6.1 Texas Finance Code Chapter 343 & High-Cost Home Loans

Texas Finance Code Chapter 343 is titled Home Loans. It is the statute the Texas overlay tests when the question is whether a residential loan is a high-cost home loan and which contract terms Texas then forbids. It sits beside federal HOEPA (Truth in Lending Act § 32, implemented at 12 C.F.R. § 1026.32) rather than replacing it. A loan can be a federal high-cost mortgage, a Texas high-cost home loan, both, or neither. The exam reward is applying the current Finance Code, not assuming Texas copied every federal trigger and exception.

What is a 'home loan' before it is 'high-cost'?

Section 343.001 defines a home loan as a loan made to one or more individuals for personal, family, or household purposes and secured, in whole or part, by either (i) a manufactured home, as defined by Finance Code § 347.002, used or to be used as the borrower's principal residence, or (ii) real property improved by a dwelling designed for occupancy by four or fewer families and used or to be used as the borrower's principal residence. A bridge loan is temporary or short-term financing requiring payment of only interest until the unpaid balance is due. A restructure is a change in the payment schedule or other terms because of the borrower's default.

Section 343.002 then limits the whole chapter. Chapter 343 applies to a loan under the chapter extended to a person who is located in Texas at the time the loan is made. It does not apply to a reverse mortgage or to an open-end account as defined by Finance Code § 301.002. That open-end exclusion is a Texas drafting choice. Federal HOEPA, after Dodd-Frank, can reach certain open-end credit secured by a principal dwelling. A Texas HELOC or other open-end home-secured account is therefore not a Chapter 343 high-cost home loan even if a federal high-cost analysis is still required. Reverse mortgages are likewise outside Chapter 343 (they are a separate constitutional product under Article XVI § 50(a)(7)).

Subchapter C: when a home loan becomes a Texas high-cost home loan

Section 343.201 (amended effective September 1, 2023 by S.B. 1371) defines high-cost home loan. Every element in the definition must be true. The loan:

• is made to one or more individuals for personal, family, or household purposes;
• is secured by a manufactured home (principal residence) or by 1–4 family real property used or to be used as the borrower's principal residence;
• has a principal amount equal to or less than one-half of the maximum conventional loan amount for first mortgages as established and adjusted by the Federal National Mortgage Association;
• is not a reverse mortgage or an open-end account; and
• is a credit transaction described by 12 C.F.R. § 1026.32, as amended, except that the term includes a residential mortgage transaction (12 C.F.R. § 1026.2) if the total loan amount is $20,000 or more and either (i) the APR exceeds the rate in 12 C.F.R. § 1026.32(a)(1)(i), as amended, or (ii) total points and fees payable at or before closing exceed the amount in 12 C.F.R. § 1026.32(a)(1)(ii), as amended.

Points and fees take the meaning assigned by 12 C.F.R. § 1026.32(b), as amended. Originators do not invent a Texas-only fee list.

The federal APR test currently written in § 1026.32(a)(1)(i) is an APR that exceeds the average prime offer rate (APOR) for a comparable transaction by more than 6.5 percentage points on a first-lien (other than a small personal-property first lien), more than 8.5 percentage points on a first-lien if the dwelling is personal property and the loan amount is less than $50,000, or more than 8.5 percentage points on a subordinate-lien. The federal points-and-fees test in § 1026.32(a)(1)(ii) uses 5 percent of the total loan amount once the loan amount reaches a CPI-adjusted figure that started at $20,000, and the lesser of 8 percent or a CPI-adjusted dollar (starting at $1,000) for smaller loans. Those federal dollar amounts move each January 1. The $20,000 figure in Texas § 343.201(1)(E) is the number the Legislature wrote into the Finance Code for including residential mortgage transactions; do not substitute a practice-bank count or a remembered 2002 HOEPA chart for either figure.

Federal HOEPA also has a third coverage trigger: a prepayment penalty that can be charged more than 36 months after consummation (or that can exceed 2 percent of the amount prepaid). Texas § 343.201 points to a transaction described by § 1026.32 and then spells out the APR and points-and-fees paths. Regardless of how coverage is reached, § 343.205 is stricter on the term itself: a lender may not make a high-cost home loan containing a provision for a prepayment penalty.

The FNMA half-conventional-loan-amount cap is the Texas-only size gate. FNMA's maximum conventional first-mortgage amount is the conforming limit FHFA/FNMA publish and adjust. A large principal-residence first lien can fail the Texas size gate and still be a federal high-cost mortgage. Chapter 343 Subchapter C simply does not attach. The originator still has to obey federal HOEPA, TILA, and any other applicable law; Texas did not repeal those duties.

Prohibited and restricted terms on Texas high-cost home loans

Balloons — § 343.202. A high-cost home loan may not contain a provision for a scheduled payment that is more than twice as large as the average of earlier scheduled monthly payments, unless the balloon becomes due not less than 60 months after the date of the loan. Two statutory exceptions: the payment schedule is adjusted for the borrower's seasonal or otherwise irregular income, or the loan is a bridge loan in connection with the acquisition or construction of a dwelling intended to become the borrower's principal dwelling. A four-year balloon due at month 48 that is three times the regular payment fails the 60-month timing rule. A balloon due at month 84 can satisfy the timing rule even if the payment is more than twice the earlier average.

Negative amortization — § 343.203. A high-cost home loan may not provide for a payment schedule with regular periodic payments that cause the principal balance to increase. Negative amortization is still allowed as a consequence of a temporary forbearance, a bridge loan, or a restructure sought by the borrower. A planned payment-option ARM that adds unpaid interest to principal on a high-cost home loan is the prohibited structure.

Ability to repay — § 343.204. A lender may not engage in a pattern or practice of extending high-cost home loans based on the consumers' collateral without regard to the obligor's repayment ability, including current and expected income, current obligations, employment status, and other financial resources other than equity in the dwelling. Obligor means the persons obligated to pay, including a borrower, cosigner, or guarantor, treated collectively if more than one. This is a pattern-or-practice collateral-lending ban, not a restatement of the federal Ability-to-Repay/Qualified Mortgage rule that applies loan-by-loan to most closed-end dwellings.

Prepayment penalties — § 343.205. A lender may not make a high-cost home loan containing a provision for a prepayment penalty. There is no Texas high-cost exception for a two-year or 2-percent penalty.

Subchapter B: 'flipping' as the statute actually writes it, and single-premium credit insurance

Section 343.101 is the anti-refinancing rule. A low-rate home loan is a home loan that at inception carries an interest rate two percentage points or more below the yield on Treasury securities with comparable maturity (use the fully indexed or fully stepped-up rate if the start rate is a discounted introductory or step-up rate). A lender may not replace or consolidate a low-rate home loan directly made by a government or nonprofit lender before the seventh anniversary of the loan date unless the new or consolidated loan has a lower interest rate and requires payment of a lesser amount of points and fees than the original loan, or is a restructure to avoid foreclosure. That is not a 12-month ban on all refinances.

Section 343.104 is a home-loan (not high-cost-only) restriction: a lender may not offer individual or group credit life, disability, or unemployment insurance on a prepaid single-premium basis in conjunction with a home loan unless the statutory notice is provided to each applicant by hand delivery or mail not later than the third business day after the application is received. Chapter 343 does not, in that section, enact a silent total ban; it conditions the product on timely delivery of the required notice. Federal high-cost rules separately restrict financing certain credit-insurance premiums into a HOEPA loan. Teach the Texas notice clock and the federal overlay as two different controls.

Worked example

Maria is buying a four-unit property in Fort Worth that she will occupy as her principal residence. The closed-end first lien is $240,000, well below one-half of FNMA's published maximum conventional first-mortgage amount. She is located in Texas when the loan is made. The loan is not a reverse mortgage and not open-end. The comparable APOR is 6.40%. The APR is 13.05%, which exceeds APOR by 6.65 percentage points—more than the 6.5-point first-lien spread in 12 C.F.R. § 1026.32(a)(1)(i)(A). Section 343.201 is satisfied. The originator cannot write a 36-month balloon due at month 36 that is more than twice the average monthly payment (§ 343.202), cannot schedule payments that increase principal (§ 343.203), cannot rely on a pattern of equity-based underwriting that ignores income and obligations (§ 343.204), and cannot insert a prepayment-penalty clause (§ 343.205).

Contrast: same APR spread on a $900,000 first lien. If that principal exceeds one-half of FNMA's maximum conventional first-mortgage amount, § 343.201(1)(C) keeps the loan out of Texas high-cost status even though federal HOEPA may still apply. Do not tell the borrower that 'Texas high-cost' and 'federal HOEPA' are the same label.