Home Equity Liens

Home equity lending came into law within Texas and San Antonio beginning in 1997 via the citizenry’s approval of an amendment to the Texas Constitution. When this new law came into effect in Texas, it contained some of the most stringent consumer protection provisions there are in the nation. So what exactly is a home equity? Home equity is simply the difference between the fair market value of your home, and the total balance of all encumbrances or liens on your property.

The general rule that can apply regarding the enforceability of home equity liens is located in Section 50, Article XVI of the Texas Constitution. The section provides that the family homestead is exempt from forced sale for the payment of debts such as credit card payments or satisfaction of support to an illegitimate child among many others. However, under the same section are several exceptions. When the homestead is used as collateral for the payment of debt, a lien on that real property is created. How then can these liens be enforceable?

Compliance with the home equity or reverse mortgage loan provisions of the Texas Constitution and the Property Code is the mandatory requirement for a lien to be enforceable. But what are the requisites enumerated under the above mentioned pertinent laws?

The initial part of the amended law contains the terms and conditions and the respective rights of the parties involved in home-equity loan. Paragraph 6 (a) of the same section (Sec. 50) provides that the extension of credit must be secured by a voluntary lien in writing with the consent of each owner and each owner’s spouse. Paragraph 6 (b) states that the total of all mortgage debt (not solely the home equity loan) must not be more than 80% of the fair market value of your home. For example, you can no longer borrow against your $100,000 home, if you already have an $80,000 mortgage. If the mortgage on that same $100,000.00 home were $81,000.00, a home equity loan is no longer an option because the current mortgage already exceeds 80% of the fair market value.

The borrower/homeowner should also be aware that under the law, a home equity loan may only be obtained against a home one at a time. While further financing modifications might be possible, a homeowner cannot insist on a second home equity loan until the first has been satisfied in full, and only one home equity loan a year.  In addition there are inclusions on agricultural or open space lands.  These are not part of the operation of a home equity loan.  If the individual is unlicensed they will not be able to make the home equity loan unless they meet these conditions:

  • Provide seller-financing or
  • Related to the borrower within the second degree

Lenders are not allowed to charge fees and costs (other than interest) which amounts to more than 3% of the principal of the loan. The law has provisions in place that allow penalties to lenders who violates this rule and refuse to correct the error once the lender is notified.

This law has been applied in deciding Stringer & Stringer v. Cendant Mortgage Corporation (decided 2000) and in Tammy Elkins v. Bank of America, N.A. from Dallas County; 5th district where the court voided a lien on a home equity loan for its failure to comply with Sec. 50 of Article XIV of the Texas Constitution (2007).

For more information on home equity loans, refer to the documents released by the Office of Consumer Credit Commissioner in cooperation with the Department of Banking, Savings and Loan Department, and the Credit Union Department.  These agencies offer further explanations of this law.

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