- December 11, 2018
- All Texas Issuing Offices
- UNDERWRITING - Lender’s Adding Impermissible Debt or Expenses to Homestead Loans [Revised 5-13-19]
We have become aware of a trend with some lenders wishing to add personal debts to homestead loans. The Texas Constitution allows liens against homestead property for only 8 things:
1. Purchase money
4. Federal tax liens
5. Owelty liens
6. Manufactured home conversion to real property
7. Home equity
8. Reverse mortgages
Other debts are not allowed to be secured by homestead property. See Art.16 Sections 50 (a) and (c), Texas Constitution.
Examples of impermissible add-on debts are:
• Delinquent child support not supported by a recorded lien
• Personal loans
• Car loans
• Credit card debts
• Liens on other property
• Judgment Liens
• Federal taxes for which no Federal Tax Lien has been filed
There are essentially two ways to handle such requests. First, a home equity loan can be made that will provide money to refinance any constitutionally allowed lien against the homestead and provide money ("cash out") for other, otherwise unsecured loans. For that, the lender must make home equity loans and the homestead must have sufficient equity to qualify as a home equity loan. The second method would be to accept the non-home equity loan at the full amount but except to the unsecured portion.
An appropriate exception for use in the second instance should be:
Loss, cost, damage or expense arising by virtue of any allegation that the Loan insured by this Policy is void or voidable to the extent of $________ being the amount in excess of the [insert here the type of loan being refinanced from the list of 8 items set out above] debt existing at the policy date.
We would also require that the deed of trust contain a partial invalidity clause substantially as follows:
Should all or any portion of the debt secured hereby be determined by a court of competent jurisdiction to be invalid, all sums paid hereunder shall first be applied to such invalid amounts.
Insuring a loan without the exception and the partial invalidity clause mentioned in this bulletin could expose escrow personnel to allegations that they breached fiduciary responsibilities to the borrower. Defense of such allegations is an unnecessary expense to undertake.
We do not seek to force our lender customers to change their business or lending practices. However, we cannot insure liens against homestead property which are not allowed by the Texas Constitution.
Of course, this bulletin does not apply to non-homestead and commercial loans.
Escrow officers are advised to seek assistance from counsel or management if a transaction seems to have an inflated sales price with large credits to the buyer from the seller used to fund payment of personal debts to third parties. Such matters are escrow matters outside the scope of our agency agreements.
If you have a question about underwriting matters, please contact a Texas underwriter.
If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.
For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.
THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.