The Significant Changes, Issues, and Why the Vote Matters
Earlier this year, the Texas Legislature passed Senate Joint Resolution 60 (S.J.R. 60), proposing amendments to the provisions of the Texas Constitution that govern home equity lending (the “Amendments”). On November 7, 2017, the voters must decide whether to approve these Amendments, which appear on the ballot as Proposition 2. This legal update addresses (i) the significant changes these Amendments propose, (ii) the issues and interpretive clarifications needed if the Amendments are approved, and (iii) why the vote on November 7, 2017, matters.
Significant Proposed Changes:
- Removing the Ban on Home Equity Lending to Agricultural Homesteads. The Amendments would repeal the provision that prohibits home equity loans on homesteads with an agricultural tax exemption other than dairy farms. This change would create more options for borrowers and eliminate a significant risk for lenders originating loans in rural areas.
- Changing the 3% Fee Cap to a 2% Fee Cap and Excluding Certain Fees. The Amendments propose a significant change to the current 3% fee cap for home equity loans. The fee cap would be reduced to a 2% fee cap, and the following fees would be excluded from this calculation: (i) an appraisal performed by a third-party appraiser, (ii) a property survey by a state registered or licensed surveyor, (iii) a state base premium for a mortgagee policy of title insurance with endorsements, and (iv) a title examination report if its cost is less than the state base premiums for title insurance without endorsements. Lenders have frequently objected that the 3% fee cap limits their ability to originate low loan amount home equity loans because the appraisal fee, survey, and title insurance fees alone often exceed the 3% cap. This change aims to provide access to home equity lending for borrowers seeking a smaller loan amount.
- Permitting Refinances of Seasoned Home Equity Loans as Non-Home Equity Loans. Perhaps the most significant proposed change is the amendment to allow a seasoned home equity loan to be refinanced as a non-home equity loan under Article XVI, Section 50(a)(4) of the Texas Constitution (a “rate and term” refinance). Currently, an existing home equity loan may only be refinanced with another home-equity loan or with a reverse mortgage. The Amendments would permit the refinance of a home equity loan as a rate and term refinance if the following conditions are met: (i) the refinance is not closed before the first anniversary date the home equity loan is closed, (ii) no additional funds are advanced other than funds advanced to refinance a debt under subsections 50(a)(1)-(7) or actual costs and reserves required by the lender to refinance the debt, (iii) the principal amount of the refinance when added to the aggregate total of the outstanding principal balances of all valid encumbrances of record against the homestead does not exceed 80% of the homestead’s fair market value on the date of the refinance; and (iv) the lender provides the owner the written notice in subsection (f)(2)(D) of S.J.R. 60 on a separate document within three business days of the application and at least twelve days before the refinance is closed. Notably, S.J.R. 60 provides that an affidavit executed by the owner or owner’s spouse acknowledging that the requirements of subsection 50(f)(2) have been met conclusively establishes that the requirements of a rate and term refinance under subsection 50(a)(4) have been met. Lenders should consult their Texas counsel to ensure such an affidavit is prepared and executed as a required closing document.
- Removing the 50% Ceiling for Additional Advances on HELOCs. The Amendments would eliminate the provision that prevents additional advances on home equity lines of credit or HELOCs if the principal amount outstanding exceeds 50% of the fair market value of the homestead. This change will not affect the 80% fair market value cap under subsection (a)(6)(B).
- Updating Who is Authorized to Make Home Equity Loans. The Amendments also propose updating which entities and persons are authorized to make home equity loans. Specifically, the Amendments would clarify that subsidiaries of the authorized banks, savings and loan associations, savings banks, or credit unions are also authorized to originate home equity loans. In addition, the outdated term “broker” is removed from subsection (a)(6)(P)(vi) and replaced with “banker or mortgage company,” clarifying that licensed mortgage companies and registered mortgage bankers may make home equity loans.
- Amending the 12-Day Notice to Borrowers to reflect these Changes. Last, as you might expect, the Amendments would modify the 12-day notice in section 50(g) to conform to the changes mentioned above.
Important Issues and Interpretive Clarifications Needed if Proposition 2 Passes
Provided that the Amendments are approved by the voters, lenders need to be aware of certain issues and interpretive clarifications needed with respect to the implementation of these changes.
A 12-day Moratorium on Home Equity Lending. Perhaps most significantly, lenders should note the amendment of the 12-day notice required by Section 50(g) for home equity loans, and the 12-day notice required by subsection (f)(2)(D) for rate and term refinances of home equity loans. Because the effective date of the Amendments is January 1, 2018, there would be a twelve-day window (January 1, 2018 through January 12, 2018) during which home equity loans and rate and term refinances of home equity loans cannot close.
Interpretive Clarifications Needed. If Proposition 2 passes, there are also several questions that will need to be answered. Fortunately, the Texas Constitution provides that the Texas Finance Commission and Texas Credit Union Commission (together, the “Commissions”) have authority to issue home equity lending interpretations that lenders may rely upon as a safe harbor, even if the interpretations are later deemed incorrect. It is anticipated that the Commissions will issue new proposed interpretations, but final amendments will likely not be effective until March 2018 at the earliest. Lenders and their counsel will need to determine how to address this dilemma. If the Amendments are approved, below is a sample of some of the most important interpretive questions the Commissions will need to address:
- With respect to the new 2% fee cap:
- Does the “third party” qualification for appraisals exclude appraisers employed by affiliates of the lender?
- Which “endorsements” are included in the exclusion from the 2% fee cap?
- With respect to the change permitting rate and term refinances of home equity loans:
- Does this provision apply only to closed-end home equity loans, or may seasoned HELOCs and reverse mortgages also be refinanced as rate and term refinances?
- Although an affidavit executed by the owner or its spouse acknowledging that the requirements of subsection 50(f)(2) have been met conclusively establishes the requirements of subsection 50(a)(4), what if there is conclusive evidence to the contrary (e.g., an appraisal that demonstrates the loan violated the 80% LTV restriction)?
- How will the time periods for providing the notice required by subsection (f)(2)(D) be counted?
The Vote on November 7, 2017 Matters
If passed, the Amendments will (i) provide consumers greater flexibility and access to homestead equity through lower loan amount home equity loans and removing the restriction for agricultural tax exemptions; (ii) provide interest savings to consumers by allowing seasoned home equity loans to be refinanced as non-home equity loans, which generally have lower interest rates; and (iii) eliminate the arbitrary 50% LTV limit on HELOC additional advances. Regardless of your position with respect to the Amendments, be sure to vote so that your voice is heard.
 The text of S.J.R. 60 may be found here: http://www.legis.state.tx.us/tlodocs/85R/billtext/pdf/SJ00060F.pdf#navpanes=0 (last visited November 11, 2017).
 See Op. Tex. Att’y Gen. No. DM-452 (1997) (opining on implementation questions after the amendment authorizing home equity lending in Texas in 1997) (“Before the amendment becomes effective . . . the provisions of the amendment referred to in the notice have no legal effect. Notice given before the effective date of the amendment is not notice “prescribed by” the amendment. Therefore, the amendment’s notice requirement is not satisfied if notice is given before the effective date of the amendment, and thus the twelve-day waiting period is not triggered by such a notice . . . the notice to borrowers prescribed by the amendment is not effective if given before the amendment’s effective date.”).
 Tex. Const. art XVI § 50(u).