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<p>FARMERS BRANCH, Texas – Texas credit unions involved in home equity lending have been urged to review disclosure forms to ensure that they contain language intended to clarify discrepancies for borrowers and to reduce credit union exposure to litigation. Under a Texas Constitutional Amendment that went into effect Jan. 1, 1998, Texas became the last of 50 states granted permission to offer home equity loans. Unfortunately, because the amendment contains confusing wording and rigorous requirements, home equity lending often is as much a burden as a blessing to participating credit unions. At issue here is contradictory language in the actual constitutional amendment and the “Notice Concerning Extension of Credit” disclosure, usually referred to as the 12-Day Notice, that is provided to loan applicants. Section 50(a)(6) of the Texas Constitution allows a Texas Home Equity Lender to require that loan proceeds be used to pay: 1) debts secured by the homestead, and 2) non-homestead debts to third-party creditors. On the other hand, in Section 50(g) of the Texas Constitution, the 12-Day Notice provision provides that the Home Equity Lender cannot require a borrower to apply loan proceeds to another debt that is not secured by the home or to another debt to the same lender. Section 50(g) does not mention payment of non-homestead debts to third parties. In June 2000, the Texas Supreme Court handed down its first decision on the discrepancy in “Stringer V. Cendant Mortgage Company,” 23 S.W.3d 353. The Court concluded that a home equity lender may require a borrower to use loan proceeds to pay third-party debt that is not secured by the homestead. However, the court also stated that Texas home equity lenders should add language to the 12-Day Notice to explain and clarify the conflict. This recommendation apparently has not been widely publicized, according to Suzanne Yashewski, Associate General Counsel for the Texas Credit Union League. The League’s auditors, she said, are finding that many credit unions have not added the court-recommended language to their forms. Most forms providers should have incorporated this language into the 12-Day Notice, but forms purchased prior to the June 2000 Texas Supreme Court case do not contain current language. Texas credit unions should review their forms to ensure that this additional language has been included. If not, the language should be added verbatim as suggested by the Court. The language is shown in the sidebar. The additional language is a “bandaid fix,” according to Yashewski, but likely the best available in the short term, because changing the Texas Constitution is “an arduous process,” she said. “Credit unions without the additional language are not out of compliance,” Yashewski added, “but the Court provided language to use, so credit unions should include it to protect themselves.” -</p> <p>[email protected]</p>

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