Lately we have seen a growing number of lenders interested in offering home equity lines of credit (“HELOCs”) in Texas—some looking to expand existing HELOC programs into the state, others seeking to build a Texas-specific product from the ground up.
As with closed-end home equity loans, the Texas Constitution imposes a host of specific requirements and limitations that make open-end lines of credit secured by homestead property challenging to originate. In addition to those constitutional requirements, lenders must also satisfy the Texas Government Code mandate that the closing documents be prepared or reviewed by a Texas-licensed attorney. Lenders offering a HELOC product that may be secured by a homestead should keep the following key considerations in mind.
Texas law requires that HELOC closing documents be prepared or reviewed by a Texas-licensed attorney.
Texas Government Code Section 83.001 requires that any instrument affecting title to real property be prepared or reviewed by a Texas-licensed attorney. This requirement applies equally to open-end and closed-end credit. There is no general exception for HELOCs, nor any specific exception for smaller balances or second-lien lines of credit. A deed of trust securing a small line of credit is subject to the same requirement as one securing a large closed-end loan.
The consequences for failing to meet this attorney-review requirement can be significant. A lender that originates HELOCs without the requisite attorney involvement risks action by borrowers and by the State Bar of Texas, and it may breach a representation or warranty made to an investor or other counterparty that it has complied with all applicable Texas law—exposure that exists even on a perfectly performing loan.
Because the statute allows the documents to be either prepared or reviewed by a Texas-licensed attorney, a lender can satisfy the mandate and obtain an independent review of the transaction in a single step. That review is especially valuable on HELOCs, where lenders often forgo title insurance (discussed below) and attorney review may be the only independent check standing between the lender and an invalid lien.
A HELOC secured by the borrower’s homestead is subject to Texas 50(a)(6) requirements.
Both closed-end home equity loans and HELOCs are subject to Article XVI, Section 50(a)(6) of the Texas Constitution when secured by the borrower’s homestead. Those requirements include the 80% combined loan-to-value cap, delivery of the Notice Concerning Extensions of Credit, and the closing location rules.
Compliance is critical: a HELOC is subject to the same penalties for an uncured 50(a)(6) violation as a closed-end home equity loan—which can include forfeiture of all principal and interest.
HELOCs are subject to additional requirements under the Texas Constitution.
Beyond the closed-end requirements, HELOCs must also satisfy Article XVI, Section 50(t), which provides that:
- Any single debit or advance must be at least $4,000;
- A credit card, debit card, or similar device—including unrequested preprinted checks—may not be used to obtain an advance;
- Any fee to originate, evaluate, maintain, record, insure, or service the HELOC may be charged only when the line of credit is established;
- The lender may not amend the HELOC unilaterally; and
- During the draw period, each periodic payment must at least cover the accrued interest.
These restrictions often mean that a lender seeking to offer its national HELOC product must make changes to that product to comply with Texas law. For example, many lenders offer HELOCs that are tied to a credit or debit card, which is prohibited under Texas law. Additionally, many lenders charge annual maintenance fees or non-usage fees, both of which are prohibited under Section 50(t).
Before introducing a national HELOC product in Texas, we recommend that lenders have the initial and closing packages reviewed by a Texas-licensed attorney to ensure compliance with the myriad requirements of state law. We have rarely seen a national HELOC product that complies with Texas law; some modifications to the loan program documents are almost always required.
A HELOC and a closed-end home equity loan cannot encumber the homestead at the same time.
Article XVI, Section 50(a)(6)(K) permits only one 50(a)(6) lien against homestead property at any given time. Because both closed-end home equity loans and HELOCs are 50(a)(6) loans, a property cannot secure both simultaneously.
Since a HELOC is often originated as a second lien behind an existing first lien, lenders making second-lien HELOCs must review the title commitment to confirm whether that first lien is itself a 50(a)(6) loan. The most common—and most difficult to cure—error we see is a second-lien HELOC originated on a property where the first lien turns out to be a 50(a)(6) home equity loan.
HELOCs often carry more risk because lenders forgo title insurance.
Lenders frequently choose not to obtain a mortgagee title policy on a HELOC—because of the relatively low line amount, its second-lien position, or simply to keep the product competitively priced.
Skipping the policy plainly increases the lender’s risk, since there is no coverage to fall back on for a post-closing loss. Just as important, it removes the title company’s parallel review of the transaction—its independent look at the property’s characteristics, ownership structure, and existing liens. A second set of eyes is therefore especially valuable when no title insurer is involved, to catch and mitigate factors that could result in an invalid lien or other loss. As noted above, attorney review under Section 83.001 can fill exactly that gap.
In today’s market, HELOCs give lenders a valuable way to serve borrowers who want to tap their home equity. But Texas’s constitutional requirements make these loans uniquely challenging to originate. Familiarity with those requirements is essential to a valid, enforceable lien—and engaging a Texas-licensed attorney, both in standing up a HELOC program and in originating loans under it, is often the deciding factor in staying compliant with Texas law.
