Americans borrowed a record $256 billion against the value of their homes last year, but Texas banks - and homeowners - largely missed out on the boom because the state's laws on home equity lending are by far the strictest.
That could change this year. State lawmakers are considering four bills that would relax restrictions on home equity lending, including one that would let homeowners take out home equity lines of credit. Texas is the only state that outlaws such lines of credit.
Banks say that changing the law would give consumers more flexibility in borrowing against the value of their homes. And it would probably generate billions of dollars of loans for Texas-based banks, which last year accounted for less than 1% of all home equity loans - even though Texas is the second-largest state.
"These are safe and good loans, and consumers are demanding them," said Stephen Y. Scurlock, the executive vice president of the Independent Bankers Association of Texas. "But it's not going to be easy, and we will keep hammering away."
The bankers are facing stiff opposition from Realtors' groups, which argue that more Texans would lose their homes if lenders push home equity loans on borrowers who cannot afford them. Moreover, lawmakers have historically been reluctant to infringe on Texans' homestead rights, and this year they are dealing with a budget shortfall that is sure to distract them from other matters.
Still, the banking industry's case is simple: All states but Texas lets homeowners take out home equity lines of credit. Mike Hensley, the chief executive officer of the $26 million-asset Van Horn State Bank, said the only reason Realtors are against the changes is that more access to home equity loans could mean fewer consumers selling their homes.
"People in every other state are allowed to do to these things, so the Realtors must think people in Texas are a bunch of morons," said Mr. Hensley, who is also the chairman of the Texas Bankers Association.
Bill Stinson, vice president of governmental affairs at the Texas Association of Realtors, dismisses that claim and says Realtors are merely looking out for the public. "These bills make home equity lending in Texas very similar to consumer credit card spending," he said. "And where banks are pushers of credit, we are protectors of equity."
Home equity lending was banned more than 160 years ago in the state's Homestead Act, which encouraged more people to settle in Texas by guaranteeing residents that creditors would not take their homes. The law became part of the constitution in 1876. In 1997 - after years of fierce lobbying by banks and thrifts - the Legislature passed constitutional amendment that allowed home equity lending, but in a far more restrictive form than bankers had hoped.
Under the current law customers can borrow no more than the amount of their home's equity - up to 80% of the home's value - and they have to wait 12 days after applying to find out if the loan has been approved. Furthermore, they cannot refinance the loan with their mortgage or make more than one payment a month.
The penalty for bankers who make errors in the lending process is forfeiture of the loan's principal and interest. And since the law - which applies to all property in Texas - is part of the constitution and not the banking code, any changes to it must go through the courts.
The result is that less than half of Texas community banks are even making home equity loans, a survey by the Independent Bankers Association of Texas found.
Many community banks said in the survey that they would get into home equity lending if the laws were eased.
With a line of credit, customers can borrow a portion of their home's equity, but in a straight home equity loan they must borrow the entire value of the equity they have in a home. Bankers said that because the borrowers can get the exact amount they need at a lower cost, while still having room for additional lines of credit, home equity lines of credit are much more popular than home equity loans.
"Consumers love this product and are clamoring for it," said Guido Piggot, the chief executive at the $279 million-asset Central Bank in Houston. "But when they move into Texas and find out about all the restrictions, it creates a touchy situation with the bank because they view it as bank policy and not the law."
Besides the lines-of-credit issue, lawmakers are also considering bills that would allow regulators, not the courts, to rule on home equity lending matters and let borrowers refinance mortgages and home equity loans together as well as make weekly and twice-monthly payments. The last proposal is the only one the Realtors are not fighting.
Steve Smith, the chairman of American Bank of Texas in Marble Falls, said his bank started making home equity loans but stopped because it could not afford the possible penalty costs. "The process was so onerous it just didn't make a lot of sense to keep doing it," he said.
But he added that it would definitely return to the business under softer laws.
Last week the House Committee on Financial Institutions met to discuss the bills, and a Senate committee is expected to take them up in the near future. The state's legislative session ends June 2.
