Client Memo - Texas Regulators Adopt Amendments to Home Equity Lending Provisions

January 20, 2021

Recently, the Finance Commission of Texas and the Texas Credit Union Commission (the “Commissions”)
adopted several amendments to the home equity lending interpretations in the Texas Administrative
Code. The amendments substantively addressed the following topics: (i) the repayment schedule of the
loan and the ability to modify the loan post-closing; (ii) what constitutes a “state of emergency” under the
exception to the one-year seasoning requirement; (iii) what areas at a proper location a loan may close
at; (iv) when electronic copies of required documents can be provided to owners; and (v) when lenders
may execute the acknowledgment of fair market value. The Commissions also made typographical
corrections to two rules.

The amendments were published in the November 20, 2020 issue of the Texas Registerand became
effective November 26, 2020. They are described in detail below.

  1. The Repayment Schedule Requirements Only Apply At Closing.

    Section 50(a)(6)(L)(i) of the Texas Constitution requires the repayment schedule of a home equity loan to
    be repaid “in substantially equal successive periodic installments, not more often than every 14 days and
    not less often than monthly, beginning no later than two months from the date the extension of credit is
    made, each of which equals or exceeds the amount of accrued interest as of the date of the scheduled

    The Commissions amended Rule 153.11 to clarify that the repayment schedule requirements in Section
    50(a)(6)(L)(i) only apply at closing. The amended rule now explains that a lender and borrower may agree
    to modify an equity loan post-closing to include a deferment of the borrower’s original obligation and
    capitalize past due amounts, so long as the modification does not satisfy and replace the original
    obligation and does not include a new extension of credit. The amended rule also clarifies that any
    modification does not affect the requirement that the first payment date be within two months of the
    closing date of the original extension of credit.

    The Commissions explain that the amendments to Rule 153.11 were enacted in response to the Texas
    Supreme Court's decision in Sims v. Carrington Mortg. Servs., LLC, 440 S.W.3d 10 (Tex. 2014):

    In Sims, the Texas Supreme Court analyzed a modification of a home equity loan where the
    borrower and lender agreed to capitalize past-due interest, fees, property taxes, and insurance
    premiums into the principal, and where the modification did not involve the satisfaction or
    replacement of the original note, an advancement of new funds, or an increase in the obligations
    created by the original note. The court held that because the modification was not a new
    extension of credit, it did not trigger reapplication of the constitutional requirements of Section
    50. Sims, 440 S.W.3d at 18.

  2. A “State of Emergency” Includes a “State of Disaster” Under Chapter 418 of the Texas
    Government Code Under the Exception to the One Year Seasoning Requirement.

    Section 50(a)(6)(M)(iii) of the Constitution generally prohibits a home equity loan from being closed less
    than one year after the closing date of a previous home equity loan secured against the same property.
    However, the Constitution makes an exception for a “state of emergency” declared by the president of
    the United States or the governor of Texas. In response to COVID-19, President Trump declared a state
    of emergency that covered Texas under the National Emergencies Act, and Governor Abbott declared a
    “state of disaster” covering Texas under Chapter 418 of the Texas Government Code.

    Lenders expressed some uncertainty over whether these declarations (especially the Governor’s disaster
    declaration) fell within the “state of emergency” exception to the one-year seasoning requirement.
    In response, the Commissions amended Rule 153.14 to clarify that a “state of emergency” for purposes of
    Section 50(a)(6)(M)(iii) includes a state of emergency declared under the National Emergencies Act as well
    as a state of disaster declared under Chapter 418 of the Texas Government Code

  3. A Loan May Close at Any Area Located at a Proper Closing Location, Including Parking Lots.

    Section 50(a)(6)(N) of the Constitution states that a home equity loan may only be closed at the office of
    the lender, title company, or an attorney. Due to social distancing requirements enacted in response to
    COVID-19, stakeholders expressed interest in being able to close loans in open areas located at a proper
    closing location. In response, the Commissions amended Rule 153.15 to explain that a home equity loan
    may be closed in an area located at the permanent physical address of the lender, title company, or an
    attorney. The amended rule gives an “indoor office” and “parking lot” as two examples of permissible areas.

  4. Lenders May Provide Owners with Electronic Copies of the Loan Application and All Documents Signed at Closing.

    Section 50(a)(6)(Q)(v) of the Constitution requires the lender to provide the owner with a copy of the loan
    application and all documents signed by the owner at closing. New Rule 153.22(3) explains that a lender
    may provide such documents electronically in accordance with applicable state and federal governing
    electronic signatures and delivery of electronic documents, and includes references to the Texas Uniform
    Electronic Transactions Act, Texas Business & Commerce Code, Chapter 322, and the federal E-Sign Act,
    15 U.S.C. §§7001-7006.

  5. The Acknowledgment of Fair Market Value May be Signed by the Lender On or Before the Closing Date.

    Section 50(a)(6)(Q)(ix) of the Texas Constitution requires the owner of the homestead and the lender to
    sign a written acknowledgement of fair market value of the homestead property “on the date the
    extension of credit is made.” Lenders and other stakeholders have long pointed to uncertainty
    surrounding this language. Does the Constitution require the lender to sign the acknowledgment on the
    closing date? Or does “on the date the extension of credit is made” only require that the fair market value
    be the value of the property as of the closing date?

    The Commissions have clarified that the Constitution only requires the latter. New Rule 153.26 explains
    that “the phrase ‘on the date the extension of credit is made’ modifies only the immediately preceding
    phrase ‘the fair market value of the homestead property,’ in accordance with the doctrine of last
    antecedent.” The rule goes on to state that the lender may sign the acknowledgment on or before closing,
    as well as authorizing an agent to sign on the lender’s behalf.

    One commentor suggested that the rule allow the lender to sign the acknowledgment after closing in
    order to comply with Section 50(a)(6)(Q)(ix). The Commissions rejected this proposed interpretation.The
    Commissions stated that the requirement that the home equity loan be “made on the condition that
    the owner of the homestead and the lender sign a written acknowledgment of fair market value” to
    require the acknowledgment be signed prior to, or at, closing.

    The Commissions noted that Section 50(a)(6)(x)(d) of the Constitution allows a lender to correct its failure
    to sign the acknowledgment prior to closing the loan by subsequently signing the acknowledgment and
    mailing a copy to the owner. For this reason—there would be no need for a cure provision if a lender
    could sign the acknowledgment after closing and still comply with Section 50(a)(6)(Q)(ix)—the
    Commissions believed the commentor’s proposed interpretation was inappropriate and declined to adopt
    the commentor’s position.

  6. Typographical Corrections.

    Finally, the Commissions corrected typographical errors in two rules. First, the Commissions removed an
    extraneous “or” in Rule 153.8(1)(C) to correct a list that included the word twice. Second, the
    Commissions removed an erroneous reference to 50(a)(7) in the introductory paragraph to Rule 153.41,
    because Section 50(e) of the Constitution, which the rule interprets, does not make reference to 50(a)(7).