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TCUD Issues Guidance for Home Equity Lending in Disaster Areas
Wednesday, November 1, 2017 6:55 AM

The Texas Credit Union Department has issued an informational memorandum to help guide credit unions affected by natural disasters such as Hurricane Harvey when making, refinancing or modifying home equity loans.  These situations have constitutional implications and credit unions should proceed with caution.

With new home equity loans or home equity lines of credit, the principal balance of all other loans secured by the homestead may not exceed 80% of the homestead’s fair market value at the time the loan is made. The fair market value has probably declined due to damage sustained in the disaster.

However, a home improvement loan is not subject to the same loan-to-value requirement and is usually evaluated based on the value after improvements.  It also has a shorter waiting period to close than home equity loans or home equity lines of credit.

Refinancing an existing home equity loan may provide additional funds for the homeowner and may be obtained without the one-year seasoning requirement if the homestead is located in an area that has been declared a ‘disaster’ by the Governor or the President of the United States.

An existing home equity loan may be modified without violating the Texas Constitution if it is consistent with the opinion of the Supreme Court in Sims v Carrington Mortg. Services, L.L.C., which held that the capitalization of the past-due interest, taxes, insurance premiums and fees was not an ‘advance of additional funds’ if those amounts were among the obligations assumed by the borrower under the terms of the original loan.

The memorandum, which can be found here, is informational and not an interpretation of the Texas Constitution. Therefore, the Credit Union Department recommends that credit union management consult with legal counsel before engaging in these types of loan modifications for home equity loans.

Contact Texas Credit Union Association President Jeff Huffman at 469-385-6488 for more information.