Untitled Texas Attorney General Opinion

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DAN MORALES
ATTORNEY
GENERAL November 6,1997

The Honorable Kenny Marchant Opinion No. DM-452
Chair, Committee on Financial Institutions
Texas House of Representatives Re: Permissible activities of lenders prior to
P.O. Box 2910 effective date of home equity lending amendment
Austin Texas 78768-2910 to the Texas Constitution (RQ-993)

Dear Representative Marchant:

You ask whether lenders may solicit, accept, and process applications for home equity loans
before the constitutional amendment authorizing such loans goes into effect. We conclude tJmt they
may. You also ask whether the twelve-day wsiting period for loans required by the amendment may
begin to run before the amendment’s effective date. We conclude that it may not.

As you know, article XVI, section 50 of the Texas Constitution prohibits the forced sale of
a person’s homestead for the payment of debts except in certain cases.’ Because a homestead may
not be foreclosed upon, the constitution effectively prevents homeowners t%omusing the equity in
their homes as collateral for loans. This year, the legislature passed House Joint Resolution 3 1
(“H.J.R. 31’3, proposing an amendment to the Texas Constitution that would allow home equity
lending. The amendment was approved by a majority of voters in an election held on
November 4,1997.2 The constitutional amendment becomes effective on January 1,199s.

You ask whether lenders3 may solicit, accept, and process home equity loan applications
prior to the amendment’s effective date of Jarmary 1,1998. Certainly, any lion created pursuant to
a home equity loan closed before the effective date of the amendment could not constitutionally be
enforced against a homestead. However, nothing in H.J.R. 31 prohibits home equity loan
applications before the effective date of the amendment. Nor are we aware of any federal or Texas

‘Article XVI, section SOpermits the forced sale of a homestead to pay the owner’s debt for the home’s purchase
money, for taxes due on the home, pursuant to an owelty of partition, for the refinance of a lien against the homestead,
or for improvements on the home.

‘See Tex. Const art XVII, $ 1 (requiring proposed constitutional amendments to be voted upon by qualified
electors); H.J.R. 31,75th Leg., R.S., 5 3, 1997 Tex. Sess. Law Serv. A-2, A-9 (setting November4, 1997 as election
date 00 proposed amendment).

%I this opinion,“lenders” means those entities and individuals authorized by the con.stitutio&l amendment
to make home equity loans.
TheHonorableKemry Marchant - Page 2 @M-452)

statute or common-law rule that expressly prohibits a lender tiom processing a loan application when
the terms of the loan transaction cannot legally be enforced at the time the application is made.

We caution, however, that consumer protection statutes such as the federal Truth in Lending
Ac~,~the Texas Deceptive Trade Practices-Consumer Protection Act,s and common-law causes of
action such as tiaud, promissory estoppel, and breach of contract might be applied to a lender who
misleads a potential borrower as to the effect of a home equity loan application or otherwise harms
a borrower. Lenders should particularly advise consumers of the consequences of paying fees,
appraisal costs, and other loan-related charges prior to the amendment’s effective date. Provided
applications are solicited, accepted, and processed in a manner that does not mislead or deceive
consumers, we find no legal prohibition on such practices prior to the effective date of the
amendment.

Your second question regards the twelve-day waiting period imposed by the constitutional
amendment. A lien created pursuant to a home equity loan is unenforceable if the loan is closed
before the 12th day a&r the date the home owner submits a loan application to the lender, or the
date the lender provides the owner with a certain written notice regarding the terms of the loan,
whichever cornea later. You ask whether the twelveday waiting period may begin to run before the
amendment becomes effective on January 1,1998. In other words, if a borrower has submitted an
application and the lender has provided notice twelve days before January 1,1998, may the loan be
closed on January 1,1998, and be enforceable under the provisions of the amendment? We conclude
that it may not.

The amendment provides that a home equity loan may be enforced if it is closed not before
“the 12th day after the later of the date that the owner of the homestead submits an application to the
lender for the extension of credit or the date that the lender provides the owner a copy of the notice
prescribed by Subsection (g) of this section.” Subsection (g) sets out the specific language of the
notice and includes references to the requirements of the constitutional amendment. Before the
amendment becomes effective, no notice is prescribed by Subsection (g) and the provisions of the
amendment referred to in the notice have no legal effect. Notice given before the effective date of
the amendment is not notice ‘prescribed by” the smendment. Therefore, the amendment’s notice
requirement is not satisfied if notice is given before the effective date of the amendment, and thus
the twelve-day waiting period is not triggered by such a notice.

‘1s U.S.C. gp 1601 - 1667f.

‘BUS. & Corn. Code ch. 17, subch. E.

p. 2535
The Honorable Kenny Marchant - Page 3 @M-452)

A lender may solicit, accept, and process applications for home equity
loans before the constitutional amendment authorizing such loans becomes
effective. However, the notice to borrowers prescribed by the amendment is
not effective if given before the amendment’s effkctive date.

DAN MORALES
Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Barbara Griti
Assistant Attorney General

p. 2536