The Home Equity Amendment to the Texas Constitution Subsection 50 (a), became effective January 1, 1998. In addition to creating home equity lending and reverse mortgage lending in Texas, the Amendment also changed how loans are made on construction of improvements on homestead. Specifically, Subsection 50 (a) (5) was changed to read as follows:

"(5), or for work and material used in constructing new improvements thereon, if contracted for in writing, or work and material used to repair or renovate existing improvements thereon if:

(A) the work and material are contracted for in writing, with the consent of both spouses, in the case of a family homestead, given in the same manner as is required in making a sale and conveyance of the homestead;

(B) the contract for the work and material is not executed by the owner or the owner's spouse before the 12th day after the owner makes written application for any extension of credit for the work and material, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead property and the owner of the homestead acknowledges such in writing;

(C) the contract for the work and material expressly provides that the owner may rescind the contract without penalty or charge within three days after the execution of the contract by all parties, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead and the owner of the homestead acknowledges such in writing; and

(D) the contract for the work and material is executed by the owner and the owner's spouse only at the office of a third-party lender making an extension of credit for the work and material, an attorney at law, or a title company".

It appears that the Texas Legislature intended that the 12 day cooling-off period and the 3 day rescission period apply only in instances where the construction was for repair and renovation of existing improvements and not to new construction. However, the language of the subsection is not entirely clear that the 12 day cooling-off and 3 day rescission periods do not also apply to new construction, such as construction of a new home on the consumer's lot. And since the penalty for noncompliance, i.e., failure of the lien on the homestead, would be very detrimental to safe and sound lending practices, this issue needs to be addressed by each lender.

By the end of 1999, the title insurance underwriters of Texas consistently concluded that these four sub-parts apply only in instances where the construction was for repair and renovation of existing improvements and not to new construction. In Spradlin v. Jim Walter Homes, Inc., 9 SW3d 473, (Tex. App.-Dallas, January 11, 2000, n.w.h.), the Dallas Court of Appeals agreed.

Another unanswered question is whether the reference in 50 (a) (5) to "contract for work and material" refers to the construction contract (such as the signed work proposal or AIA form contract) or to the lien contract actually creating the mechanic"s lien. Must the 3 day rescission period be given in both of these documents? Although the provision is not clear, it appears that if a consumer could rescind the mechanic"s lien contract but not rescind the obligation to pay under the construction contract, the effect of the provision would be to give the consumer a very limited remedy. The firm believes the prudent course of action is to require inclusion of the 3 day rescission period in both the construction contract and the lien contract documents.

Please consider these comments carefully and call Johnnie Davis to discuss policy decisions your institution will need to make.