Voluntary Lien. Home equity loans are voluntary. Involuntary liens on homesteads are prohibited.
Heavily Regulated. Home equity loans are subject to the regulations on residential lending outlined in Chapter 13 and later in this Chapter.
The following State law requirements apply to home equity loans (i.e., a loan secured by the equity in the homestead property):
•Twelve Day Disclosure. The Bank is required to give the borrower a written notice when the borrower applies for an equity loan. If negotiations were conducted in a language other than English the disclosures must be given in that language. See the Notice Concerning Extension of Credit form located at the end of this Chapter.
•Closing Date. An equity loan cannot be closed until at least 12 days after the borrower applies for the loan or receives the required Notice Concerning Extensions of Credit. This “cooling off” period is in addition to the three day rescission period following closing. Be sure the Bank has a signed and dated Equity Credit Application in its loan file.
•Limitation on Loan Amount. The amount of the equity loan plus the total of all other debt against the homestead property (i.e., the purchase money mortgage) cannot exceed 80% of the market value of the property, determined by an appraisal, on the date the loan is closed.
•Non-recourse. The loan must be nonrecourse (i.e., no personal liability for the homeowner) unless the homeowner or spouse obtained the loan through actual fraud.
•Two Percent Fee Limit. For loans originated on or after January 1, 2018 the fees on the loan are capped at 2% of the original principal amount of the loan. Survey fees, appraisal fees and title insurance and title report fees are excluded from the fee cap. For home equity loans originated before January 1, 2018 the fees were capped at 3%. See “Fee Cap Limitations Breakdown” below.
•Closed End Credit. The loan may not be an open-end account that may be debited from time to time or under which credit may be extended from time to time unless it is a home equity line of credit.
•Prepayment Penalties Prohibited. The loan may not have prepayment penalties.
•Repayment Terms. An equity loan must be repayable in substantially equal bi-monthly or monthly payments that equal or exceed the amount of accrued interest for each payment period.
•Only One Equity Loan at a Time. The borrower may have only one equity loan at a time.
•Use of Proceeds. The Bank may not require the borrower to apply the proceeds of an equity loan to repay another debt to the Bank.
•Refinancing. An equity loan cannot be refinanced more frequently than once a year.
•No Cross-Collateral. The Bank may not require any property (real or personal) other than the homestead property, as collateral for the loan. Regulators have interpreted this to mean a Bank cannot have guarantors or cosigners since these are considered “additional collateral.” Escrows are not “additional collateral.”
•No Cross-Defaults. The Bank may not demand payment because of a default on another debt (i.e., the loan may not be cross-defaulted to other loans of the homeowner).
•Acceleration. The Bank may not demand payment if there is a decrease in the market value of the homestead property.
•Location of Closing. The closing of the loan must take place at the Bank, a title company or an attorney’s office, not at the borrower’s home or any other location. The Texas Supreme Court has held that if a power of attorney is to be used “executing the required consent or power of attorney are part of the closing process and also must occur at the Bank, an attorney’s office or a title company”.
•Owner/Spousal Consent. Each owner and each owner’s spouse must consent to the loan.
•Interest Rate. The Bank may charge any fixed or variable rate of interest authorized by law.
•No Assignment of Wages. The Bank may not require the borrower to assign wages as security.
•No Blanks in Instruments. The Bank may not require that the borrower execute instruments which have blanks left to be filled in.
•No Confession of Judgment or Power of Attorney. The Bank may not require that the borrower sign a confession of judgment or power of attorney to another person to confess judgment or appear in a legal proceeding on its behalf.
•Copies of Documents. The Bank must provide the borrower with a copies of the final loan application and all documents he signs at closing. See the Borrower’s Confirmation of Receipt of Documents form located at the end of this chapter.
•Security Interest Disclosure. The security instruments must contain a disclosure that the loan is a loan defined by Section 50(a)(6), Article XVI, of the Texas Constitution. “THIS SECURITY INSTRUMENT SECURES AN EXTENSION OF CREDIT THAT IS THE TYPE OF CREDIT DEFINED BY SUBSECTION (a)(6) OF SECTION 50, ARTICLE XVI OF THE TEXAS CONSTITUTION”
•Release or Assignment of Lien. The loan documents must provide that when the loan is paid in full, the Bank will sign and give the borrower a release of lien or an assignment of the lien, whichever is appropriate.
•Right of Rescission. The loan documents must provide that the borrower may, within three (3) calendar days after closing, rescind the loan without penalty or charge. See the Notice of Rights of Rescission form located at the end of Chapter 15.
•Fair Market Value Determination. The borrower and the Bank must acknowledge in writing the fair market value of the home on or before the date the loan closes (not after!). See the Acknowledgement as to Fair Market Value of Homestead Property form located at the end of this Chapter.
•Forfeiture of Principal and Interest. The loan documents must provide that the Bank will forfeit all principal and interest if the Bank fails to comply with the Bank’s obligations unless the Bank promptly cures the failure to comply. Section 50(a)(6)(Q)(x), Article XVI, of the Texas Constitution and 7 Texas Administrative Code establishes the method for a lender to cure most common violations. If you believe your financial institution has failed to comply CONTACT BANK COUNSEL IMMEDIATELY.