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Home Equity Reform Bill Advances in Texas Legislature
Author: Barry Johnson
The Texas house and senate are presently considering a joint resolution proposing a constitutional amendment easing some restrictions on Texas Home Equity Loans and Lines of Credit. This resolution – SJR 60 – is advancing to committee and has substantial industry support. While final approval by the senate and house is less than assured given the crowded legislative schedule, this resolution appears to stand the best chance in years of being approved and sent to the people of Texas for a vote in November 2017.
The amendment will, if approved, clarify some uncertain issues and substantially ease refinancing of home equity loans.
First, the bill will expressly exclude “bona fide discount points used to buy down the interest rate” of a loan from the fee and cost limitations. Home equity loans are subject to a 3% fee and cost limitation. When the original home equity amendment was written in 1997, it was largely assumed that “loan discount points” were – as they always have been under Texas law – “interest” and not a fee and cost. Never the less, there was a good deal of litigation over this issue until finally resolved by the Texas Supreme Court two years ago. The proposed amendment now removes any uncertainty as to the status of loan discount points when calculating the applicable fee and cost cap for a home equity credit.
Second, the proposed amendment lowers the fee and cost cap from 3% to 2% but also excludes items that are presently included in the calculation of the cap. Presently, all closing costs associated with the loan – both lender and third party costs – are included in calculating the 3% fee and cost limit on closing costs. The only items that are excluded are interest (such as discount points), prepaid items (taxes and insurance as well as escrow deposits) and certain other real estate related expenses (such as HOA dues and the like). The proposed amendment will lower the fee and cost cap from 3% to 2% of the loan amount but will now expressly exclude discount points (discussed above), appraisal fees, survey fees, and title insurance premiums or cost of title examination.
Third, the proposed amendment will eliminate the restriction on home equity loans secured by agricultural use property. From the original amendment in 1997, the constitution has prohibited land taxed at agricultural use valuation from being used to secure a home equity loan. There was one minor exception for land used for the production of milk but in general this restriction prohibited much of the rural land in Texas from securing a home equity loan.
Finally, the most far reaching proposed change is in the so-called “refinance rules”. Since 1997 Texas has required home equity loans to be refinanced with another home equity loan. The home equity provisions of our Texas constitution contain substantive consumer protections –such as limits on interest rates, fees and costs, a maximum loan to value ratio, and foreclosure remedies. Under our present law the rule has been “once a home equity loan, always a home equity loan” meaning that a home equity loan was always refinanced with another equity loan – regardless of whether new cash was taken out of the property. The proposed amendment will change this rule giving the borrower the option to refinance a home equity loan under some circumstances with a “regular” non-equity loan. This will allow customers to refinance equity credit (generally) at lower interest rates and on better economic terms than are generally offered for equity loans. To accomplish such a refinance, the loan must not close within a year of closing of the equity loan (already a restriction in our law). In addition, the new loan cannot advance additional money to the borrower other than money to pay “actual costs and reserves required …to refinance the debt.” The new loan (including any financed closing costs) is still subject to the 80% loan to value limit generally applicable to equity loans. In addition, the lender must provide a special disclosure 12 days prior to closing which advises the borrower that they are surrendering certain rights, such as the right to a judicial foreclosure and the non-recourse nature of the debt. This would be a substantial change in Texas law, and we believe a substantial benefit to equity borrower who can access better economic terms for non-equity “rate and term” refinance products.
SJR 60 still has a long way to go before it becomes law – it must be favorably reported out of committee, and passed by the house and senate. It does, however, have substantial support form industry groups and other interested stakeholders. We will continue to monitor the progress of this resolution and discuss in future postings.
If you would like any additional information regarding SJR 60 or any other home equity or residential lending topic, please feel free to contact me at email@example.com or 214-560-1714.