Locke Lord QuickStudy: Texas Voters Ratify Amendment to Texas Constitution’s Home-Equity Lending Provisions

On November 7, 2016, Texas voters passed Proposition 2, which amends several familiar requirements for home-equity loans under Article XVI, Section 50 of the Texas Constitution, and which bids adieu to the old adage: “once a home-equity loan, always a home-equity loan.”  Passage of Proposition 2 marks the first significant changes to the home-equity provisions of the Texas Constitution in over 14 years.

The amendments become effective on January 1, 2018, and will apply to all home-equity loans originated on or after that date.  Home-equity loans originated before January 1, 2018, will continue to be governed by the version of the Texas Constitution in existence at the time of those loans’ respective originations.  The following provides a list of the constitutional provisions being amended and a summary of the substantive amendments made by Proposition 2:

• Fee Cap under Section 50(a)(6)(E).  Amends the limit on fees that a borrower may be charged on a home-equity loan from 3 percent to 2 percent, but expressly excludes bona fide discount points and the following fees from being included in the 2-percent calculation: appraisal fees; survey fees; and either title premiums or title examination charges in lieu of a title policy if less than the title premiums.
• Agricultural Exemption under Section 50(a)(6)(I).  Repeals the prohibition against securing a home-equity loan with homestead property designated for agricultural use that is not used primarily for the production of milk.  Any homestead property that is designated for agricultural use will be allowed to serve as security for a home-equity loan in Texas, regardless of how the property is used.
• Authorized Lenders under Sections 50(a)(6)(P)(i) & (vi).  Clarifies that subsidiaries of banks, savings and loan associations, savings banks, and credit unions are authorized to make home-equity loans in Texas.  Also clarifies that persons regulated as a “mortgage banker” or “mortgage company” are authorized to make home-equity loans in Texas.
• Refinancing under Section 50(f).  Permits the refinance of a seasoned home-equity loan as a rate and term refinance.  Current law requires that the refinance of a home-equity loan comply with the requirements of Section 50(a)(6).  That requirement led to the adage: “once a home-equity loan, always a home-equity loan.”  Proposition 2 will allow the refinance of a home-equity loan as a traditional rate and term refinance under the following conditions: (a) the refinance is closed at least one year after the date the home-equity loan was closed; (b) the refinance does not include the advance of any additional funds other than funds advanced to refinance certain debts or the actual costs and reserves required by the lender to refinance the debt; (c) the refinance is of an amount that, when added to the total outstanding principal balances of other indebtedness secured by encumbrances against the homestead, does not exceed 80 percent of the fair market value of the homestead; and (d) the lender provides a newly prescribed written notice.  The contents of the written notice are provided in new Section 50(f)(2)(D).  Newly added Section 50(f-1) provides that an affidavit executed by the owner of the homestead or owner’s spouse acknowledging that the above-listed requirements have been met conclusively establishes that the refinance is a permitted type of debt under Section 50(a)(4).
• Written Notice under Section 50(g).  Amends the written notice required to be given to borrowers pursuant to Section 50(a)(6)(M)(i) to reflect the amendment to Section 50(a)(6)(E) and the repeal of Section 50(a)(6)(I).
• HELOC Advances under Section 50(t)(6).  Repeals the restriction on debits or advances to HELOCs when the total principal amount outstanding exceeds 50 percent of the fair market value of the homestead as determined on the date the HELOC is established.  HELOC borrowers will be able to draw on the entire amount of the HELOC.  HELOCs are still restricted to 80 percent of the fair market value of the homestead at the time of origination.

It is expected that the Joint Financial Regulatory Commissions will adopt formal “safe harbor” interpretations to implement Proposition 2 pursuant to the authority delegated to them by the Legislature under Section 50(u), Article XVI of the Texas Constitution.  The proposed interpretations have been approved by the Joint Commissions for publication for notice and comment.  The proposed interpretations have not yet been published in the Texas Register but are anticipated to be published later in November.  Public comments will then be due 31 days after publication for comment.  Thus, it is likely that public comment will be closed before the new amendments go into effect.  A copy of the proposed interpretations is available on the Finance Commission’s website (beginning at p.48).