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.