A Look at the Proposed Changes to Texas Home Equity Law

A Look at the Proposed Changes to Texas Home Equity Law

Introduction

Texas Senate Joint Resolution 60 (“SJR 60”) will be on the ballot as a constitutional amendment on November 7, 2017.  SJR 60 proposes a constitutional amendment which would reduce the expenses that can be charged to a borrower and remove certain financing expense limitations for a home equity loan, change certain options for the refinancing of home equity loans, change the threshold for an advance of a home equity line of credit, and allow home equity loans on agricultural homesteads.  The following is a summary of the current law (governed by governed by Art. 16, sec. 50(a)(6) of the Texas Constitution), the proposed changes and bill analysis provided by the House Research Organization of the Texas House of Representatives.

Fee Cap

SJR 60 redefines what is and is not included in the calculation of the cap on fees associated with a home equity loan.  The goal is to lower the cap one percent, from three to two percent, because a few higher fees and costs were excluded, which was making it difficult for lenders to make smaller loans.  In addition, the following would be excluded from the calculation of the fee cap:  appraisals done by third party appraisers; property surveys by state registered or licensed surveyors; state base premiums for title insurance with endorsements; and a title examination report if its cost is less than the state base premiums for title insurance without endorsements.

Supporters of SJR 60 say that this fee cap would balance consumer protection with an appropriate standard for lenders by lowering the ceiling on fees that can be charged and removing certain fees from the calculation of the cap.  Supporters also state that these changes would address problems that have surfaced, especially for loans around $100,000 and those in rural areas.  It can be difficult for lenders to put together a loan under the fee cap, resulting in some being reluctant to make such loans.  The fees that would be excluded from the cap come from third parties and do not go to lenders.  If these were excluded and the cap was lowered, consumers would continue to be protected against extreme fees from lenders, and lenders would be held to a reasonable standard that would help ensure they could offer such loans.

Opponents of SJR 60 say that the changes to the fee cap would raise, not lower, costs for consumers and could create incentives to lenders to make loans.  While the bill would lower the overall cap, it also would exclude major charges from the cap calculation.  Borrowers would continue to pay these charges for appraisals, surveys, title insurance, or title examination reports.  Lenders would then have room under the cap to raise or add upfront fees.  Taken together, the costs to borrowers could easily be higher than current costs under the 3 percent cap.  Higher fees going to lenders could incentivize the approval of loans by originators interested in the fees.

Refinancing

SJR 60 allows for an alternative and option in refinancing of a seasoned home equity loan with a purchase money loan into one loan with one rate and term.  Currently, the Texas Constitution does not allow for the option to refinance a home equity loan into a non-home equity loan.  SJR 60 would allow for this option, provided that the following conditions are met:  the refinanced loan is signed at least a year after the original home equity loan was signed; the refinanced loan cannot provide any additional money to the borrower other than to cover the costs to do the refinancing; the refinanced loan cannot exceed 80 percent of the fair market value of the house; and the lender of the loan must provide the borrower with a notice about their rights associated with a home equity or non-home equity loan 12 or more days before the date of refinance.

Supporters of SJR 60 say that it would increase consumer choice by allowing the refinancing of home equity loans into non-home equity loans with reasonable parameters on such refinances.  Additionally, SJR 60 would require that consumers receive a notice that clearly explained the differences in the two types of loans so that they could make an informed choice.  Refinanced loans would be under the same regulations as any non-home equity loans with which the borrower would be familiar.

Opponents of SJR 60 say that allowing home equity loans to be refinanced as non-home equity loans would be counter to the ideas and protections embedded in the Texas home equity laws.  These laws deliberately encompassed the idea of “once-a-home-equity-loan, always-a-home-equity-loan” so that homeowners who borrowed against the equity in their homes would have certain protections, such as protections requiring judicial foreclosure on home equity loans and making home equity loans non-recourse so that a borrower’s other assets are not at risk in a default.  Allowing this type of refinancing also could give lenders incentives to push the refinancing of loans both to earn the fees and to bring a loan out from under the protections given to home equity borrowers.

Agricultural Homesteads

SJR 60 allows farm and ranch property owners to acquire home-equity loans, while maintaining the agricultural valuation of their properties.  Previously, only dairymen had the ability to take out a home equity loan based on an agreement when the Texas Legislature first passed home equity in 1997.

Supporters of SJR 60 say that it would allow home equity loans to be made on agricultural homesteads to give these consumers the same choice as other Texans.  In addition to shutting owners of larger farms and ranches out from home equity loans, the current prohibition keeps smaller, hobby agricultural homesteads from having the option of taking out home equity loans.  All of the current consumer protections would continue to cover these loans.

The House Research Organization bill analysis provides no formal opposition to this provision of SJR 60.

Home Equity Lines of Credit

SJR 60 maintains the $4,000 draw requirements on home equity lines of credit, but increases the 50 percent equity provision to an 80 percent requirement to be the same as all home equity loans.

Supporters of SJR 60 say that it would repeal an unnecessary restriction on home equity lines of credit, which has resulted in consumers being unable to access funds for which they had been approved.  In such instances, owners must repay funds in order to access the remaining line of credit.  This can result in consumers taking out larger loans sooner than they would like and paying more interest.  SJR 60 would eliminate the 50 percent limit on the amount that can be outstanding before making additional withdrawals, but lines of credit would continue to be covered by provisions that limit loans to 80 percent of fair market value.  This would make conditions on lines of credit consistent with regular home equity loans, while continuing the same protections with these loans.

The House Research Organization bill analysis provides no formal opposition to this provision of SJR 60.

Voting and Effective Date

SJR 60 will be on the ballot in Texas as a proposed constitutional amendment on November 7, 2017.

The ballot language will read:  “The constitutional amendment to establish a lower amount for expenses that can be charged to a borrower and removing certain financing expense limitations for a home equity loan, establishing certain authorized lenders to make a home equity loan, changing certain options for the refinancing of home equity loans, changing the threshold for an advance of a home equity line of credit, and allowing home equity loans on agricultural homesteads.”

If the constitutional amendment is passed, it will take effect on January 1, 2018 and the changes would apply only to loans made on or after that date and to existing loans that are refinanced on or after that date.

No information in this article is intended to constitute legal advice.  For specific legal advice, please contact an attorney.

If you have any questions or would like more information about Texas home equity law, please contact Eric Mettenbrink at 713.220.9141 or emettenbrink@hirschwest.com.