to confess judgment or to appear for the owner in a 6-6 judicial proceeding; 6-7 (v) the lender, at the time the extension 6-8 of credit is made, provide the owner of the homestead a copy of all 6-9 documents signed by the owner related to the extension of credit; 6-10 (vi) the security instruments securing the 6-11 extension of credit contain a disclosure that the extension of 6-12 credit is the type of credit defined by Section 50(a)(6), Article 6-13 XVI, Texas Constitution; 6-14 (vii) within a reasonable time after 6-15 termination and full payment of the extension of credit, the lender 6-16 cancel and return the promissory note to the owner of the homestead 6-17 and give the owner, in recordable form, a release of the lien 6-18 securing the extension of credit or a copy of an endorsement and 6-19 assignment of the lien to a lender that is refinancing the 6-20 extension of credit; 6-21 (viii) the owner of the homestead and any 6-22 spouse of the owner may, within three days after the extension of 6-23 credit is made, rescind the extension of credit without penalty or 6-24 charge; 6-25 (ix) the owner of the homestead and the 6-26 lender sign a written acknowledgment as to the fair market value of 6-27 the homestead property on the date the extension of credit is made; 7-1 and 7-2 (x) the lender or any holder of the note 7-3 for the extension of credit shall forfeit all principal and 7-4 interest of the extension of credit if the lender or holder fails 7-5 to comply with the lender's or holder's obligations under the 7-6 extension of credit within a reasonable time after the lender or 7-7 holder is notified by the borrower of the lender's failure to 7-8 comply; or 7-9 (7) a reverse mortgage. 7-10 (b) An [ 7-11 claimed as homestead may not [ 7-12 homestead without the consent of each owner and the [ 7-13 of each owner, given in such manner as may be prescribed by law. 7-14 (c) No mortgage, trust deed, or other lien on the homestead 7-15 shall ever be valid unless it secures a debt described by this 7-16 section, [ 7-17 such mortgage, [ 7-18 created by the owner alone, or together with his or her spouse, in 7-19 case the owner is married. All pretended sales of the homestead 7-20 involving any condition of defeasance shall be void. 7-21 (d) A purchaser or lender for value without actual knowledge 7-22 may conclusively rely on an affidavit that designates other 7-23 property as the homestead of the affiant and that states that the 7-24 property to be conveyed or encumbered is not the homestead of the 7-25 affiant. 7-26 (e) A refinance of debt secured by a homestead and described 7-27 by any subsection under Subsections (a)(1)-(a)(5) that includes the 8-1 advance of additional funds may not be secured by a valid lien 8-2 against the homestead unless: 8-3 (1) the refinance of the debt is an extension of 8-4 credit described by Subsection (a)(6) of this section; or 8-5 (2) the advance of all the additional funds is for 8-6 reasonable costs necessary to refinance such debt or for a purpose 8-7 described by Subsection (a)(2), (a)(3), or (a)(5) of this section. 8-8 (f) A refinance of debt secured by the homestead, any 8-9 portion of which is an extension of credit described by Subsection 8-10 (a)(6) of this section, may not be secured by a valid lien against 8-11 the homestead unless the refinance of the debt is an extension of 8-12 credit described by Subsection (a)(6) of this section. 8-13 (g) An extension of credit described by Subsection (a)(6) of 8-14 this section may be secured by a valid lien against homestead 8-15 property if the extension of credit is not closed before the 12th 8-16 day after the lender provides the owner with the following written 8-17 notice on a separate instrument: 8-18 "NOTICE CONCERNING EXTENSIONS OF CREDIT 8-19 DEFINED BY SECTION 50(a)(6), ARTICLE XVI, TEXAS CONSTITUTION: 8-20 "SECTION 50(a)(6), ARTICLE XVI, OF THE TEXAS CONSTITUTION 8-21 ALLOWS CERTAIN LOANS TO BE SECURED AGAINST THE EQUITY IN YOUR HOME. 8-22 SUCH LOANS ARE COMMONLY KNOWN AS EQUITY LOANS. IF YOU DO NOT REPAY 8-23 THE LOAN OR IF YOU FAIL TO MEET THE TERMS OF THE LOAN, THE LENDER 8-24 MAY FORECLOSE AND SELL YOUR HOME. THE CONSTITUTION PROVIDES THAT: 8-25 "(A) THE LOAN MUST BE VOLUNTARILY CREATED WITH THE CONSENT 8-26 OF EACH OWNER OF YOUR HOME AND EACH OWNER'S SPOUSE; 8-27 "(B) THE PRINCIPAL LOAN AMOUNT AT THE TIME THE LOAN IS MADE 9-1 MUST NOT EXCEED AN AMOUNT THAT, WHEN ADDED TO THE PRINCIPAL 9-2 BALANCES OF ALL OTHER LIENS AGAINST YOUR HOME, IS MORE THAN 80 9-3 PERCENT OF THE FAIR MARKET VALUE OF YOUR HOME; 9-4 "(C) THE LOAN MUST BE WITHOUT RECOURSE FOR PERSONAL 9-5 LIABILITY AGAINST YOU AND YOUR SPOUSE UNLESS YOU OR YOUR SPOUSE 9-6 OBTAINED THIS EXTENSION OF CREDIT BY ACTUAL FRAUD; 9-7 "(D) THE LIEN SECURING THE LOAN MAY BE FORECLOSED UPON ONLY 9-8 WITH A COURT ORDER; 9-9 "(E) FEES AND CHARGES TO MAKE THE LOAN MAY NOT EXCEED 3 9-10 PERCENT OF THE LOAN AMOUNT; 9-11 "(F) THE LOAN MAY NOT BE AN OPEN-END ACCOUNT THAT MAY BE 9-12 DEBITED FROM TIME TO TIME OR UNDER WHICH CREDIT MAY BE EXTENDED 9-13 FROM TIME TO TIME; 9-14 "(G) YOU MAY PREPAY THE LOAN WITHOUT PENALTY OR CHARGE; 9-15 "(H) NO ADDITIONAL COLLATERAL MAY BE SECURITY FOR THE LOAN; 9-16 "(I) THE LOAN MAY NOT BE SECURED BY AGRICULTURAL HOMESTEAD 9-17 PROPERTY, UNLESS THE AGRICULTURAL HOMESTEAD PROPERTY IS USED 9-18 PRIMARILY FOR THE PRODUCTION OF MILK; 9-19 "(J) YOU ARE NOT REQUIRED TO REPAY THE LOAN EARLIER THAN 9-20 AGREED SOLELY BECAUSE THE FAIR MARKET VALUE OF YOUR HOME DECREASES 9-21 OR BECAUSE YOU DEFAULT ON ANOTHER LOAN THAT IS NOT SECURED BY YOUR 9-22 HOME; 9-23 "(K) ONLY ONE LOAN DESCRIBED BY SECTION 50(a)(6), ARTICLE 9-24 XVI, OF THE TEXAS CONSTITUTION MAY BE SECURED WITH YOUR HOME AT ANY 9-25 GIVEN TIME; 9-26 "(L) THE LOAN MUST BE SCHEDULED TO BE REPAID IN PAYMENTS 9-27 THAT EQUAL OR EXCEED THE AMOUNT OF ACCRUED INTEREST FOR EACH 10-1 PAYMENT PERIOD; 10-2 "(M) THE LOAN MAY NOT CLOSE BEFORE 12 DAYS AFTER YOU SUBMIT 10-3 A WRITTEN APPLICATION TO THE LENDER OR BEFORE 12 DAYS AFTER YOU 10-4 RECEIVE THIS NOTICE, WHICHEVER DATE IS LATER; AND IF YOUR HOME WAS 10-5 SECURITY FOR THE SAME TYPE OF LOAN WITHIN THE PAST YEAR, A NEW LOAN 10-6 SECURED BY THE SAME PROPERTY MAY NOT CLOSE BEFORE ONE YEAR HAS 10-7 PASSED FROM THE CLOSING DATE OF THE OTHER LOAN; 10-8 "(N) THE LOAN MAY CLOSE ONLY AT THE OFFICE OF THE LENDER, 10-9 TITLE COMPANY, OR AN ATTORNEY AT LAW; 10-10 "(O) THE LENDER MAY CHARGE ANY FIXED OR VARIABLE RATE OF 10-11 INTEREST AUTHORIZED BY STATUTE; 10-12 "(P) ONLY A LAWFULLY AUTHORIZED LENDER MAY MAKE LOANS 10-13 DESCRIBED BY SECTION 50(a)(6), ARTICLE XVI, OF THE TEXAS 10-14 CONSTITUTION; AND 10-15 "(Q) LOANS DESCRIBED BY SECTION 50(a)(6), ARTICLE XVI, OF 10-16 THE TEXAS CONSTITUTION MUST: 10-17 "(1) NOT REQUIRE YOU TO APPLY THE PROCEEDS TO ANOTHER 10-18 DEBT THAT IS NOT SECURED BY YOUR HOME OR TO ANOTHER DEBT TO THE 10-19 SAME LENDER; 10-20 "(2) NOT REQUIRE THAT YOU ASSIGN WAGES AS SECURITY; 10-21 "(3) NOT REQUIRE THAT YOU EXECUTE INSTRUMENTS WHICH 10-22 HAVE BLANKS LEFT TO BE FILLED IN; 10-23 "(4) NOT REQUIRE THAT YOU SIGN A CONFESSION OF 10-24 JUDGMENT OR POWER OF ATTORNEY TO ANOTHER PERSON TO CONFESS JUDGMENT 10-25 OR APPEAR IN A LEGAL PROCEEDING ON YOUR BEHALF; 10-26 "(5) PROVIDE THAT YOU RECEIVE A COPY OF ALL DOCUMENTS 10-27 YOU SIGN AT CLOSING; 11-1 "(6) PROVIDE THAT THE SECURITY INSTRUMENTS CONTAIN A 11-2 DISCLOSURE THAT THIS LOAN IS A LOAN DEFINED BY SECTION 50(a)(6), 11-3 ARTICLE XVI, OF THE TEXAS CONSTITUTION; 11-4 "(7) PROVIDE THAT WHEN THE LOAN IS PAID IN FULL, THE 11-5 LENDER WILL SIGN AND GIVE YOU A RELEASE OF LIEN OR AN ASSIGNMENT OF 11-6 THE LIEN, WHICHEVER IS APPROPRIATE; 11-7 "(8) PROVIDE THAT YOU MAY, WITHIN 3 DAYS AFTER 11-8 CLOSING, RESCIND THE LOAN WITHOUT PENALTY OR CHARGE; 11-9 "(9) PROVIDE THAT YOU AND THE LENDER ACKNOWLEDGE THE 11-10 FAIR MARKET VALUE OF YOUR HOME ON THE DATE THE LOAN CLOSES; AND 11-11 "(10) PROVIDE THAT THE LENDER WILL FORFEIT ALL 11-12 PRINCIPAL AND INTEREST IF THE LENDER FAILS TO COMPLY WITH THE 11-13 LENDER'S OBLIGATIONS." 11-14 If the discussions with the borrower are conducted primarily 11-15 in a language other than English, the lender shall, before closing, 11-16 provide an additional copy of the notice translated into the 11-17 written language in which the discussions were conducted. 11-18 (h) A lender or assignee for value may conclusively rely on 11-19 the written acknowledgment as to the fair market value of the 11-20 homestead property made in accordance with Subsection (a)(6)(Q)(ix) 11-21 of this section if: 11-22 (1) the value acknowledged to is the value estimate in 11-23 an appraisal or evaluation prepared in accordance with a state or 11-24 federal requirement applicable to an extension of credit under 11-25 Subsection (a)(6); and 11-26 (2) the lender or assignee does not have actual 11-27 knowledge at the time of the payment of value or advance of funds 12-1 by the lender or assignee that the fair market value stated in the 12-2 written acknowledgment was incorrect. 12-3 (i) This subsection shall not affect or impair any right of 12-4 the borrower to recover damages from the lender or assignee under 12-5 applicable law for wrongful foreclosure. A purchaser for value 12-6 without actual knowledge may conclusively presume that a lien 12-7 securing an extension of credit described by Subsection (a)(6) of 12-8 this section was a valid lien securing the extension of credit with 12-9 homestead property if: 12-10 (1) the security instruments securing the extension of 12-11 credit contain a disclosure that the extension of credit secured by 12-12 the lien was the type of credit defined by Section 50(a)(6), 12-13 Article XVI, Texas Constitution; 12-14 (2) the purchaser acquires the title to the property 12-15 pursuant to or after the foreclosure of the voluntary lien; and 12-16 (3) the purchaser is not the lender or assignee under 12-17 the extension of credit. 12-18 (j) Subsection (a)(6) and Subsections (e)-(i) of this 12-19 section are not severable, and none of those provisions would have 12-20 been enacted without the others. If any of those provisions are 12-21 held to be preempted by the laws of the United States, all of those 12-22 provisions are invalid. This subsection shall not apply to any 12-23 lien or extension of credit made after January 1, 1998, and before 12-24 the date any provision under Subsection (a)(6) or Subsections 12-25 (e)-(i) is held to be preempted. 12-26 (k) "Reverse mortgage" means an extension of credit: 12-27 (1) that is secured by a voluntary lien on homestead 13-1 property created by a written agreement with the consent of each 13-2 owner and each owner's spouse; 13-3 (2) that is made to a person who is or whose spouse is 13-4 55 years or older; 13-5 (3) that is made without recourse for personal 13-6 liability against each owner and the spouse of each owner; 13-7 (4) under which advances are provided to a borrower 13-8 based on the equity in a borrower's homestead; 13-9 (5) that does not permit the lender to reduce the 13-10 amount or number of advances because of an adjustment in the 13-11 interest rate if periodic advances are to be made; 13-12 (6) that requires no payment of principal or interest 13-13 until: 13-14 (A) the homestead property securing the loan is 13-15 sold or otherwise transferred; or 13-16 (B) all borrowers cease occupying the homestead 13-17 property as a principal residence for more than 180 consecutive 13-18 days and the location of the homestead property owner is unknown to 13-19 the lender; 13-20 (7) that provides that if the lender fails to make 13-21 loan advances as required in the loan documents and if the lender 13-22 fails to cure the default as required in the loan documents, the 13-23 lender forfeits all principal and interest of the reverse mortgage; 13-24 and 13-25 (8) that is not made unless the owner of the homestead 13-26 attests in writing that the owner received counseling regarding the 13-27 advisability and availability of reverse mortgages and other 14-1 financial alternatives. 14-2 (l) Advances made under a reverse mortgage and interest on 14-3 those advances have priority over a lien filed for record in the 14-4 real property records in the county where the homestead property is 14-5 located after the reverse mortgage is filed for record in the real 14-6 property records of that county. 14-7 (m) A reverse mortgage may provide for an interest rate that 14-8 is fixed or adjustable and may also provide for interest that is 14-9 contingent on appreciation in the fair market value of the 14-10 homestead property. Although payment of principal or interest 14-11 shall not be required under a reverse mortgage until the entire 14-12 loan becomes due and payable, interest may accrue and be compounded 14-13 during the term of the loan as provided by the reverse mortgage 14-14 loan agreement. 14-15 (n) A reverse mortgage that is secured by a valid lien 14-16 against homestead property may be made or acquired without regard 14-17 to the following provisions of any other law of this state: 14-18 (1) a limitation on the purpose and use of future 14-19 advances or other mortgage proceeds; 14-20 (2) a limitation on future advances to a term of years 14-21 or a limitation on the term of open-end account advances; 14-22 (3) a limitation on the term during which future 14-23 advances take priority over intervening advances; 14-24 (4) a requirement that a maximum loan amount be stated 14-25 in the reverse mortgage loan documents; 14-26 (5) a prohibition on balloon payments; 14-27 (6) a prohibition on compound interest and interest on 15-1 interest; 15-2 (7) a prohibition on contracting for, charging, or 15-3 receiving any rate of interest authorized by any law of this state 15-4 authorizing a lender to contract for a rate of interest; and 15-5 (8) a requirement that a percentage of the reverse 15-6 mortgage proceeds be advanced before the assignment of the reverse 15-7 mortgage. 15-8 (o) For the purposes of determining eligibility under any 15-9 statute relating to payments, allowances, benefits, or services 15-10 provided on a means-tested basis by this state, including 15-11 supplemental security income, low-income energy assistance, 15-12 property tax relief, medical assistance, and general assistance: 15-13 (1) reverse mortgage loan advances made to a borrower 15-14 are considered proceeds from a loan and not income; and 15-15 (2) undisbursed funds under a reverse mortgage loan 15-16 are considered equity in a borrower's home and not proceeds from a 15-17 loan. 15-18 (p) The advances made on a reverse mortgage loan under which 15-19 more than one advance is made must be made at regular intervals 15-20 according to a plan established by the original loan agreement. 15-21 (q) To the extent that any statutes of this state, including 15-22 without limitation, Section 41.001 of the Texas Property Code, 15-23 purport to limit encumbrances that may properly be fixed on 15-24 homestead property in a manner that does not permit encumbrances 15-25 for extensions of credit described in Subsection (a)(6) or (a)(7) 15-26 of this section, the same shall be superseded to the extent that 15-27 such encumbrances shall be permitted to be fixed upon homestead 16-1 property in the manner provided for by this amendment. 16-2 (r) The supreme court shall promulgate rules of civil 16-3 procedure for expedited foreclosure proceedings related to the 16-4 foreclosure of liens under Subsection (a)(6) of this section. 16-5 (s) The Finance Commission of Texas shall appoint a director 16-6 to conduct research on the availability, quality, and prices of 16-7 financial services and research the practices of business entities 16-8 in the state that provide financial services under this section. 16-9 The director shall collect information and produce reports on 16-10 lending activity of those making loans under this section. The 16-11 director shall report his or her findings to the legislature not 16-12 later than December 1 of each year. 16-13 SECTION 2. The following temporary provision is added to the 16-14 Texas Constitution: 16-15 TEMPORARY PROVISION. (a) This temporary provision applies 16-16 to the constitutional amendment proposed by the 75th Legislature, 16-17 Regular Session, 1997, authorizing a voluntary consensual 16-18 encumbrance on homestead property. 16-19 (b) The constitutional amendment takes effect January 1, 16-20 1998. 16-21 (c) This temporary provision takes effect on the adoption of 16-22 the amendment by the voters and expires January 2, 1998. 16-23 SECTION 3. This proposed constitutional amendment shall be 16-24 submitted to the voters at an election to be held November 4, 1997. 16-25 The ballot shall be printed to permit voting for or against the 16-26 proposition: "The amendment to the Texas Constitution expanding 16-27 the types of liens for home equity loans that a lender, with the 17-1 homeowner's consent, may place against a homestead." _______________________________ _______________________________ President of the Senate Speaker of the House I certify that H.J.R. No. 31 was passed by the House on May 9, 1997, by the following vote: Yeas 112, Nays 36, 1 present, not voting; and that the House concurred in Senate amendments to H.J.R. No. 31 on May 29, 1997, by the following vote: Yeas 116, Nays 25, 2 present, not voting and that the House adopted H.C.R. No. 326 authorizing certain corrections in H.J.R. No. 31 on May 31, 1997, by a non-record vote. _______________________________ Chief Clerk of the House I certify that H.J.R. No. 31 was passed by the Senate, with amendments, on May 26, 1997, by the following vote: Yeas 22, Nays 7, 2 present, not voting and that the Senate adopted H.C.R. No. 326 authorizing certain corrections in H.J.R. No. 31 on June 1, 1997, by a viva-voce vote. _______________________________ Secretary of the Senate RECEIVED: _____________________ Date _____________________ Secretary of State |