Texas is the only state in the United States to regulate home equity lending though its constitution. Accordingly, compliance with constitutional provisions is crucial for the loan to be valid, enforceable and insurable. Lenders have sought assurance that their loans are in compliance. The Texas Insurance Department has promulgated two endorsement forms, unique to Texas, to address these concerns. The endorsements are the T-42 and T-42.1.
A number of matters set out in Art. 16, Section 50 a6 of the Texas Constitution are fairly straightforward and can be easily addressed. These matters are those covered by the T-42 endorsement. Other matters require more effort and are covered by the T-42.1.
Please also see R-28A for more information on this endorsement.
Please note: A T-42 endorsement must be attached to any loan policy insuring a home equity loan. Items for which no coverage is appropriate may be deleted but be advised that few lenders will close if items are deleted.
1. A written agreement signed by all owners and all spouses must be obtained. At a minimum, this means that all owners and all spouses must sign the deed of trust whether they all live on the property or not. Please note that at least 1 owner must live on the property and claim it as homestead for the loan to be a home equity loan. It may be necessary to obtain affidavits as to homestead or even do an inspection of the property.
2. Determine from your title search that no other unreleased home equity lien encumbers the property. If your home equity transaction is going to be at least partially used to pay off and existing home equity lien that has been recorded longer than one year at your closing date, and a release of that existing lien is coming in the ordinary course of business, you may leave item 2(c) of the T-42 intact.
3. A borrower may have only one home equity loan at a time. If your title search discloses a home equity loan that has been recorded sooner than one year before your scheduled closing date, item 2(d) of the T-42 must be deleted.
4. All home equity deeds of trust must prominently disclose that they are home equity liens or liens made pursuant to Art. 16, Section 50 a6 of the Texas Constitution. Failure to comply with this provision requires deletion of item 2(e) of the T-42.
5. The company may provide additional coverage as item 2(f) to read exactly as follows:
a. “(f) The extension of credit secured by the lien of the insured mortgage being closed at a location other than the office of the lender, an attorney at law, or a title company, as set forth in Subsection (a)(6)(N) of Section 50, Article XVI, Texas Constitution.”
b. This additional coverage may be added only in compliance with P-44 C which reads as follows:
i. The promissory note secured by the insured mortgage and the insured mortgage must be executed by the borrower(s)/grantor(s) at the office of a title company and the insured mortgage must be acknowledged by the borrower(s)/grantor(s) at the office of a title company. For purposes of this subparagraph C(1), "the office of a title company" shall mean the leased or owned Texas office location(s) of: (a) a title insurance company; or, (b) a direct operation; or, (c) a title insurance agent; or, (d) an attorney conducting the attorney’ s business in the name of a title insurance company or direct operation or title insurance agent where the attorney and the attorney’s bona fide employees who close transactions are licensed as escrow officers as provided in Article 9.42.C, Texas Insurance Code.
The additional matters for which many lenders desire to have title insurance coverage are addressed in the T-42.1 Supplemental Home Equity Endorsement. These coverages are provided in a direct and indirect manner has set out below:
Underwriting Requirement T-42.1
Please note: Upon request by the lender, a T-42.1 may be attached to any loan policy insuring a home equity loan. Items for which no coverage is appropriate may be deleted but be advised that few lenders will close if items are deleted
1. The constitution requires a 12 day wait from the time a loan is applied for until the closing. This requirement is met in item 2(a) by the title company not closing until the date the lender instructs.
2. The constitution requires that the borrower has a 3 day right to rescind the transaction before the funds can be disbursed. This requirement is met in item 2(b) by the title company not disbursing until the 4th day after closing.
3. The constitution requires that the borrower sign an election not to rescind the home equity lien on or before the insured mortgage and note are executed. This requirement is met in item 2(c) by assuring that your escrow personnel do not allow the election not to rescind to be signed until after the 3 day right of rescission has expired.
4. The constitution requires that the borrower receive a copy of all documents signed at closing. This requirement is met in item 2(d) by the title company providing a copy of all such documents.
5. The constitution requires that the lender cannot collect fees in excess of 3% of the loan amount excluding interest. This requirement is met in item 2(e) by assuring that escrow personnel do not collect fees in excess of those shown on the settlement statement as provided to the lender.
6. The constitution requires that documents may contain no material blanks. This requirement is met in item 2(f) by escrow personnel carefully reviewing all documents to assure that all blanks are filled in.
7. The constitution requires that the borrower agree as the fair market value of the property to assure that the home equity loan and all other loans leave at least 20% of the value in equity. This requirement is met in item 2(g) by having escrow personnel determine that a purported appraisal or evaluation of the property is actually attached to the acknowledgment of fair market value.
8. The constitution requires that the acknowledgement as to fair market value be signed at closing. This requirement is met by item 2(h) by having escrow personnel be certain to confirm the acknowledgement document is obtained.
9. The constitution requires that the property actually is the homestead of the borrower. This requirement is met by item 2(i) by (a) obtaining a homestead affidavit from the borrowers claiming the subject property, (b) by a tax certificate showing homestead tax exemption status, (c) doing an inspection of the property including interviews with neighbors or some other step or action approved by a Texas underwriter.
10. The constitution prohibits a borrower from having more than one home equity loan on more than one property in the same county as the land being encumbered as a home equity loan. This prohibition is met be 2(j) which requires a general name search of the borrowers the result of which is no additional home equity loans on other property owned by the borrowers. An affidavit from the borrowers to this effect may also be appropriate. Consult a Texas underwriter for assistance as needed.
11. The constitution prohibits a borrower from having more than one home equity loan on more than one property in another county as the land being encumbered as a home equity loan. This prohibition is met by 2(k). If you are licensed in more than one county, conduct a general name search of the borrowers in each of your counties. If the result of which is no additional home equity loans on other property owned by the borrowers. An affidavit from the borrowers to this effect should also be obtained since it is impractical to conduct name searches in all 254 Texas Counties, especially those for which you do not have title plants. Consult a Texas underwriter for assistance as needed.
12. The constitution requires that the borrower receive a final closing statement reflecting all actual fees, points, interest, costs and charges collected or disbursed by the title company at least 3 calendar days before closing. This requirement is met by item 2(l) and by requiring escrow personnel not to close a transaction until the next business day after the day on which the completed, final closing statement is actually received by the borrower(s).
Stewart Title Guaranty Company has issued a number of bulletins dealing with this evolving area of the law and title insurance practices. These bulletins are found on virtual underwriter ( vuwriter.com, at bulletins, Texas) and are: Tx-37, Tx-40, Tx47, Tx-52, Tx-57, Tx-70, Tx-2007003 and Tx-20013004 (this latter bulletin is on the strict limitations on use of powers of attorney in home equity lending).
For further guidance, refer to the applicable subsections in Section 11.04 of the National Underwriting Manual on Virtual Underwriter http://www.vuwriter.com/vumanuals.jsp?displaykey=UM00000208