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Reverse Mortgages and Home Equity Lines of CreditOn September 13, 2003, with passage of amendments to the Texas Constitution under Propositions 6 and 16, Texas voters approved significant changes to the landscape of home equity lending in the state. The amendments provide homeowners with flexibility in obtaining reverse mortgages and home equity loans while easing some restrictions on home equity lenders. The Texas Constitution was amended in 1997 to allow homeowners to borrow against the value of their homesteads under reverse mortgages or home equity loans. However, due to the longstanding presumption in favor of preserving homesteads, these new loans came with many restrictions. One of the most significant was that a home equity loan could not be in the form of a line of credit, meaning that a borrower must accept a lump sum for the full amount of the loan instead of being able to withdraw against the full amount of the loan from time to time. The amendments remove this restriction, allowing the home equity loan to be in the form of a line of credit. There are still some restrictions placed on borrowers with respect to the line of credit, including minimum and maximum amounts allowed for each advance, and limits on the form of advance. Lenders are also prohibited from charging fees on any advances against a home equity line of credit. A second aspect of the amendments is the authorization of reverse mortgages in connection with the refinancing of a home equity loan. Under Texas law, only those over the age of 62 are eligible for reverse mortgages, which are credit agreements that require repayment of the loan amount only upon the borrower's death or if the borrower moves from the homestead. Until the passage of these amendments, a reverse mortgage could not be used to refinance a home equity loan. The removal of this restriction gives qualified borrowers the flexibility to choose between methods of refinancing. Another major change enacted by the amendments relates to consumer protection. As a result of a traditional legislative and constitutional preference for preserving homesteads, a home equity lender used to be automatically subject to strict penalties, namely, the forfeiture of all principal and interest in the loan, for failing to uphold its obligations under a home equity loan. The argument was that since the borrower was putting his or her homestead at risk, the lender should be required to put its corresponding financial interest at risk as well. While the penalty remains in place under the amendments, the specific provision has been revised to allow lenders the opportunity to cure, or correct, their defaults under home equity loans. Other revisions under the amendments include expanding the categories
of institutions or individuals who can offer home equity loans, allowing
for more flexible payment schedules, and increasing the disclosure
requirements for lenders relating to the total expenses for which the
borrower will be responsible under a home equity loan. For further information on this topic, please contact Beth Tiggelaar at beth.tiggelaar@strasburger.com.
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