Recently we have seen an increase in the number of lenders interested in offering home equity lines of credit (“HELOCs”) in Texas. Some lenders are seeking to expand their existing HELOC programs into Texas, while others are looking to create a Texas-specific product.
Much like their closed-end home equity loans, the Texas Constitution presents lenders with numerous specific requirements and limitations that can make it challenging to originate open-end lines of credit on homestead property. When offering a HELOC product that may be secured by homestead property, lenders should be mindful of the following key considerations:
- A HELOC Secured by a Borrower’s Homestead is Subject to Texas 50(a)(6) Requirements.
Both closed-end home equity loans and HELOCs are subject to the requirements of Art. XVI, Sec. 50(a)(6) of the Texas Constitution when secured by the borrower’s homestead. These requirements include the 80% combined LTV cap, delivery of the Notice Concerning Extensions of Credit, and closing location requirements.
Compliance with these requirements is critical, because a HELOC is also subject to the same penalties for failing to cure a violation of 50(a)(6) as a closed-end home equity loan, which can include the forfeiture of all principal and interest.
- HELOCs are Subject to Additional Requirements under the Texas Constitution.
In addition to being subject to the same requirements as a closed-end Texas home equity loan, HELOCs must also comply with the requirements found in Article XVI, Sec. 50(t) of the Texas Constitution, which include the following:
- any single debit or advance cannot be less than $4,000;
- use of a credit card, debit card, or anything similar, including unrequested preprinted checks, to obtain an advance is prohibited;
- any fee to originate, evaluate, maintain, record, insure, or service the HELOC may only be charged at the time the line of credit is established;
- the HELOC may not be amended unilaterally by the lender; and
- during the draw period, each periodic payment must equal or exceed the amount of accrued interest.
These restrictions often mean that a lender seeking to offer its national HELOC product must make changes to that product to comply with Texas law. For example, many lenders offer HELOCs that are tied to a credit or debit card, which is prohibited under Texas law. Additionally, many lenders charge annual maintenance fees or non-usage fees, both of which are prohibited under Section 50(t).
Before introducing a national HELOC product in Texas, we recommend lenders have the initial and closing packages reviewed by a Texas-licensed attorney to ensure compliance with the myriad requirements of state law. We have rarely seen a national HELOC product that complies with Texas law; some modifications to the loan program documents are almost always required.
- A HELOC and a Closed-End Home Equity Loan Cannot Be Secured on Homestead Property at the Same Time.
Article XVI, Sec. 50(a)(6)(K) of the Texas Constitution states that only one 50(a)(6) lien may be secured by the property at any one time. Because both closed-end home equity loans and HELOCs are considered 50(a)(6) loans, this limitation means that a property cannot be secured by both a closed-end home equity loan and a HELOC at the same time.
Because a HELOC is often originated as a second lien and the existing first lien remains in place, it is critical for lenders making second-lien HELOCs to review the title commitment to determine if the existing first lien is a 50(a)(6) loan. The most common error we see—and one of the most difficult to cure—is where a lender originates a second-lien HELOC on a property where the first lien turns out to be a 50(a)(6) home equity loan.
- HELOC Closing Documents Must Be Prepared or Reviewed by a Texas-Licensed Attorney.
Section 83.001 of the Texas Government Code requires that any instrument affecting title to real property must be prepared or reviewed by a Texas-licensed attorney. This requirement applies equally to closed-end and open-end credit such as a HELOC, if the extension of credit is to be secured by real property.
Lenders that fail to have HELOCs reviewed by a Texas-licensed attorney run the risk of action by borrowers or the Texas State Bar. Such lenders also risk violating any representations and warranties they have made to a third party that the lender has complied with all applicable Texas laws.
- HELOCs Are Often Subject to More Risk Because Lenders Often Forego Title Insurance.
Lenders often elect not to obtain a mortgagee title policy on a HELOC for a variety of reasons, such as the relatively low dollar amount of the line of credit, its position as a second lien, or in order to offer a competitively-priced product.
The lack of a mortgagee title policy obviously increases the lender’s risk in making such loans because the lender has no insurance policy to fall back on should it suffer a loss after closing. But the lack of title company involvement in the transaction also increases the lender’s risk when underwriting the loan, because there is no third-party undertaking its own parallel review of the proposed transaction, including a review of the property’s characteristics, ownership structure, and existing liens.
A second set of eyes is therefore especially helpful when a lender is foregoing title insurance in order to catch, and potentially mitigate, any factors that may lead to an invalid lien or other loss to the lender. Aside from the legal requirement that a Texas-licensed attorney review HELOC documents, attorney review can also serve this important function when no title company is involved in the transaction.
In the current market, HELOC products offer lenders a valuable additional loan option to offer to borrowers who want to tap the equity in their home. However, Texas’ constitutional requirements for such extensions of credit also present lenders with unique challenges in originating such loans. Familiarity with the Texas Constitutional requirements is critical to ensure a valid and enforceable lien, and engaging a Texas-licensed attorney in both the implementation of a HELOC program and the origination of extensions of credit under such a program can be an essential factor ensuring compliance with Texas law.