Which states have specific home equity laws?

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A home equity loan — also known as an equity loan, home equity installment loan, or second mortgage — is a type of consumer debt. Home equity loans allow homeowners to borrow against the equity in their homes. The loan amount is based on the difference between the current market value of the home and the homeowner’s mortgage balance due. Because home equity loans require mortgage holders to put their home at risk if they fail to repay the loan, these types of loans are relatively tightly regulated.

There are a number of laws that govern the way home equity loans are advertised, sold, and administered. Some of these are federal, while others operate at the state level. Every state in the US has laws that apply to home equity loans in some way, and some states have gone much further than the federal government in trying to control and limit these loans.

In this article, we explain why states have tried to regulate home equity loans, the kind of rules they put in place, and then look at a specific example: Texas.

The central theses

  • Home equity loans may be unsuitable for some borrowers because they carry the risk of losing your home.
  • There are many federal and state laws that apply to home equity loans. These cover many aspects of how these loans are advertised, sold and administered.
  • Government regulations in this area are constantly changing.
  • If you believe that a home loan has been missold to you, you should file a complaint with the Consumer Financial Protection Bureau and/or the US Department of Housing and Urban Development (HUD).
  • If you believe a lender has violated the laws in your state, contact your state regulator or a local attorney.

State laws on home equity loans

For some borrowers, home equity loans can be a great way to access home equity. If you have a stable, reliable income and you know you can pay back the loan, low interest rates and potential tax deductions make a sensible home equity loan choice.

However, there are some potential pitfalls with this type of loan. Home equity loans can be an all-too-simple solution for a borrower who may have been caught in a perpetual cycle of spending, borrowing, spending and deeper debt. Unfortunately, this scenario is so common that lenders have a term for it: debt restructuring, which is basically the habit of taking out a loan to pay off existing debt and free up additional credit that the borrower can then use to make additional purchases. There is also a chance of misleading borrowers who are desperate for a quick source of cash to service their existing debt.

These dangers have led to relatively strict regulation of home equity loans. There are federal laws that apply to these loans, but many states have also tried to control them. Every state in the US has laws that affect home equity loans in some way, and these are constantly changing. In fact, there is a multi-volume textbook that is published each year, Pratt’s State Regulation of 2nd Mortgages & Home Equity Loans, that provides an overview of these laws.

As this book states, state home equity lending laws apply to almost every aspect of that lending. There are state-level laws that apply to second mortgages in all of these categories:

  • advertisement
  • application practices
  • Bad Check Fees
  • balloon payments
  • Brokerage of second mortgage loans
  • consumer protection
  • Line of Credit/Revolving Credit Loan
  • disclosure
  • discrimination
  • Fees and Charges
  • home loan
  • insurance
  • interest and usury
  • Late Fees
  • licensing
  • Plain English
  • Predatory Loans
  • Advance payment
  • Prohibited Credit Terms
  • Record keeping
  • State regulators

It is important that lenders are aware of these rules and follow them. For borrowers, they probably only become relevant if they believe a home loan has been missold to you. In this case, however, it’s best to consult an attorney, as government regulations about what lenders can and cannot do are constantly changing.

State Home Equity Laws in Texas

A telling example of just how detailed state home equity laws can be is Texas. The state was the last in the US to allow home equity loans – these became legal in 1997 – and they are governed by a Texas constitutional law known as Section 50. This section of the Constitution protects consumers from predatory lenders by mandating strict rules requiring lenders to operate with severe penalties for non-compliance.

Section 50 governs many aspects of how home equity loans work in Texas. It sets a state limit on the maximum amount homeowners can borrow, restricts them to one loan, and requires their lender to complete a detailed due diligence process to ensure the loan is accountable. There are also strict laws regarding how home equity loans can be sold and advertised and how their terms are explained to borrowers. These terms are also listed in the Texas Home Equity Early Disclosure document that must be provided to borrowers taking out a home equity loan in the state.

Although Texas home equity home loan laws are unusually strict, it is not uncommon for the state to have these laws. When considering a home equity loan, it’s worth researching the laws in your home state, as in most cases these are designed to protect borrowers from taking out loans that they will have difficulty repaying.

Does Reg Z apply to home equity loans?

Regulation Z is a federal law that standardizes how lenders pass the cost of borrowing on to consumers. It also restricts certain lending practices and protects consumers from misleading lending practices. It applies to home mortgages, home equity lines of credit, reverse mortgages, credit cards, installment loans, and certain student loans.

How Does a Home Equity Loan Work?

A home equity loan is a loan for a set amount of money that is repaid over a set period of time, using the equity you have in your home as collateral for the loan. If you can’t repay the loan, you could lose your home in foreclosure.

Are there any state laws on home equity loans?

The final result

Home equity loans may be unsuitable for some borrowers because they come with the risk of losing your home. There are many federal and state laws that apply to home equity loans. These cover many aspects of how these loans are advertised, sold and administered, and government regulations in this area are constantly changing.

If you think you have been missold on a home equity loan, the first thing you should do is contact the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD). If you believe a lender has violated the laws in your state, contact your state regulator or a local attorney.

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