8.02 Home Equity Loans

8.02.1

Home Equity Loans (frequently called HEL loans in Texas) are created by Article 16, Section 60 a6 of the Texas Constitution. No HELs were available in Texas until January 1, 1998.  The Constitution and Consumer Finance Provisions also regulate HELs.

8.02.2

Constitutional Provisions

This Provision of the constitution contains several features that are unique to Texas but, because of the constitutional nature of the loans, affect the validity of the lien insured.

  • No HEL within 12 months of the prior one
  • After January 1, 2018, HEL loans can be refinanced as conventional loans subject to proper notice and lender instructions or another HEL loan.
  • Prior Agricultural homestead HEL prohibitions will be deleted as of January, 1, 2018.
  • All HEL documents must be signed in 
    • Title company office
    • Lender’s office, or
    • Office of an attorney
    • No remote e-notary or online notary accepted for HELs
  • Per Procedural Rule-44C a T-42 (f) must be added if not signed in STC office
  • General Rules on Power of Attorneys  
    • If you are presented with an already executed power of attorney with an execution date of prior to June 21, 2013, no home equity loan may be insured in reliance on it. If you are presented with an executed power of attorney dated after June 23, 2013, you must obtain a certification from both the lender and the parties to the Power of Attorney that it was executed at the Lenders office before it can be used to insure a home equity loan. If the POA is executed in your office after June 23, 2013, it may be used. (TX Bulletin 2013004)
    • The September 1, 2017 Power of Attorney legislative changes did not overturn the Texas Supreme Court’s holding in Finance Commissioner v. Norwood, found in Bulletin TX 2013004.  Our position remains the same as above. (TX2017007- Legislative Update).
      POA signed before January 1, 1998 must grant specific power since those forms did not contemplate HEL loans
      • More specific the better - loan amount, lender, terms, authority to sign note, deed of trust and related closing documents.
    • Power of attorney executed after January 1, 1998 is ok to use unless power to make a HEL loan is explicitly rejected.
  • Joinder of spouses on separate-property homestead 
    • All owners and all spouses of all owners must sign.
  • Must sign whether the property is separate property or community property
  • Cannot be secured by additional collateral, including guarantees. For example, Texas Attorney General opinion KP-0183 states that U.S. Department of Veterans Affairs cash-out refinance loans are prohibited under Tex. Const. art. XVI, § 50(a)(6)(H) since the Department guarantees a percentage of the loan repayment.   

 

8.02.3

Urban Homestead

  • Urban homesteads are limited to no more than 10 acres.
  • If only the T-42 endorsement form is being issued, the size of the property is not an issue.
  • If the T-42.1 endorsement is being issued then, the title company must
    o    Determine size of tract
    o    Surveyor's computation probably ok
  • Title company can estimate it - ok 75 x 250 lot = 18,750 ft2 or use survey software to compute.

8.02.4

Rural Homestead

  • Rural Homesteads are limited to no more than 200 acres per family
  • May be a tract carved out of a larger tract, as long as the carve out includes access to a public road, and includes the home
  • Must include the carved out tract and access in the legal description
  • As of January 1, 2018 the access to the public road may cross agricultural exempt land

8.02.5

Business Homestead

After January 1, 2000, separate business homesteads are abolished.  A homestead may include a small business on the tract in which the home is located.

8.02.6

Second Homes

  • You only get one homestead
    o    How to decide which house is homestead and which house is not homestead can be quite difficult.
    o    For example, a person who lives in one city and has a house in a resort area must make an election  as to which is homestead.
    o    1995 Amendment allows for affidavit claiming and disclaiming Homestead property
  • Real 2nd home isn't HS.  A real second home is one where the owner does not spend the majority of his time.  The real second home will not have a homestead tax exemption.
  • Under T-42, policy does not insure whether or not the property is homestead.  Under T-42.1, we do insure homestead status.

8.02.7

Out of State Residents

  • If they live outside Texas, then land in Texas shouldn't be homestead
    o    So, no HEL loans, Regular non-HS loan is ok.
  • Under T-42, policy does not insure whether or not the property is homestead. Under T-42.1 we do insure homestead status.

8.02.8

Texas Reverse Mortgage Endorsement T-43

Endorses the standard mortgagee policy:  to insure only up to, and liability hereunder is limited to,

  • the amount of proceeds of the loan secured by the lien instrument set forth under Schedule A hereof actually disbursed as of the date of this policy,
  • but increases as each subsequent advance or disbursement of loan proceeds is made from time to time and as unpaid interest accrues on loan proceeds,
  • so that any loss payable hereunder shall be limited to the amount of unpaid accrued interest and aggregate amount of loan proceeds actually disbursed and outstanding at the time a loss occurs hereunder;
  • provided that in no event shall the liability of the Company hereunder exceed the face amount of this policy

 

  • The Company insures the Insured that any disbursements of such loan proceeds made subsequent to the date of this policy shall be deemed to have been made as of the date of this policy and such disbursements and accrued interest shall have the same priority as any advances made as of the date of this policy,

·         except as to (i) bankruptcies affecting the estate or interest described on Schedule "A" hereof prior to the date of any such advance or disbursement; and (ii) taxes, costs, charges, damages and other obligations to the government secured by statutory liens arising or recorded subsequent to the date of the Policy.

Notwithstanding the provisions of paragraph 5 of the Exclusions from Coverage set out in the main policy entitled Mortgagee Policy of Title Insurance relating to consumer credit protection laws, the Company insures the Insured against loss, if any, sustained by the Insured under the terms of the policy because of invalidity or unenforceability of the lien of the insured mortgage by reason of:

(i)                   the failure of the insured mortgage to be created under a written agreement with the consent of each owner of the estate or interest described in Schedule A and each owner's spouse, as set forth in Subsection (k)(1) of Section 50, Article XVI, Texas Constitution;

(ii)                 the failure of the extension of credit secured by the insured mortgage to be made to a person who is or whose spouse is 62 years or older, as set forth the Subsection (k)(2) of Section 50, Article XVI, Texas Constitution;

(iii)                the failure of the written document purporting to be made pursuant to Subsection (k)(8) of Section 50, Article XVI, Texas Constitution to be executed by the owner on the date that the insured mortgage and promissory note secured thereby are executed by the owner, provided that the Company does not insure that the written document complies with Subsection (k)(8) of Section 50, Article XVI, Texas Constitution;

(iv)                or the failure of the Company or its Title Insurance Agent to furnish the owner with a copy of the written notice purporting to be made pursuant to Subsection (k)(9) of Section 50, Article XVI, Texas Constitution on the date that the owner executed the insured mortgage and the promissory note secured thereby, provided that the Company does not insure that the written document complies with Subsection (k)(9) of Section 50, Article XVI, Texas Constitution.

The Company does not insure against loss or damage based on

(a)     usury;

(b)     or  any consumer credit protection or truth-in-lending law and/or violation of Subsections (k)(3), (k)(4), (k)(5), (k)(6), (k)(7), (k)(8), (k)(9), (k)(10), (k)(11), (m), or (p) of Section 50, Article XVI, Texas Constitution and any regulatory or statutory requirements for a mortgage made pursuant to Subsection (a)(7) of Section 50, Article XVI, Texas Constitution except as expressly provided in paragraph 3 of this endorsement;

(c)      or  costs, expenses or attorney's fees required to obtain a determination of the amount of interest or indebtedness.

For purposes of this endorsement, "interest" means interest, compound interest, interest on interest, interest calculated at a rate that varies from time to time in accordance with the provisions of the insured mortgage, and interest contingent on the appreciation in the fair market value of land charged in accordance with the terms of the insured mortgage. In this endorsement, the term "owner" refers to each owner described in Schedule "A" of this Mortgagee Policy. This endorsement does not represent or insure that a Title Insurance Agent of the Company is the agent of the Company other than for issuance of title insurance policies, as provided by applicable law.

8.02.09

Refinancing When No Longer Homestead

HEL Advisory dated April 1, 2004:  It is an acceptable risk to allow a person to refinance an existing home equity loan on property that is no longer their designated homestead with a regular non-home equity loan.

If the people still occupy property subject to a home equity lien, refinance of a home equity loan can be either with another home equity loan or other non-home equity loans subject to certain conditions

8.02.10

Refinancing to Conventional loan on Homestead Property after January 1, 2018

Home equity loans may be refinanced as non-home equity loans and secured with a lien against a home, if certain conditions are met.

The refinancing must: 

  • occur more than 1 year after the home equity loan was closed; see (T-42(2)d)
  • not include additional funds other than funds to refinance another type of debt outlined in the Constitution and costs and reserves required by the lender to refinance the debt;
  • see T-42(2)c
  • be of an amount that, when added to the total outstanding principal balances of other indebtedness secured by encumbrances against the home, is not more than 80 percent of the fair market value of the home. (Not really a title insurance issue)

In addition, the lender would be required to give the owner a written notice within three business days of a loan application being submitted and at least 12 days before the loan is closed. The written notice lists the differences between home equity and non-home equity loans. The form of the notice is found in the Constitution.

  • not insure whether or not the property is homestead.  Under T-42.1, we do insure homestead status.

8.02.11

Comparison Of T-42 and T-42.1 Endorsement

 

The Equity Loan Mortgage Endorsement (Form T-42) now provides insurance for future advances under home equity lines of credit, and insures disclosure of fees by title insurance companies or title insurance agents who close home equity loans. The amendment to the Supplemental Coverage Equity Loan Mortgage Endorsement (T-42.1) insures the advance disclosure of fees and incorporates a definition of business day for purposes of the endorsement.

Premiums:

T-42: 10%

T-42.1: 15%

Total: 25% of basic premium.

Note: You may not issue a T-42.1 unless you also issue a T-42. Thus, the price of a T-42.1 is essentially 25%.

R-8 credits are available. You should compute the additional premium before the R-8 credit is applied.

 

Consumer Credit Issue

T-42 coverage

T-42.1 Coverage

Loan must be agreed to by all owners and all spouses

Yes: 2a

Covered in T-42

Land not subject to ag use exemption for tax purposes

Yes: 2b

Covered by T-42

Only HEL loan on land; unless the other liens are those permitted by Texas Constitution Art. 16, Sec 50 (a) (1 through 5) and (8).

* (8) being conversion liens secured by manufactured housing units.

Yes: 2c

Covered by T-42

Only HEL loan on land in 12 months * unless the loan is a home equity line of credit

Yes: 2d

Covered by T-42

Deed of Trust Discloses that loan is extension of credit under Art. 16, Sec. 50 a6, Texas Constitution

Yes: 2e

Covered by T-42

Loan closed at title company, lender or attorneys office

Yes: optional 2f only available if closed at title company

Covered by T-42

* Insures that any disbursements under a home equity line of credit deemed to have been made as of policy date and have the same priority as advance made at policy date

Yes.  Paragraph 3.  Subject to bankruptcy and statutory liens in favor of government.

Covered by T-42

12 day cooling off period

No.

Addressed: insures that loan will not close before date set out in instructions

3 day right of recession

No.

Addressed: insures that title company didn't disburse until 4thcalendar day after closing.

Election not to rescind

No.

Addressed: Insures against execution of acknowledgment of right to rescind before an escrow officer on date note & DT is executed

All persons signing note get copies of every document

No.

Addressed: Title company gave copies of all documents signed in its office to all owners and spouses

No more than 3% of loan made by borrower as costs

No.

Addressed: Insures that figures set on HUD1 and given to Lender are figures collected and disbursed

No blanks in documents

No.

Addressed: Insures that no blanks in mortgage, note, acknowledgment, affidavit of fair market value or documents prepared by title company

Total indebtedness against property, including HEL loan, can't exceed 80% of fair market value of land

No.

Addressed: (i) Insures that acknowledgment of fmv has an appraisal attached when signed by owner and (ii) insures that the acknowledgment of fmv was attached when note & DT were signed

Land must be homestead

No. Guideline: if the owners live outside of Texas, you may still insure a home equity loan provided only the T-42 is issued since the land actually being homestead is not insured by this endorsement.

Yes. Insures against part of land not being Homestead. Guidelines: Determine that urban land does not exceed ten acres and has fire and police protection and at least 3 utilities (41.002(c)) Property Code; Determine that all land is composed of only one tract used as a residence (a business located on the property with the home does not prohibit use of the land as homestead), no other property claimed as HS and all owners live on the property.

Land is homestead and is there is no other collateral for the loan

No.

Addressed: Insures that no other HEL loans on homestead property in same or adjoining county

No HEL loan in previous 12 months against other HS property

No.

Addressed: Insures that no other HEL loans on homestead property in same or adjoining county in past 12 months

Failure of Company to provide final copy of closing statement 1 day before closing *

No.

* Yes. Insures that company provided final closing figures (actual fees, points, interest, costs and charges collected or disbursed by title company at least one calendar day before the closing. ?Day "is as defined by Texas

Finance Commission and /or Texas Credit Union Commission (under Title 7, Chapter 153 of Texas Administrative Code (all calendar days except Sunday and listed federal holidays)

* Under line of credit, no more than 40% of the land value being advanced

No.

No.

* All advances under line of credit exceeding $4000

No.

No.

If any coverage is not satisfactorily proven, then that provision must be struck from the endorsement.

* indicates a coverage added by amendments effective April 1, 2004