DAN MORALES

ATTORNEY GENERAL 

### @ffice of tiy 5Zlttornep QBenerat &ate of Qexae November 6,1997 The Honorable Kenny Marchant Chair, Committee on Financial Institutions Texas House of Representatives P.O. Box 2910 Austin Texas 78768-2910 Opinion No. DM-452 Re: Permissible activities of lenders prior to effective date ofhome equity lending amendment to the Texas Constitution (RQ-993) Dear Representative Marchant: You ask whether lenders may solicit, accept, andprocess applications for home equity loans before the constitutional amendment authorizing such loans goes into effect. We conclude tJmtthey may. You also ask whether the twelve-day wsiting period for loans required by the amendment may begin to run before the amendment’s effective date. We conclude that it may not. As you know, article XVI, section 50 of the Texas Constitution prohibits the forced sale of a person’s homestead forthe payment of debts except in certain cases.’ Because ahomestead may not be foreclosed upon, the constitution effectively prevents homeowners t%om using the equity in their homes as collateral for loans. This year, the legislature passed House Joint Resolution 31 (“H.J.R. 31’3, proposing an amendment to the Texas Constitution that would allow home equity lending. The amendment was approved by a majority of voters in an election held on November 4,1997.2 The constitutional amendment becomes effective on January 1,199s. You ask whether lenders3 may solicit, accept, and process home equity loan applications prior to the amendment’s effective date of Jarmary 1,1998. Certainly, any lion created pursuant to ahome equity loan closed before the effective date of the amendment could not constitutionally be enforced against a homestead. However, nothing in H.J.R. 31 prohibits home equity loan applications before the effective date ofthe amendment. Nor are we aware of any federal or Texas

‘Article XVI, section SO permitstheforced saleofahomesteadtopay theowner’s debtforthehome’s purchase money, fortaxes dueon thehome, pursuantto anowelty ofpartition, for therefinance ofa lien against the homestead, or for improvements on the home.

‘SeeTex. Const art XVII, $ 1 (requiring proposed constitutional amendments to be voted upon by qualified electors); H.J.R. 31,75th Leg., R.S., 5 3, 1997 Tex. Sess. Law Serv. A-2, A-9 (setting November4, 1997 as election date 00 proposed amendment).

%I thisopinion,“lenders” means those entities and individualsauthorized by the con.stitutio&l amendment to make home equity loans.TheHonorableKemry Marchant - Page 2 @M-452)

statute orcommon-law rule that expressly prohibits alender tiom processing aloan application when the terms of the loan transaction cannot legally be enforced at the time the application is made. We caution, however, that consumer protection statutes such asthe federal Truth in Lending Ac~,~ the Texas Deceptive Trade Practices-Consumer Protection Act,s and common-law causes of action such as tiaud, promissory estoppel, andbreach of contract might be applied to a lender who misleads apotential borrower asto the effect of ahome equity loan application or otherwise harms a borrower. Lenders should particularly advise consumers of the consequences of paying fees, appraisal costs, and other loan-related charges prior to the amendment’s effective date. Provided applications are solicited, accepted, and processed in a manner that does not mislead or deceive consumers, we find no legal prohibition on such practices prior to the effective date of the amendment. Your second question regards the twelve-day waiting period imposed by the constitutional amendment. A lien created pursuant to ahome equity loan is unenforceable if the loan is closed before the 12th day a&r the date the home owner submits a loan application to the lender, or the date the lender provides the owner with a certain written notice regarding the terms of the loan, whichever cornea later. You ask whether the twelveday waiting period may begin to runbefore the amendment becomes effective on January 1,1998. In other words, if aborrower has submitted an application and the lender hasprovided notice twelve days before January 1,1998, may the loan be closed on January 1,1998, andbeenforceable under theprovisions ofthe amendment? Weconclude that it may not. The amendment provides that ahome equity loan may be enforced if it is closed not before
“the 12thday after the later ofthe date that the owner ofthe homestead submits an application to the lender forthe extension of credit or the date that the lender provides the owner a copy of the notice prescribed by Subsection (g) of this section.” Subsection (g) sets out the specific language of the notice and includes references to the requirements of the constitutional amendment. Before the amendment becomes effective, no notice isprescribed by Subsection (g) and the provisions of the amendment referred to in the notice have no legal effect. Notice given before the effective date of the amendment is not notice ‘prescribed by” the smendment. Therefore, the amendment’s notice requirement is not satisfied ifnotice is given before the effective date of the amendment, and thus the twelve-day waiting period is not triggered by such anotice.

‘1s U.S.C. gp 1601 - 1667f.

‘BUS.& Corn. Code ch. 17, subch. E.

p. 2535The Honorable Kenny Marchant - Page 3 @M-452)

A lender may solicit, accept, and process applications for home equity loans before the constitutional amendment authorizing such loans becomes effective. However, the notice toborrowers prescribed by the amendment is not effective if given before the amendment’s effkctive date.

DAN MORALES Attorney General of Texas JORGE VEGA First Assistant Attorney General SARAH J. SHIRLEY Chair, Opinion Committee Prepared by Barbara Griti Assistant Attorney General

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