Bulletin: TX000041

Dear Associates:

The Home Equity Constitutional Amendment is effective January 1, 1998. In addition to authorizing Home Equity Mortgages and Reverse Mortgages on homestead property, this Constitutional Amendment changes the law concerning mechanic's lien contracts on homestead.

Suit has been filed by the National Association of the Remodeling Industry, Inc. - Houston Chapter in Travis County challenging this Amendment. This suit will not affect our requirements, unless we subsequently notify you.

New Improvements

We conclude that the law has not changed for "new improvements" on homestead. Our requirements for new improvements on rural, urban business and urban residential homestead will remain the same.

We will interpret a contract for "new improvements" to mean a contract for:

• Construction of improvements on unimproved land (such as a new house).
  
  
• Construction of a new swimming pool or separate new non-contiguous building.

REQUIREMENTS

We will require only the following on a loan for "new improvements" on homestead:

• A mechanic's lien contract signed by both spouses (or the single owner) and the contractor, acknowledged, and recorded in the real property records.
  
  
• The mechanic's lien contract must describe in general or specific terms the new improvements, and must not include repair of any other improvements or removal of any existing improvements (such as an existing pool or deck).
  
  
• The spouses (or the single owner) must execute our New Improvements Affidavit. (See the references section at the end of this bulletin.)
  
  
• The mechanic's lien contract must not include repair or renovation of existing improvements, which would include a "tear down" contract (for removal of existing improvements and replacement with new improvements, such as a new house); new siding; new roof; a new room to a house; an attached garage; new windows; or interior repairs to an existing building.

Repair or Renovation of Existing Improvements

The law has changed, effective January 1, 1998, for "repair or renovation" of existing improvements on the homestead.

The requirements include:

(1) the requirement that the contract include an express right of rescission;

(2) execution of the contract at the office of a third party lender, an attorney at law, or a title company; and

(3) delay in execution of the contract until 12 days after the written application by the owner for any extension of credit. The time delays do not apply if certain bona fide emergencies exist; however, we will not rely on the exception for emergencies.

Our requirements for repair or renovation on rural, urban business and urban residential homestead have changed. These new requirements apply to contracts on existing homestead and to contracts for repair or renovation by purchasers of their new homestead.

We consider the following to be examples of "repair or renovation" of existing improvements: a "tear down" contract to remove existing improvements and add new improvements (such as replacement of existing structure with new house); a contract to complete improvements if the prior contractor has abandoned the contract; new siding; new roof; new room for house; new windows; attached garage; new windows; interior repairs to existing building.

REQUIREMENTS

We will require the following on a contract for repair or renovation of existing improvements on homestead:

• A mechanic's lien contract signed by both spouses (or the single owner) and the contractor, acknowledged, and recorded in the real property records.
  
  
• The mechanic's lien contract must describe in general or specific terms the repair or renovation of existing improvements.
  
  
• The spouses (or the single owner) and Contractor must execute our Repair or Renovation of Existing Improvements Affidavit. (See the references section at the end of this bulletin.)
  
  
• The Mechanic's Lien Contract and any separate construction contract between the owners and contractor must contain an express three-day right of rescission. If they do not, the contracts should be terminated and re-executed, and the new contracts must contain (in the body or in an exhibit) an express right of rescission. You should review the contracts to verify compliance with this requirement.
  
  
• If the Mechanic's Lien Contract (or any separate construction contract with the Contractor) was executed less than 12 days after the owners made written application with a third-party lender for financing, the Owners and Contractor must expressly terminate the Mechanic's Lien Contract (and any separate construction contract) and must re-execute a new Contract more than 12 days after the written application for credit is made.
  
  
• If there is no third party financing, the written application for credit must be given by the owners to the Contractor.
  
  
• If you close on a permanent finance of the Contract after completion of improvements, you may assume that the Constitutional Requirements were met, if the Mechanic's Lien Contract contains an express right of rescission and if the prior closing occurred with a title company. Otherwise require the Repair or Renovation of Existing Improvements Affidavit.
  
  
• We do not require a mechanic's lien contract or compliance with this Constitutional Amendment if (1) the buyer will make repairs, (2) the vendor's lien includes the amount of the repairs to be made, (3) the cost of the repairs does not exceed the lesser of 5% of the sales price or the amount of the down payment due by the buyer, and (4) you escrow the repair costs or verify that they have been paid and completed.