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You are here: Home . bulletins . 1998 . b-0008-8

COMMISSIONER'S BULLETIN # B-0008-98

Title Bulletin No. 159

March 24, 1998


To: ALL INSURERS WRITING TITLE INSURANCE IN THE STATE OF TEXAS AND ALL DIRECT OPERATIONS OR AGENTS THEREOF


Re: THE RECENT CONSTITUTIONAL AMENDMENT ON HOME EQUITY LOANS

Appendix For Current Title Bulletins, Basic Manual of Title Insurance (continued)

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The Texas Department of Insurance has received several recent inquiries about newly amended Sec. 50, Article XVI, Texas Constitution, as adopted by the Texas voters November 4, 1997.

Under Section 50(e) of the Constitutional Amendment:
A refinance of debt secured by a homestead and described by any subsection under Subsections (a)(1)-(a)(5) that includes the advance of additional funds may not be secured by a valid lien against the homestead unless:
(1) the refinance of the debt is an extension of credit described by Subsection (a)(6) of this section; or
(2) the advance of all of the additional funds is for reasonable costs necessary to refinance such debt or for a purpose described by Subsection (a)(2), (a)(3), or (a)(5) of this section.

"Reasonable costs necessary to refinance" is not defined in Section 50.

In closing any refinance transaction under Section 50(e)(2) where "reasonable costs necessary to refinance" the existing debt are included in the new loan there is a potential risk to the lender that the costs may be claimed to be unreasonable or unnecessary. If a court later determines that the additional funds were not "reasonable costs necessary to refinance," there is a potential that the lien may be voided.

It has been reported to us that some title companies are representing to lenders that "reasonable costs necessary to refinance" can be stated as a percentage of the original loan amount. We believe the final determination of the meaning of this phrase will be made by either the Attorney General or by judicial decision.

While this agency lacks specific authority to define these terms, the Constitutional Amendment itself establishes a three percent (3%) cap for origination expenses for a home equity loan. Texas Constitution Art. XVI, 50 (a) (6) (E). The "reasonable costs necessary to refinance" provision in Section 50 (e)(2) of the Constitutional Amendment is separate from the three percent (3%) cap in Section 50 (a)(6)(E) that applies to new cash-out home equity loans. This indicates, however, that three percent (3%) might be a safe harbor for bona fide expenses connected with a refinance loan.

Accordingly, until more definitive guidance comes from the Texas Legislature, the Attorney General or a court of competent jurisdiction, the Texas Department of Insurance will not object to a company utilizing an underwriting guideline which limits amounts included in the new loan for reasonable and necessary expenses of up to three percent (3%) of the amount of the loan being refinanced. Agents and underwriters are strongly urged to monitor legal developments to ensure that they make any changes necessary to adjust to the evolving law in this area.

Please advise your employees and staff of these issues. For more information, please contact the Department s Title Division.

/s/ Elton Bomer
ELTON BOMER
COMMISSIONER OF INSURANCE


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