THE ATTORXEY GENERAL
OF TEXAS
December 21, 1990
Honorable Bruce Gibson Opinion No. JM-1269
Chairman
Rouse Government Organi- Re: Whether the homestead
zation Committee provision of the Texas Consti-
P.O. Box 2910 tution has been preempted by
Austin, Texas 78768-2910 federal legislation regulating
savings and loan associations
and other lending institutions
(RQ-2066)
Dear Representative Gibson:
You ask whether federal law and regulations have
preempted the Texas homestead provisions, in particular,
article XVI, section 50, of the Texas Constitution, which
provides in part:
P
The homestead of a family, or of'a single
adult person, shall be, and is hereby pro-
tected from forced sale, for the payment of
all debts except for the purchase money
thereof, or a part of such purchase money,
the taxes due thereon, or for work and
material used in constructing improvements
thereon . . . . Notaaae. trust deed, or
otherlien
aid. extent for the wurchase mon v there-
or. or imwrovements made thezeon. as
hereinbefore wrovided . . . . All pretended
sales of the homestead involving any condi-
tion of defeasance shall be void.
Tex. Const. art. XVI, § 50 (emphasis added).1 This provi-
sion prevents the owners of homestead property from
1. The Texas homestead exemption first appeared in the
statutes of the Republic of Texas and was placed in the
constitution when Texas became a state in 1845. It has been
included in every Texas Constitution since that time. See2
G. Braden, The Constitution of Texas: An Annotated and
Comwarative Analysis at 788 (1977).
P. 6779
Honorable Bruce Gibson - Page 2 (JM-1269)
borrowing money secured by the equity in the homestead for
any purpose other than the expressly authorized purposes.
Your inquiry was prompted by a 1989 opinion letter
written by the deputy general counsel of the Federal Home
Loan Bank Board [hereinafter Bank Board], which regulated
federally chartered savings and loan associations under the
Home Owners' Loan Act of 1933 [HOLA], 12 U.S.C. S 1464. The
letter from the Bank Board responded to questions asked by
the United States Department of Housing and Urban Develop-
ment .2
The Sank Board's letter concluded that HOLA and regula-
tions issued thereunder permit national savings and loan
associations to issue "line of credit home equity conversion
mortgages," or "reverse mortgages," which would al.low the
homeowner to borrow money on the security of his equity in
his residence. The deputy general counsel expressed the
opinion that the federal statute and regulations would
preempt the Texas homestead provisions with respect to such
mortgages issued by federally-chartered savings and loan
associations. The Department of Housing and Urban Develop-
ment also inquired whether the federal Alternative Mortgage
Transaction Parity Act of 1982 [hereinafter Parity Act], 12
U.S.C. 55 3801-3806, would authorize state associations to
make "reverse mortgages@0on an equal basis with national
savings and loans associations, with the result that the
Texas homestead provisions would be preempted as to mortgag-
es issued by state-chartered associations. The Bank Board
letter declined to express an opinion about state-chartered
associations because they were not under its supervision.
You ask this office to review the reasoning of the
deputy general counsel's opinion letter and to answer the
question he left unanswered. Your inquiry raises the
following issues:
Is a federally-chartered lender permitted by
federal law and regulations to make home
equity loans?
2. Letter from Jack D. Smith, Deputy General Counsel,
Federal Home Loan Bank Board to John A. Maxim, Jr.,
Associate General Counsel, U.S. Department of Housing and
Urban Development (Aug. 4, 1989). The O;;~~alo~ Loan
Bank Board was replaced with the Thrift
Supervision in late 1989. See infra note 5 at 10.
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Honorable Bruce Gibson - Page 3 (JM-1269)
h
If so, does the federal authority preempt the
Texas homestead exemption law, insofar as the
federally-chartered lender is concerned?
If a federally-chartered lender has authority
to make home equity loans, do state-chartered
lenders have similar authority to make home
equity loans under the Parity Act, adopted as
title VIII of the Garn-St Germain Depository
Institutions Act of 1982, Pub. L. No. 97-320?
With respect to the first issue, we will not undertake
to reanalyze the federal laws and regulations relied on in
the Bank Board's opinion letter; instead, we will set out
the letter's reasoning as a basis for reaching the next
question. Any questions we have about the reasoning of the
Bank Board's letter can be raised in our discussion of the
preemption question.
According to the opinion letter of the Bank Board, the
authority of federally-chartered savings and loan associa-
tions to make loans on the security of a home owner's equity
in his residence, including "reverse mortgages," is based on
- the following. provision of HOLA:
An association may to such extent, and
subject to such rules and regulations as the
Board may prescribe from time to time,
invest in, sell, or otherwise deal with the
following loans, or other investments:
. . . .
(l)(B) Real property loans
Loans on the security of liens upon
residential or nonresidential real property.
12 U.S.C. 5 1464(c)(l)(B) (superseded).3 The agency's
rule-making power is set out in the following provision:
3. This provision now reads as follows:
To the extent specified in regulations of the
Director [of the Office of Thrift Management], a
Federal savings association may invest in, sell,
or otherwise deal in the following loans and other
investments:
(Footnote Continued)
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Honorable Bruce Gibson - Page 4 (JM-1269)
In order to provide thrift institutions
for the the deposit of funds and for the
extension of credit for homes and other goods
and services, the Director [of the Office of
Thrift Management] is authorized, under such
regulations as the Director may prescribe --
(1) to provide for the organization,
incorporation, examination, operation, and
regulation of associations to be known as
Federal savings associations (incl~uding
Federal savings banks), and
(2) to issue charters therefore,
giving primary consideration of the best
practices of thrift institutions in the
United States. The lending and investment
powers conferred by this section are intended
to encourage such institutions to provide
credit for housing safely and soundly.
12 U.S.C. 5 1464(a).
The letter from the Bank Board provides the following
discussion of the regulations promulgated to implement this
provision:
The history of 12 C.F.R. pt. 545, which
governs the operations of Federal associa-
tions, is crucial to this analysis. Prior to
the Garn-St Germain Act, Federal associations
were specifically authorized by 12 C.F.R. s&Y
545.6-2(a)(7) and 545.6-4(d) (1981) to offer
reverse mortgages to homeowners.
After the Garn-St Germain Act was enacted,
the Board substantially revised 12 C.F.R. pt.
545. Explicit provisions governing reverse
mortgages were removed from the regulation,
(Footnote Continued)
(1) . . .
(B) Residential real property loans
Loans on the security of liens upon
residential real property.
P. 6782
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and 12 C.F.R. 5 545.1 (1988), which reads as
follows, was added:
A Federal association may exercise all
authority granted it by the Home Owners '
Loan Act of 1933, 12 U.S.C. 1464, as
amended . . . whether or not implemented
specifically by Rank Board regulation,
subject to the limitations and interpreta-
tions contained in this part.
Thus, the letter concludes that the regulation authorizes
the federally-chartered associations to exercise powers that
are not specifically set out by regulations, including
powers that are inconsistent with state law.
The letter quotes the preamble to 12 C.F.R. 5 545.1 on
the Bank Board's approach to exercise of its regulatory
power:
Current Part 545 is based upon the premise
that the investment authority of the HOLA
must be implemented expressly by regula-
tion . . . . In order to grant associations
the maximum flexibility ,to exercise the
authorities granted by the HOLA, the Board
has determined to revise the general approach
to regulating investment activities of
Federal associations. Accordingly, Part 545
now addresses the authority of associations
only to limit, interpret or recognize inci-
dental authority. Federal associations may
exercise all authority granted by the HOIA
subject only to limitations contained in the
regulations. Because this approach differs
from the current treatment, these amendments
to Part 545 include a section specifically
stating that Federal associations may exer-
cise all statutory authority subject to the
limitations in this Part. The Board empha-
sizes that deletion of sections specifically
implementing existing authority does not mean
that any authority can no longer be exer-
cised.
Bank Board letter of August 4, 1989 (quoting 48 Fed. Reg.
23032 (May 23, 1983)).
The opinion letter states that federally-chartered
associations may offer reverse mortgages to homeowners. It
goes on to express the opinion that Texas homestead laws
have been preempted with respect to federal institutions,
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Honorable Bruce Gibson - Page 6 (JM-1269)
relying on Fidelitv de
Cuestg, 458 U.S. 141 (1982) and the provisions Lf gOhA:
Congress by statute has explicitly permitted
Federal associations to secure loans with
real estate. 12 U.S.C. f 1464(o)(l)(B). It
is axiomatic that the authority to secure
loans protects lenders in the event of
default on such loans by foreclosing on the
property constituting the security. State
laws which prevent or otherwise restrict
Federal associations from engaging in trans-
actions involving such mortgages, are in
conflict with Sank Board regulations.
The Texas laws in question clearly prevent
Federal associations from exercising the
authority granted to them by the HOIA and the
Board's regulations. Therefore, this Office
concludes that the constitution and statutes
of Texas under review are *an obstacle to the
accomplishment and execution of the purposes
and objectives' of 12 C.F.R. pt. 545 to the
extent that they prevent Federal associations
from securing line of credit conversion
mortgages with real estate consisting of
homesteads, and foreclosing on such mortgages
in the event of default. According to de la
Cuestg, the HOLA authorizes the Board to
enact regulations that preempt substantive
state real property laws purporting to govern
the mortgage lending operations of Federal
associations. The regulatory history of 12
C.F.R. 5 545 reveals that the Board exercised
this authority to preempt state real property
laws, insofar as reverse mortgages are
concerned.
The "doctrine of preemption" is rooted in the Supremacy
Clause of the United States Constitution. U.S. Const. art.
VI, cl. 2; wtv Federal Sa . & Loan Ass‘n v. de la
Cuesta, 458 U.S. 141, 152 (19Z2). The Supremacy Clause
requires inconsistent state laws to yield to valid federal
laws and regulations. Fidelitv Federal Sa . & Loan A
d la Cuesta, m; Seiter v. v tia, 756VS.W.2d 303Ss;~e~:
lZ88).
The de la Cuesta case arose out of a conflict between a
regulation of the Federal Home Loan Bank Board on
P. 6784
Honorable Bruce Gibson - Page 7 (JM-1269)
wdue-on-saleH clauses4 in mortgages and California common
law. The federal regulation authorized federal savings and
loan associations to include a "due-on-sale" clause in the
loan document, while the California Supreme Court had
declared that such clauses could be exercised only under
limited circumstances. The United States Supreme Court
found that the California rule created an obstacle to the
accomplishment and execution of the full purposes and
objectives of the due-on-sale regulation. 458 U.S. at 156.
It also found that the Bank Board expressly intended to
preempt contrary state laws and that it acted within its
authority in issuing the preemptive regulation, reviewing
the language and legislative history of the HOLA to reach
the latter conclusion.
We are not persuaded that the Be la Cuestg case re-
solves the question before us. That case involved a board
rule specifically authorizing the federal associations to
include a O1due-on-salellclause in loan documents. It did
not address the current system of regulation, which allows
federal associations to exercise all statutory authority
subject only to express limitations. Moreover, the Finan-
cial Institutions Reform, Recovery, and Enforcement Act of
- 1989, P.L. 101-73, adopted amendments to HOLA directed at
providing closer supervision of federal.thrift institutions.
1989 U.S. Code Cong. & Admin. News 432 (House Conf. Rep. No.
101-222, 101 Cong. 1st Sess.). Thus, the relevant federal
provisions differ in some ways from those at issue in de la
Cuesta. Expressions of congressional intent in connection
with the 1989 amendments may also be relevant to the preemp-
tion question.
The 1982 case dealt with the timing of repayment of a
loan secured by real property. The Texas homestead laws,
however, forbid the use of equity in a homestead to securing
loans for any purpose not authorized by the constitution.
We are faced with a question of whether the transaction may
be made at all, not merely a question of the terms of a
transaction. Thus, preemption of the Texas constitutional
protection for the homestead raises a different, and possi-
bly more difficult, question than the one addressed in de la
Cuesta.
4. A due-on-sale clause allows the lender to declare
the balance on a mortgage loan immediately due and payable
when the property is sold. If the lender exercises this
option, the purchaser cannot assume the loan.
P. 6785
Honorable BNCe Gibson - Page 8 (JM-1269)
Supreme Court decisions on preemption questions decided
subsequent to de la Cuesta must also be considered.
California V. C America Corn., 109 S.Ct. 1661 (1989), 2:
Court reiterated the presumption against finding preemption
of state law in areas traditionally regulated by the states:
When Congress legislates in a field tradi-
tionally occupied by the States, 'we start
with the assumption that the historic police
powers of the States were not to be supersed-
ed by the Federal Act unless that was the
clear and manifest purpose of Congress.'
109 S.Ct. at 1665.
In Goit -Joint Venture v. Federal Sav. &
Loan Ins. CON, 109 s.ct. 1361 (1989), the Bank Board
claimed that HOL and the enabling legislation of the
Federal Savings and Loan Insurance Corporation (FSLIC)
preempted Texas law on the adjudication of claims against
federal associations and conferred this power on the FSLIC.
The Supreme Court interpreted provisions governing the FSLIC
and the Bank Board, adopted over a span of fifty years, to
determine the Congressional intent underlying the specific
provision in question. It concluded that Congress did not
intend to authorize the FSLIC to adjudicate claims and that
state law was not preempted.
Finally, preemption cases can be difficult to recon-
cile. Levy, Karst, Mahoney, Encvclowedia of the American
ConstitutioQ at 1438. Preemption questions arise because
Congress has ignored the existence of related state laws and
the court must deal with the factors that would have con-
fronted the legislature had it thought about related state
laws. The judges* views as to the wisdom of the federal and
state laws are among the factors that may in fact be deci-
sive in a preemption question. Id.
In answer to your second question, neither the deputy
general counsel's opinion letter nor the authorities he
cites convince us that the Texas homestead provisions are
preempted as to federally-chartered associations by regula-
tions issued under HOLA. Because this question ultimately
cannot be resolved solely by analyzing statutes and judicial
decisions, it cannot be resolved in an advisory opinion. It
is a question for judicial resolution in an adversary
proceeding, in which the relevant state and federal policies
can be thoroughly briefed and argued. We cannot advise you
that the courts would follow the approach taken by the
opinion letter written by the deputy general counsel of the
Bank Board.
P. 6786
Honorable BNCe Gibson - Page 9 (JM-1269)
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We can, however, advise you as to the intended effect
of the Parity Act, about which you inquire in your third
question. Even if regulations issued under HOLA preempted
the Texas homestead provisions with respect to home equity
loans made by federally-chartered savings and loan associa-
tions, the Parity Act would not give state-chartered associ-
ations similar authority to make such loans. A careful
reading of the Parity Act shows that it deals with interest
rates and repayment terms of mortgage loans, and does not
relate to the use of the equity in a homestead as security
for a loan.
The Parity Act, 12 U.S.C. 55 3801-3806, was enacted as
title VIII of the Garn-St. Germain Depository Institutions
Act of 1982. It was adopted to give state-chartered mort-
gage lenders parity with federally-chartered lenders with
respect to "alternative mortgage loans.H m 12 U.S.C. §
3801. It allows state-chartered mortgage lenders to make
such transactions to the extent that they are authorized for
federally-chartered institutions by valid regulation of the
appropriate federal agency: that is, the Comptroller of the
Currency for national banks, the National Credit Union
Administration Board for federal credit unions, and the
Director of the Office of Thrift Supervision (formerly the
Federal Home Loan Bank Board) for federally-chartered
savings and loan associations. 12 U.S.C. 5 3803(a). The
Parity Act thus makes applicable to state lenders certain
valid regulations issued under other law by a federal
regulatory agency. & It expressly preempts contrary
provisions in state constitutions, laws, or regulations,
except for states that opted out of its provisions by
October 15, 1985. 12 U.C.S. 50 3803(c), 3804.
The Congressional purpose in adopting the Parity Act is
stated in section 3801 of title 12 of the United States
Code, which provides as follows:
(a The Congress hereby finds that --
(1) increasingly volatile and dynamic
changes in interest rates have
seriously impaired the ability of
housing creditors
._. -. _ to provide consumers
Wllxl fixed-tern,, fixed-rate credit
secured by interests in real prope~y,
cooperative housing, manufactured
homes, and other dwellings;
(2) alternative mortgage transactions
are essential to the provision of an
adequate supply of credit secured by
residential property necessary to meet
the demand expected during the 1980's;
and
P. 6787
Honorable BNCe Gibson - Page 10 (JM-1269)
(3) the Comptroller of the Currency,
the National Credit Union
Administration, and the Director of the
Office of Thrift Supervision have
recognized the importance of
alternative mortgage transactions and
have adopted regulations authorizing
federally chartered depository
institutions to engage in alternative
mortgage financing.
(b) It is the purpose of thiTm;kzEter to
eliminate the discriminatory that
those regulations have upon nonfederally
chartered housing creditors and provide them
with parity with federally chartered institu-
tions by authorizing all housing creditors to
make, purchase, and enforce alternative
mortgage transactions so lona as the transac-
tions are in conformitv with the reations
issued bv the Federal =-icisi . (Emphasis
added.)
As subsection (b) of section 3801 indicates,5
federally-chartered depository institutions were already
authorized by agency regulations to engage in such "alterna-
tive mortgage transactions" before the Parity Act was
adopted. The purpose of the Parity Act was to enable
state-chartered institutions to engage in such transactions
on an equal basis with the national institutions. The
Parity Act can effect a preemption of a Texas constitutional
provision only if regulations issued under other federal law
authorizing federally-chartered institutions to engage in
alternative mortgage transactions preempt the Texas provi-
sion. &g 12 U.S.C. 5 3803(a)(3). To determine whether
state-chartered lenders have authority pursuant to the
Parity Act to make loans secured by a home owner's equity,
5. Section 3801, indicating the intent of Congress,
has not been amended since its enactment in 1982, except for
the substitution in 1989 of Vhe Director of the Office of
Thrift Supervision" for the "Federal Home Loan Bank Board"
when the Bank Board was abolished and the Office of Thrift
Supervision was created. &g pub. L. 101-73, 9 744(c). The
new agency published, transferred, and recodified Bank Board
regulations as its own on November 30, 1989. 54 Fed. Reg.
49411. See aeneral.& Malloy, mna to Fear But FIRREA
Itself: e-f's
Federal Bank Reoulation, 50 Ohio State L.J. 1117 (1989).
P- 6788
Honorable BNCe Gibson - page 11 (J&1269)
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we must inquire whether such loans are encompassed by the
term "alternative mortgage transactions.W
Section 3801(a)(l) indicates that the "alternative
mortgage transactions" and "alternative mortgage financing"
referred to are transactions employing an alternative
interest rate structure that depart from the usual
"fixed-term, fixed-rate" structure. Congress was referring
only to regulations dealing with flexible interest rates, as
is further demonstrated by the definition of "alternative
mortgage transaCtion in section 3802:
As used in this chapter --
(1) the term 'alternative mortgage
transaction' means a loan or credit sale
secured by'an interest in residential real
property, a dwelling, all stock allocated
to a dwelling unit in a residential
cooperative housing corporation, or a
residential manufactured home . . .
(A) in which the interest rate or
finance charge may be adjusted or
renegotiated:
(B) involving a fixed-rate, but which
implicitly permits rate adjust-
ments . . . or
(C) involving any similar type of
rate, method of determining return,
term, repayment, or other variation not
common to traditional fixed-rate,
fixed-term transactions, including
without limitation, transactions that
involve the sharing of equity or
appreciation;
described and defined by applicable regula-
tion.
12 U.S.C. 5 3802(l).
The emphasis in section 3802, as in section 3801, is on
variations of interest rates and repayment schedules as
contrasted to the "traditional fixed-rate, fixed-term" loan
on residential property. Nothing in the section 3802
definition of "alternative mortgage transaction" suggests
that Congress intended "applicable regulationsW describing
and defining such transactions to embrace any subject matter
other than matters relevant to determining the interest rate
P. 6789
Honorable Bruce Gibson - Page 12 (JM-1269)
for transactions that could otherwise be fixed-rate transac-
tions under existing law.
Section 3802(1)(C) defines a category of alternative
mortgage transactions as nincluding without limitation,
transactions that involve the sharing of equity or apprecia-
tion." We have received briefs arguing that this language
refers to a mortgage secured by a homeowner's equity in his
residence. However, the word nincluding00shows that the
language refers only to a sub-category of transactions
involving a variable interest rate, repayment period, or
other variation from the traditional fixed-rate, fixed-term
residential mortgage. In addition, the phrase "a sharing of
equity or appreciation" would be an unusual and inaccurate
description of a mortgage secured by a homeowner's equity in
his home. The mortgage lender does not receive a tOsharellof
equity (unless the money he receives in a foreclosure sale
can be characterized in this way). The phrase "transactions
that involve the sharing of equity or appreciation" refers
instead to a joint venture in which both the lender and
developer of real estate share in the profits of a project.
a Annot., Aareement for Share in Earninas of or Income
from Prowertv in Lieu of. or in Addition to, Interest as
Usurious, 16 A.L.R. 3d 475 (1967); see also Coit Indewen-
Pence Joint Venture Feder 1 Sa . 8 Loan Ins. co
m, at 1364-65 (fZera1 s&ingsv and loan associatio;
required a profit sharing interest as a condition of lending
money to purchase undeveloped land). The final clause of
section 3802(1)(C) deals with how loans may be structured,
not with the kind of residential property interest that may
secure them.
Accordingly, the Parity Act does not address the
authority of state savings and loan associations to make
loans secured by a homeowner's equity in his homestead; nor
does it purport to preempt provisions of the Texas Constitu-
tion and statutes protecting the homestead from foreclosure
for any purpose not constitutionally authorized.
SUMMARY
The federal Parity Act, 12 U.S.C. 9.8
3801 et. sea,, does not attempt to authorize
state savings and loan associations to make
loans secured by a homeowner's equity in his
residence, and accordingly does not purport
P. 6790
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to authorize preemption of the Texas home-
stead laws.
JIM MATTOX
Attorney General of Texas
MARYKELLKR
First Assistant Attorney General
mu MCcREARY
Executive Assistant Attorney General
JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General
RENEA HICKS
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Susan Garrison
Assistant Attorney General
C
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