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Texas to Vote on Major Amendment to Home Equity Law
Author: Barry Johnson
The Texas Legislature in the recently concluded regular session approved SJR 60, proposing the first major regulatory overhaul of home equity lending in nearly a decade. This proposed amendment to the Texas Constitution will be presented for ratification in Texas’ regular November 2017 election. If approved by the voters, the amendment will become effective on January 1, 2018, and, therefore applicable to all Texas home equity loans closed on or after that date.
The proposed amendment addresses the following issues:
Specifically excludes “bona fide discount points used to buy down the interest rate” from the limitation on borrower paid closing costs. This follows recent Texas Supreme Court decisions that essentially reach the same result – loan interest rate discount points are “prepaid interest” and therefore excluded from the limitation on borrower paid closing costs.
The proposed amendment lowers the amount of closing costs that can be charged with the origination of a home equity loan from 3% of the loan amount to 2%. However, certain costs will now be excluded from the calculation of borrower closing costs, including: (a) cost of a third party appraisal; (b) cost of a survey; (c) the premium paid for a mortgagee policy of title insurance (and endorsements); and (d) the cost of a title examination report (in lieu of title insurance) under certain circumstances.
Repeals the restriction on home equity loans secured by land taxed at the agricultural use valuation. Presently most land taxed at “agricultural use” cannot secure a home equity loan even if the land otherwise qualifies as “homestead”. Home equity loans secured by rural properties have been difficult to originate, requiring the borrower to survey a portion of the property, including the dwelling, into a separate tract. This in turn resulted in access and other issues and negatively affected the valuation of the “home” tract. Under the proposed amendment, agricultural property which otherwise meets the definition of “homestead” can be pledged as collateral.
Clarifies that subsidiaries of certain financial institutions are authorized home equity lenders.
Allows an existing home equity loan to be refinanced with a “regular” non-home equity loan provided: (a) the refinancing occurs more than one year after closing of the home equity loan; (b) the principal amount of the new loan does not exceed the amount of the home equity loan being paid in full, plus any prior liens, plus actual costs and reserves required by the new lender; (c) the amount of the new loan is 80% or less of the value of the homestead property at the time of closing; and (d) the lender provides a special notice to the consumer regarding the legal effect of refinancing a home equity loan with a non-equity loan.
Makes changes to the Texas twelve (12) day “Notice Concerning Extension of Credit.”
Repeals the 50% “collar” on home equity lines of credit, commonly referred to as a HELOC.
Of the changes outlined above, the new refinance rule will be most helpful to consumers and lenders. Presently, usually in cases where a borrower has a second lien home equity loan, borrowers experience difficulties in refinancing “normal” purchase money first liens and taking advantage of lower overall interest rates. Assuming the amendment passes, consumers will now be able to consolidate home equity loans and “regular” loans into one normal rate and term refinance. This is beneficial to consumers as non-equity loans generally have longer terms and lower interest rates for consumers. The current law only allows home equity loan to be refinanced by another home equity loan. The tradeoff for the consumer is that the new non-home equity loan is recourse in nature while the home equity loan that is being refinanced is non-recourse.
It is anticipated that the amendment will pass when voted on during the November 2017 general election. Lenders should prepare for the January 1, 2018 effective date by, among other things, contacting their forms vendors to prepare the updated 12 day notice and the new special refinance notice, and by updating underwriting and closing guidelines for both equity loans and the new class of refinance transactions.