4.3 Texas Reverse Mortgages, the HECM Overlay, & Usury Ceilings

4.3 Texas Reverse Mortgages, the HECM Overlay, & Usury Ceilings

Quick Answer: A Texas reverse mortgage is the § 50(a)(7) homestead gate, and its conditions live in § 50(k)–(p) and (v): written consent of each owner and each owner's spouse, a borrower or spouse aged 62 or older, non-recourse treatment, counseling completed not earlier than the 180th day nor later than the 5th day before closing with both spouses attesting, a 12-day separate-instrument notice, listed advance methods, and no credit-card, debit-card, or preprinted-solicitation-check advances. A HECM adds HUD/FHA rules on top; it does not replace the Texas text. On interest, quote the statutes: 10 percent default under Article XVI § 11 and Finance Code § 302.001(b), Chapter 303 optional ceilings with an 18 percent floor and ordinary 24 percent cap in § 303.009, DIDMCA preemption on covered first liens, and the greater-than-12-percent homestead prepayment-penalty bar in § 302.102.

OpenExamPrep publishes this independent Texas overlay study. It is not an NMLS, SML, or OCCC publication and does not claim official approval, partnership, or exact equivalence with those agencies' materials. Reverse mortgages and usury sit together because both decide what a homestead lien may contain: whether the § 50(a)(7) gate from Section 4.2 actually opens, and what rate any Texas homestead note may lawfully carry. The § 50(a)(6) equity conditions—80 percent combined loan-to-value, fee cap, cooling-off, closing locations—are Chapter 5.

Reverse mortgages — constitutional conditions originators actually close

§ 50(k) defines a reverse mortgage as an extension of credit that meets all of the listed elements, including:

• A voluntary written lien with the consent of each owner and each owner’s spouse ((k)(1)).
• Made to a person who is, or whose spouse is, 62 years or older ((k)(2)). Proprietary Texas reverses can satisfy this when either the owner or the owner’s spouse is 62. A HECM has a stricter federal overlay, discussed below.
• Without recourse for personal liability against each owner and each owner’s spouse ((k)(3)).
• Advances based on homestead equity, or—after the 2013 amendment—for the purchase of homestead property the borrower will occupy as a principal residence ((k)(4)).
• The lender may not reduce the amount or number of periodic advances because of an interest-rate adjustment ((k)(5)).
• No required payment of principal or interest until a (k)(6) event: all borrowers have died; the homestead is sold or transferred; all borrowers cease occupying for longer than 12 consecutive months without prior written lender approval; on a purchase reverse, the borrower fails to occupy as principal residence within the time the agreement stipulates; or the borrower defaults on repair, tax, assessment, or insurance duties, commits actual fraud, or fails to protect lien priority after notice (with the listed contest/subordination cures).
• If the lender fails to make required advances and fails to cure after notice, the lender forfeits all principal and interest, unless a governmental agency takes an assignment to cure ((k)(7)).
• Counseling: the prospective borrower and spouse attest in writing that they received counseling on reverse mortgages and other financial alternatives completed not earlier than the 180th day nor later than the 5th day before closing ((k)(8)).
• The loan is not closed before the 12th day after the lender provides the separate-instrument reverse-mortgage notice that (k)(9) sets out, which the lender or originator and the borrower must sign for the notice to take effect. That notice warns that a reverse can end a property-tax deferral and lists foreclosure grounds.
• Foreclosure may not start until mail notice that a ground exists and at least 30 days to cure (or 20 days for the priority-lien default in (k)(6)(D)(iii)) ((k)(10)).
• Court-order foreclosure except when the ground is death of all borrowers or sale/transfer ((k)(11)). § 50(r) directs the Supreme Court to write expedited procedures (Rule 736 is Chapter 8).

§ 50(v) adds three product bans that national HELOC habits violate: the owner does not use a credit card, debit card, preprinted solicitation check, or similar device to obtain an advance; after the credit is established, no transaction fee is charged solely for a debit or advance; and the lender may not unilaterally amend the credit. § 50(p) lists the lawful advance methods (initial plus scheduled, borrower-requested up to a limit, re-advance after repayment, and lender advances to pay taxes, insurance, third-party repairs, assessments, or prior liens). § 50(m) allows fixed or adjustable rates and even interest contingent on appreciation; interest may accrue and compound until the loan becomes due. § 50(n) lets a valid reverse be made without regard to several other Texas-law limits, including balloon-payment bans, compound-interest bans, and a prohibition on contracting for a rate of interest authorized by any law of this state that authorizes a lender to contract for a rate—not a license to invent a rate with no statutory hook.

HECM federal overlay versus the Texas constitutional reverse

Two products share a closing table. A Home Equity Conversion Mortgage (HECM) is the FHA-insured reverse under federal Housing Act authority (see 24 C.F.R. Part 206). HUD requires the youngest borrower to be 62 at closing (24 C.F.R. § 206.33), HUD-approved counseling, occupancy as principal residence, payoff or low balance of prior liens, no delinquent federal debt (or a plan that uses proceeds to clear it), and FHA insurance with a nationwide maximum claim amount that HUD publishes by calendar year—cite the current HUD mortgage-limit publication rather than a prior year’s dollar figure. HECM origination-fee and mortgage-insurance formulas live in 24 C.F.R. §§ 206.31 and 206.105; they are federal product rules, not Article XVI usury numbers.

A proprietary reverse is not FHA-insured. SML’s constitutional lending report treats HECM as the predominant product and proprietary reverses as typically aimed at higher-value homes. Either product that will be a valid Texas homestead lien must still satisfy § 50(a)(7) and § 50(k)–(p), (v). HUD counseling does not replace the Texas 180th-day to 5th-day attestation by borrower and spouse. A HECM feature that used a credit card, debit card, or unsolicited convenience check would collide with § 50(v); Texas originations use the constitutional advance methods instead. Regulation Z 12 C.F.R. § 1026.33 defines a reverse mortgage for TILA; Texas adds the homestead consent, notice, and device bans. TILA’s three-business-day rescission can apply to a refinance reverse; SML notes it does not apply in the same way to a reverse used to purchase the home.

Usury and interest limits originators actually face on homestead loans

Do not memorize an unpublished weekly ceiling from a training blog. Quote the statutes.

Article XVI § 11 and Finance Code § 302.001(b) set the default: the maximum rate is 10 percent a year except as otherwise provided by law. A greater rate is usurious unless another law authorizes it. § 302.002 supplies 6 percent when no rate is agreed. § 302.101 tests real-property-secured loans by spreading all contracted interest over the stated term using the actuarial method. Penalties live in Finance Code Chapter 305.

Finance Code Chapter 303 is the optional-ceiling statute. § 303.001 lets a person contract for a rate that does not exceed the applicable Chapter 303 ceiling. The Consumer Credit Commissioner computes and publishes weekly (and other) ceilings. § 303.009(a) says that if the computed ceiling is less than 18 percent, the ceiling is 18 percent. § 303.009(b) caps the ordinary ceiling at 24 percent (a higher 28 percent cap applies to certain business-purpose contracts under (c)). Those 18 and 24 figures are in the statute. The weekly computed number is not—look it up in the OCCC Texas Credit Letter when you originate; do not freeze a snapshot into exam folklore. SML’s mortgage-lending report discusses reverse-mortgage maximum interest by citing § 303.009, § 342.301, and § 346.101, which is the right method: name the authorizing sections rather than inventing a reverse-only percentage.

§ 303.301 is a narrow carve-out, not a general homestead holiday. Chapter 303 ceilings do not apply to an agreement that is both (1) seller-extended credit (or an owner, subsidiary, or affiliate of the seller) for a transaction governed by Business & Commerce Code Chapter 601 and (2) secured by a lien on the obligor’s homestead. Ordinary purchase-money and reverse files do not become ceiling-free merely because the collateral is homestead.

DIDMCA. For loans made after April 1, 1980, secured by first liens on residential real property that meet the federal definition, 12 U.S.C. § 1735f-7a preempts state usury ceilings unless the state opted out. The Supreme Court of Texas held in Seiter v. Veytia that Texas did not opt out. Finance Code § 302.103 treats late charges on those federally preempted loans as interest within the preemption. Junior-lien / secondary homestead credit is a different stack: when the effective rate is greater than 10 percent, Finance Code Chapter 342, Subchapter G (secondary mortgage loans) and § 342.301 (interest not exceeding the Chapter 303 alternative ceiling) are the usual statutory hooks. Home equity still needs a statutory interest authorization because § 50(a)(6)(O) says “authorized under statute.”

Homestead-specific prepayment. Finance Code § 302.102: if the interest rate on a loan for property that is or is to be the borrower’s residential homestead is greater than 12 percent a year, a prepayment penalty may not be collected unless a federal agency requires the penalty. That 12 percent figure is in the statute. It is a prepayment rule, not a second usury ceiling.

Why this section stops before 50(a)(6). Reverse mortgages are homestead-encumbrance law: age, non-recourse, counseling, advances, and device bans decide whether § 50(a)(7) exists. Usury is Finance Code law that rides on whatever constitutional gate you used. § 50(a)(6) adds a dense second constitution—80 percent combined loan-to-value, fee cap, cooling-off, closing locations, one equity loan—that Chapter 5 will teach as its own product. Mixing those equity conditions into a purchase-money or reverse file is how originators void liens. Keep the gates separate, then apply the interest statute that actually authorizes the rate on that gate.

Official starting points

• SML laws page
• Texas Constitution Article XVI § 50(a)(7), (k)–(p), (v); § 11
• Finance Code §§ 302.001, 302.002, 302.101–302.103, 303.009, 303.301, 342.301, 346.101
• 12 U.S.C. § 1735f-7a; 24 C.F.R. Part 206 (HECM); 12 C.F.R. § 1026.33