THE ATTORXEY GENERAL 

OF TEXAS 

December 21, 1990 

Honorable Bruce Gibson Opinion No. 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 

savings and loan associations 

and other lending institutions 

(RQ-2066) 

Dear Representative Gibson: 

You ask whether federal law and regulations have 

preempted the Texas homestead provisions, 

article XVI, section 

in particular, 

50, of the Texas Constitution, which 

P provides in part: 

The homestead of a family, or of'a single 

adult person, 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 such purchase money, 

the taxes due thereon, or for work and 

material used in constructing improvements 

thereon . . . . Notaaae. trust deed, or 

otherlien 

aid. extent for the wurchase mon v thereor. or imwrovements made thezeon. as 

hereinbefore wrovided . . . . All pretended 

sales of the homestead involving any condition of defeasance shall be void. 

Tex. Const. art. XVI, § 50 (emphasis added).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 

constitution when Texas became a state in 1845. It has been 

included in every Texas Constitution since that time. See2 

G. Braden, The Constitution of Texas: An Annotated and 

Comwarative Analysis at 788 (1977). 

P. 6779 
Honorable Bruce Gibson - Page 2 (JM-1269) 

borrowing money secured by the equity in the homestead for 

any purpose other than the expressly authorized purposes. 

Your inquiry was prompted by a 1989 opinion letter 

written by the deputy general counsel of the Federal Home 

Loan Bank Board [hereinafter Bank Board], which regulated 

federally chartered savings and loan associations under the 

Home Owners' Loan Act of 1933 [HOLA], 12 U.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 thereunder permit national savings and loan 

associations to issue "line of credit home equity conversion 

mortgages," or "reverse mortgages," which would al.low the 

homeowner to borrow money 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 homestead provisions with respect to such 

mortgages issued by federally-chartered savings and loan 

associations. The Department of Housing and Urban Development also inquired whether the federal Alternative Mortgage 

Transaction Parity Act of 1982 [hereinafter Parity Act], 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 homestead provisions would be preempted as to mortgages issued by state-chartered associations. The Bank Board 

letter declined to express an opinion about state-chartered 

associations because 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-chartered lender permitted by 

federal law and regulations to make home 

equity loans? 

2. Letter from Jack 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. 

P. 6780 
h 

Honorable Bruce Gibson - Page 3 (JM-1269) 

If so, does the federal authority preempt the 

Texas homestead exemption law, insofar as the 

federally-chartered lender is concerned? 

If a federally-chartered lender has authority 

to make home equity loans, do state-chartered 

lenders have similar authority to make home 

equity loans under the Parity Act, adopted as 

title VIII of the Garn-St Germain Depository 

Institutions Act of 1982, Pub. L. No. 97-320? 

With respect to the first issue, we will not undertake 

to reanalyze the federal laws and regulations relied on in 

the Bank Board's opinion letter; instead, we will set out 

the letter's reasoning as a basis 

question. 

for reaching the next 

Any questions we 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 security of a home owner's equity 

- 

in his residence, including "reverse mortgages," is based on 

the following. provision of HOLA: 

An association may to such extent, and 

subject to such rules and regulations as the 

Board may prescribe from time to time, 

invest in, sell, or otherwise deal with the 

following loans, or other investments: 

. . . . 

(l)(B) Real property loans 

Loans on the security of liens upon 

residential or nonresidential real property. 

12 U.S.C. 5 1464(c)(l)(B) (superseded).3 The agency's 

rule-making power is set out in the following provision: 

3. This provision now reads as follows: 

To the extent specified in regulations of the 

Director [of the Office of Thrift Management], a 

Federal savings association may invest in, sell, 

or otherwise deal in the following loans and other 

investments: 

(Footnote Continued) 

P. 6781 
Honorable Bruce Gibson - Page 4 (JM-1269) 

In order to provide thrift institutions 

for the the deposit of funds and for the 

extension of credit for homes and other goods 

and services, the Director [of the Office of 

Thrift Management] is authorized, under such 

regulations as the Director may prescribe -- 

(1) to provide for the organization, 

incorporation, examination, operation, and 

regulation of associations to be known as 

Federal savings associations (incl~uding 

Federal savings banks), 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 conferred by this section are intended 

to encourage such institutions to provide 

credit for housing safely and soundly. 

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

The letter from the Bank Board provides the following 

discussion of the regulations promulgated 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 Germain Act, Federal associations 

were specifically authorized by 12 C.F.R. s&Y 

545.6-2(a)(7) and 545.6-4(d) (1981) to offer 

reverse mortgages to homeowners. 

After the Garn-St Germain Act was enacted, 

the Board substantially revised 12 C.F.R. pt. 

545. Explicit provisions governing reverse 

mortgages were removed from the regulation, 

(Footnote Continued) 

(1) . . . 

(B) Residential real property loans 

Loans on the security of liens upon 

residential real property. 

P. 6782 
Honorable Bruce Gibson - Page 5 (JM-1269) 

and 12 C.F.R. 5 545.1 (1988), which reads as 

follows, was added: 

A Federal association may exercise all 

authority granted it by the Home Owners ' 

Loan Act of 1933, 12 U.S.C. 1464, as 

amended . . . whether or not implemented 

specifically by Rank Board regulation, 

subject to the limitations and interpretations contained in this part. 

Thus, the letter concludes that the regulation authorizes 

the federally-chartered associations to exercise powers that 

are not specifically set out by regulations, including 

powers that are inconsistent with state law. 

The letter quotes the preamble to 12 C.F.R. 5 545.1 on 

the Bank Board's approach to exercise of its regulatory 

power: 

Current Part 545 is based 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 

authorities granted 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, interpret or recognize incidental authority. Federal associations may 

exercise all authority granted by the HOIA 

subject only to limitations contained in the 

regulations. Because this approach differs 

from the current treatment, these amendments 

to Part 545 include a section specifically 

stating that Federal associations may exercise all statutory authority subject to the 

limitations in this Part. The Board emphasizes that deletion of sections specifically 

implementing existing authority does not mean 

that any authority can no longer be exercised. 

Bank Board letter of August 4, 1989 (quoting 48 Fed. Reg. 

23032 (May 23, 1983)). 

The opinion letter states that federally-chartered 

associations may offer reverse mortgages to homeowners. It 

goes on to express the opinion that Texas homestead laws 

have been preempted with respect to federal institutions, 

P- 6783 
Honorable Bruce Gibson - Page 6 (JM-1269) 

relying on Fidelitv de 

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

Congress by statute has 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 foreclosing on the 

property constituting the security. State 

laws which prevent or otherwise restrict 

Federal associations from engaging in transactions involving such mortgages, are in 

conflict with Sank Board regulations. 

The Texas laws in question clearly prevent 

Federal associations from exercising the 

authority granted to them by the HOIA and the 

Board's regulations. Therefore, this Office 

concludes that the constitution and statutes 

of Texas under review are *an obstacle to the 

accomplishment and 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 foreclosing on such mortgages 

in the event of default. According to de la 

Cuestg, the HOLA authorizes the Board to 

enact regulations that preempt substantive 

state real property laws purporting 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 "doctrine of 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 inconsistent state 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 

P. 6784 
Honorable Bruce Gibson - Page 7 (JM-1269) 

wdue-on-saleH clauses4 in mortgages and California common 

law. The federal regulation authorized federal savings and 

loan associations to 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 California rule created an obstacle to the 

accomplishment and execution of the full purposes and 

objectives of the due-on-sale regulation. 458 U.S. at 156. 

It also found that the Bank Board expressly intended to 

preempt contrary state laws and that it acted within its 

authority in issuing the preemptive regulation, reviewing 

the language and legislative history of the HOLA to reach 

the latter conclusion. 

We are not persuaded that the Be la Cuestg case resolves the question before us. That case involved a board 

rule specifically authorizing the federal associations to 

include a O1due-on-salell clause in loan documents. It did 

not address the current system of regulation, which allows 

federal associations to exercise all 

subject only to express limitations. 

statutory authority 

Moreover, the Financial Institutions Reform, Recovery, and Enforcement Act of 

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

providing closer supervision of federal. thrift institutions. 

1989 U.S. Code Cong. & Admin. News 432 (House Conf. Rep. No. 

101-222, 101 Cong. 1st Sess.). Thus, the relevant federal 

provisions differ in some ways from those at issue in de la 

Cuesta. Expressions of congressional intent in connection 

with the 1989 amendments may also be relevant to the preemption question. 

The 1982 case dealt with the timing of repayment of a 

loan secured by real property. 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 faced with a question of whether 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 immediately due and payable 

when the property is sold. If the lender exercises this 

option, the purchaser cannot assume the loan. 

P. 6785 
Honorable BNCe Gibson - Page 8 (JM-1269) 

Supreme Court decisions on preemption questions decided 

subsequent to de la Cuesta must also be considered. 

California V. C America Corn., 109 S.Ct. 1661 (1989), 2: 

Court reiterated the presumption against finding preemption 

of state law in areas traditionally regulated by 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 States were not to be superseded by the Federal Act unless that was the 

clear and manifest purpose 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 

federal associations and conferred this power on the FSLIC. 

The Supreme Court interpreted provisions governing the FSLIC 

and the Bank Board, adopted over a span of fifty years, to 

determine the Congressional intent underlying 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 

ConstitutioQ at 1438. Preemption questions arise because 

Congress has ignored the existence of related state laws and 

the court must deal with the factors that would have confronted the legislature had it thought about related state 

laws. The judges* views as to the wisdom of the federal and 

state laws are among the factors that may in fact be decisive in a preemption question. Id. 

In answer to your second question, neither the deputy 

general counsel's opinion letter nor the authorities he 

cites convince us that the Texas homestead provisions are 

preempted as to federally-chartered associations by regulations issued under HOLA. Because this question ultimately 

cannot be resolved solely by analyzing statutes and judicial 

decisions, it cannot be resolved in an advisory opinion. It 

is a question for judicial resolution in an adversary 

proceeding, in which the relevant state and federal policies 

can be thoroughly briefed and argued. We cannot advise you 

that the courts would follow the approach taken by the 

opinion letter written by the deputy general counsel of the 

Bank Board. 

P. 6786 
C 

Honorable BNCe Gibson - Page 9 (JM-1269) 

We can, however, advise you as to the intended effect 

of the Parity Act, about which you inquire in your third 

question. Even if regulations issued under HOLA preempted 

the Texas homestead provisions with respect to home equity 

loans made by federally-chartered savings and loan associations, the Parity Act would not give state-chartered associations similar authority to make such loans. A careful 

reading of the Parity Act shows that it deals with interest 

rates and repayment terms of mortgage loans, and does not 

relate to the use of the equity in a homestead as security 

for a loan. 

The Parity Act, 12 U.S.C. 55 3801-3806, was enacted as 

title VIII of the Garn-St. Germain Depository Institutions 

Act of 1982. It was adopted to give state-chartered mortgage lenders parity with federally-chartered lenders with 

respect to "alternative mortgage loans.H m 12 U.S.C. § 

3801. It allows state-chartered mortgage lenders to make 

such transactions to the extent that they are authorized for 

federally-chartered institutions by valid regulation of the 

appropriate federal agency: that is, the Comptroller of the 

Currency for national banks, the National Credit Union 

Administration Board for federal credit unions, and the 

Director of the Office of Thrift Supervision (formerly the 

Federal Home Loan Bank Board) for 

savings and loan associations. 

federally-chartered 

12 U.S.C. 5 3803(a). The 

Parity Act thus makes applicable to state lenders certain 

valid regulations issued under other law by a federal 

regulatory agency. & It expressly preempts contrary 

provisions in state constitutions, laws, or regulations, 

except for states that opted out of its provisions by 

October 15, 1985. 12 U.C.S. 50 3803(c), 3804. 

The Congressional purpose in adopting the Parity Act is 

stated in section 3801 of title 12 of the United States 

Code, which provides as follows: 

(a The Congress hereby finds that -- 

(1) increasingly volatile and dynamic 

changes in interest rates have 

seriously impaired the ability of 

housing creditors to provide consumers ._. -. _ 

Wllxl fixed-tern,, fixed-rate credit 

secured by interests in real 

cooperative 

prope~y, 

housing, manufactured 

homes, and other dwellings; 

(2) alternative mortgage transactions 

are essential to the provision of an 

adequate supply of credit secured by 

residential property necessary to meet 

the demand expected during the 1980's; 

and 

P. 6787 
Honorable BNCe Gibson - Page 10 (JM-1269) 

(3) the Comptroller of the Currency, 

the National Credit Union 

Administration, and the Director of the 

Office of Thrift Supervision have 

recognized the importance of 

alternative mortgage transactions and 

have adopted regulations authorizing 

federally chartered depository 

institutions to engage in alternative 

mortgage financing. 

(b) It is the purpose of thiTm;kzEter to 

eliminate the discriminatory that 

those regulations have upon nonfederally 

chartered housing creditors and provide them 

with parity with federally chartered institutions by authorizing all housing creditors to 

make, purchase, and enforce alternative 

mortgage transactions so lona as the transactions are in conformitv with the reations 

issued bv the Federal =-icisi . (Emphasis 

added.) 

As subsection (b) of section 3801 indicates,5 

federally-chartered depository institutions were already 

authorized by agency regulations to engage in such "alternative mortgage transactions" before the Parity Act was 

adopted. The purpose of the Parity Act was to enable 

state-chartered institutions to engage in such transactions 

on an equal basis with the national institutions. The 

Parity Act can effect a preemption of a Texas constitutional 

provision only if regulations issued under other federal law 

authorizing federally-chartered institutions to engage in 

alternative mortgage 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 

Parity Act to make loans secured by a home owner's equity, 

5. Section 3801, indicating the 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 "Federal Home Loan Bank Board" 

when the Bank Board was abolished and the Office of Thrift 

Supervision was created. &g pub. L. 101-73, 9 744(c). The 

new agency published, 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). 

P- 6788 
Honorable BNCe Gibson - page 11 (J&1269) 

P 

we must inquire whether such loans are encompassed by the 

term "alternative mortgage transactions.W 

Section 3801(a)(l) indicates that the "alternative 

mortgage transactions" and "alternative mortgage financing" 

referred to are transactions employing an alternative 

interest rate structure that depart from the usual 

"fixed-term, fixed-rate" structure. Congress was referring 

only to regulations dealing with flexible interest rates, as 

is further demonstrated 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 

secured by'an interest in residential real 

property, a dwelling, all stock allocated 

to a dwelling unit in a residential 

cooperative housing corporation, or a 

residential manufactured home . . . 

(A) in which the interest rate or 

finance charge may be adjusted or 

renegotiated: 

(B) involving a 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 "traditional fixed-rate, fixed-term" loan 

on residential property. Nothing in the section 3802 

definition of "alternative mortgage transaction" suggests 

that Congress intended "applicable regulationsW describing 

and defining such transactions to embrace any subject matter 

other than matters relevant to determining the interest rate 

P. 6789 
Honorable Bruce Gibson - Page 12 (JM-1269) 

for transactions that could otherwise be fixed-rate transactions under existing law. 

Section 3802(1)(C) defines a category of alternative 

mortgage transactions as nincluding without limitation, 

transactions that involve the sharing of equity or appreciation." We have received briefs arguing that this language 

refers to a mortgage secured by a homeowner's equity in his 

residence. However, the word nincluding00 shows that the 

language refers only to a sub-category of transactions 

involving a variable interest rate, repayment period, or 

other variation from the traditional fixed-rate, fixed-term 

residential mortgage. In addition, the phrase "a sharing of 

equity or appreciation" would be an unusual and inaccurate 

description of a mortgage secured by a homeowner's equity in 

his home. The mortgage lender does not receive a tOsharell of 

equity (unless the 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 in Addition to, Interest as 

Usurious, 16 A.L.R. 3d 475 (1967); see also Coit IndewenPence Joint Venture Feder 1 Sa . 8 Loan In s. co 

m, at 1364-65 (fZera1 s&ingsv and loan associatio; 

required a profit sharing interest as a condition of lending 

money to purchase undeveloped land). The final clause of 

section 3802(1)(C) deals with how loans may be structured, 

not with the kind of residential property interest that may 

secure them. 

Accordingly, the Parity Act does not address the 

authority of state savings and loan associations to make 

loans secured by a homeowner's equity in his homestead; nor 

does it purport to preempt provisions of the Texas Constitution and statutes protecting the homestead from foreclosure 

for any purpose not constitutionally authorized. 

SUMMARY 

The federal Parity Act, 12 U.S.C. 9.8 

3801 et. sea,, does not attempt to authorize 

state savings and loan associations to make 

loans secured by a homeowner's equity in his 

residence, and accordingly does not purport 

P. 6790 
Honorable BNCe Gibson - Page 13 (JM-1269) 

C 

to authorize preemption of the Texas homestead laws. 

JIM MATTOX 

Attorney General of Texas 

MARYKELLKR 

First Assistant Attorney General 

mu MCcREARY 

Executive Assistant Attorney General 

JUDGE ZOLLIE STEAKLEY 

Special Assistant Attorney General 

RENEA HICKS 

Special Assistant Attorney General 

RICK GILPIN 

Chairman, Opinion Committee 

Prepared by Susan Garrison 

Assistant Attorney General 

C 

P. 6791