This column first appeared in the SA Express-News and it MySA website on January 20, 2015.
Dear Mr. Premack: I am considering taking a home equity loan for extra cash. My wife had a stroke and can no longer understand or participate in our financial issues. I had the foresight to acquire a LegalZoom Durable Power of Attorney two years ago while she was well, so I can sign for her. Now the lender is saying that there may be some legal issue with obtaining the loan. What am I missing? The Durable Power of Attorney says I can “borrow money and pledge as security the principal's property,” so there should not be any impediments. – H.B.
Home equity loans were illegal in Texas until 1997 because the Texas Constitution did not allow an equity lender to obtain a valid lien against a homestead. Texas was the only state that did not allow equity loans, and the lending institutions were eager to profit from this untapped market.
The lenders convinced the legislature and the governor that the people of Texas should have the right to use their homesteads as security for equity loans. In other states, people used equity loans to buy boats, pay for college, pay medical bills, etc. If the people would vote to approve a change to the Constitution, they could share in those benefits.
The legislature was, however, wary of predatory lenders taking unfair advantage of Texas homeowners. Consequently, the proposed constitutional amendment was extremely detailed in its requirements. It was so detailed that after the people approved it in 1998, lenders still refused to offer equity loans in Texas. They said that the provisions were too restrictive. Another round of changes was voted upon and approved in 2003. Thereafter, equity lending in Texas has become a routine practice.
Those details in the constitution require that any equity loan be voluntary and that both spouses consent to the loan. The constitution also requires that the loan be closed either in the office of the lender, a title company or an attorney. The Texas Finance Commission was given authority to interpret the constitutional provisions, and it declared (among other things) that a spouse’s consent could be signed by an agent under a Durable Power of Attorney, and that the consent could even be mailed to the closing officer.
Various individuals disagreed with the Commission’s rules and filed suit. The case eventually came to the Texas Supreme Court (Finance Commission v Norwood). The court ruled that the Commission was wrong when it allowed any part of the home equity loan closing to happen outside the office of the lender, title company or attorney. Going one more step, the court determined that if a Durable Power of Attorney is used for the closing, the Durable Power of Attorney itself must have been executed at one of the locations allowed by the constitution. The court recognized that this may make it difficult for the elderly or infirm to close an equity loan, but since the constitutional provision was designed to ensure that any equity loan was voluntary, required that all parts of the closing take place in a professional setting.
A Durable Power of Attorney signed at home, or in a nursing home, or in a hospital, etc., is not valid when used to obtain a home equity loan. A Durable Power of Attorney can only be used if it was signed in a law office, a title company or a lender’s office. A Durable Power of Attorney prepared by LegalZoom, or any other online source is not valid when used to obtain a home equity loan. Your lawyer is the only proper source for a valid Durable Power of Attorney, which when signed in the lawyer’s office, may be safely and legally used for any and all purposes including closing on a home equity loan.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and business entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.
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