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.