Refinances now make up over 60% of the loan applications according to the latest MBA Weekly Survey. As refinances fill lenders’ pipelines, we thought it would be timely to revisit the particular requirements and aspects of the Texas 50(f)(2) loan, as we have seen some lenders overlook critical requirements, which delayed some loan closings.
Introduced in 2018, a 50(f)(2) loan is a rate/term refinance of an existing home equity loan. The loan is commonly called a 50(f)(2) loan because the requirements are set forth in Subsection 50(f)(2), of Article XVI of the Texas Constitution. Prior to the introduction of 50(f)(2) loans, an existing 50(a)(6) home equity loan (“50(a)(6) loan”) could only be refinanced as a new 50(a)(6) loan. The 50(f)(2) loan allows a lender to complete a rate/term refinance of an existing 50(a)(6) loan.
We hope that this brief refresher of the 50(f)(2) loan requirements will assist you in originating and closing these types of loans during the current refinance cycle. The following six requirements must be met in order to properly originate and close a 50(f)(2) loan.
- One-Year Waiting Period. § 50(f)(2)(A).
A 50(f)(2) loan cannot close until one year has passed since the closing date of the previous home equity loan. The closing date of the home equity loan is the date all of the owners and owners’ spouses sign the home equity security instrument. Please note that, although there is a possibility of a Borrower on oath requesting a waiver of the 50(a)(6) one year seasoning requirement based on the State of Emergency declared by the Texas Governor and President Trump due to COVID-19, this constitutional waiver provision ONLY applies to a home equity refinance under 50(a)(6) of an existing home equity loan and does NOT apply to 50(f)(2) refinance. There is simply no constitutional basis to waive the one year waiting period for a 50(f)(2) loan.
- Paying off A Purchase-Money First Lien and Existing Home Equity Second Lien. § 50(f)(2)(B)
A 50(f)(2) loan can be completed to pay off multiple liens on title, one being an existing home equity loan. Simply put, if the borrower purchased the property, and then later took out a second-lien home equity loan, the lender can refinance both liens together as a rate/term refinance 50(f)(2) loan.
- No Cash Back to the Borrower. § 50(f)(2)(B).
A borrower cannot receive cash-back at closing from a 50(f)(2) loan. The lender is permitted to roll reasonable closing costs into the new loan amount as long as they are “actual costs and reserves required by the lender to refinance the debt.”
- 80% LTV. § 50(f)(2)(C).
The combined loan-to-value (CLTV) of the 50(f)(2) loan and all other existing valid liens on the homestead does not exceed 80% of the homestead’s fair market value. If you are only refinancing an existing 50(a)(6) loan and leaving another valid lien on title, then you must ensure that the principal amount of the 50(f)(2) loan plus the outstanding principal balance of the other valid lien does not collectively exceed 80% of the fair market value of the property. A common question from lender is whether an appraisal is required in order to establish that fair market value. There is no legal requirement that requires the lender obtain an appraisal for a 50(f)(2). Therefore, a property inspection waiver (PIW) can be used for the transaction if allowed by your investor guidelines.
- Timely Delivery of the 50(f)(2) Notice. § 50(f)(2)(D).
As you are probably aware, on a 50(a)(6) loan, the lender is required to provide the borrower a 12 Day Notice, advising the borrower of most of the requirements for a 50(a)(6) loan. Similarly, a 50(f)(2) loan has a specified legal notice that must be delivered to the borrower (i) no more than three business days after submission of the loan application and (ii) at least twelve days prior to closing. The date of loan application could be the date the borrower submits the 1003. However, in some instances, the borrower does not indicate that the existing lien is a 50(a)(6) lien and the Lender doesn’t learn about the nature of the existing lien until after receiving the title commitment, which could be after the expiration of the 3 business day disclosure window if measured from the date of the 1003. Fortunately, in those instances, the Texas Administrative Code provides the lender some leeway on the disclosure timeline. Section 153.45 of the Texas Administrative Code provides that, if the borrower originally applied for a different loan type, the Texas application can be modified and the three business day window for the delivery of the 50(f)(2) Notice commences upon the date of such modification, which can be orally or in writing. The lender should document the change of the application to satisfy any investor or regulator that the disclosure was timely provided. Please note that if the original loan application was specifically for a rate/term refinance of an existing home equity loan, then the application must be cancelled and a new loan application made in order for timely delivery of the 50(f)(2) Notice.
- 50(f-1) Affidavit. § 50(f-1).
In order to deliver the loan to Fannie Mae (Selling Guide B5-4.1-02), the borrowers must execute an affidavit at closing attesting that the requirements of a 50(f)(2) loan have been met. This affidavit, made pursuant to Article XVI, § 50(f-1) of the Texas Constitution (a “50(f-1) Affidavit”) “conclusively establishes that the requirements of Subsection (a)(4) of this section have been met.” Therefore, the lender can be certain that the lien will be treated as a valid refinance of a lien against the homestead property and a 50(a)(4) lien moving forward. Please note that PBG can provide a form of the 50(f-1) Affidavit in your closing package if requested to ensure it is signed at closing.
After two years of assisting lenders with 50(f)(2) loans, I can say with certainty that the 50(f)(2) Notice delivery requirements have led to the most heartburn for lenders. My recommendation is to establish a standard procedure for processors and loan originators to follow in providing the 50(f)(2) Notice within three days of loan application. I trust this article will help you in originating and closing 50(f)(2) loans, and please do not hesitate to email me with any questions regarding this loan type.