Bulletin: TX2017009

Dear Associates:

An amendment to the Texas Constitution passed November 2017. It makes significant changes to the provisions related to home equity loans for loan applications made after 1-1-2018. Please note the following changes are effective January 1, 2018:

Agricultural Homesteads

Repeals prohibition on home equity loans for homesteads designated for agricultural use.

What you should know/do:

This is the most noteworthy change to title insurance practices.

T-42 item 2b) is now redundant and may be deleted upon request. 

It reads “b) The land being homestead property designated for agricultural use as provided by statutes governing property tax, as set forth in Subsection (a)(6)(I) of Section 50, Article XVI, Texas Constitution.”

Procedural Rule P-44(B) allows for the deletion of any provision of paragraph 2 if the Title Insurance Company does not consider the additional risk to be insurable. Clearly, the risk of the land being agricultural is no longer a risk at all. You no longer need to determine if all or any of the land has agricultural tax exemptions, or require that such exemptions be removed. Unlike before, the access to a rural homestead may cross agricultural exempt land.

Refinancing 

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 the types 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 form of the written notice is contained in the Texas Constitution and lists the differences between home equity and non-home equity loans.   

What you should know/do:

The T-42 and T-42.1 endorsements deal with some home equity loan refinance issues.

• T-42.1a states the lender provides the closing date in the written closing instructions.

• When refinancing a home equity loan with cash out it be must be refinanced as a Home Equity Loan, and a T-42 endorsement must be issued.

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  • If refinancing to a non-home equity loan according to the conditions above, we cannot issue a T-42 endorsement.

• You must obtain a fully executed Texas Home Equity Loan Refinancing Affidavitwhen issuing either T-42 or T-42.1.

• We are not responsible for the form of the notice which is found in the constitution in Art. 16, Section 50 a6 subsection (f)(2)(D).When a home equity loan is refinanced with a conventional loan, the lender will be entitled to an R-8 credit.

• If you are asked to insure the refinance of a home equity loan as a non-home equity loan, you should require the owner and spouse to execute the Texas Home Equity Loan Refinancing Affidavit (1-1-2018).

Approved Lenders

The current list of entities that can make home equity loans is expanded to include subsidiaries of banks, savings and loan associations, savings banks, and credit unions that meet other requirements in the Texas Constitution. Mortgage brokers are removed from the list and mortgage bankers and mortgage companies are added.

What you should know:

This issue is not a title insurance matter.

Fee Cap 

The cap on fees that can be charged to borrowers is lowered from 3 percent to 2 percent of the principal of the loan and the types of fees that count toward the cap are revised. The following are excluded from the calculation of the fee cap:

• appraisals that are done by third-party appraisers;

• property surveys by state registered or licensed surveyors;

• state base premiums for title insurance with endorsements; and

• title examination report if its cost is less than the state base premiums for title insurance without endorsements

What you should do:

The subject of fees is addressed in the optional T-42.1 item 1.e that requires the lender to approve the closing disclosure showing all fees. Otherwise, this is not a title insurance issue.

Home Equity Lines of Credit

Repeals the current restriction on home equity lines of credit, which prohibits additional advances on a loan from being made if the principal amount outstanding exceeds 50 percent of the fair market value of the homestead, and allows such advances up to 80 percent.

What you should know/do:

T-42 item 3 addresses home equity lines of credit. The constitutional amendment change has no effect on this coverage.

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

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