BWM C.S.H.J.R. 31 75(R)BILL ANALYSIS
FINANCIAL INSTITUTIONS
C.S.H.J.R. 31
By: Patterson, L. P. "Pete"
4-20-97
Committee Report (Substituted)
BACKGROUND
During its course of work in the 75th Legislative session, the Committee
on Financial Institutions has reviewed several proposals that would allow
voters to choose if they wanted to alter the constitution to allow
homestead owners more liberal access to equity in their homesteads. The
major proposals have focused on three primary themes: (1) Allowing access
to equity through extending credit on a first lien beyond the original
purchase money--"cash out refinancing"--and refinancing of retired liens;
(2) Allowing second liens with no restrictions relating to purpose, and;
(3) Allowing second liens restricted to purpose and with consumer
protections, especially regarding foreclosure, included in the
constitution. Additional differences included percentage of appraised
value available for second liens and refinancing, lines of credit,
agriculture use exemptions, and reverse mortgages. While all proposals
significantly would change lien law regarding homesteads and would allow
consumers to access equity in some fashion, the differences are also
significant and are important enough to attempt to address as the
legislature focuses on such a major change to a state tradition regarding
protection of people's homesteads.
PURPOSE
To allow a voluntary encumbrance against homestead property for the
purpose 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 within the restrictions as set
forth in this Constitutional amendment.
RULEMAKING AUTHORITY
It is the committee's opinion that this bill does not expressly grant any
additional rulemaking authority to a state officer, department, agency or
institution.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Section 50, Article XVI, Texas Constitution by
numerating the existing provisions into subsections (a), (b), (c) and
creating subsections new subsection a(6), a(7), (d)(o).
Sec. 50(a)(5). Makes conforming changes to Constitutional language.
Sec 50 (a)(6). Provides for an encumbrance against homestead property for
an extension of credit, if the extension meets requirements as set for in
Sec. 50, Subsection (d).
Sec. 50 (a)(7). Provides for a voluntary encumbrance against homestead
property for an equity loan.
Sec. 50 (b). Makes perfecting changes.
Sec. 50 (d). Provides that the extension of credit is the only debt
secured by the homestead; previous debt must be paid or refinanced as a
part of the extension of credit.
This makes the extension a first lien. Subsection (d) also provides that
a lender may not require a person to extend credit on a homestead as a
condition for receiving credit not associated with the homestead.
Sec. 50 (e). Provides for written notice to be given by the lender to the
borrower upon request of an equity loan. Provides language for written
notice.
Sec. 50 (f). Provides notice must be signed by both the lender and
borrower upon closing of an equity loan and must include a statement of
the fair market value of the property.
Sec. 50 (g). Provides that the lender or holder of an equity loan must:
(1) deliver a copy of the promissory note and all other signed documents
to the borrower;
(2) disclose that the loan is an equity loan; and
(3) within a reasonable time of repayment of the loan the lender must
also:
(A) cancel and return the note to the borrower and give the borrower a
release of the lien in recordable form; or
(B) assign the note and lien to a refinancing lender.
Sec. 50 (h). Provides a lender or holder of an equity loan may not:
(1) demand payment, accelerate payment or foreclose due to a drop in the
fair market value of the homestead unless the decrease is caused by
causing by substantial damage or destruction;
(2) demand payment, accelerate payment, or foreclose because of default
on another loan;
(3) require borrower to apply proceeds from an equity loan to pay off
another loan not secured by the homestead;
(4) accept a borrower's homestead property as collateral for another loan;
(5) establish a form of open-end credit;
(6) close the loan before the twelfth day after the lender receivers the
completed application;
(7) impose prepayment penalties for advance payments;
(8) require the borrower to pay over 3% fees to originate, evaluate,
maintain, record, insure, or service the loan;
(9) accept an assignment of wages as security for the loan;
(10) accept a confession of judgement 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; or,
(11) accept an instrument in which blanks are left to be filled in by the
borrower.
Sec. 50 (i). Provides that an equity loan must be a debt secured only by
the homestead property, thus a lender may not require any property other
than the homestead property as collateral for the loan.
Sec. 50 (j). Provides for a three-day period to rescind the equity loan
without penalty.
Sec. 50 (k). Provides for specified allowable locations for closing an
equity loan.
Sec. 50 (l). Provides a penalty of forfeiture of principal and interest,
and payment of attorney's fees and other costs incurred by the borrower,
if the lender or holder of an equity loan fails to comply with this
section of the Constitution within a reasonable time after after receiving
notice of its failure to comply.
Sec. 50 (m). Provides for a 75% loan-to-value cap where the amount of the
equity loan plus the total of all other debt against the homestead cannot
exceed 75% of the market value of the property. Provides that the lien
securing an equity loan shall not be valid in excess of the 75% cap.
Sec. 50 (n). Provides for an election of remedies where 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.
Sec. 50 (o). Defines (1) "equity loan," as an extension of credit, other
than under Subsections (a)(1)-(6), that:
(A) is secured by a voluntary lien on the homestead property where the
total debt on the property cannot exceed 75% of the fair market value of
the property at the time the loan is closed;
(B) is created with the consent of each owner and spouse of each owner;
(C) is made by:
(i) a bank, savings and loan, savings bank, or credit union in Texas or
the United States;
(ii) a federally chartered lending instrumentality or mortgagee approved
to make federally insured loans; or
(iii) a person licensed to make regulated loans as provided by statute
of this state;
(D) is not secured by property already used to secure an equity loan;
(E) is not 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;
(F) is scheduled to be repaid in monthly payments;
(G) requires each payment to be amortized.
Sec. 50 (o)(2). Defines "close or closing" as the execution by the
borrower of the promissory notes and the security instruments securing the
loan.
SECTION 2. (a) Temporary provision added to the Texas Constitution
applying to the constitutional amendment proposed by the 75th Legislature,
Regular Session, 1997, authorizing a voluntary, consensual encumbrance on
homestead property.
(b) The constitutional amendment takes effect January 1, 1998.
(c) The temporary provision takes effect on the adoption of the amendment
by the voters and expires January 2, 1998.
SECTION 3. Ballot language and provision for election date.
COMPARISON OF ORIGINAL TO SUBSTITUTE
Whereas HJR 31 as filed allowed for an encumbrance against the homestead
property for an extension of credit in the form of a first lien refinance
to obtain equity credit, the Committee Substitute to HJR 31 expands this
allowance for encumbrances against the homestead property to include
second lien home equity loans. The Committee Substitute provides for
restrictions on the second lien home equity loans to include a 75%
loan-to-value cap, a requirement of written notice to the borrower, an
election of remedies in the event of foreclosure, providing for no
recourse against the borrower in the event of nonjudicial foreclosures and
requiring judicial foreclosure if a lender seeks assets in addition to the
property to repay the debt, restrictions against demand of payment in the
event of market value decrease, and specifics on allowable locations for
the closing of the loan. Furthermore, the Substitute provides for a
twelve day cooling off period, a three day period wherein the borrower may
rightfully rescind the loan, restrictions against open-end account home
equity loans, restrictions against cross collateralization, restrictions
against cross default, restrictions against prepayment penalties, and
restrictions against additional collateral being required. Finally, the
Substitute caps loan fees at 3% of the loan amount, defines authorized
lenders, and prohibits balloon payments.