By Danburg H.B. No. 1188
Substitute the following for H.B. No. 1188:
By Solomons C.S.H.B. No. 1188
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to permitting an encumbrance against homestead property
1-3 for certain extensions of equity credit.
1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-5 SECTION 1. Section 41.001(b), Property Code, is amended to
1-6 read as follows:
1-7 (b) Encumbrances may be properly fixed on homestead property
1-8 for:
1-9 (1) purchase money;
1-10 (2) taxes on the property;
1-11 (3) work and material used in constructing
1-12 improvements on the property if contracted for in writing as
1-13 provided by Sections 53.059(a), (b), and (c);
1-14 (4) an owelty of partition imposed against the
1-15 entirety of the property by a court order or by a written agreement
1-16 of the parties to the partition, including a debt of one spouse in
1-17 favor of the other spouse resulting from a division or an award of
1-18 a family homestead in a divorce proceeding; [or]
1-19 (5) the refinance of a lien against a homestead,
1-20 including a federal tax lien resulting from the tax debt of both
1-21 spouses, if the homestead is a family homestead, or from the tax
1-22 debt of the owner;
1-23 (6) an extension of credit for any other purpose, if
1-24 the extension of credit meets the requirements of Section 41.008;
2-1 or
2-2 (7) an equity loan, as defined by Article 5A.01, Title
2-3 79, Revised Statutes (Article 5069-5A.01, Vernon's Texas Civil
2-4 Statutes).
2-5 SECTION 2. Subchapter A, Chapter 41, Property Code, is
2-6 amended by adding Section 41.008 to read as follows:
2-7 Sec. 41.008. CERTAIN EXTENSIONS OF CREDIT SECURED BY
2-8 HOMESTEAD. (a) An extension of credit under Section 41.001(b)(6)
2-9 must be the only debt secured by the homestead. Any prior debt
2-10 secured by the homestead must be paid in full before the extension
2-11 of credit under Section 41.001(b)(6) or refinanced as part of the
2-12 extension of credit under Section 41.001(b)(6).
2-13 (b) A lender may not require as a condition on an extension
2-14 of credit under Section 41.001(b)(6) that the proceeds of the
2-15 extension of credit be used for a particular purpose.
2-16 SECTION 3. Title 79, Revised Statutes (Article 5069-1.01 et
2-17 seq., Vernon's Texas Civil Statutes), is amended by adding Chapter
2-18 5A to read as follows:
2-19 CHAPTER 5A. EQUITY LOANS
2-20 Art. 5A.01. DEFINITIONS. In this chapter:
2-21 (1) "Application" means an oral or written request for
2-22 an equity loan made according to procedures established by the
2-23 lender.
2-24 (2) "Business day" means a day other than a Sunday or
2-25 a legal public holiday listed by 5 U.S.C. Section 6103(a).
2-26 (3) "Close" or "closing" means, for the purpose of an
2-27 equity loan, the execution by the borrower of the promissory note
3-1 and the security instruments securing the loan.
3-2 (4) "Equity loan" means an extension of credit under a
3-3 written agreement, other than an extension of credit under Section
3-4 41.001(b)(1)-(6), Property Code, that:
3-5 (A) is secured by a voluntary lien on a
3-6 homestead or other consensual security interest in a homestead
3-7 securing payment of a debt in an amount that is not greater than 75
3-8 percent of the fair market value of the homestead property at the
3-9 time the equity loan is closed;
3-10 (B) is created with the consent of each owner
3-11 and the spouse of each owner in accordance with applicable
3-12 statutory requirements;
3-13 (C) is made by:
3-14 (i) a bank, savings and loan association,
3-15 savings bank, or credit union doing business under the laws of this
3-16 state or the United States;
3-17 (ii) a federally chartered lending
3-18 instrumentality or a person approved as a mortgagee by the United
3-19 States government to make federally insured loans; or
3-20 (iii) a person licensed to make regulated
3-21 loans, as provided by statute of this state;
3-22 (D) is not secured with property encumbered by a
3-23 prior duly recorded equity loan;
3-24 (E) is not secured by any additional real or
3-25 personal property, other than the homestead, except for a
3-26 manufactured home or rents to be derived from the homestead;
3-27 (F) is scheduled to be repaid in substantially
4-1 equal successive monthly installments beginning no later than two
4-2 months after the date principal is advanced under an equity loan;
4-3 and
4-4 (G) requires each installment under the schedule
4-5 of payments by the borrower to equal the amount of interest and
4-6 principal scheduled to accrue as of the date of the installment or
4-7 that would accrue as of the installment date through amortization
4-8 of the equity loan.
4-9 (5) "Reverse mortgage" means an extension of credit
4-10 under a written agreement:
4-11 (A) that is secured by a voluntary lien on
4-12 homestead property or other consensual security interest in
4-13 homestead property;
4-14 (B) that is created with the consent of each
4-15 owner and the spouse of each owner in accordance with applicable
4-16 statutory requirements;
4-17 (C) that is made without recourse for personal
4-18 liability against each owner and the spouse of each owner;
4-19 (D) under which advances are provided to a
4-20 borrower based on the equity in a borrower's homestead;
4-21 (E) that does not permit the lender to reduce
4-22 the amount or number of advances because of an adjustment in the
4-23 interest rate if periodic advances are to be made; and
4-24 (F) that requires no payment of principal or
4-25 interest until:
4-26 (i) the homestead property securing the
4-27 loan is sold; or
5-1 (ii) all borrowers cease occupying the
5-2 homestead property as a principal residence for more than 180
5-3 consecutive days and the location of the homestead property owner
5-4 is unknown to the lender.
5-5 Art. 5A.02. CONSTRUCTION OF CHAPTER. (a) For the purposes
5-6 of this chapter, an equity loan is considered closed on the
5-7 earliest date on which both of the following are executed:
5-8 (1) each promissory note evidencing the equity loan;
5-9 and
5-10 (2) a deed of trust or other security instrument
5-11 securing the equity loan.
5-12 (b) In establishing the fair market value of homestead
5-13 property, a lender shall rely on an appraisal or evaluation, as
5-14 appropriate, prepared in accordance with a state or federal
5-15 requirement applicable to the lender. If no state or federal
5-16 appraisal or evaluation requirement applies to an equity loan, the
5-17 fair market value of the homestead property may be, at the lender's
5-18 option, the value estimate set forth in:
5-19 (1) the most recent ad valorem tax appraisal district
5-20 valuation for the homestead property;
5-21 (2) an appraisal prepared by a licensed or certified
5-22 appraiser under the Texas Appraiser Licensing and Certification Act
5-23 (Article 6573a.2, Vernon's Texas Civil Statutes); or
5-24 (3) any other competent appraisal.
5-25 Art. 5A.03. APPLICABILITY OF CHAPTER. A lender making an
5-26 equity loan must comply with:
5-27 (1) this chapter;
6-1 (2) any nonconflicting requirement of another law
6-2 relied on as authority for the rate or amount of interest provided
6-3 for in the loan; and
6-4 (3) applicable federal law.
6-5 Art. 5A.04. PERCENT OF VALUE LIMIT. (a) The principal
6-6 amount of an equity loan, plus the aggregate total of the
6-7 outstanding balances of other indebtedness secured by valid
6-8 encumbrances of record against the homestead property, may not
6-9 exceed 75 percent of the fair market value of the homestead
6-10 property on the date the equity loan is closed. The lien securing
6-11 the equity loan is valid only if the principal amount of the equity
6-12 loan plus the aggregate total of the outstanding balances of other
6-13 indebtedness secured by valid encumbrances of record against the
6-14 homestead property do not exceed 75 percent of the fair market
6-15 value of the homestead property on the date the equity loan is
6-16 closed. Violation of this article does not affect the validity of
6-17 other indebtedness secured by valid encumbrances of record against
6-18 the homestead property or of the lien securing the equity loan.
6-19 (b) For the purposes of this article, the aggregate total of
6-20 the outstanding balances of indebtedness secured by valid
6-21 encumbrances of record against the homestead property does not
6-22 include any advance made by a lender to protect a lien on the
6-23 homestead property securing the loan, including the payment of
6-24 hazard insurance premiums, repairs to the homestead property, or
6-25 payments on any indebtedness secured by a prior valid encumbrance
6-26 on the homestead property.
6-27 Art. 5A.05. WAITING PERIOD; RESCISSION. (a) An equity loan
7-1 may not be closed before the 12th day after the date the lender
7-2 receives an application for the loan.
7-3 (b) Each owner or spouse of each owner of homestead property
7-4 securing an equity loan may rescind the loan. Compliance with all
7-5 applicable state and federal law regarding the right to rescind,
7-6 including 12 C.F.R. Sections 226.15 et seq. and 226.23 et seq., is
7-7 considered compliance with this chapter regarding rescission.
7-8 (c) The right of rescission provided by this article applies
7-9 to each equity loan made under this chapter, regardless of the
7-10 purpose of the loan. An owner of the homestead property securing
7-11 an equity loan may not waive the right of rescission required by
7-12 this article, regardless of whether applicable state or federal law
7-13 provides for a waiver.
7-14 Art. 5A.06. INTEREST. A lender may contract for and receive
7-15 on an equity loan any fixed or variable rate of interest that does
7-16 not exceed the maximum rate of interest authorized under Article
7-17 1.04 of this title or under any other state or federal statute
7-18 authorizing the lender to contract for a rate of interest.
7-19 Interest shall be accrued and earned by applying the simple annual
7-20 interest rate or rates under the loan contract to the principal
7-21 balance. In determining the amount of interest accrued, the lender
7-22 may assume that the payments have been made as originally scheduled
7-23 and ignore any difference created by late or early payments.
7-24 Art. 5A.07. INSURANCE. (a) Under an equity loan, a lender
7-25 may request or require a borrower to provide insurance:
7-26 (1) in the amounts and under the conditions that apply
7-27 to a secondary mortgage loan under Articles 5.02 and 5.03 of this
8-1 title;
8-2 (2) in the amounts and under the terms and conditions
8-3 of:
8-4 (A) the Home Equity Conversion Mortgage
8-5 Insurance program, Housing and Community Development Act of 1987,
8-6 Pub. L. 100-242;
8-7 (B) Section 255 of the National Housing Act (12
8-8 U.S.C. Section 1715z-20); and
8-9 (C) 24 C.F.R. Section 206 et seq.; and
8-10 (3) in the amounts and under the terms and conditions
8-11 provided for by any state or federal statute authorizing or
8-12 requiring any type of insurance relating to a loan or other
8-13 extension of credit, including insurance authorized under Chapters
8-14 3, 4, 5, and 15 of this title.
8-15 (b) Premiums for insurance under this article may be added
8-16 to the loan contract.
8-17 Art. 5A.08. DEFAULT BY BORROWER. On default by the borrower
8-18 on an equity loan, the holder of the loan may not seek recourse
8-19 against the assets of the borrower, other than the homestead
8-20 property securing the loan, unless the holder has obtained a
8-21 judicial foreclosure of the lien securing the loan in a district
8-22 court of the county in which the homestead property is located. If
8-23 the holder elects to sell the homestead property under a power of
8-24 sale conferred by a deed of trust or other contract lien rather
8-25 than obtain a judicial foreclosure of the lien, the holder shall
8-26 send the borrower written notice of the default by certified mail.
8-27 The holder may not give notice of the sale required by Section
9-1 51.002(b), Property Code, until the borrower is given at least 30
9-2 days after receiving the notice to cure the default, including the
9-3 day on which the notice is given and the day notice of the sale is
9-4 given as required by Section 51.002(b), Property Code.
9-5 Art. 5A.09. REPORT BY LENDERS. (a) Before March 1 of each
9-6 year, a lender that makes an equity loan shall submit to the
9-7 director of the Division of Access to Financial Services a report
9-8 of the lender's home equity loan activity during the calendar year
9-9 preceding the year the report is submitted. For each home equity
9-10 loan for which the lender received an application, the report must
9-11 state the primary purpose of the loan, whether the loan was
9-12 granted, and the applicant's income and census tract. The director
9-13 of the Division of Access to Financial Services may set and collect
9-14 from the lender a reasonable filing fee in connection with the
9-15 submission of the report in an amount necessary and reasonable to
9-16 enable the director to carry out this article.
9-17 (b) The director of the Division of Access to Financial
9-18 Services may accept a copy of a report submitted by the lender to a
9-19 federal agency instead of the report required under Subsection (a)
9-20 of this article if the report submitted to the federal agency
9-21 contains the information required for a report under Subsection (a)
9-22 of this article.
9-23 (c) A lender that does not make a home equity loan during
9-24 the period covered by a report is not required to submit the
9-25 report.
9-26 Art. 5A.10. EQUITY LOAN RECOVERY FUND. (a) The Consumer
9-27 Credit Commissioner shall establish and maintain an equity loan
10-1 recovery fund. The fund shall be used for reimbursing aggrieved
10-2 persons who suffer actual damages as a result of misrepresentation,
10-3 dishonesty, or fraud committed by an authorized lender in the
10-4 course of making an equity loan, if the recovery is ordered by a
10-5 court against the lender and the court determines that the lender
10-6 is unable to make the payment.
10-7 (b) An action for a judgment that subsequently results in an
10-8 order for collection from the equity loan recovery fund may not be
10-9 brought later than two years after the date of accrual of the cause
10-10 of action.
10-11 (c) The Finance Commission shall establish and collect
10-12 reasonable and necessary fees from authorized lenders for each home
10-13 equity loan originated by the lender to accomplish the purposes of
10-14 this article. Fees collected shall be deposited into the equity
10-15 loan recovery fund. The money in the equity loan recovery fund
10-16 shall be held by the Consumer Credit Commissioner in trust for
10-17 carrying out the purposes of the equity loan recovery fund.
10-18 (d) The Finance Commission shall adopt rules necessary to
10-19 implement this article.
10-20 Art. 5A.11. GENERAL PROVISIONS RELATING TO REVERSE
10-21 MORTGAGES. (a) Advances made under a reverse mortgage and
10-22 interest on those advances have priority over a lien filed for
10-23 record in the real property records in the county where the
10-24 homestead property is located after the reverse mortgage is filed
10-25 for record in the real property records of that county.
10-26 (b) A reverse mortgage may provide for an interest rate that
10-27 is fixed or adjustable and may also provide for interest that is
11-1 contingent on appreciation in the fair market value of the
11-2 homestead property.
11-3 (c) If a reverse mortgage provides for periodic advances to
11-4 a borrower, the advances may not be reduced in amount or number
11-5 because of an adjustment in the interest rate.
11-6 (d) A lender who fails to make loan advances as required in
11-7 the loan documents and who fails to cure the default as required in
11-8 the loan documents, forfeits any right to collect all interest.
11-9 Art. 5A.12. RELATIONSHIP OF OTHER STATUTES TO REVERSE
11-10 MORTGAGE. A reverse mortgage loan may be made or acquired without
11-11 regard to the following provisions of any applicable state or
11-12 federal statute:
11-13 (1) a limitation on the purpose and use of future
11-14 advances or other mortgage proceeds;
11-15 (2) a limitation on future advances to a term of years
11-16 or a limitation on the term of open-end account advances;
11-17 (3) a limitation on the term during which future
11-18 advances take priority over intervening advances;
11-19 (4) a requirement that a maximum loan amount be stated
11-20 in the reverse mortgage loan documents;
11-21 (5) a prohibition on balloon payments;
11-22 (6) a prohibition on compound interest and interest on
11-23 interest;
11-24 (7) a prohibition on contracting for, charging, or
11-25 receiving any rate of interest authorized under Article 1.04 of
11-26 this title or under any other statute authorizing a lender to
11-27 contract for a rate of interest; and
12-1 (8) a requirement that a percentage of the reverse
12-2 mortgage proceeds advanced before the assignment of the reverse
12-3 mortgage.
12-4 Art. 5A.13. STATUS OF REVERSE MORTGAGE LOAN UNDER PUBLIC
12-5 ASSISTANCE PROGRAM. For the purposes of determining eligibility
12-6 under any statute relating to payments, allowances, benefits, or
12-7 services provided on a means-tested basis by this state, including
12-8 supplemental security income, low-income energy assistance,
12-9 property tax relief, medical assistance, and general assistance:
12-10 (1) reverse mortgage loan advances made to a borrower
12-11 are considered proceeds from a loan and not income; and
12-12 (2) undisbursed funds under a reverse mortgage loan
12-13 are considered equity in a borrower's home and not proceeds from a
12-14 loan.
12-15 Art. 5A.14. REVERSE MORTGAGE LOAN INFORMATION AND
12-16 COUNSELING. A lender may not make a reverse mortgage commitment
12-17 unless the loan applicant attests in writing that the applicant
12-18 received from the lender, at the time the notice is required by
12-19 Section 50, Article XVI, Texas Constitution, of this title, a
12-20 statement prepared by the Consumer Credit Commissioner regarding
12-21 the advisability and availability of independent information and
12-22 counseling services on reverse mortgages. The Consumer Credit
12-23 Commissioner shall:
12-24 (1) develop the content and format of the statement;
12-25 (2) provide independent consumer information on
12-26 reverse mortgages and their alternatives; and
12-27 (3) refer consumers to independent counseling services
13-1 with expertise in reverse mortgages.
13-2 SECTION 4. Chapter 2, Title 79, Revised Statutes (Article
13-3 5069-2.01 et seq., Vernon's Texas Civil Statutes), is amended by
13-4 adding Article 2.02E to read as follows:
13-5 Art. 2.02E. DIVISION OF ACCESS TO FINANCIAL SERVICES. (a)
13-6 The Division of Access to Financial Services is created in the
13-7 Office of Consumer Credit Commissioner to inform, monitor, and
13-8 report on the availability and quality of home equity loans,
13-9 including equity loans offered by lenders in the state to
13-10 agricultural businesses, small businesses, and individual consumers
13-11 in the state.
13-12 (b) The division shall be headed by a director appointed by
13-13 the Consumer Credit Commissioner.
13-14 (c) The director of the Division of Access to Financial
13-15 Services shall adequately staff the division to carry out the
13-16 division's functions under this article.
13-17 (d) The division shall:
13-18 (1) conduct research on the effect of equity lending
13-19 on the availability, quality, and cost of equity loans for
13-20 agricultural businesses, small businesses, and individual consumers
13-21 in various regions of the state;
13-22 (2) conduct research on the effect of the practices of
13-23 business entities in the state that provide equity loans to
13-24 agricultural businesses, small businesses, and individual consumers
13-25 in the state;
13-26 (3) conduct a public information campaign to provide
13-27 low-income and elderly consumers with information and counseling
14-1 about the benefits and liabilities associated with equity loans;
14-2 (4) compile a summary of the information received from
14-3 each lender under Article 5A.09, Title 79, Revised Statutes
14-4 (Article 5069-5A.09, Vernon's Texas Civil Statutes), including an
14-5 analysis of census tract demographic data, to produce reports on
14-6 equity lending patterns with regard to the rate of application and
14-7 loan acceptance by income and census tract of the homes;
14-8 (5) not later than December 1 of each even-numbered
14-9 year, provide to the legislature a report detailing the findings of
14-10 the division and recommending any action the division believes is
14-11 necessary to protect consumers with respect to equity lending; and
14-12 (6) prepare information of public interest describing
14-13 the functions of the division and make the information available to
14-14 the public and appropriate state and federal agencies.
14-15 (e) The division may apply for and receive public and
14-16 private grants and gifts and contract with public and private
14-17 entities to carry out studies and analyses under this article.
14-18 (f) The Consumer Credit Commissioner shall establish and
14-19 collect reasonable and necessary fees to accomplish the purposes of
14-20 this article.
14-21 SECTION 5. Chapter 2, Title 79, Revised Statutes (Article
14-22 5069-2.01 et seq., Vernon's Texas Civil Statutes), is amended by
14-23 adding Article 2.02F to read as follows:
14-24 Art. 2.02F. STUDY AND REPORT; EQUITY LOANS. (a) After May
14-25 1, 2000, the director of the Division of Access to Financial
14-26 Services shall conduct a study of equity lending under Chapter 5A,
14-27 Title 79, Revised Statutes (Article 5069-5A.01 et seq., Vernon's
15-1 Texas Civil Statutes).
15-2 (b) Before January 1, 2001, the director of the Division of
15-3 Access to Financial Services shall submit a report on its study to
15-4 the governor, lieutenant governor, and speaker of the house of
15-5 representatives. The report must include:
15-6 (1) a summary of the information received by the
15-7 director of the Division of Access to Financial Services under
15-8 Article 5A.09, Title 79, Revised Statutes (Article 5069-5A.09,
15-9 Vernon's Texas Civil Statutes);
15-10 (2) an analysis of the effectiveness of Chapter 5A,
15-11 Title 79, Revised Statutes (Article 5069-5A.01 et seq., Vernon's
15-12 Texas Civil Statutes), intended to protect borrowers; and
15-13 (3) other information the director of the Division of
15-14 Access to Financial Services considers relevant to the regulation
15-15 of equity loans.
15-16 SECTION 6. Section 9.02, Insurance Code, is amended by
15-17 adding Subsection (r) to read as follows:
15-18 (r) "Equity loan mortgagee policy" means a Texas promulgated
15-19 Form T-2 mortgagee policy of title insurance that insures the
15-20 validity and priority of an equity loan mortgage, including a deed
15-21 of trust, trust deed, or other security instrument, on homestead
15-22 property.
15-23 SECTION 7. Section 9.07, Insurance Code, is amended by
15-24 adding Subsection (g) to read as follows:
15-25 (g) The commissioner shall promulgate an endorsement that
15-26 must be attached to an equity loan mortgagee policy. The
15-27 endorsement must insure the priority of future advances, made in
16-1 accordance with the mortgage and applicable law, subject to any
16-2 legal limits on priority and to the other terms of the policy. The
16-3 endorsement must insure the validity of the mortgage subject to the
16-4 terms of the policy and subject to an exclusion for compliance by
16-5 the lender with any constitutional or statutory requirements for,
16-6 and limitations on, equity loans secured by a mortgage on a
16-7 homestead. The endorsement must affirmatively insure against
16-8 invalidity of the mortgage because of the failure of each owner and
16-9 the spouse of each owner to join in the mortgage. The commissioner
16-10 may promulgate other policies and endorsements relating to an
16-11 equity loan mortgage on a homestead.
16-12 SECTION 8. This Act takes effect January 1, 1998, but only
16-13 if the constitutional amendment proposed by __. J.R. No. ____, Acts
16-14 of the 75th Legislature, Regular Session, 1997, allowing voluntary,
16-15 consensual encumbrances on homestead property for the purpose of
16-16 equity loans, is approved by the voters. If that amendment is not
16-17 approved by the voters, this Act has no effect.
16-18 SECTION 9. The importance of this legislation and the
16-19 crowded condition of the calendars in both houses create an
16-20 emergency and an imperative public necessity that the
16-21 constitutional rule requiring bills to be read on three several
16-22 days in each house be suspended, and this rule is hereby suspended.