A home equity loan, also known as a home 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 home. The loan amount is based on the difference between the home’s current market value and the homeowner’s mortgage balance.
Because home equity loans force mortgage holders to put their homes at risk if they default on lending, these types of lending are relatively tightly regulated. A number of laws control how home equity loans are advertised, sold and managed. Some of them are federal and others operate at the state level. Every state in the United States has laws that apply to home equity loans in one way or another, and some states have gone much further than the federal government in seeking to control and limit these loans.
In this article, we’ll explain why states have sought to regulate home equity loans, what kind of rules they’ve put in place, and then we’ll look at a specific example: Texas.
Key points to remember
- Home equity loans may not be suitable 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 managed.
- National regulations in this area are constantly changing.
- If you believe you have been sold a home equity loan, you should file a complaint with the Consumer Financial Protection Bureau and/or the United States Department of Housing and Urban Development (HUD).
- If you think a lender has acted against your state’s laws, contact your regulator or local attorney.
State home equity loan laws
For some borrowers, home equity loans can be a great way to access the equity in your property. If you have a steady, reliable source of income and know you’ll be able to repay the loan, low interest rates and possible tax deductions make home equity loans a smart choice.
There are, however, a few potential pitfalls with this type of loan. Home equity loans may seem like too easy a solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending and sinking deeper into debt. Unfortunately, this scenario is so common that lenders have a term for that: reloadwhich is basically the habit of taking out a loan to pay off existing debt and free up additional credit, which the the borrower then uses to make additional purchases. There is also a risk of misleading borrowers who are desperate for a quick source of cash to pay off 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 sought to control them. Every state in the United States has laws that affect home equity loans in some way, and these are constantly changing. There is indeed a manual in several volumes published each year, Pratt State Regulations on Second Mortgages and Home Equity Loanswhich gives an overview of these laws.
As this book indicates, state home equity loan laws apply to almost every aspect of these loans. There are state-level laws that apply to second mortgages in all of these categories:
- Application practices
- NSF check fees
- Lump sum payments
- Second Mortgage Brokerage
- Consumer protection
- Line of credit/revolving credit loans
- Fees and charges
- Home Equity Loans
- Interest and usury
- Late fee
- pure english
- Predatory loans
- Prohibited loan conditions
- Records retention
- State regulators
It is important that lenders know these rules and follow them. For borrowers, they will likely only become relevant if you believe you have been wrongly sold a home equity loan. However, it is best to consult an attorney in this case, as state rules about what lenders can and cannot do are constantly changing.
Texas Home Equity Loan State Laws
Texas is an instructive example of how detailed state laws can be when it comes to home equity loans. The state was the last in the United States to allow home equity loans – they became legal in 1997 – and they are regulated by a statute of the Texas Constitution known as Section 50. This section of the The Constitution protects consumers from predatory lenders by dictating strict provisions under which lenders must operate, with stiff penalties for non-compliance.
Section 50 regulates many aspects of how home equity loans operate in Texas. It sets a state limit on the maximum amount homeowners can borrow, limits them to one loan, and requires their lender to go through a detailed process of due diligence to make sure the loan is responsible. There are also strict laws on how home equity loans can be sold and advertised, and how their terms are explained to borrowers. These terms are also outlined in the Texas Home Equity Early Disclosure document, which must be given to borrowers who take out a home equity loan in the state.
Although Texas home equity loan laws are exceptionally strict, the state is not uncommon to have these laws. If you’re considering a home equity loan, it’s worth researching the laws in your home state. In most cases, these aim to protect borrowers against taking out loans that they will find difficult to repay.
Does Regulation Z apply to home equity loans?
Regulation Z is a federal law that standardizes how lenders pass on the cost of borrowing to consumers. It also limits certain lending practices and protects consumers against deceptive lending practices. It applies to residential mortgages, home equity lines of credit (HELOC), reverse mortgages, credit cards, installment loans and some student loans.
How does a mortgage loan work?
Are there state laws on home equity loans?
Yes a lot. And they are constantly changing. If you believe you have been sold a home equity loan, you should first contact the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD). If you believe a lender has acted in violation of your state laws, contact your state regulator or local attorney.
Home equity loans may not be suitable 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 managed, and state regulations in this area are constantly changing.
If you believe you have been sold a home equity loan, you should first contact the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD). If you think a lender has acted against your state’s laws, contact your regulator or local attorney.