Can federal savings and loan law override Texas's homestead protection so lenders can make home equity loans on a home?

Texas AG Opinion JM-1269: Does Federal Savings and Loan Law Override Texas's Homestead Protection?

Plain-English summary

For most of Texas history, the Texas Constitution flatly barred using the equity in your home as collateral for an ordinary loan. Article XVI, section 50 protected the homestead from forced sale for any debt except a short list of exceptions (purchase money, taxes, and work or materials used to improve the property). It also voided any mortgage or lien on the homestead outside those exceptions. That meant a bank could not lend you money against your built-up home equity the way lenders in other states could.

In 1990, the chairman of the Texas House Government Organization Committee asked the Attorney General a pointed question: had federal law quietly wiped out that homestead protection? The question was prompted by a 1989 opinion letter from the deputy general counsel of the Federal Home Loan Bank Board, who argued that the federal Home Owners' Loan Act (HOLA) and its regulations let federally chartered savings and loan associations make "reverse mortgages" and other home-equity loans, and that this federal authority preempted the Texas homestead laws. The committee also asked whether, if that were true for federal lenders, the federal Alternative Mortgage Transaction Parity Act of 1982 would give state-chartered Texas lenders the same power.

The Attorney General gave a careful, two-part answer. On the main preemption question, he declined to say the Texas homestead protection had been preempted. He reviewed the Bank Board letter's reasoning and the Supreme Court preemption cases it relied on, most importantly Fidelity Federal Savings & Loan Ass'n v. de la Cuesta, and concluded that those authorities did not convince him federal law overrode the homestead provisions as to federally chartered associations. He also stressed that preemption is a hard question that turns on weighing competing state and federal policies, and that it could not be resolved in an advisory opinion. It was a matter for a court to decide in an adversary lawsuit where both sides could be fully briefed and argued.

On the second part, which he could answer, the Attorney General held that the federal Parity Act did not help state-chartered lenders at all. Reading the Parity Act closely, he found that it deals with interest rates and repayment terms of "alternative mortgage transactions," things like adjustable-rate and other non-traditional loans, and not with whether a homeowner's equity can be used as security in the first place. The phrase in the statute about "the sharing of equity or appreciation" refers to profit-sharing joint ventures between a lender and a real estate developer, not to a homeowner pledging home equity. So the Parity Act did not authorize state savings and loan associations to make homestead-equity loans and did not preempt the Texas homestead provisions.

Currency note

This opinion was issued in 1990. Texas voters later amended article XVI, section 50 to permit home equity loans and reverse mortgages under detailed conditions, and the federal thrift-regulation landscape has continued to change since then. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule mentioned here.

Who this opinion affected (as of 1990)

Federally chartered savings and loan associations: The opinion did not give these lenders the green light. The Attorney General declined to conclude that HOLA and its regulations preempted the Texas homestead protection, and said the question would have to be settled by a court, not by his office.

State-chartered savings and loan associations: For these lenders the answer was clearer and negative. The opinion held that the federal Parity Act did not authorize them to make loans secured by homestead equity and did not preempt the Texas homestead provisions.

Homeowners: In 1990 the practical effect was that Texas homeowners still could not pledge their home equity for a general-purpose loan, and this opinion did not change that. The Attorney General left the homestead protection intact pending either a court ruling or a change in the law.

The Legislature and lenders pushing for home equity lending: The opinion signaled that if Texas wanted to allow home equity lending, the path ran through the courts or a constitutional change, not through an assumption that federal law had already done the work.

Common questions

Did this opinion say banks could start making home equity loans in Texas?
No. The Attorney General declined to conclude that federal law preempted the Texas homestead protection, and he held that the federal Parity Act did not authorize state-chartered lenders to make loans against homestead equity. In 1990 the homestead protection remained in force.

Why did the Attorney General refuse to answer the main preemption question?
He explained that whether federal savings and loan law preempts the Texas homestead provision cannot be resolved just by reading statutes and cases. Preemption turns on weighing competing state and federal policies, so it belongs to a court in an actual adversary lawsuit where both sides can brief and argue it, not to an advisory opinion.

What was the Federal Home Loan Bank Board letter that started this?
A 1989 opinion letter from the Bank Board's deputy general counsel argued that HOLA and its regulations let federally chartered savings and loan associations make reverse mortgages and other home-equity loans, and that this federal authority preempted contrary Texas homestead law. The committee asked the Attorney General to review that reasoning, and he was not persuaded by it.

What is the Parity Act, and why didn't it help?
The Alternative Mortgage Transaction Parity Act of 1982 lets state-chartered lenders offer the same kinds of "alternative mortgage transactions," such as adjustable-rate loans, that federally chartered lenders can offer. The Attorney General found it addresses interest rates and repayment terms, not whether homestead equity can secure a loan, so it did nothing to override the Texas homestead protection.

Did the phrase "sharing of equity or appreciation" in the Parity Act mean home equity loans?
No. The opinion read that phrase to describe profit-sharing joint ventures between a lender and a real estate developer, not a homeowner using the equity in a residence as collateral.

Background and statutory framework

The homestead protection in article XVI, section 50 of the Texas Constitution dates to the Republic of Texas and has appeared in every Texas Constitution since statehood in 1845. It shields the homestead from forced sale for the payment of debts, with narrow exceptions for purchase money, taxes, and work and materials used to improve the property, and it voids any mortgage or lien on the homestead that falls outside those exceptions. The practical result in 1990 was that a homeowner could not borrow against home equity for a general purpose.

The inquiry came from a 1989 opinion letter by the deputy general counsel of the Federal Home Loan Bank Board, written in response to questions from the U.S. Department of Housing and Urban Development. The letter concluded that the Home Owners' Loan Act of 1933 (HOLA), 12 U.S.C. § 1464, and the regulations issued under it permit federally chartered savings and loan associations to make "line of credit home equity conversion mortgages," or reverse mortgages, and that the federal scheme preempts the Texas homestead provisions as to federally chartered associations. The letter relied on HOLA's grant of authority to make real property loans (12 U.S.C. § 1464(c)(1)(B)), the agency's rulemaking authority (12 U.S.C. § 1464(a)), and the post-Garn-St Germain regulatory approach in 12 C.F.R. part 545, under which federal associations may exercise all authority granted by HOLA subject only to express regulatory limits (12 C.F.R. § 545.1 (1988), replacing the specific reverse-mortgage provisions formerly at 12 C.F.R. §§ 545.6-2(a)(7) and 545.6-4(d) (1981)). The Bank Board rested its preemption conclusion on Fidelity Federal Savings & Loan Ass'n v. de la Cuesta, 458 U.S. 141 (1982).

The Attorney General agreed to set out the Bank Board's reasoning as a springboard but declined to reanalyze the federal loan authority himself. On preemption, he began from the Supremacy Clause (U.S. Const. art. VI, cl. 2) and de la Cuesta, then explained why de la Cuesta did not resolve the Texas question. That case involved a Bank Board rule specifically authorizing "due-on-sale" clauses in loan documents, and it addressed the timing of repayment of a loan already secured by real property, not whether a lien on homestead equity could be created at all. It also predated the current regulatory system, in which federal associations exercise all statutory authority subject only to express limits, and predated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, which tightened supervision of federal thrifts. The Attorney General noted that later preemption decisions, including California v. ARC America Corp., 109 S. Ct. 1661 (1989) (reaffirming the presumption against preempting areas traditionally regulated by the states), and Coit Independence Joint Venture v. Federal Sav. & Loan Ins. Corp., 109 S. Ct. 1361 (1989) (finding no preemption of Texas law on adjudicating claims against federal associations), had to be weighed as well. Because preemption ultimately depends on reconciling competing state and federal policies, he concluded the question could not be answered in an advisory opinion and was for judicial resolution in an adversary proceeding.

On the third question, the Attorney General analyzed the Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. §§ 3801-3806, enacted as title VIII of the Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320. The Parity Act gives state-chartered lenders parity with federally chartered lenders to make "alternative mortgage transactions" to the extent authorized by valid federal regulation (12 U.S.C. § 3803(a)), and it expressly preempts contrary state constitutions, laws, and regulations except in states that opted out by October 15, 1985 (12 U.S.C. §§ 3803(c), 3804). But the congressional findings and purpose in 12 U.S.C. § 3801 tie the Act to volatile interest rates and the need for flexible, non-traditional mortgage terms, and the definition of "alternative mortgage transaction" in 12 U.S.C. § 3802(1) covers loans whose interest rate or finance charge may be adjusted, or that otherwise vary from traditional fixed-rate, fixed-term loans. The Attorney General read the definition's reference in 12 U.S.C. § 3802(1)(C) to "transactions that involve the sharing of equity or appreciation" as describing lender-developer profit-sharing arrangements, not a homeowner pledging home equity, citing Coit and an A.L.R. annotation on shared-appreciation agreements. Because the Parity Act addresses how loans may be structured rather than what residential property interest may secure them, he concluded it neither authorizes state savings and loan associations to make loans secured by homestead equity nor preempts the Texas homestead provisions. Any preemptive effect the Parity Act might carry (12 U.S.C. § 3803(a)(3)) depended on an underlying federal regulation reaching homestead-equity lending, which the analysis of the first question had not established.

Citations

Constitutional and statutory authorities:

• Tex. Const. art. XVI, § 50 (homestead protection from forced sale)
• U.S. Const. art. VI, cl. 2 (Supremacy Clause)
• Home Owners' Loan Act of 1933, 12 U.S.C. § 1464; § 1464(c)(1)(B) (real property loans); § 1464(a) (rulemaking and chartering authority)
• Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. §§ 3801-3806; § 3801 (findings and purpose); § 3802(1) and § 3802(1)(C) (definition of alternative mortgage transaction); § 3803(a) and § 3803(a)(3) (authority tied to valid federal regulation); §§ 3803(c), 3804 (express preemption and opt-out)
• Garn-St Germain Depository Institutions Act of 1982, Pub. L. No. 97-320 (Parity Act enacted as title VIII)
• Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73; § 744(c) (substituting Office of Thrift Supervision for the Federal Home Loan Bank Board)
• 12 C.F.R. pt. 545 (operations of federal associations); 12 C.F.R. §§ 545.6-2(a)(7), 545.6-4(d) (1981) (former reverse-mortgage provisions); 12 C.F.R. § 545.1 (1988) (general grant of HOLA authority)

Cases:

• Fidelity Federal Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141 (1982) (U.S. Supreme Court)
• California v. ARC America Corp., 109 S. Ct. 1661 (1989) (U.S. Supreme Court)
• Coit Independence Joint Venture v. Federal Sav. & Loan Ins. Corp., 109 S. Ct. 1361 (1989) (U.S. Supreme Court)
• Seiter v. Veytia, 756 S.W.2d 303 (Tex. 1988) (Texas Supreme Court)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1269
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1269.pdf

Original opinion text

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

December 21, 1990

Honorable Bruce Gibson
Chairman
House Government Organization Committee
P.O. Box 2910
Austin, Texas 78768-2910

Opinion No. JM-1269

Re: Whether the homestead provision of the Texas Constitution has been preempted by 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, in particular, article XVI, section 50, of the Texas Constitution, which 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 . . . . No mortgage, trust deed, or other lien on the homestead shall ever be valid, except for the purchase money therefor, or improvements made thereon, as hereinbefore provided . . . . All pretended sales of the homestead involving any condition of defeasance shall be void.

Tex. Const. art. XVI, § 50 (emphasis added).[Footnote 1] This provision prevents the owners of homestead property from 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. § 1464. The letter from the Bank Board responded to questions asked by the United States Department of Housing and Urban Development.[Footnote 2]

The Bank 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 allow 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. §§ 3801-3806, would authorize state associations to make "reverse mortgages" 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?

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 for reaching the next question. 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:

. . . .

(1)(B) Real property loans

Loans on the security of liens upon residential or nonresidential real property.

12 U.S.C. § 1464(c)(1)(B) (superseded).[Footnote 3] The agency's rule-making power is set out in the following provision:

In order to provide thrift institutions for the deposit of funds and for the extension of credit for homes and other goods and services, the Director [of the Office of Thrift Supervision] 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 (including 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. § 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. §§ 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, and 12 C.F.R. § 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 Bank 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. § 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 HOLA 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, relying on Fidelity Federal Savings & Loan Ass'n v. de la Cuesta, 458 U.S. 141 (1982) and the provisions of HOLA:

Congress by statute has explicitly permitted Federal associations to secure loans with real estate. 12 U.S.C. § 1464(c)(1)(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 Bank Board regulations.

The Texas laws in question clearly prevent Federal associations from exercising the authority granted to them by the HOLA 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 Cuesta, 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. § 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; see Fidelity Federal Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 152 (1982). The Supremacy Clause requires inconsistent state laws to yield to valid federal laws and regulations. Fidelity Federal Sav. & Loan Ass'n v. de la Cuesta, supra; Seiter v. Veytia, 756 S.W.2d 303 (Tex. 1988).

The de la Cuesta case arose out of a conflict between a regulation of the Federal Home Loan Bank Board on "due-on-sale" clauses[Footnote 4] 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 de la Cuesta case resolves the question before us. That case involved a board rule specifically authorizing the federal associations to include a "due-on-sale" clause in loan documents. It did not address the current system of regulation, which allows federal associations to exercise all statutory authority subject only to express limitations. 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 secure 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.

Supreme Court decisions on preemption questions decided subsequent to de la Cuesta must also be considered. In California v. ARC America Corp., 109 S. Ct. 1661 (1989), the 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 Coit Independence Joint Venture v. Federal Sav. & Loan Ins. Corp., 109 S. Ct. 1361 (1989), the Bank Board claimed that HOLA 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, Encyclopedia of the American Constitution 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.

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. §§ 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." See 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 federally-chartered savings and loan associations. 12 U.S.C. § 3803(a). The Parity Act thus makes applicable to state lenders certain valid regulations issued under other law by a federal regulatory agency. Id. 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.S.C. §§ 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 with fixed-term, fixed-rate credit secured by interests in real property, cooperative 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

(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 this chapter to eliminate the discriminatory impact 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 long as the transactions are in conformity with the regulations issued by the Federal agencies. (Emphasis added.)

As subsection (b) of section 3801 indicates,[Footnote 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. See 12 U.S.C. § 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, we must inquire whether such loans are encompassed by the term "alternative mortgage transactions."

Section 3801(a)(1) 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. § 3802(1).

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 regulations" describing and defining such transactions to embrace any subject matter other than matters relevant to determining the interest rate for transactions that could otherwise be fixed-rate transactions under existing law.

Section 3802(1)(C) defines a category of alternative mortgage transactions as "including 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 "including" 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 "share" 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. See Annot., Agreement for Share in Earnings of or Income from Property in Lieu of, or in Addition to, Interest as Usurious, 16 A.L.R. 3d 475 (1967); see also Coit Independence Joint Venture v. Federal Sav. & Loan Ins. Corp., supra, at 1364-65 (federal savings and loan association 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. §§ 3801 et. seq., 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 to authorize preemption of the Texas homestead laws.

Yours very truly,

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU 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

Footnote 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. See 2 G. Braden, The Constitution of Texas: An Annotated and Comparative Analysis at 788 (1977).

Footnote 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 Federal Home Loan Bank Board was replaced with the Office of Thrift Supervision in late 1989. See infra note 5.

Footnote 3: This provision now reads as follows: To the extent specified in regulations of the Director [of the Office of Thrift Supervision], a Federal savings association may invest in, sell, or otherwise deal in the following loans and other investments: (1) . . . (B) Residential real property loans. Loans on the security of liens upon residential real property.

Footnote 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.

Footnote 5: Section 3801, indicating the intent of Congress, has not been amended since its enactment in 1982, except for the substitution in 1989 of "the 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. See Pub. L. 101-73, § 744(c). The new agency published, transferred, and recodified Bank Board regulations as its own on November 30, 1989. 54 Fed. Reg. 49411. See generally Malloy, Nothing to Fear But FIRREA Itself: Revising and Reshaping the Enforcement Process of Federal Bank Regulation, 50 Ohio State L.J. 1117 (1989).