BILL ANALYSIS C.S.S.B. 301 By: Patterson State Affairs 4-12-95 Committee Report (Substituted) BACKGROUND The Texas Constitution prohibits the forced sale, or foreclosure, of a homestead except for the failure to pay property taxes, to repay a purchase money mortgage (a mortgage to finance the purchase of a homestead), or to repay a home improvement loan. The effect of this provision is to prevent homestead owners from using any portion of their homesteads as collateral for any other type of loan. Texas is the only state that prohibits the use of homestead equity as collateral for equity loans. An independent economic study conducted by the University of Texas estimated the total unencumbered equity in Texas homesteads was $116 billion at the end of 1991. Texas is also the only state that includes business property in its homestead restrictions. Texas law allows one acre, regardless of value, to each single person or head of a family as an urban homestead. This acre can be one lot, or a series of lots, as long as the total acreage does not exceed one acre. If more than one lot qualifies as an urban homestead, the lots do not have to be located next to each other. The lots that comprise the one-acre urban homestead can be used for a residence or a business. Many Texans that live in urban areas have homes on pieces of property whose size is less than one acre, and businesses on separate pieces of property. Texas law prohibits borrowing against either piece of property for any reason except purchase, improvements to the property, or to pay property taxes. The law applies automatically; a small business owner cannot waive the homestead designation on the business property and borrow against it. PURPOSE As proposed, C.S.S.B. 301 authorizes a person to bring a voluntary, consensual encumbrance on a homestead property for an equity loan. RULEMAKING AUTHORITY It is the committee's opinion that rulemaking authority is granted to the Finance Commission of Texas in SECTION 2 (Article 5A.29, Article 5069-1.01, V.T.C.S.) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 41.001(b), Property Code, to include an equity loan in the list of authorized items for which encumbrances may be properly fixed on homestead property (homestead). SECTION 2. Amends Title 79, Article 5069-1.01 et seq., V.T.C.S., by adding Chapter 5A, as follows: CHAPTER 5A. EQUITY LOANS Art. 5A.01. DEFINITIONS. Defines "advance," "application," "blended equity loan," "business day," "equity loan," and "reverse mortgage." Art. 5A.02. CONSTRUCTION OF CHAPTER. (a) Provides that an equity loan is considered made on the earliest date on which both each promissory note, or contract for an open account, evidencing the equity loan; and a deed of trust or other security instrument securing the equity loan are executed. (b) Requires a lender to rely on appraisal or evaluation in establishing the fair market value of the homestead. Authorizes certain estimates to be used at the lender's option to determine the fair market value of the homestead if no federal appraisal or evaluation requirement applies to an equity loan. Art. 5A.03. APPLICABILITY OF CHAPTER. (a) Sets forth legal requirements for a lender making, negotiating, or arranging an equity loan. (b) Provides that a loan made for the payment or refinancing of the purchase money of the homestead, taxes on the homestead, or a loan made in renewal or extension of such a loan, is not an equity loan, but may be subject to this chapter if the parties agree to be governed by this chapter. Provides that a blended equity loan is governed by this chapter. Art. 5A.04. AUTHORIZED LENDERS. (a) Authorizes only certain parties to make an equity loan. (b) Authorizes a lender to make an equity loan in addition to any other loan authorized for that lender. Art. 5A.05. ELIGIBLE PROPERTY. Prohibits an equity loan from being secured by homestead property that is designated for agricultural use. Art. 5A.06. ONE EQUITY LOAN AUTHORIZED. Prohibits the homestead from being encumbered by more than one equity loan in addition to a valid encumbrance. Art. 5A.07. ADVANCES AND REPAYMENT DETERMINED BY AGREEMENT. Authorizes an equity loan to provide for funding to or for the benefit of the borrower in advances at a frequency and for a term to which the parties agree. Authorizes an equity loan to provide for repayment on a payment schedule and in amounts to which the parties agree. Art. 5A.08. LIMITATION ON EQUITY LOAN TO PERSONS 65 YEARS OF AGE OR OLDER. Prohibits a lender from making an equity loan other than a reverse mortgage if a borrower is 65 years or older. Art. 5A.09. PERCENT OF VALUE LIMIT. Prohibits the principal amount of an equity loan plus the aggregate total of the outstanding balances of other indebtedness secured by valid encumbrances of record against the homestead from exceeding 90 percent of the fair market value of the homestead. Art. 5A.10. ADVANCE NOT INCLUDED AS OUTSTANDING INDEBTEDNESS. Provides that the aggregate total of the outstanding balances of indebtedness secured by valid encumbrances against the homestead does not include any advance made by a lender to protect a lien, security interest, or other valid encumbrance on the homestead. Art. 5A.11. LIMIT ON COLLATERAL AND USE OF PROCEEDS. (a) Prohibits a lender from requiring or accepting real or personal property as additional collateral on an equity loan, except for a manufactured home, personal property affixed to the homestead in a manner that would make the property a fixture, or rents derived from the homestead. Authorizes only the homestead property securing an equity loan to be used as collateral. (b) Sets forth prohibited activities for a lender. (c) Provides that this section does not limit any statutory or common law lien or right of offset or prevent a lender from requiring insurance as security for an equity loan. (d) Authorizes proceeds of a sale of the homestead or its fixtures or the insurance covering the property to be included as part of the security without being considered additional collateral (e) Provides that a provision of a deed of trust or other security agreement that secures a loan other than an equity loan and that makes the deed or interest applicable to other indebtedness of the borrower does not apply to an equity loan of the borrower to the extent that the provision would cause the equity loan to be secured by property other than the homestead. Provides that this subsection does not affect the validity of the provision as applied to a loan other than an equity loan. Art. 5A.12. ACCELERATION PROHIBITED. (a) Prohibits a lender from accelerating the remaining payments of an equity loan because of a decrease in the market value of the homestead property securing the equity loan, with an exception. Provides that a lender is not prohibited from refusing to make additional advances under an equity loan, other than a reverse mortgage, if the market value decreases, regardless of the cause. (b) Prohibits a lender from accelerating the remaining payments of an equity loan because of the borrower's default under any other indebtedness not secured by a prior valid encumbrance on the homestead, regardless of whether the indebtedness is owed to the lender provides that a lender is not prohibited from refusing to make additional advances other than a reverse mortgage, if the borrower has defaulted in the payment of another indebtedness. Art. 5A.13. NOTICE. (a) Requires the lender in an equity loan to provide a notice to the borrower and sets forth required language for the notice. (b) Requires the lender to provide the notice upon receiving a loan application. Art. 5A.14. WAITING PERIOD; RESCISSION. (a) Prohibits an equity loan from being made before the 16th day after the lender receives the loan application. (b) Authorizes each owner of residential homestead property securing an equity loan to rescind the loan. Provides that compliance with applicable state and federal laws regarding the right to rescind is considered compliance with this chapter. (c) Provides that the right of rescission applies to each equity loan made under this chapter. Prohibits a residential homestead owner securing an equity loan from waiving the right of rescission required by this section. Art. 5A.15. LOCATION OF CLOSING. Prohibits an equity loan from being closed at the borrower's residence, and requires it to be closed only at the office of the lender, a title company or a Texas licensed attorney. Defines "closing." Art. 5A.16. GENERAL PROVISIONS RELATING TO REVERSE MORTGAGES. (a) Requires payment to be permitted without penalty at any time during the term of a reverse mortgage, notwithstanding any other provision of this chapter. (b) Provides that advances made under a reverse mortgage and interest on those advances have priority over a lien filed for record in the real property records in the county where the property is located after the reverse mortgage is filed for record in the real property records of that county. (c) Authorizes a reverse mortgage to provide for a fixed or adjustable interest rate and for one that is contingent on appreciation in the fair market value of the homestead. (d) Prohibits the reverse mortgage advances from being reduced because of an adjustment in the interest rate. (e) Provides that a lender who fails to make required loan advances, and fails to cure the default, forfeits any right to collect all interest. Art. 5A.17. REPAYMENT OF REVERSE MORTGAGE. (a) Sets forth circumstances under which a reverse mortgage becomes due and payable. (b) Prohibits certain temporary absences from the homestead from causing the reverse mortgage to become due and payable. Prohibits temporary absences between consecutive days and one year from causing the reverse mortgage to become due and payable if the borrower has taken prior action to secure the home. (c) Subjects the lender's right to collect reverse mortgage payments to the statute of limitations, except that the period begins on the date the reverse mortgage is due and payable. (d) Requires the lender to prominently disclose any interest or fee to be charged during the period that begins on the date the reverse mortgage becomes due and payable and ends when repayment is made in full. Art. 5A.18. INAPPLICABILITY OF OTHER STATUTES TO REVERSE MORTGAGE. Authorizes a reverse mortgage loan to be made or acquired without regard to certain provisions of applicable state or federal statutes. Art. 5A.19. STATUS OF REVERSE MORTGAGE LOAN UNDER PUBLIC ASSISTANCE PROGRAM. Provides that for the purposes of determining eligibility under any statute relating to payments, allowance, benefits, or services provided on a means-tested basis by this state, reverse mortgage loan advances made to a borrower are considered proceeds from a loan, and not income; and undisbursed funds under a reverse mortgage loan are considered equity in a borrower's home and not proceeds from a loan. Art. 5A.20. REVERSE MORTGAGE LOAN INFORMATION AND COUNSELING. Prohibits a lender from making a reverse mortgage commitment, unless the applicant makes a statement attesting that the applicant received a notice from the consumer credit commissioner (commissioner) regarding independent information and counseling services on reverse mortgages. Sets forth requirements for the commissioner. Art. 5A.21. INTEREST. Authorizes a lender to contract for and receive on an equity loan any fixed or variable interest rate that does not exceed the maximum interest rate authorized under any state or federal statute permitting the lender to contract for a rate of interest. Requires the interest to be accrued and earned by applying the simple annual rate or rates to the principal balance. Authorizes the lender to assume that the payments have been made as originally scheduled and ignore any difference created by late or early payments in determining the amount of interest accrued. Provides that although payment of principal or interest is not required under a reverse mortgage until the entire loan becomes due and payable, interest accrues and may be compounded during the existence of the loan as provided by the loan agreement. Art. 5A.22. CLOSED-END EQUITY LOANS. (a) Requires each closed-end equity loan to be scheduled to be repaid in substantially equal monthly installments, with an exception. (b) Requires the amount of each installment to equal or exceed the amount of interest scheduled to accrue as of the date of the installment or that would accrue as of the installment date through amortization of the loan on the date of the loan. Art. 5A.23. CHARGES AND FEES. Sets forth certain authorized fees and charges that a lender is permitted to collect for an equity loan contract. Art. 5A.24. INSURANCE. (a) Authorizes a lender to request or require a borrower to provide certain amounts of insurance. (b) Authorizes premiums for insurance to be added to the loan contract. Art. 5A.25. LENDER'S DUTY TO BORROWER. (a) Requires a lender under an equity loan to deliver to the borrower, or to one of the borrowers if more than one, a copy of the note or the contract for an open account, a copy of all other documents signed by the borrower or borrowers, and a written statement containing certain information. (b) Authorizes a copy of the note or another document containing the information required by Subsection (a) to be delivered to the borrower rather than the separate written statement. (c) Requires the lender to give a receipt to a person making a cash payment on an equity loan on the borrower's request. (d) Prohibits a prepayment fee, charge, or penalty from being collected on any equity loan, with an exception. (e) Requires the holder to perform certain actions within a reasonable time on termination and full payment of an equity loan. Art. 5A.26. PROHIBITED PRACTICES. (a) Prohibits a lender from accepting an assignment of wages as security for a loan made under this chapter. (b) Prohibits a lender, in connection with an equity loan, from accepting a confession of judgment or power of attorney running to the lender or to a third person to confess judgment or to appear for a borrower in a judicial proceeding. (c) Prohibits a lender from accepting an instrument in which blanks are left to be filled in after an equity loan is executed. Art. 5A.27. OWNER ACKNOWLEDGEMENT. Authorizes a lienholder or assignee for value to rely on an acknowledgement by the owner of the homestead and the owner's spouse, of compliance with applicable requirements for an equity loan secured by a mortgage, trust deed, or other lien on a homestead. Art. 5A.28. REPORT BY LENDERS. (a) Requires a lender making an equity loan to submit within a specified time frame a report of the lender's equity loan activity during the year preceding the year the report is submitted to the director of the office of access to financial services (director). Sets forth required information for the report. Authorizes the director to set and collect from the lender a fee in connection with the submission of the report to enable the director to carry out this section. (b) Authorizes the director to accept a copy of a report submitted by the lender to a federal agency instead of the report required under Subsection (a) if the report submitted to the federal agency contains the information required under Subsection (a). (c) Provides that a lender that does not make an equity loan during the period covered by a report is not required to submit the report. Art. 5A.29. EQUITY LOAN RECOVERY FUND. (a) Requires the commissioner to establish and maintain an equity loan recovery fund (fund). Requires the fund to be used for reimbursing aggrieved persons who suffer actual damages as a result of misrepresentation, dishonesty, or fraud committed by an authorized lender in the course of making an equity loan, provided the recovery is ordered by a court of competent jurisdiction against the lender, and the court determines that the lender is unable to make the payment. (b) Requires the sums received by the commissioner for the fund to be held in trust for carrying out the purposes of the fund. (c) Requires the Finance Commission (commission) to establish and collect fees from authorized lenders for each home equity loan originated by the lender to accomplish the purposes of this Act. Requires fees collected to be deposited into the fund. (d) Requires the commission to adopt rules to implement this article. SECTION 3. Amends Article 342-101 et seq., V.T.C.S. (Texas Banking Code), by adding Article 11D, as follows: Art. 11D. DIVISION OF ACCESS TO FINANCIAL SERVICES. (a) Creates the division of access to financial services (division) in the commissioner's office to inform on the availability and quality of home equity loans offered by financial institutions in this state to agricultural businesses, small businesses, and individual consumers. (b) Requires the division to be headed by a director appointed by the commission. (c) Requires the director to staff the division to carry out the office's functions. (d) Sets forth required functions for the division. (e) Requires the division to have the authority to apply for and receive public and private grants and gifts. (f) Requires the division to have the authority to contract with public and private entities to carry out studies and analyses. (g) Requires the commission to establish and collect fees to accomplish the purpose of this article. SECTION 4. Amends Article 342-101, et seq., V.T.C.S., by adding Article 11E, as follows: Art. 11E. ASSESSMENT FOR THE OFFICE OF ACCESS TO FINANCIAL SERVICES. Requires the comptroller to collect annually, to defray the costs of creating and operating the division, from each bank, savings and loan association, savings bank, and credit union doing lawful business, from each person licensed under Article 5069-3.01, et seq., V.T.C.S., and from each person approved as a mortgagee to make insured loans, an assessment of 25 cents for each loan originated during that calendar year. SECTION 5. (a) Requires the director to conduct a study of homestead equity lending after May 1, 1998. (b) Requires the director to submit a report on the study to the governor, lieutenant governor, and speaker of the house of representatives before January 1, 1999. Sets forth required information for the report. SECTION 6. Effective date: May 1, 1996, providing that S.J.R. 25 is approved by the voters. Provides that if that amendment is not approved by the voters, this Act has no effect. SECTION 7. Emergency clause.