Chapter 343 of the Texas Finance Code has a number of restrictions that apply to any “high-cost home loan," which is any loan that:
- is made to an individual for personal, family or household purposes;
- is secured by the borrower’s principal residence – which is either a one-to-four family residential property or a manufactured home;
- is in a principal amount equal to or less than ½ of the maximum amount for Fannie Mae conventional first mortgages (for 2006 Fannie Mae’s conventional maximum is $417,000);
- is not an open-end or a reverse mortgage; and
- is a loan subject to Section 32 of Regulation Z, OR is a “residential mortgage loan” under Regulation Z with an APR that is more than 8 percent (for first lien loans) or 10 percent (for subordinate lien loans) above the T-bill rate for the same term to maturity as the loan, or with total points and fees that exceed 8 percent of the loan amount.
The Texas statute covers any residential mortgage loan that exceeds the high-cost thresholds of Section 32, INCLUDING any purchase money or initial construction mortgage loan that exceeds those thresholds. (Note that the federal law DOES NOT apply to purchase money loans.)
If a lender has made a loan that qualifies as a high-cost home loan in Texas, there are certain specific restrictions and requirements that apply to that loan which must be observed. These are:
- No Balloons – a high-cost home loan may not provide for a payment that is more than twice as large as the average of earlier scheduled monthly payments within the first sixty months of the loan.
- No Negative Amortization – a high-cost home loan may not provide for a payment schedule that may cause the principal balance to increase.
- Borrower’s Payment Ability – the lender may not make high-cost home loans based on the collateral value of the property without regard for the borrower’s repayment ability, including current and expected income, current obligations, employment status, and other financial resources.
- No Prepayment Penalty – a high-cost home loan may not contain a provision for a prepayment penalty.
- No Charge for Service Not Received – a lender on a high-cost home loan may not charge a borrower for a service or product if the borrower does not receive it.