One of the restrictions relates to how to apply the proceeds from a Texas home equity loan.
Article 16, Section 50 (a)(6)(Q) of the Texas Constitution requires that a home equity loan is made on the condition that:
(i) the owner of the homestead is not required to apply the proceeds of the extension of credit to repay another debt except debt secured by the homestead or debt to another lender;
In addition, Section 50(a)(6)(g) requires the lender to provide each owner of the collateral property a disclosure at least 12 calendar days before closing a home equity loan. The disclosure, commonly loan as the "12-Day Notice", must notify the recipient that the lender does
NOT REQUIRE YOU TO APPLY THE PROCEEDS TO ANOTHER DEBT EXCEPT A DEBT THAT IS SECURED BY YOUR HOME OR OWED TO ANOTHER LENDERTexas Administrative Code (TAC), Title 7, Part 8, Article 153 was promulgated by the Texas Finance Commission to provide additional regulatory guidance regarding home equity lending in Texas. Section 153.18 provides:
An equity loan must be made on the condition that the owner of the homestead is not required to apply the proceeds of the extension of credit to repay another debt except debt secured by the homestead or debt to another lender. (1) The lender may not require an owner to repay a debt owed to the lender, unless it is a debt secured by the homestead. The lender may require debt secured by the homestead or debt to another lender or creditor be paid out of the proceeds of an equity loan. (2) An owner may apply for an equity loan for any purpose. An owner is not precluded from voluntarily using the proceeds of an equity loan to pay on a debt owed to the lender making the equity loan.In other words, in originating a Texas home equity loan, the lender should not require the borrower to use the loan proceeds to repay another debt owed to the lender unless the previous debt was secured by a lien against the homestead (e.g., purchase money lien, deed of trust lien, or a home equity lien). However, the lender may require the loan proceeds to be applied toward other debts owed to other creditors (e.g., tax lien, credit card debt, etc.)
According to the TAC, a borrower may voluntarily apply the loan proceeds from a home equity loan toward another debt owed to the same lender. Lenders should, however, be cautious in doing so because it may have to prove to a court that the use of the loan proceeds was indeed voluntary in the event of a future default. One can easily anticipate a defaulting borrower arguing otherwise when facing foreclosure.