### THE ATTORXEY GENERAL OF TEXAS

December 21, 1990

Honorable Bruce Gibson OpinionNo. JM-1269 Chairman Rouse Government Organi- Re: Whether the homestead zation Committee provision of the Texas ConstiP.O. Box 2910 Austin, Texas tution has been preempted by

78768-2910 federal legislation regulating

savingsand loan associations and other lending institutions (RQ-2066)

Dear RepresentativeGibson:

You ask whether federal law and regulations have preempted the Texas homesteadprovisions, article XVI, section in particular, 50, of the Texas Constitution, which
P provides inpart:

The homestead of a family, or of'a single adultperson, shall be, and is hereby protected from forced sale, for the payment of all debts except for the purchase money thereof, or a part of suchpurchase money, the taxes due thereon, or for work and material used in constructing improvements thereon

. . . . Notaaae. trust deed, or otherlien aid. extent for the wurchasemon v thereor. or imwrovements made thezeon. as hereinbeforewrovided

. . . . All pretended sales of the homestead involvingany condition of defeasance shallbe void.

Tex. Const. art. XVI, § 50 (emphasisadded).1 This provision prevents the owners of homestead property from

1. The Texas homestead exemption first appeared in the statutes of the Republic of Texas and was placed in the constitutionwhen Texas became a state in 1845. It has been included in every Texas Constitutionsince that time. See2 G. Braden, The Constitution of Texas: An Annotated and ComwarativeAnalysis at 788 (1977).

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borrowingmoney securedby the equity in the homestead for any purpose other than the expressly authorizedpurposes.

Your inquiry was prompted **by** a 1989 opinion letter written by the deputy general counsel of the Federal Home **Loan** Bank Board [hereinafterBank Board],which regulated federallychartered savings and loan associationsunder the Home Owners' LoanAct of 1933 [HOLA], 12U.S.C. S 1464. The letter from the Bank Board responded to questions asked by the United States Department of Housing and Urban Development.2

The Sank Board's letter concluded that HOLA and regulations issued thereunderpermit national savings and loan associations to issue "lineof credithome equity conversion mortgages," or "reverse mortgages,"which would al.low the homeowner to borrowmoney on the security of his equity in his residence. The deputy general counsel expressed the opinion that the federal statute and regulations would preempt the Texas homesteadprovisionswith respect to such mortgages issued by federally-charteredsavings and loan associations. The Departmentof Housing and Urban Development also inquiredwhether the federalAlternative Mortgage Transaction ParityAct of 1982 [hereinafterParityAct], 12 U.S.C. 55 3801-3806,would authorize state associations to make "reverse mortgages@0 on an equal basis with national savings and loans associations, with the result that the Texas homesteadprovisionswould be preempted as to mortgages issuedby state-charteredassociations. The Bank Board letterdeclined to express an opinion about state-chartered associationsbecause they were not under its supervision.

You ask this office to review the reasoning of the deputy general counsel's opinion letter and to answer the question he left unanswered. Your inquiry raises the following issues:

Is a federally-charteredlenderpermitted by federal law and regulations to make home equity loans?

2. Letter fromJack D. Smith, Deputy General Counsel, Federal Home Loan Bank Board to John A. Maxim, Jr., Associate General Counsel, U.S. Department of Housing and Urban Development (Aug.4, 1989). The O;;~~alo~ Bank Board was replaced with the Loan Thrift Supervision in late 1989. See infra note 5 at 10.

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If so, does the federalauthoritypreempt the Texas homestead exemption law, insofaras the federally-charteredlender is concerned?

If a federally-charteredlenderhas authority to make home equity loans,do state-chartered lendershave similar authority to make home equity loansunder the ParityAct, adopted as titleVIII of the Garn-St Germain Depository InstitutionsAct of 1982, Pub. L. No. 97-320?
With respect to the first issue,we will not undertake to reanalyze the federal laws and regulationsrelied on in the Bank Board's opinion letter; instead, we will set out the letter's reasoningas a basis question. for reaching the next

Any questionswe have about the reasoning of the Bank Board's letter can **be** raised **in** our discussion of the preemption question. According to the opinion letter of the Bank Board, the authority of federally-chartered savings and loan associations to make loans on the securityof a home owner's equity

- in his residence, including "reversemortgages," is based on

the following.provision of HOLA:

An association may to such extent, and subject to such rules and regulationsas the Board may prescribe from time to time, invest in, sell, or otherwisedeal with the following loans,or other investments:

. . . . (l)(B)Real property loans

Loans on the security of liens upon residentialor nonresidentialreal property.

12 U.S.C. 5 1464(c)(l)(B) (superseded).3 The agency's rule-makingpower is set out in the followingprovision:

3. This provision **now** reads as follows:

To the **extent** specified in regulations of the Director [ofthe Office of Thrift Management], a Federal savings association may invest in, sell,
or otherwisedeal in the following loans and other investments: (FootnoteContinued)

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In order to provide thrift institutions for the the deposit of funds and for the extension of credit forhomes and other goods and services, the Director [ofthe Office of Thrift Management] is authorized,under such regulationsas the Directormay prescribe --
(1) to provide for the organization, incorporation,examination, operation, and regulation of associationsto be known as Federal savings associations (incl~uding Federal savingsbanks), and

(2) to issue charters therefore, giving primary consideration of the best practices of thrift institutions in the United States. The lending and investment powers conferredby this section are intended to encourage such institutions to provide credit forhousing safely and soundly.

12U.S.C. 5 1464(a).

The letter from the Bank Boardprovides the following discussion of the regulationspromulgated to implement this provision:

The history of 12 C.F.R. pt. 545, which

governs the operations of Federal associations, is crucial to this analysis. Prior to the Garn-St GermainAct, Federal associations
were specificallyauthorizedby 12 C.F.R. s&Y 545.6-2(a)(7)and 545.6-4(d) (1981)to offer
reversemortgages to homeowners.

After the Garn-St GermainAct was enacted, the Board substantiallyrevised 12 C.F.R.pt. 545. Explicit provisionsgoverning reverse mortgages were removed from the regulation,

(FootnoteContinued)
(1)

. . . (B) Residential real property loans

Loans on the security of liensupon residentialreal property.

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and 12 C.F.R. 5 545.1 (1988),which reads as follows,was added:

A Federal associationmay exercise all authoritygranted it by the Home Owners' LoanAct of 1933, 12 U.S.C. 1464, as amended

. . . whether or not implemented specifically by Rank Board regulation, subject to the limitationsand interpretations contained in this part.
Thus, the letter concludesthat the regulation authorizes the federally-charteredassociationsto exercisepowers that
are not specifically set out by regulations, including powers that are inconsistentwith state law.

The letter quotes thepreamble to 12 C.F.R. 5 545.1 on the Bank Board's approach to exercise of its regulatory power:

Current Part 545 isbased upon the premise

that the investment authority of the HOLA must be implemented expressly by regulation

. . . . In order to grant associations the maximum flexibility ,to exercise the authoritiesgranted by the HOLA, the Board has determined to revise the general approach to regulating investment activities of Federal associations. Accordingly, Part 545
**now** addresses the authority of associations only to limit, interpretor recognize incidental authority. Federalassociations may exercise all authoritygranted by the HOIA subject only to limitationscontained in the regulations. Because this approach differs from the current treatment, these amendments to Part 545 include a section specifically stating that Federal associationsmay exercise all statutory authority subject to the limitations in this Part. The Board emphasizes that deletion of sections specifically implementingexistingauthoritydoes not mean that any authoritycan no longer be exercised.

Bank Board letter of August 4, 1989 (quoting48 Fed. Reg. 23032 (May23, 1983)).

The opinion letter states that federally-chartered associationsmay offer reversemortgages to homeowners. It goes on to express the opinion that Texas homestead laws have been preempted with respect to federal institutions,

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relying on Fidelitv de Cuestg, 458 U.S. 141 (1982)and the provisions Lf gOhA:

Congress by statutehas explicitly permitted Federal associations to secure loans with real estate. 12 U.S.C. f 1464(o)(l)(B). It is axiomatic that the authority to secure loans protects lenders in the event of default on such loans by foreclosingon the property constituting the security. State laws which prevent or otherwise restrict Federal associations from engaging in transactions involving such mortgages, are in conflictwith Sank Board regulations.

The Texas laws in question clearlyprevent Federal associations from exercising the authority granted to them by the HOIA and the Board's regulations. Therefore, this Office concludes that the constitutionand statutes of Texas under review are *an obstacle to the accomplishmentand execution of the purposes and objectives' of 12 C.F.R. pt. 545 to the extent that they prevent Federal associations from securing line of credit conversion mortgages with real estate consisting of homesteads, and foreclosingon suchmortgages in the event of default. According to de la Cuestg, the HOLA authorizes the Board to enact regulations that preempt substantive state realproperty lawspurporting to govern the mortgage lending operations of Federal associations. The regulatory history of 12 C.F.R. 5 545 reveals that the Board exercised this authority to preempt state real property laws, insofar as reverse mortgages are concerned.

The "doctrineof preemption" is rooted in the Supremacy Clause of the United States Constitution. U.S. Const. art. VI, cl. 2;wtv Federal Sa

. & Loan Ass‘n v. de la Cuesta, 458 U.S. 141, 152 (19Z2). The Supremacy Clause requires inconsistentstate laws to yield to valid federal laws and regulations. Fidelitv Federal Sa

. & Loan A d la Cuesta,m; Seiter lZ88). v. v tia, 756VS.W.2d 303Ss;~e~:

The de la Cuesta case arose out of a conflict between a regulation of the Federal **Home** Loan Bank Board on

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wdue-on-saleHclauses4 inmortgages and California common law. The federalregulationauthorized federal savings and loan associationsto include a "due-on-sale"clause in the loan document, while the California Supreme Court had declared that such clauses could be exercised only under limited circumstances. The United States Supreme Court found that the Californiarule created an obstacle to the accomplishment and execution of the full purposes and objectives of the due-on-saleregulation. 458 U.S. at 156. It also found that the Bank Board expressly intended to preempt contrary state laws and that it actedwithin its authority in issuingthe preemptive regulation, reviewing the language and legislativehistory of the HOLA to reach the latter conclusion.

We are not persuaded that the Be la Cuestg case resolves the questionbefore us. That case involveda board rule specifically authorizingthe federalassociations to includea O1due-on-salell clause in loan documents. It did not address the current system of regulation,which allows federalassociations to exercise all subject only to express limitations. statutory authority Moreover, the Financial InstitutionsReform, Recovery, and EnforcementAct of

- 1989, P.L. 101-73, adopted amendmentsto HOLA directed at

providing closer supervisionof federal. thrift institutions. 1989U.S. Code Cong. &Admin. News 432 (HouseConf. Rep. No. 101-222, 101 Cong. 1st Sess.). Thus, the relevant federal provisions differ in someways from those at issue in de la Cuesta. Expressions of congressional intent in connection with the 1989 amendmentsmay also be relevant to the preemption question.

The 1982 case dealtwith the timing of repayment of a loan secured by realproperty. The Texas homestead laws, however, forbid the use of equity in a homestead to securing loans for any purpose not authorized by the constitution. We are facedwith a question ofwhether the transaction may be made at all, not merely a question of the terms of a transaction. Thus, preemption of the Texas constitutional protection for the homestead raises a different, and possibly more difficult,question than the **one** addressed in de la Cuesta.

4. A due-on-sale clause allows the lender to declare the balance on a mortgage loan immediatelydue and payable when the property is sold. If the lender exercises this option, the purchaser cannot assume the loan.

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Supreme Court decisions on preemption questions decided subsequent to de la Cuestamust also be considered. CaliforniaV. C America Corn., 109 S.Ct. 1661 (1989), 2: Court reiterated the presumptionagainst finding preemption of state law in areas traditionallyregulatedby the states:

When Congress legislates in a field traditionally occupied by the States, 'we start with the assumption that the historic police powers of the Stateswere not to be superseded by the Federal **Act** unless that was the clear and manifestpurpose of Congress.'

109 S.Ct. at 1665.

In Goit -Joint Venture v. Federal Sa v. & Loan Ins. CON, 109 s.ct. 1361 (1989),the Bank Board claimed that HOL and the enabling legislation of the Federal Savings and Loan Insurance Corporation (FSLIC) preempted Texas law on the adjudication of claims against federalassociationsand conferred this power on the FSLIC. The Supreme Court interpretedprovisionsgoverning the FSLIC and the Bank Board, adopted over a span of fiftyyears, to determine the Congressional intentunderlying the specific provision in question. It concluded that Congress did not intend to authorize the FSLIC to adjudicate claims and that state law was not preempted. Finally,preemption cases can be difficult to reconcile. Levy, Karst, Mahoney, Encvclowedia of the American ConstitutioQat 1438. Preemption questions arise because Congresshas ignored the existence of related state laws and the courtmust deal with the factors that would have confronted the legislaturehad it thought about related state laws. The judges*views as to the wisdom of the federal and state laws are among the factors thatmay in fact **be** decisive in a preemption question. Id.

**In** answer to your second question,neither the deputy general counsel's opinion letternor the authorities he cites convince us that the Texas homesteadprovisions are preempted as to federally-charteredassociationsby regulations issuedunder HOLA. Because this question ultimately cannotbe resolved solelyby analyzing statutes and judicial decisions, it cannot be resolved in an advisory opinion. It is a question for judicial resolution in an adversary proceeding, inwhich the relevant state and federalpolicies
can be thoroughlybriefed and argued. We cannot advise you that the courts would follow the approach taken by the opinion letterwritten by the deputy general counsel of the Bank Board.

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We can, however, adviseyou as to the intended effect of the Parity Act, about which you inquire inyour third question. Even if regulations issuedunder HOLA preempted the Texas homesteadprovisions with respect to home equity loansmade **by** federally-charteredsavings and loan associations, the ParityAct would not give state-charteredassociations **similar** authority to make such loans. A careful reading of the Parity **Act** shows **that** it deals with interest rates and repayment terms ofmortgage loans, and does not relate to the use of the equity **in** a homestead as security for a loan.

The ParityAct, 12U.S.C. 55 3801-3806,was enacted as titleVIII of the Garn-St.Germain Depository Institutions Act of 1982. Itwas adopted to give state-chartered mortgage lenders parity with federally-charteredlenders with respect to "alternative mortgage loans.H m 12U.S.C. § 3801. It allows state-charteredmortgage lenders to make such transactions to the extent that they are authorized for federally-charteredinstitutionsby valid regulation of the appropriate federalagency: that is, the Comptroller of the Currency for national banks, the National Credit Union AdministrationBoard for federalcredit unions, and the **Director** of the Office of Thrift Supervision (formerly the Federal Home Loan Bank Board) for savings and loan associations. federally-chartered 12U.S.C. 5 3803(a). The ParityAct thus makes applicable to state lenders certain valid regulations issued under other law by a federal regulatoryagency. & It expressly preempts contrary provisions in state constitutions, laws, or regulations, except for **states** that opted out of its provisions by October 15, 1985. 12U.C.S. 50 3803(c), 3804.

The Congressionalpurpose in adopting the ParityAct is stated in section 3801 of title 12 of the United States Code,which provides as follows:

(a The Congresshereby finds that --
(1) increasinglyvolatile and dynamic changes in interest rates have seriously impaired the ability of housing creditors to provide consumers

._. -. _ Wllxl fixed-tern,, fixed-rate credit securedby interests in real cooperative prope~y,

housing, manufactured homes, and other dwellings;

(2) alternativemortgage transactions
are essential to the provision of an adequate supply of credit secured by residentialpropertynecessary to meet the demand expectedduring the 1980's; and
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(3) the Comptrollerof the Currency, the National Credit Union Administration,and the Director of the Office of Thrift Supervision have recognized the importance of alternativemortgage transactions and have adopted regulations authorizing federally chartered depository institutionsto engage in alternative **mortgage** financing.
(b) It is the purpose of thiTm;kzEter to eliminate the discriminatory that those regulations have upon nonfederally charteredhousing creditors and provide them with parity with federallychartered institutions by authorizingall housing creditors to make, purchase, and enforce alternative mortgage transactionsso lona as the transactions are in conformitvwith the reations issued bv the Federal =-icisi

. (Emphasis added.)

As subsection (b) of section 3801 indicates,5 federally-chartered depository institutions were already authorizedby agency regulationsto engage in such "alternative mortgage transactions" before the Parity Act was adopted. The purpose of the Parity Act was to enable state-chartered institutionsto engage in such transactions
on an equal basis with the national institutions. The ParityAct can effect a preemption of a Texas constitutional provision only if regulations issuedunder other federal law authorizing federally-chartered institutionsto engage in alternativemortgage transactions preempt the Texas provision. &g 12 U.S.C. 5 3803(a)(3). To determine whether state-chartered lenders have authority pursuant to the ParityAct to make loans securedby a home owner's equity,

5. Section 3801, indicatingthe intent of Congress, has not been amended since its enactment in 1982, except for the substitution in 1989 of Vhe Director of the Office of Thrift Supervision" for the "FederalHome Loan Bank Board" when the Bank Boardwas abolished and the Office of Thrift Supervisionwas created. &g pub. L. 101-73, 9 744(c). The
new agencypublished, transferred,and recodified Bank Board regulations as its own on November 30, 1989. 54 Fed. Reg. 49411. See aeneral.&Malloy, mna to Fear But FIRREA Itself: e-f's Federal Bank Reoulation, 50 Ohio State L.J. 1117 (1989).

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we must inquire whether such loans are encompassedby the

term "alternativemortgage transactions.W

Section 3801(a)(l) indicates that the "alternative mortgage transactions"and "alternativemortgage financing" referred to are transactions employing an alternative interest rate structure that depart **from** the usual "fixed-term, fixed-rate"structure. Congresswas referring only to regulationsdealingwith flexible interest rates, as is furtherdemonstrated by the definition of "alternative mortgage transaCtion in section 3802:

**As** used in this chapter --

**(1)** the term 'alternative mortgage transaction'means a loan or credit sale securedby'an interest in residentialreal property, a dwelling, all stock allocated to a dwelling unit in a residential cooperative housing corporation, or a residentialmanufacturedhome

. . . (A) inwhich the interest rate or finance charge **may** be adjusted or renegotiated:

(B) involvinga fixed-rate,but which implicitly permits rate adjustments

. . . or
(C) involving any similar type of rate, method of determining return, term, repayment,or other variation not common to traditional fixed-rate, fixed-term transactions, including without limitation, transactions that involve the sharing of equity or appreciation;

described and defined by applicable regulation.

12 U.S.C. 5 3802(l).

The emphasis in section 3802, as in section 3801, is on variations of interest rates and repayment schedules as contrasted to the "traditionalfixed-rate, fixed-term" loan on residential property. Nothing in the section 3802 definition of "alternativemortgage transaction" suggests that Congress intended "applicableregulationsW describing and defining such transactionsto embrace any subjectmatter other than matters relevant to determining the interestrate

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for transactionsthat could otherwisebe fixed-rate transactions under existing law.
Section 3802(1)(C) defines a category of alternative mortgage transactions as nincluding without limitation, transactionsthat involve the sharing of equity or appreciation." We have received briefs arguing that this language refers to a mortgage securedby a homeowner's equity in his residence. However, the word nincluding00 shows that the languagerefers only to a sub-category of transactions involvinga **variable** interest rate, repayment period, or othervariation from the traditional fixed-rate, fixed-term residentialmortgage. In addition, the phrase "a sharing of equity or appreciation"would be an unusual and inaccurate description of a mortgage securedby a homeowner's equity in his home. The **mortgage** lenderdoes not receive a tOsharell of equity (unlessthe money he receives in a foreclosure sale
**can be**  characterized in this way). The phrase "transactions that involve the sharing of equity or appreciation" refers instead to a joint venture in which both the lender and developer of real estate share in the profits of a project.
a Annot., Aareement for Share in Earninas of or Income from Prowertv in Lieu of. or inAddition to, Interest as Usurious, 16A.L.R. 3d 475 (1967);see also Coit IndewenPence Joint Venture Feder 1 Sa

. 8 Loan Ins. co m, at 1364-65 (fZera1 s&ingsv and loan associatio; requireda profit sharing interestas a condition of lending money to purchase undeveloped land). The final clause of section 3802(1)(C)dealswith how loansmay be structured, not with the kind of residentialproperty interest that may secure them. Accordingly, the Parity Act does not address the authority of state savings and loan associations to make loans securedby a homeowner's equity in his homestead; nor does itpurport to preemptprovisions of the Texas Constitution and statutesprotecting the homestead from foreclosure for any purpose not constitutionallyauthorized.

SUMMARY
The federal Parity Act, 12 U.S.C. 9.8 3801 et. sea,, does not attempt to authorize state savings and loan associationsto make loans securedby a homeowner's equity in his residence,and accordingly does not purport

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to authorize preemption of the Texas homestead laws.

JIM MATTOX Attorney General of Texas

MARYKELLKR FirstAssistant Attorney General

mu MCcREARY ExecutiveAssistantAttorney General

JUDGE ZOLLIE STEAKLEY SpecialAssistantAttorney General

RENEA HICKS SpecialAssistantAttorney General

RICK GILPIN Chairman, Opinion Committee
Preparedby Susan Garrison AssistantAttorney General

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