The Finance Commission of Texas and the Texas Credit Union Commission ("commissions") adopt amendments to §153.8 (relating to Security of the Equity Loan: Section 50(a)(6)(H)), §153.11 (relating to Repayment Schedule: Section 50(a)(6)(L)(i)), §153.14 (relating to One Year Prohibition: Section 50(a)(6)(M)(iii)), §153.15 (relating to Location of Closing: Section 50(a)(6)(N)), §153.22 (relating to Copies of Documents: Section 50(a)(6)(Q)(v)), and §153.41 (relating to Refinance of a Debt Secured by a Homestead: Section 50(e)); and adopt new §153.26 (relating to Acknowledgment of Fair Market Value: Section 50(a)(6)(Q)(ix)) in 7 TAC, Chapter 153, concerning Home Equity Lending.

The commissions adopt the amendments to §§153.8, 153.11, 153.14, 153.15, and 153.22 without changes to the proposed text as published in the September 4, 2020, issue of the Texas Register (45 TexReg 6204). The text of these sections will not be republished.

The commissions adopt the amendments to §153.41, and adopt new §153.26, with changes to the proposed text as published in the September 4, 2020, issue of the Texas Register (45 TexReg 6204). The text of these sections will be republished.

The commissions received six official comments on the proposal. Two comments were from Black, Mann & Graham, LLP. One comment was from Cornerstone Credit Union League, Independent Bankers Association of Texas, Texas Bankers Association, and Texas Mortgage Bankers Association. One comment was from the Independent Bankers Association of Texas. One comment was from the Texas Mortgage Bankers Association. One comment was from an individual.

The comment from Cornerstone Credit Union League, Independent Bankers Association of Texas, Texas Bankers Association, and Texas Mortgage Bankers Association expressed general support for the proposal, stating that the proposed changes "will provide some extremely helpful clarity to lenders, particularly as to issues that have arisen during this time of pandemic." Each of the six comments recommended changes to certain sections of the proposal. The commissions' responses to these comments are included following the discussion of each applicable section.

7 TAC Chapter 153 contains the commissions' interpretations of the home equity lending provisions of Texas Constitution, Article XVI, Section 50 ("Section 50"). In general, the purpose of the proposed rule changes to 7 TAC Chapter 153 is to implement changes resulting from the commissions' review of the chapter under Texas Government Code, §2001.039. Notice of the review of 7 TAC Chapter 151 was published in the May 1, 2020, issue of the Texas Register (45 TexReg 2897). The commissions received no comments in response to that notice.

The interpretations in 7 TAC Chapter 153 are administered by the Joint Financial Regulatory Agencies ("agencies"), consisting of the Texas Department of Banking, Department of Savings and Mortgage Lending, Office of Consumer Credit Commissioner, and Texas Credit Union Department. The agencies distributed an early precomment draft of proposed changes to interested stakeholders for review, and then held an online webinar regarding the proposed changes. The agencies received three informal precomments on the rule text draft. The agencies appreciate the thoughtful input provided by stakeholders.

An amendment to §153.8(1)(C) removes the word "or" to correct a list that unnecessarily includes the word "or" twice.

In an official comment, one commenter recommended deleting the statement in current §153.8(2) that a "guaranty or surety of an equity loan is not permitted." The commenter argued that this provision leads to an absurd result, and that parties other than the owner or owner's spouse should be able to enter a surety or guaranty to be held personally liable for a home equity loan.

The commissions originally adopted §153.8(2) on the rationale that a guaranty or surety constitutes additional property that would secure the home equity loan, in violation of Section 50(a)(6)(H). Cf. Smith v. Cash Store Mgmt., 195 F.3d 325, 331 (7th Cir. 1999) (holding that a postdated check is "security" for a loan because it creates additional value to the lender). This is a long-standing interpretation going back to the agencies' original 1998 commentary on Section 50, and has not been superseded by subsequent constitutional amendments or court rulings. See Joint Financial Regulatory Agencies, Regulatory Commentary on Equity Lending Procedures, p. 6 (Oct. 7, 1998). The commissions believe that this rationale is still correct. For this reason, the commissions disagree with the comment and decline to amend current §153.8(2).

Amendments to §153.11 explain that the repayment schedule requirements in Section 50(a)(6)(L)(i) of the Texas Constitution apply at closing. New paragraph (1) explains that this constitutional provision does not prohibit a lender from agreeing with the borrower to certain modifications, and explains that a modification may include a deferment of the original obligation. An amendment at §153.11(2) explains that the modification does not affect the two-month time period described by Section 50(a)(6)(L)(i).

These amendments to §153.11 are based on the Texas Supreme Court's decision in Sims v. Carrington Mortg. Servs., LLC, 440 S.W.3d 10 (Tex. 2014). In Sims, the Texas Supreme Court analyzed a modification of a home equity loan where the borrower and lender agreed to capitalize past-due interest, fees, property taxes, and insurance premiums into the principal, and where the modification did not involve the satisfaction or replacement of the original note, an advancement of new funds, or an increase in the obligations created by the original note. The court held that because the modification was not a new extension of credit, it did not trigger reapplication of the constitutional requirements of Section 50. Sims, 440 S.W.3d at 18.

In its first official comment, Black, Mann & Graham, LLP recommended adding the new text on modifications to §153.14 instead of §153.11. Section 153.14 deals primarily with the one-year requirement in Section 50(a)(6)(M)(iii), while §153.11 deals primarily with the repayment schedule requirement in Section 50(a)(6)(L)(i). The commissions believe that the new text on modifications relates primarily to the repayment schedule requirement, and, therefore, appropriately belongs in §153.11. For this reason, the commissions disagree with the comment and have maintained the new text in §153.11.

Another commenter recommended adding the following two sentences to §153.11 regarding which modifications are permissible: "Any deferment may include no payments or monthly payments in an amount that is less than the amount of accrued interest during the deferment period." And, "No more than six (6) months of payments may be deferred in any twelve (12) month period." The commissions decline to include this text in the adoption, because the text appears to go beyond interpreting Section 50 of the Texas Constitution, and could be misunderstood to allow actions that are prohibited by other law. For example, for high-cost home loans, Texas Finance Code, §343.203 generally prohibits negative amortization (i.e., a payment schedule that causes the principal balance to increase). In addition, the first sentence recommended by the commenter is unnecessary, because this concept is sufficiently addressed by the existing text on deferments.

In an informal precomment, one precommenter suggested amending §153.11(1) to state that the two-month time period described by Section 50(a)(6)(L)(i) begins "on the day the loan is funded." Section 50(a)(6)(L)(i) provides that the payments must begin "no later than two months from the date the extension of credit is made." Currently, §153.11(1) explains that the two-month period begins "on the date of closing." The commissions believe that the current text appropriately interprets the word "made" in the context of Section 50(a)(6)(L)(i), and have not included this suggested change in the proposal. Cf. Black's Law Dictionary, "make" (11th ed. 2019) (defining "make" to include "caus[ing] (something) to exist" and "legally perform[ing], as by executing, signing, or delivering (a document)").

Amendments to §153.14 describe states of emergency. Section 50(a)(6)(M)(iii) of the Texas Constitution generally prohibits a home equity loan from being closed within one year after another home equity loan on the same property, but includes an exception for a state of emergency declared by the president of the United States or the governor of Texas. Amendments to §153.14 would describe this exception and explain that a state of emergency includes a national emergency declared by the president of the United States under the National Emergencies Act, 50 U.S.C. §§1601-1651, and a state of disaster declared by the governor of Texas under Texas Government Code, Chapter 418. The commissions believe that these federal and state statutes describe states of emergency within the meaning of Section 50(a)(6)(M)(iii).

Amendments to §153.15 describe permissible closing locations. Section 50(a)(6)(N) of the Texas Constitution provides that a home equity loan must be closed only at the office of a lender, an attorney at law, or a title company. Because of the pandemic resulting from the coronavirus and the disease COVID-19, lenders have expressed interest in closing loans in places where they can maintain social distancing, such as an office parking lot. An amendment to §153.15(1) explains that the closing may occur in any area located at the permanent physical address of the lender, attorney, or title company. Amendments to paragraphs (2) and (3) add references to the permanent physical address. The commissions believe that these amendments are consistent with the closing location requirement of Section 50(a)(6)(N), and clarify that lenders have this option to maintain social distancing while closing loans at their offices.

In its first official comment, Black, Mann & Graham, LLP recommended adding the phrase "or branch office" after "office" in §153.15(2) and (3). The commissions believe that this change is unnecessary because the general term "office" encompasses branch offices and existing §153.15(1) already makes clear that a branch office is included. For this reason, the change is not included in this adoption.

An amendment to §153.22 describes requirements for electronic copies of loan documents. Section 50(a)(6)(Q)(v) of the Texas Constitution requires the lender to provide the owner with a copy of the loan application and all documents signed by the owner at closing. New §153.22(3) explains that the lender may provide documents electronically in accordance with state and federal law governing electronic signatures and delivery of electronic documents, and would include references to the Texas Uniform Electronic Transactions Act, Texas Business & Commerce Code, Chapter 322, and the federal E-Sign Act, 15 U.S.C. §§7001-7006.

In its second official comment, Black, Mann & Graham, LLP recommended that proposed §153.22(3) be renumbered as a new and separate section and then revised to apply to all notices, disclosures and documents required to be delivered to the owner. In addition to the deliveries described by §153.22, the new section would apply to those described by §153.13 (relating to Preclosing Disclosures: Section 50(a)(6)(M)(ii)), §153.51 (relating to Consumer Disclosure: Section 50(g)), and §153.45 (relating to Refinance of an Equity Loan: Section 50(f)). Alternatively, the commenter recommended that each of the cited sections be separately amended to permit the same type of electronic delivery as would be permitted by proposed §153.22(3). The comment from the Independent Bankers Association of Texas and the comment from the Texas Mortgage Bankers Association also expressed support for this recommendation. In general, the agencies do not object to the concept of providing required disclosures electronically in accordance with state and federal law. However, the suggested changes go significantly beyond the scope of the current proposal and cannot be accomplished within this rulemaking. In the future, the agencies and the commissions will consider whether a new consolidated section or amendments to other sections in Chapter 153 might be appropriate to address this issue.

New §153.26 describes the acknowledgment of fair market value. Under Section 50(a)(6)(Q)(ix) of the Texas Constitution, the owner of the homestead and the lender must sign a written acknowledgment as to the fair market value of the homestead property on the date the extension of credit is made. New §153.26(2) explains that the lender may sign the written acknowledgment before or at closing. New §153.26(3) explains that an authorized agent may sign the written acknowledgment on behalf of the lender.

Three of the official comments discussed §153.26 and the written acknowledgment of fair market value. Two of these comments, including the first comment from Black, Mann & Gramm, LLP, referred to the doctrine of last antecedent. Under the doctrine of last antecedent, "a qualifying phrase in a statute or the Texas Constitution must be confined to the words and phrases immediately preceding it to which it may, without impairing the meaning of the sentence, be applied." Spradlin v. Jim Walter Homes, Inc., 34 S.W.3d 578, 581 (Tex. 2000) (applying the doctrine of last antecedent to Texas Constitution, Article XVI, Section 50(a)(5)). Two commenters argue that the doctrine of last antecedent should be applied to Section 50(a)(6)(Q)(ix), and that the phrase "on the date the extension of credit is made" should be read to modify only the immediately preceding phrase "the fair market value of the homestead property." The third official comment, from Cornerstone Credit Union League, Independent Bankers Association of Texas, Texas Bankers Association, and Texas Mortgage Bankers Association, expressed general support for the analysis of §153.26 in the first two comments.

The commissions agree that it is appropriate to apply the doctrine of last antecedent to Section 50(a)(6)(Q)(ix), and that the phrase "on the date the extension of credit is made" modifies only the immediately preceding phrase "the fair market value of the homestead property." In response to these comments, adopted paragraph (1) has been added to §153.26 to explain this concept.

One of the commenters, after discussing the doctrine of last antecedent, recommended including a statement in §153.26 that the lender may sign the written acknowledgment "before, at or after closing." The commenter cited Section 50(a)(6)(Q)(x)(d), which allows a lender to correct a failure to comply with Section 50(a)(6)(Q)(ix) by "obtaining the appropriate signatures" within 60 days after being notified of the failure to comply. The commenter raised questions about whether lenders can rely on the information contained in an appraisal. The commenter also explained that there may be factual questions, not addressed in the interpretations, regarding who is an "authorized agent" of the lender for purposes of §153.26.

The commissions agree that the acknowledgment may be signed before or at closing. The commissions also agree that Section 50(a)(6)(x)(d) allows a lender to correct a failure to comply with Section 50(a)(6)(Q)(ix) by obtaining the appropriate signatures. However, the language suggested by the commenter gives the impression that the lender complies with Section 50(a)(6)(Q)(ix) by signing the acknowledgment at any time after closing. Under Section 50(a)(6)(Q)(ix), a home equity loan must be "made on the condition that . . . the owner of the homestead and the lender sign a written acknowledgment as to the fair market value of the homestead property on the date the extension of credit is made." Generally, a lender should have the information it needs to complete and sign the acknowledgment before or at closing. See Regulation B Valuations Rule, 12 C.F.R. §1002.14(a)(1) (requiring a creditor, for certain first-lien mortgages, to provide a copy of any appraisal at least three business days before consummation). For this reason, the commissions believe that the proposed text is inappropriate and decline to make the change suggested by the commenter. Regarding the commenter's questions about a lender's ability to rely on an appraisal, this issue is addressed by Section 50(h), which generally allows a lender to "conclusively rely on the written acknowledgment as to the fair market value . . . if . . . the value acknowledged to is the value estimate in an appraisal or evaluation prepared in accordance with a state or federal requirement applicable to [home equity loans]." Regarding the commenter's statement on factual questions about who is an "authorized agent," §153.26 does not require the lender to use an authorized agent, and if a lender is concerned about factual questions that arise from using an authorized agent, then the lender can sign the acknowledgment itself.

In its first comment, Black, Mann & Gramm, LLP recommended removing the word "must" from the introductory paragraph of §153.26. The comment makes this recommendation in connection with the discussion of the doctrine of last antecedent, as discussed earlier. The comment does not explain what the word "must" should be replaced with. The use of the word "must" in §153.26 is consistent with the introductory paragraphs of several other sections currently located throughout 7 TAC Chapter 153, including §153.8, §153.11, and §153.22. The word "must" appropriately reflects that certain conditions must be satisfied in order for the lender to have a valid lien under Section 50(a)(6). For this reason, the commissions decline to remove the word "must" from this provision.

An amendment to §153.41 removes the phrase "or (a)(7)" in the introductory paragraph. Section 50(e) of the Texas Constitution generally provides that if a refinance of debt against the homestead includes additional funds, the refinance must be described by Section 50(a)(6) (i.e., must be a home equity loan). Section 50(e) does not refer to Section 50(a)(7). The phrase "or (a)(7)" in the introductory paragraph of §153.41 appears to be a typographical error. For this reason, the amendment removes this phrase.

A change has been made to the introductory paragraph of §153.41 to remove the numbers "(1)" and "(2)" within this paragraph, based on input from staff of the Texas Register.

The constitutional provisions affected by the adoption are contained in Texas Constitution, Article XVI, §50.

No statute is affected by this adoption.