BWM C.S.H.B. 1188 75(R)BILL ANALYSIS
FINANCIAL INSTITUTIONS
C.S.H.B. 1188
By: Danburg, et al.
4-20-97
Committee Report (Substituted)
BACKGROUND
Currently, state law permits a homeowner to use a home as collateral for
only five types of loans: a mortgage to purchase the property ("purchase
money" mortgage); a home improvement loan; a loan to pay property taxes
owed against the home; a loan to pay off an IRS tax lien (for failure to
pay federal income taxes); and an owelty of partition imposed against a
home by a court order (usually in a divorce or inheritance where one
family member borrows against the home to "buy out" another family
member's interest).
State law does not allow home equity loans. An equity loan is where the
borrower uses the value of the equity in his or her home as collateral.
Equity is the difference between market value of the home and the
amount(s) owed against it. Texas is the only state in the country that
prohibits home equity loans.
PURPOSE
To make statutory revisions to allow for a voluntary encumbrance against
homestead property for the purposes of equity credit including a first
lien refinance mortgage loan, a mortgage loan secured by the home if the
property is owned free and clear, or a second lien home equity loan. The
bill would also establish a statutory framework in the Consumer Credit
Code to provide for the regulation and oversight of home equity loans
including lending activity reports and the establishment of an equity loan
recovery fund for the protection of homeowners.
RULEMAKING AUTHORITY
It is the committee's opinion that rulemaking authority is expressly
granted to the Finance Commission of Texas in SECTION 3, Article 5A.10(d),
to adopt rules to implement Art. 5A.10 of the bill.
It is the committee's opinion that while not expressly granting rulemaking
authority to the Insurance Commissioner, the bill does provide in SECTION
7, Section 9.07(g), Insurance Code, for the Insurance Commissioner to
promulgate an endorsement that must be attached to an equity loan
mortgagee policy and to promulgate other policies and endorsements
relating to an equity loan mortgage on a homestead.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends 41.001(b), Property Code.
(6) Provides for the allowance of a voluntary encumbrance properly fixed
on homestead property for an extension of credit which meets the
requirements of Section 41.008;
(7) Provides for the allowance of a voluntary encumbrance properly fixed
on homestead property for an equity loan as defined by Article 5A.01,
Title 79, Revised Statutes (Article 5069-5A.01, Vernon's Texas Civil
Statues).
SECTION 2. Amends Subchapter A, Chapter 41, Property Code by adding
Section 41.008.
Sec. 41.008. CERTAIN EXTENSIONS OF CREDIT SECURED BY HOMESTEAD.
(a) Provides that an extension of credit made under Section 41.001(b)(6)
must be the only debt secured by the property and any debt must be paid in
full or refinanced as part of the extension of credit.
(b) Provides that a lender may not require a person to extend credit
under Section 41.001(b)(6) on a homestead as a condition for receiving
credit not associated with the homestead.
SECTION 3. Amends Title 79, Article 5069-1.01 et seq., Vernon's Texas
Civil Statutes by adding Chapter 5A.
Art. 5A.01. DEFINITIONS. Defines:
(1) "Application;"
(2) "Business day;"
(3) "Close" or "closing;"
(4) "Equity loan" as an extension of credit under a written agreement
other than under Section 41.001(b)(1)-(6), Property Code, that:
(A) is secured by a voluntary lien against a homestead where the
resulting total debt on the property is not greater than 75% of the fair
market value of the homestead at the time that the loan is closed;
(B) is created with the consent each owner and all spouses;
(C) is made by:
(i) a bank, S&L association, savings bank, or credit union;
(ii) a federally chartered lending instrumentality or a person approved
as a mortgagee by the U.S. government to make federally insured loans;
or
(iii) a person licensed to make regulated loans by this state;
(D) is not secured with property encumbered by an earlier equity loan;
(E) is not secured by any additional real or personal property other
than the homestead;
(F) is scheduled to be repaid in monthly payments; and
(G) requires that each loan installment be fully amortized.
(5) "Reverse mortgage" as an extension of credit under a written
agreement:
(A) that is secured by a voluntary lien on homestead property or other
consensual security interest;
(B) that is created with the consent of each owner and the spouse of
each owner;
(C) that is made without recourse for personal liability;
(D) under which advances are provided based on the equity in the
homestead;
(E) that does not allow the lender to reduce the amount or number of
advances because of adjustments in interest rates; and
(F) that requires no payment until:
(i) the homestead is sold; or
(ii) all borrowers cease occupying the property as a residence for 180
consecutive days and the location of the property owner is not known to
the lender.
Art. 5A.02. CONSTRUCTION OF CHAPTER. (a) Provides that for the purposes
of this chapter an equity loan is considered closed on the earliest date
on which both of the following are executed:
(1) each promissory note; and
(2) a deed of trust or other instrument securing the loan.
(b) In establishing the fair market value of the property, the lender
shall rely on an appraisal or evaluation prepared in accordance with state
or federal requirements. If no requirement applies to an equity loan, the
fair market value of the property may be, at the lender's option, the
value estimate set forth in:
(1) the most recent ad valorem tax appraisal district evaluation;
(2) an appraisal by a licensed or certified appraiser; or
(3) any other competent appraisal.
Art. 5A.03. APPLICABILITY OF CHAPTER. Provides that an lender making an
equity loan must comply with:
(1) this chapter;
(2) any nonconflicting requirement of another law relied on for the rate
or amount of interest;
(3) applicable federal law.
Art. 5A.04. PERCENT OF VALUE LIMIT. Provides that: (a) the principal of
an equity loan plus the aggregate total of outstanding balances of other
indebtedness against the homestead may not exceed 75% of the fair market
value of the property at the time of the closing and that the lien is only
valid if the amount does not exceed 75%. Violation of this article does
not affect the validity of other indebtedness secured by the homestead.
(b) For the purposes of this article, the aggregate total of indebtedness
does not include any advance made by a lender to protect a prior lien
against the homestead, including the payment of hazard insurance, repairs
to the property, or payments on any other indebtedness secured by the
property.
Art. 5A.05. WAITING PERIOD; RESCISSION. Provides: (a) an equity loan
cannot be closed before the twelfth day after the lender receives the
application for the loan.
(b) that each owner or spouse may rescind the loan and that compliance
with all applicable state and federal law regarding the right to rescind
is considered compliance with this Chapter.
(c) that the right of rescission applies to each equity loan made under
this chapter, regardless of the purpose. An owner of a homestead property
may not waive the right of rescission.
Art. 5A.06. INTEREST. Provides that a lender may contract for and
receive interest on an equity loan that does not exceed the maximum rate
of interest authorized under Article 1.04 of this title or any other state
or federal statute. Provides that interest shall be calculated by
applying the simple annual interest rate or rates under the loan contract
to the principal balance. In determining the amount of interest accrued,
the lender may assume that the payments have been made on time and may
ignore any difference created by early or late payments.
Art. 5A.07. INSURANCE. (a) Provides that a lender may request or require
a borrower to provide insurance:
(1) in the amounts and under the conditions that apply to a secondary
mortgage loan under Art. 5.02 and 5.03 of this title;
(2) in the amounts and under the conditions of:
(A) the Home Equity Conversion Mortgage Insurance program;
(B) Section 255 of the National Housing Act; and
(C) 24 C.F.R. Section 206 et seq.; and
(3) in the amount and under the terms and conditions provided for by any
state or federal statute, including insurance authorized under Chapters
3, 4, 5, and 15 of this title.
(b) premiums charged under this article can be added to the loan contract.
Art. 5A.08. DEFAULT BY BORROWER. Provides that on default the holder of
the loan may not seek recourse against the assets of the borrower other
than the homestead property, unless the holder has obtained a judicial
foreclosure of the lien securing the equity loan. If the holder chooses
to sell the homestead under power of sale rather than obtain a judicial
foreclosure, the holder must notify the borrower by written notice of the
default by certified mail. The holder may not give notice of the sale
required by Sec. 51.002(b), Property Code, until the borrower has had at
least 30 days after receiving the notice of default, to cure the default.
Art. 5A.09. REPORT BY LENDERS. (a) Requires that a lender shall prepare
a report annually of its equity lending activities and give that report to
the director of the Division of Access to Financial Services. The report
must include the primary purpose of the loan, whether the loan was
approved, and the applicant's income and census tract. Provides for the
director to set and collect reasonable filing fees in connection with the
submission of the report.
(b) Provides the director may 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 contains the same information.
(c) Provides that a lender who doesn't make a home equity loan during the
period covered by the report is not required to submit the report.
Art. 5A.10. EQUITY LOAN RECOVERY FUND. (a) Provides that the Consumer
Credit Commissioner shall create and maintain an equity loan recovery
fund. The fund shall be used to reimburse persons who suffer damages as a
result of actions by an authorized lender in the course of making an
equity loan, if a court rules against the lender.
(b) Provides that a judgement that results in an order for collection from
the fund may not be brought later than 2 years after the date of accrual
of the cause of action.
(c) Provides that the Finance Commission shall establish and collect
reasonable fees from lenders to accomplish the purposes of this article
and the fees will be deposited in the equity loan recovery fund. The
money in the fund shall be held by the Consumer Credit Commissioner in
trust.
(d) Provides the Finance Commission shall adopt rules necessary to
implement this article.
Art. 5A.11. GENERAL PROVISIONS RELATING TO REVERSE MORTGAGES. (a)
Provides that advances made under a reverse mortgage and interest on those
advances have priority over a lien filed for record.
(b) Provides for authorization of fixed or variable interest rates.
(c) Provides prohibition against a reduction in periodic advances because
of an adjustment in the interest rate.
(d) Provides for forfeiture of all interest for a lender that fails to
make loan advances as required under the loan documents.
Art. 5A.12. RELATIONSHIP OF OTHER STATUTES TO REVERSE MORTGAGE. Provides
a reverse mortgage may be acquired without regard to the following
provisions of state and federal statues:
(1) a limit on the use of future advances;
(2) a limit on the length of the loan;
(3) a limit on the term that advances take priority over intervening
advances;
(4) a requirement that a maximum loan amount be stated;
(5) a prohibition on balloon payments;
(6) a prohibition on compound interest and interest on interest;
(7) a prohibition on contracting for, charging, or receiving any rate of
interest authorized under Article 1.04 or under other statute authorizing
a lender to contract a rate of interest; and
(8) a requirement that a percentage of the proceeds be advanced before
the assignment of the reverse mortgage.
Art. 5A.13. STATUS OF REVERSE MORTGAGE LOAN UNDER PUBLIC ASSISTANCE
PROGRAM. For the purposes of determining eligibility under any statute
relating to payments, allowances, benefits, or services provided on a
means-tested basis by this state, including supplemental security income,
low-income energy assistance, property tax relief, medical assistance, and
general assistance:
(1) reverse mortgage loan advancements are considered proceeds from a
loan and not income; and
(2) undisbursed funds under a reverse mortgage are considered equity in a
home and not proceeds from a loan.
Art. 5A.14. REVERSE MORTGAGE LOAN INFORMATION AND COUNSELING. Provides a
lender is prohibited from making a reverse mortgage loan unless the loan
applicants attest in writing that they received a statement prepared by
the Consumer Credit Commissioner regarding the advisability and
availability of independent information and counseling services on reverse
mortgages. The Commissioner is required by statute to:
(1) develop the content and format of the statement;
(2) provide information on reverse mortgages and their alternatives; and
(3) refer consumers to independent counseling services with expertise in
reverse mortgages.
SECTION 4. Amends Chapter 2, Title 79, Revised Statutes (Article
5069-2.01 et seq., Vernon's Texas Civil Statutes).
Art. 2.02E. DIVISION OF ACCESS TO FINANCIAL SERVICES. (a) Provides for
the creation of the Division of Access to Financial Services in the Office
of the Consumer Credit Commissioner to inform, monitor and report on the
availability and quality of home equity loans including those offered to
agricultural businesses, small businesses and consumers.
(b) Provides the head of the division shall be appointed by the Consumer
Credit Commissioner.
(c) Provides the director of the division shall staff the division.
(d) Provides the division shall:
(1) research the availability quality and cost of equity loans in
various regions of the state;
(2) research the effect of the practices of lenders that provide equity
loans;
(3) conduct a public information campaign to provide low-income and
elderly consumers information and counseling about home equity loans;
(4) compile a summary of the information received in every lender's
annual home equity loan activity report to produce reports on equity
lending patterns with regard to the rate of application and loan
acceptance by income and census tract;
(5) provide the Legislature a report detailing the division's findings
and recommendations every two years; and
(6) prepare public interest information on the division and make this
information available to the public and state and federal agencies.
(e) Provides for the application for and receipt of public and private
grants and gifts and contract with public and private entities to carry
out the study and analysis.
(f) Provides the Consumer Credit Commissioner may collect fees to
accomplish this article.
SECTION 5. Amends Chapter 2, Title 79, Revised Statutes (Article
5069-2.01 et seq., Vernon's Texas Civil Statutes).
Art. 2.02F. STUDY AND REPORT; EQUITY LOANS. (a) Provides the director
of the Division of Access to Financial Services shall conduct a study of
equity lending under Chapter 5A of the Texas Credit Code after May 1,
2000.
(b) Before January 1, 2001, the director shall submit a report on the
study to the governor, the lieutenant governor, and the speaker of the
house of representatives which includes:
(1) a summary of the information received in the annual reports submitted
by home equity lenders;
(2) an analysis of the effectiveness of the provisions of Chapter 5A; and
(3) any other information the director deems relevant to the regulation
of equity loans.
SECTION 6. Amends Section 9.02, Insurance Code, by adding Subsection (r).
(r) Provides that an "equity loan mortgagee policy" means a Texas
promulgated Form T-2 mortgage policy of title insurance that insures the
validity and priority of an equity loan mortgage on homestead property.
SECTION 7. Amends Section 9.07, Insurance Code, by adding Subsection (g).
(g) Provides for the Insurance Commissioner to promulgate an endorsement
that must be attached to an equity loan mortgagee policy (title insurance
policy). The Insurance Commissioner may also promulgate other policies
and endorsements relating to an equity loan mortgage on a homestead.
SECTION 8. Effective date of January 1, 1998, contingent upon passage of
a Constitutional amendment allowing voluntary, consensual encumbrances on
homestead property for the purpose of equity loans approved by the voters.
SECTION 9. Emergency clause.
COMPARISON OF ORIGINAL TO SUBSTITUTE
The Committee Substitute to HB 1188 does not provide definitions for
"advance," "blended equity loan," and does not provide for an open-end
account or a blended equity loan in the definition of "equity loan," as
found in the original bill.
The Substitute does not include a provision to allow a valid encumbrance
on homestead property as authorized by Section 41.001(b)(1), (2), (3),
(4), or (5), Property Code, to be considered equity loans, as found in the
original bill in Art. 5A.03, Subsection (c).
The Substitute does not include provisions for ELIGIBLE PROPERTY; ONE
EQUITY LOAN AUTHORIZED; IDENTIFICATION REQUIREMENT; ADVANCES AND REPAYMENT
DETERMINED BY AGREEMENT; and CREDIT CARD ACCESS PROHIBITED; as found in
the original bill.
The Substitute changes the percent of value limit from 90% as found in the
original bill to 75%.
The Substitute does not include provisions for a LIMIT ON COLLATERAL AND
USE OF PROCEEDS; ACCELERATION PROHIBITED; NOTICE; and LOCATION OF
CLOSING, as found in the original bill.
The Substitute removes the provision allowing payment in whole or part at
any time without penalty during the term of a reverse mortgage loan as
found in the original bill.
The Substitute does not include provisions regarding repayment of reverse
mortgage concerning the reverse mortgage becoming due and payable in the
occurrence of an event specified in the loan documents, including the
death of all borrowers, concerning prohibitions in regard to the payment
and due date of a reverse mortgage in the event of the homestead property
owner's absence, concerning the lender's right to collect reverse mortgage
payments being subject to the applicable statute of limitations for a
debt, concerning the limitations period for the lien securing an equity
loan is governed by Sections 16.035 and 16.036, Civil Practice and
Remedies Code, and concerning requirements on the lender, in the loan
documents, 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 full as found in the original bill.
The Substitute does not include provisions in regards to inapplicability
of other statutes to reverse mortgages for a reverse mortgage loan be made
without regard to provisions of state or federal statutes limiting
loan-to-value ratios other than provided by this chapter as found in the
original bill.
The Substitute does not include provisions allowing interest to be accrued
on unpaid interest and additions to principal authorized by the loan
contract nor provisions allowing interest to be accrued and compounded
during the term of the loan as provided in a reverse mortgage agreement as
found in the original bill.
The Substitute does not include provisions regarding CLOSED-END EQUITY
LOANS; CHARGES AND FEES; LENDER'S DUTY TO BORROWER; PROHIBITED
PRACTICES; and OWNER ACKNOWLEDGMENT as found in the original bill.
The Substitute does not include an expiration date of January 2, 2001 to
the Section requiring the director of The Division of Access to Financial
Services to study and report equity lending as found in the original bill.
The Substitute adds provisions pertaining to CERTAIN EXTENSIONS OF CREDIT
SECURED BY HOMESTEAD in SECTION 2, Sec. 41.008.
The Substitute adds provisions for the definition of "close" or "closing."
The Substitute adds provisions to the definition of "equity loan"
requiring loan not be secured by property encumbered by a prior duly
recorded equity loan and requiring loan not be secured by any additional
real or personal property, other than the homestead, except for a
manufactured home or rents to be derived from the homestead. The
Substitute also adds federally chartered lending instrumentalities (Fannie
May, Freddie Mac, etc.) to the authorized lenders. The Substitute adds
provisions requiring an equity loan to be scheduled to be repaid in
substantially equal successive monthly installments beginning no later
than two months after the date principal is advanced under an equity loan.
The Substitute adds provisions requiring the lender to amortize an equity
loan so that each payment each installment equal the amount of interest
and principal scheduled to accrue as of the date of the installment or as
of installment date.
The Substitute adds provisions changing a reverse annuity mortgage from a
non-recourse equity loan to an extension of credit that is made without
recourse for personal liability against each owner and the spouse of each
owner. The Substitute also adds provisions that no payment of principal
of interest of a reverse mortgage loan is required until borrowers cease
occupation for more than 180 consecutive days and the location of the
homestead property owner is unknown to the lender.
The Substitute adds provisions in regards to DEFAULT BY BORROWER
establishing the borrower has no personal liability for an equity loan if
a lender chooses to pursue a nonjudicial foreclosure upon default. If,
upon default, a lender chooses to pursue other assets of a borrower in
addition to the homestead property to repay the debt, the lender must file
a lawsuit for judicial foreclosure.
The Substitute makes exacting changes to provisions addressing
CONSTRUCTION OF CHAPTER and REVERSE MORTGAGE LOAN INFORMATION AND
COUNSELING.