AUSTIN, Texas – Texans are one step closer to gaining access to home equity loans. Consumers will vote September 13 on a constitutional amendment that would reform the state’s home equity legislation originally enacted in 1998. SJR 42 and accompanying bill SB 1067, authored by Senator John Carona (R-16), were both passed during this legislative session. The measures authorize home equity lines of credit, allow payments to be made on a biweekly basis, clarify the cure process for lenders, and permit the legislature to authorize state agencies – the Credit Union Commission and the Finance Commission – to interpret constitutional provisions related to home equity lending. John Tippets, president of American Airlines Credit Union and chairman of the Texas Conference on Home Owners Rights, the consortium of credit unions, banks, finance companies and other organizations supporting the reform, said he is pleased with the outcome. “We got good legislation. Senator John Carona worked hard to ensure that these measures would pass in an acceptable form. Now, we’ve got to communicate effectively with the citizens of Texas to ensure that they come out to vote for the amendment in September. Constitutional amendments don’t normally draw a lot of voters. But we’re not expecting a lot of resistance. This is a very consumer-friendly measure that will add flexibility and lower costs for borrowers,” Tippets said. Among the provisions of the current law on home equity loans they must be a closed-end debt, repaid in monthly payments. It may be refinanced only as a home equity loan. In addition, a home equity loan: may not be foreclosed upon except by a court order; is without recourse for personal liability unless it was fraudulently obtained; may not be refinanced within one year; may not have a principal in excess of 80% of the value of the home less any outstanding principal balances of any other valid liens on the homestead; may not be accelerated because of a decrease in the homestead’s market value or the owner’s default on another debt, and may not contain fees, over any interest, in excess of 3 percent of the principal. SJR 42 amends the Texas Constitution to authorize a home equity line of credit up to 50% of fair market value of the home. It requires a lender to charge all fees related to a home equity line of credit at the time credit is extended and prohibits charging fees in connection with a line of credit advance. Draws on the line of credit must be a minimum of $4,000, and access to credit lines through credit cards, debit cards or preprinted solicitation checks is prohibited. The measure also deletes the current requirement that repayments be made on a monthly basis and permits payments every two weeks, but not less often than monthly. Andrea Johnson, president of Neches Credit Union, said the line of credit provision is the most significant home equity reform. “This will make it easier for members to pay for things like a college education. Rather than having to borrow a full year’s tuition amount upfront, they can borrow by the semester. Borrowing for home improvements will be easier and less costly, too, because they can borrow the money as they need it instead of in one lump sum,” Johnson said. “I can’t imagine why that provision wasn’t put in the original language. We should always encourage faster payoff of loans with less interest.” Larry Hall, president of Amarillo Community Credit Union, said the 50% limit for line of credit is extremely conservative but “it’s certainly a move in the right direction.” He said many borrowers have been scared away in the past because of the complexity of Texas home equity loans, and that the reforms may bring them in again. “It’s hard to guess what kind of response we would have. I was surprised to see how much home equity is out there. People with small balances on their property may well have a new reason to come in,” he said. Johnson agreed with the conservative limit put on home equity lines of credit. “I’ve seen TV ads here advertising 110 percent lines of credit in bordering states. I don’t know how they do that, but it will make it difficult to tell our members the limit is 50 percent,” she said. Currently, the Texas Constitution provides that the lender forfeits all principal and interest if a failure to comply with all the lender’s obligations is not corrected in a reasonable time. The “cure process” is not otherwise described, either in the Constitution or in statute. The new legislation has a “cure” provision allowing lenders to cure a loan in within 60 days of being notified in a manner dependent on the violation. In addition, no state agency currently has the authority to interpret home equity law, leaving the resolution of questions over the meaning of the law exclusively to the judiciary. SJR 42 gives interpretive authority to the Credit Union Commission, with a safe harbor for lenders who conform. Opposition to the state’s original home equity lending legislation by the real estate industry was intense, Johnson said, and credit unions will have to properly communicate the positive features of this reform to the public. “The real estate community doesn’t derive any benefits if people stay in their homes and don’t move. The first time around they tried to tell consumers that home equity loans would cause them to lose their homes. As a chapter, credit unions here will likely put up billboards around the area to combat those types of messages.” -

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