Bulletin: TX000037

This bulletin has been partially replaced by TX2017009.

Dear Associates:

On November 4, 1997, Texas voters approved the Texas Home Equity Constitutional Amendment (HJR 31). This amendment is effective January 1, 1998. However, according to the Attorney General, lenders cannot close and fund Home Equity Loans earlier than January 13, 1998.

This Constitutional Amendment provides the following, effective January 1, 1998:

"Home Equity Loans" on homestead

[Subsection (a)(6), Section 50, Article XVI, Texas Constitution]

A lender may now make an equity loan on business, residential or dairy farm homestead and give the money to the borrower to use for any purpose the borrower chooses. A Home Equity Mortgage may be a first mortgage or a junior mortgage. If a borrower refinances a prior mortgage, such as a mechanic's lien contract or a purchase money mortgage and the lender gives the borrower some additional cash (or "equity"), then the new mortgage is a Home Equity Mortgage and must comply with the Constitutional Amendment. If a lender refinances a prior Home Equity Mortgage (whether or not the lender also refinances another mortgage with the same new loan), then the new mortgage is a Home Equity Mortgage and must comply with the Constitutional Amendment.

The Home Equity Mortgage is subject to about two dozen requirements. Subject to approval by the Commissioner of Insurance of a new Equity Loan Mortgage Endorsement (proposed form T-42) submitted by the Texas Land Title Association (TLTA), we expect to be able to provide insurance in our Mortgagee Policy for many of these requirements:

• We expect to insure the proper execution by the owners of the Home Equity Mortgage. This means that we would verify both spouses signed the Home Equity Mortgage.
  
  
• We expect to insure that the Home Equity Mortgage "closed at the title company." This means that we would verify that both spouses signed the Home Equity Mortgage and Note at the office of the title company.
  
  
• We expect to insure that there was no "flip" transaction. This means that we would insure that there was no prior Home Equity Mortgage on the land within one year of the new Home Equity Mortgage.
  
  
• We expect to insure that there is no "stacking" of Home Equity Loans. This means that we would insure that there are no other Home Equity Mortgages on the land, unless they are paid off in full at our new Home Equity Mortgage closing.
  
  
• We expect to insure that the land is not subject to agricultural tax exemption, unless the land is used primarily for the production of milk. This means that we would verify that the land is not subject to agricultural or open space valuation, unless we were satisfied that the mortgaged land is used for dairy farm operations.
  
  
• We expect to insure that the Home Equity Mortgage discloses that it is a Home Equity Mortgage. This means that we would review the Home Equity Mortgage to verify that it says that it is an extension of credit made pursuant to Subsection (a)(6), Section 50, Article XVI, Texas Constitution (or similar language).

We do not expect to insure against many other requirements for a Home Equity Mortgage in the Constitutional Amendment. The following are examples of the additional requirements for a Home Equity Mortgage we would not insure:

• The lender must make a detailed written disclosure 12 days before closing.
  
  
• The lender must not close the Home Equity Mortgage until 12 days after the borrower applies for the loan. The Attorney General says this means that Home Equity Mortgages cannot close before January 13, 1998.
  
  
• The lender must translate the detailed written disclosure into a foreign language if the loan was negotiated in that language.
  
  
• The lender cannot require the borrower to pay fees that exceed in the aggregate 3% of the new loan amount. There are many different opinions on what "fees" are covered by this limit.
  
  
• Only certain types of lenders may make Home Equity Mortgages. For example, a bank, savings bank, savings and loan association, lender licensed in Texas to make regulated loans, or federally chartered lending instrumentality may make a Home Equity Mortgage.
  
  
• The total amount owed on the Home Equity Mortgage and any prior mortgages on the homestead cannot exceed 80% of the fair market value of the land at the time of the closing.

"Reverse Mortgages" on the residential homestead.

[Subsection (a)(7), Section 50, Article XVI, Texas Constitution]

The Constitutional Amendment will allow a borrower to mortgage the residential homestead (but not business homestead or farmland) to secure advances to be made at closing or pursuant to an original plan for disbursements over time.

• One of the borrowers must be at least 55 years of age.
  
  
• The lender generally cannot foreclose as long as one of the borrowers is alive.
  
  
• The borrower must acknowledge that she or he received counseling regarding financial alternatives.

Subject to approval by the Commissioner of Insurance of a new Texas Reverse Mortgage Endorsement (proposed form T-43), we expect to insure the proper execution of the Reverse Mortgage and to insure the priority of any future advances. We do not expect to insure matters such as the counseling given to borrowers. We do expect closing instructions to require that the borrower furnish proof of age (and perhaps to include an acknowledgment of counseling).

Refinance on urban business, urban residence and rural homestead

The constitutional amendment allows a refinance of a purchase money mortgage, ad valorem taxes, owelty lien, federal tax lien, or mechanic's lien contract, if the only additional funds (besides the payoffs) advanced are for "reasonable costs necessary to refinance such debt" or for taxes, owelty or new improvements (pursuant to a new mechanic's lien contract). [Subsection (e), Section 50, Article XVI, Texas Constitution]

This means that if a borrower receives any loan proceeds as cash at closing, the loan is not a "refinance" of a valid prior lien. [See our solution in this bulletin under Our Company Policy on Refinances.] If the borrower takes cash out of the closing, the new mortgage must then be treated as a Home Equity Mortgage, and will be subject to the same requirements and coverage. If the borrower takes cash out of the closing and the new mortgage is not then treated as a Home Equity Mortgage, then the new mortgage could be void.

If the new mortgage refinances a Home Equity Mortgage, then the new mortgage must be treated as a Home Equity Mortgage, even if the borrower does not get any new money.

Mechanic's Lien Contracts on urban business, urban residence and rural homestead.

[Subsection (a)(5), Section 50, Article XVI, Texas Constitution]

The Constitutional Amendment provides that mechanic's lien contracts are generally subject to the following new additional requirements:

• The contract may not be executed before the 12th day after a written application by the owner for the extension of credit. This requirement appears to require a written application for credit to be given by the lender or the contractor.
  
  
• The contract must expressly allow the owner to rescind for three days after the execution of the contract.
  
  
• The mechanic's lien contract must be executed by the owner and owner's spouse only at the office of a third-party lender, an attorney at law, or a title company.

This Constitutional Amendment does not change our requirements for other mortgages on homestead. For example, our prior requirements for refinancing owelty liens and federal tax liens remain in effect.

Company Policy on Home Equity Loans on Homestead

The TLTA has submitted a new Equity Loan Mortgage Endorsement (proposed form T-42) to the Commissioner of Insurance for consideration. We expect that the TLTA will submit a Texas Residential Limited Coverage Junior Mortgagee Policy to the Commissioner of Insurance for consideration. The Junior Mortgagee Policy could be issued on a subordinate Home Equity Mortgage on a residence, at a reduced rate and with reduced coverage and costs. When these forms are considered by the Commissioner, we will provide guidelines.

Until we have further information concerning new forms for Home Equity Mortgages, you should do the following if you are asked to issue a Stewart Commitment for a Mortgage Policy on a Home Equity Mortgage:

• You can decline to issue the Commitment until the Commissioner considers the new forms; or
  
  
• You can add the following to the Commitment.

  "Any Mortgagee Policy issued by the Company insuring a Home Equity Mortgage (a mortgage made pursuant to Subsection (a)(6), Section 50, Article XVI, Texas Constitution) will be subject to the terms of and insurance provided by the applicable Equity Loan Mortgage Endorsement, and compliance with the requirements for that Endorsement, if then promulgated, or will be subject to an exception satisfactory to the Company relating to the constitutional requirements for a Home Equity Mortgage (which are considered consumer credit protection laws)."

Company Policy on Reverse Mortgages on Residential Homestead

The TLTA has submitted a new Texas Reverse Mortgage Endorsement (T-43) to the Commissioner for consideration. When this form is considered by the Commissioner, we will provide guidelines.

Until we have further information concerning new forms for Reverse Mortgages on residential homestead, you should do the following if you are asked to issue a Stewart Commitment for a Mortgage Policy on a Reverse Mortgage:

• You can decline to issue such a Commitment until the Commissioner considers the new form; or
  
  
• You can add the following to the Commitment:

  "Any Mortgagee Policy issued by the Company insuring a Reverse Mortgage (a mortgage made pursuant to Subsection (a)(7), Section 50, Article XVI, Texas Constitution) will be subject to the terms of and insurance provided by the applicable Texas Reverse Mortgage Endorsement, and compliance with the requirements for that Endorsement, if then promulgated, or will be subject to an exception satisfactory to the Company relating to the constitutional requirements for a Reverse Mortgage (which are considered consumer credit protection laws)."

Company Policy on Refinances on Homestead (Beginning January 1, 1998)

When insuring refinances of mortgages on homestead (whether urban residential, urban business, or rural) commencing January 1, 1998, you should do the following:

• You may insure the new refinance mortgage for the pay-off of a purchase money mortgage, ad valorem taxes, owelty, federal tax lien, prior refinance deed of trust, or mechanic's lien contract, plus interest, all points, all origination fees, VA funding fee, prepaid interest to the end of the month, mortgage insurance premium, and other closing costs (including prepaids or reserves such as escrow for insurance and taxes, up to the greater of 5% of the loan or $5,000). (See our Bulletin TX000017 (March 26, 1993).)
  
  If you close a refinance and the payoffs are less than the funding furnished by the new lender (e.g., perhaps the mortgage has been paid down by an additional monthly payment), you may do either of the following:
  
  (1) You may apply the excess proceeds to pay down the new mortgage or apply to the escrow reserves for taxes and insurance. [If you do this, please inform the lender, for example, by sending a completed HUD-1 to the lender.] The lender may wish to revise its Truth-in-Lending disclosure (many do not) if the money is applied to pay down the loan or may wish to revise the documents to lower the loan amount.
  
  (2) You may suggest to the lender that the loan amount be changed. We suggest that you allow the lender to choose its option of these two alternatives.
  
  You should not allow the borrower to receive any proceeds on a homestead refinance (that is not a new Home Equity Mortgage) if there are excess proceeds on a refinance because of payoffs or because the lender provided excess funding.
  
  
• If you close a refinance and the borrower receives a "credit" (as excess money to take out of closing) for prepaid credit report, appraisal or loan application fee (reflected as a POC item), you may do any of the following:
  
  (1) You may apply the excess proceeds to pay down the new mortgage or to fund the escrow reserve for taxes and insurance. [If you do this, please inform the lender, for example, by sending a completed HUD-1 to the lender.] The lender may wish to revise its Truth-in-Lending disclosure (many do not) if the money is applied to pay down the loan or may wish to revise the documents to lower the loan amount.
  
  (2) You may suggest to the lender that the loan amount be changed. We believe that this approach is not necessary with a "credit."
  
  (3) You may show the payment to the borrower on line 303 of the HUD-1 (or line 1604 of HUD-1A) as a "refund of [mention type of prepaid]" and your check to the borrower may state that it is a "refund of [mention type of prepaid]" and the borrower can acknowledge in writing that "The check dated ____ in the amount of $_____ is being made as a refund for the following prepaid item [here mention type of prepaid item] and does not constitute proceeds of the loan from ______." The amount disbursed to the borrower may not exceed the amount prepaid by the borrower for credit report, appraisal and/or loan application. Any excess must be applied to reduce the loan amount unless the papers are redrawn to reduce the loan.

Company Policy on Mechanic's Lien Contracts (Beginning January 1, 1998)

We are currently awaiting clarification of the effect of the Constitutional Amendment on mechanic's liens. It appears that the additional requirements apply only to repair and renovation, not to new improvements, such as a new house or swimming pool. We will provide instructions in a later bulletin concerning the requirements of the Constitutional Amendment. We will require proof of compliance if the contract is entered on or after January 1, 1998 and if we determine that the new requirements apply to the particular contract.

If you are asked to issue a Stewart Commitment in connection with a mechanic's lien contract that may be executed on or after January 1, 1998 (and prior to our next bulletin), please add the following to the commitment:

"The Company requires satisfactory evidence of compliance with the new requirements of Subsection (a)(5), Paragraphs (A) through (D), Section 50, Article XVI, Texas Constitution, if the mechanic's lien contract is entered on or after January 1, 1998."

We will provide a sample affidavit and instructions as to the types of improvements for which this requirement will apply, in a later bulletin.

You should also beware of mechanic's lien contracts (executed before or after January 1, 1998) that are shams, intended to get equity out (cash out) of the homestead without doing work under the contract. If you believe that the contract is intended to perform such a scheme, please call our underwriting personnel.

Home Equity Closing Issues

We expect that lenders will ask that a number of issues involving Home Equity Mortgages be handled at the closing. Closing instructions might include:

• The lender may require that copies of all documents to be given to each borrower.
  
  
• The lender may require that all blanks in documents be filed in before signed by the borrowers. The lender should provide instructions on how to complete such blanks.
  
  
• The lender may require execution at closing by the borrower of an agreement on fair market value.

Some closing matters relating to Home Equity Mortgages are appropriate for coverage by the Closing Protection Letter, if a Mortgagee Policy will be issued. Other instructions may not be appropriate. Inappropriate matters relating to the Closing Protection Letter could include use of broad language, such as "verify compliance with ..." the Constitutional Amendment or "verify that this lien is a valid first lien on the land."

We will provide further instructions on these matters in our later bulletin.

The Constitutional Amendment also provides that the lender on a Home Equity Loan (whether First Lien or Junior Lien) may not require the borrower to pay fees to originate, evaluate, maintain, record, insure, or service the extension of credit that total more than 3% of the loan.

Article 3A.508 (of Article 5069 of the Texas Statutes) imposes additional limits on fees that a lender on a Junior Loan may collect from the borrower. The allowable fees include:

• the title examination and preparation of an abstract of title by an attorney (not an employee of the lender), a title company or a property search company in Texas;
  
  
• premiums for title insurance for the lender;
  
  
• reasonable attorneys' fees (by an attorney who is not an employee of the lender) for loan documents,
  
  
• charges paid to public officials to perfect a security interest; and,
  
  
• reasonable fees for a certified appraiser, credit report, survey, credit life or health insurance for the benefit of the lender, and property insurance.

On a Junior Home Equity Mortgage, allowable fees to be paid or financed by the borrower (as opposed to the lender in the opinion of many attorneys, if not financed by the loan) do not include:

• tax searches or certificates,
  
  
• delivery fees,
  
  
• escrow or settlement fees, and,
  
  
• copy charges.

The lender may not require reimbursement or payment by the borrower or add those costs to the loan principal.