Could Texas lenders start taking home equity loan applications before the law allowing them took effect?

TX AG Opinion DM-0452: Could lenders take home equity loan applications before the 1998 amendment took effect?

Plain-English summary

Texas long protected the family homestead from forced sale, and that protection (article XVI, section 50 of the Texas Constitution) effectively kept homeowners from borrowing against the equity in their homes. In 1997 the Legislature put a constitutional amendment, House Joint Resolution 31, before the voters to allow home equity lending. Voters approved it on November 4, 1997, and it was set to take effect January 1, 1998.

Representative Kenny Marchant, who chaired the House Committee on Financial Institutions, asked the Attorney General two questions about that gap between the vote and the effective date.

On the first, whether lenders could solicit, accept, and process home equity loan applications before January 1, 1998, the Attorney General said yes. A lien from a home equity loan actually closed before the effective date could not be enforced against a homestead, but nothing in the amendment, and no other state or federal law the office could find, barred a lender from merely taking and working up an application for a loan that could not yet be legally closed. The opinion added a caution: lenders still had to deal honestly with borrowers, or they could face the federal Truth in Lending Act, the Texas Deceptive Trade Practices-Consumer Protection Act, and common-law claims like fraud, promissory estoppel, and breach of contract. The opinion specifically said lenders should warn consumers about the consequences of paying fees, appraisal costs, and other charges before the amendment took effect.

On the second, whether the amendment's twelve-day waiting period could start running before the effective date, the Attorney General said no. The amendment makes a home equity loan enforceable only if it closes at least twelve days after the later of the borrower's application or the lender's delivery of the specific notice the amendment requires. Because that notice is the one "prescribed by" the amendment, and the amendment had no legal effect before January 1, 1998, a notice handed out earlier was not the prescribed notice and did not start the twelve-day clock.

Currency note

This opinion was issued in 1997. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Texas home equity lending rules in article XVI, section 50 have been amended several times since 1997, including changes to the disclosures and procedures for these loans. This opinion addressed a one-time transition question (the period just before the original amendment took effect on January 1, 1998) that no longer arises. Treat it as historical context only.

Common questions

Could a lender take a home equity loan application before the amendment took effect?
Yes. The Attorney General concluded lenders could solicit, accept, and process home equity loan applications before January 1, 1998, because no law prohibited working up an application for a loan that could not yet be legally closed, as long as the lender did not mislead or deceive the borrower.

Could a home equity loan actually close before January 1, 1998?
No, not enforceably. The opinion noted that a lien created by a home equity loan closed before the effective date could not constitutionally be enforced against a homestead.

Could the twelve-day waiting period be run out before the effective date to allow a January 1 closing?
No. The opinion concluded that notice given before the amendment took effect was not the notice "prescribed by" the amendment, so it did not trigger the twelve-day waiting period. The clock could not be started early.

What risks did the AG flag for lenders taking early applications?
The opinion pointed to the federal Truth in Lending Act, the Texas Deceptive Trade Practices-Consumer Protection Act, and common-law claims (fraud, promissory estoppel, breach of contract) for lenders who misled borrowers, and advised lenders to warn consumers about paying fees and appraisal costs before the amendment took effect.

Background and statutory framework

Article XVI, section 50 of the Texas Constitution protected the homestead from forced sale for debts except in limited cases (purchase money, taxes, owelty of partition, refinance of an existing lien, or improvements). Because a homestead could not be foreclosed, homeowners could not pledge their home equity as collateral. House Joint Resolution 31, adopted by the 75th Legislature and approved by voters on November 4, 1997 under article XVII, section 1, amended section 50 to authorize home equity loans, effective January 1, 1998.

The Attorney General's analysis turned on two points. First, the absence of any prohibition: neither the resolution nor any federal or Texas statute or common-law rule forbade processing a loan application when the loan itself could not yet be enforced. The office balanced that against consumer-protection law, citing the Truth in Lending Act (15 U.S.C. sections 1601 through 1667f) and the Deceptive Trade Practices-Consumer Protection Act (Business and Commerce Code chapter 17, subchapter E). Second, the meaning of the notice that starts the twelve-day waiting period: because the amendment ties the waiting period to the notice it prescribes in subsection (g), and that subsection had no legal effect before the amendment took effect, a pre-effective-date notice could not start the clock.

Citations

Statutes:

• Tex. Const. art. XVI, § 50 (homestead protection; home equity lending)
• Tex. Const. art. XVII, § 1 (constitutional amendment procedure)
• House Joint Resolution 31, 75th Leg., R.S. (1997)
• 15 U.S.C. §§ 1601 - 1667f (federal Truth in Lending Act)
• Tex. Bus. & Com. Code ch. 17, subch. E (Deceptive Trade Practices-Consumer Protection Act)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0452
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1997/dm0452.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General, State of Texas

DAN MORALES, ATTORNEY GENERAL

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 of home equity lending amendment to the Texas Constitution (RQ-993)

Dear Representative Marchant:

You ask whether lenders may solicit, accept, and process applications for home equity loans before the constitutional amendment authorizing such loans goes into effect. We conclude that they may. You also ask whether the twelve-day waiting 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 for the payment of debts except in certain cases. Because a homestead may not be foreclosed upon, the constitution effectively prevents homeowners from using the equity in their homes as collateral for loans. This year, the legislature passed House Joint Resolution 31 ("H.J.R. 31"), 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. The constitutional amendment becomes effective on January 1, 1998.

You ask whether lenders may solicit, accept, and process home equity loan applications prior to the amendment's effective date of January 1, 1998. Certainly, any lien created pursuant to a home 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 of the amendment. Nor are we aware of any federal or Texas statute or common-law rule that expressly prohibits a lender from processing a loan 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 as the federal Truth in Lending Act, the Texas Deceptive Trade Practices-Consumer Protection Act, and common-law causes of action such as fraud, promissory estoppel, and breach of contract might be applied to a lender who misleads a potential borrower as to the effect of a home 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 a home equity loan is unenforceable if the loan is closed before the 12th day after 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 comes later. You ask whether the twelve-day waiting period may begin to run before the amendment becomes effective on January 1, 1998. In other words, if a borrower has submitted an application and the lender has provided notice twelve days before January 1, 1998, may the loan be closed on January 1, 1998, and be enforceable under the provisions of the amendment? We conclude that it may not.

The amendment provides that a home equity loan may be enforced if it is closed not before "the 12th day after the later of the date that the owner of the homestead submits an application to the lender for the 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 is prescribed 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 amendment. Therefore, the amendment's notice requirement is not satisfied if notice is given before the effective date of the amendment, and thus the twelve-day waiting period is not triggered by such a notice.

SUMMARY

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

DAN MORALES
Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Barbara Griffin
Assistant Attorney General

Footnotes

1. Article XVI, section 50 permits the forced sale of a homestead to pay the owner's debt for the home's purchase money, for taxes due on the home, pursuant to an owelty of partition, for the refinance of a lien against the homestead, or for improvements on the home.

2. See Tex. Const. art. XVII, § 1 (requiring proposed constitutional amendments to be voted upon by qualified electors); H.J.R. 31, 75th Leg., R.S., § 3, 1997 Tex. Sess. Law Serv. A-2, A-9 (setting November 4, 1997 as election date on proposed amendment).

3. In this opinion, "lenders" means those entities and individuals authorized by the constitutional amendment to make home equity loans.

4. 15 U.S.C. §§ 1601 - 1667f.

5. Bus. & Com. Code ch. 17, subch. E.