Client Memo - Texas Home Equity Lending and Prohibited Additional Collateral Part One: Non-Owner Borrowers
September 22, 2021
Over the past few months, we have received a number of questions regarding whether an individual who is a non-owner may be a co-borrower or co-signer on a 50(a)(6) Texas home equity loan. The most common scenario proposed to us is one where a family member who does not own or occupy the property seeks to join the transaction as a borrower in order to assist the owner in qualifying for the loan. For example, a parent seeks to help an adult child qualify for a loan, or an adult child seeks to assist a retired parent.
Unfortunately, the Texas Constitution generally prohibits an individual who is not the spouse of an owner from signing the note on a home equity loan. The promise to repay the debt by a non-owner is considered “additional collateral”, which is collateral other than the borrower’s homestead, and is prohibited under the home equity provisions of the Texas Constitution. The only exception to this prohibition occurs where the individuals share one “family homestead” because one must rely on the other for support. A family homestead exists when a group of people have a social status of a family, which is defined by the head of the family having a legal or moral obligation to support the other family members, and the other members depend on the head of the family for support. Henry S. Miller Co. v. Shoaf, 434 S.W.2d 243, 244 (Tex.Civ.App.—Eastland 1968, writ ref'd n.r.e.); PaineWebber, Inc. v. Murray, 260 B.R. 815, 822 (E.D. Tex. 2001). See also Roco v. Green, 50 Tex. 483, 490 (1878).
Only Individuals with a Homestead Interest in the Property May Sign the Note
Article XVI, Section 50(a)(6)(H) of the Texas Constitution does not allow a home equity loan to be secured by any real or personal property (i.e., additional collateral) other than the borrower’s homestead. The Texas Administrative Code expressly states that “a guarantor or surety is not permitted. A guaranty or surety is considered additional property for purposes of Section 50(a)(6)(H).” 7 TAC § 153.8 (2).
Texas courts have held that an immediate right of possession is necessary for the property to be impressed with homestead character. Johnson v. Prosper State Bank, 125 S.W.2d 707 (Tex. Civ. App.—Dallas 1939) aff'd, 134 Tex. 677, 138 S.W.2d 1117 (1940); Greenawalt v. Cunningham, 107 S.W.2d 1099 (Tex. Civ. App.—Dallas 1937, no writ).
Therefore, in a scenario where only the adult child holds title to the property, and the parent does not occupy the property and depend on the child for maintenance and support, there is no family homestead. Without a family homestead in the property, the parent pledging his/her credit will likely be considered a surety or guarantor in the transaction, because the parent is signing the note to benefit the child, not themselves. The parent is therefore considered a surety or guarantor because the parent is promising to answer for the debt of the child. See Restatement (First) of Security § 82 (1941); See also Crimmins v. Lowry, 691 S.W.2d 582, 585 (Tex. 1985) (“A comaker [of the note] is in the position of a surety to the extent that he promises to answer for the portion of the debt that benefited his fellow comaker“).
Securing a Home Equity Loan with Prohibited Additional Collateral Makes the Lien Invalid Unless Cured
Should the transaction proceed with the parent acting as a guarantor, the lender will have made an invalid lien, because the parent’s guaranty is prohibited additional collateral that is separate, apart, and in addition to the borrower’s homestead. Wood v. HSBC Bank USA, N.A., 505 S.W.3d 542, 547 (Tex. 2016). Should the lienholder attempt to foreclose on the lien, the parent or the child could raise the additional collateral issue as a defense in the foreclosure action. Such a defense would require the lienholder to cure the violation by releasing the non-owner borrower from the debt, which would make the lien valid, but might result in a repurchase demand from the lienholder to the original lender. Alternatively, a failure to release the prohibited additional collateral, as required by the Constitution, could lead the court to prohibit the lienholder from foreclosing on the property.
Only Spouses and Those Persons Who Have a Homestead Interest in the Property Can Sign the Note on a Home Equity Loan
When an individual who is not the spouse of the owner or who does not have a family homestead interest in the property executes the home equity note, he/she will be considered a guarantor or surety. Such a guaranty is separate and apart from the borrower’s homestead and is considered prohibited additional collateral under Section 50(a)(6)(H) of the Texas Constitution. Therefore, unless a non-spouse family member who does not own the property: (i) occupies the property and (ii) depends on the parent/child owner for support and maintenance, such an individual may not be a borrower on a home equity loan. Reliance on the parent/child owner should be very rare for the practical reason that the non-owner family member is usually sought to be added as a borrower because of their income, which would mean that family member is capable of providing for their own support and maintenance.
If you have further questions about non-owner borrowers and prohibited additional collateral, or have questions regarding the contents of this alert, please let us know.
Allan Polunsky at Allan.Polunsky@mortgagelaw.com
Jay Beitel at Jay.Beitel@mortgagelaw.com
Marty Green at Marty.Green@mortgagelaw.com
Lauren Polunsky Dreszer at Lauren.Polunsky@mortgagelaw.com
Peter Idziak at Peter.Idziak@mortgagelaw.com
Claire Barber at Claire.Barber@mortgagelaw.com
Andrew Duane at Andrew.Duane@mortgagelaw.com
Tye McWhorter at Tye.McWhorter@mortgagelaw.com
Cody Beitel at Cody.Beitel@mortgagelaw.com
Doug Foster2 at Doug.Foster@mortgagelaw.com
1 A moral obligation for support and care exists where there is a necessity for such. Henry S. Miller Co. v. Shoaf, 434 S.W.2d 243, 245 (Tex.Civ.App.—Eastland 1968, writ ref'd n.r.e.).
2 Doug Foster is a non-lawyer and is not admitted to practice law in any state.