                 THE   ATTORXEY    GENERAL
                          OF TEXAS


                          December 21, 1990


    Honorable Bruce Gibson        Opinion No.   JM-1269
    Chairman
    Rouse Government Organi-      Re:    Whether the homestead
      zation Committee            provision of the Texas Consti-
    P.O. Box 2910                 tution has been preempted by
    Austin, Texas 78768-2910      federal legislation regulating
                                  savings and loan associations
                                  and other lending institutions
                                  (RQ-2066)
    Dear Representative Gibson:
         You ask whether federal law and regulations have
    preempted the Texas homestead provisions, in particular,
    article XVI, section 50, of the Texas Constitution, which
    provides in part:
P
           The homestead of a family, or of'a single
           adult person, shall be, and is hereby pro-
           tected from forced sale, for the payment of
           all debts except for the purchase money
           thereof, or a part of such purchase money,
           the taxes due thereon, or for work and
           material used in constructing improvements
           thereon . . . . Notaaae.      trust deed, or
           otherlien
           aid.   extent for the wurchase mon v there-
            or. or    imwrovements made    thezeon.  as
           hereinbefore wrovided . . . . All pretended
           sales of the homestead involving any condi-
           tion of defeasance shall be void.
    Tex. Const. art. XVI, § 50 (emphasis added).1 This provi-
    sion prevents the owners     of homestead property   from


         1. The Texas homestead exemption first appeared in the
    statutes of the Republic of Texas and was placed in the
    constitution when Texas became a state in 1845. It has been
    included in every Texas Constitution since that time. See2
    G. Braden, The Constitution of Texas: An Annotated and
    Comwarative Analysis at 788 (1977).



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borrowing money secured by the equity in the homestead for
any purpose other than the expressly authorized purposes.
      Your inquiry was prompted by a 1989 opinion letter
written by the deputy general counsel of the Federal Home
Loan Bank Board   [hereinafter Bank Board], which regulated
federally chartered savings and loan associations under the
Home Owners' Loan Act of 1933 [HOLA], 12 U.S.C. S 1464. The
letter from the Bank Board responded to questions asked by
the United States Department of Housing and Urban Develop-
ment .2
     The Sank Board's letter concluded that HOLA and regula-
tions issued thereunder permit national savings and loan
associations to issue "line of credit home equity conversion
mortgages," or "reverse mortgages," which would al.low the
homeowner to borrow money on the security of his equity in
his residence.   The deputy general counsel expressed the
opinion that the federal statute and regulations would
preempt the Texas homestead provisions with respect to such
mortgages issued by federally-chartered savings and loan
associations. The Department of Housing and Urban Develop-
ment also inquired whether the federal Alternative Mortgage
Transaction Parity Act of 1982 [hereinafter Parity Act], 12
U.S.C. 55 3801-3806, would authorize state associations to
make "reverse mortgages@0on an equal basis with national
savings and loans associations, with the result that the
Texas homestead provisions would be preempted as to mortgag-
es issued by state-chartered associations.   The Bank Board
letter declined to express an opinion about state-chartered
associations because they were not under its supervision.
     You ask this office to review the reasoning of     the
deputy general counsel's opinion letter and to answer   the
question he left unanswered.     Your inquiry raises    the
following issues:
        Is a federally-chartered lender permitted by
        federal law and regulations to make home
        equity loans?




     2. Letter from Jack D. Smith, Deputy General Counsel,
Federal Home Loan Bank Board to John A. Maxim, Jr.,
Associate General Counsel, U.S. Department of Housing and
Urban Development (Aug. 4, 1989). The O;;~~alo~       Loan
Bank Board was     replaced with the                Thrift
Supervision in late 1989. See infra note 5 at 10.




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h




             If so, does the federal authority preempt the
             Texas homestead exemption law, insofar as the
             federally-chartered lender is concerned?
             If a federally-chartered lender has authority
             to make home equity loans, do state-chartered
             lenders have similar authority to make home
             equity loans under the Parity Act, adopted as
             title VIII of the Garn-St Germain Depository
             Institutions Act of 1982, Pub. L. No. 97-320?
         With respect to the first issue, we will not undertake
    to reanalyze the federal laws and regulations relied on in
    the Bank Board's opinion letter; instead, we will set out
    the letter's reasoning as a basis for reaching the next
    question. Any questions we have about the reasoning of the
    Bank Board's letter can be raised in our discussion of the
    preemption question.
         According to the opinion letter of the Bank Board, the
    authority of federally-chartered savings and loan associa-
    tions to make loans on the security of a home owner's equity
    in his residence, including "reverse mortgages," is based on
-   the following. provision of HOLA:
                An association may to such extent, and
             subject to such rules and regulations as the
             Board may prescribe from      time to time,
             invest in, sell, or otherwise deal with the
             following loans, or other investments:
                .   .   .   .

                (l)(B) Real property loans
                Loans on the security of liens        upon
             residential or nonresidential real property.
    12 U.S.C. 5 1464(c)(l)(B) (superseded).3 The agency's
    rule-making power is set out in the following provision:


        3.   This provision     now   reads as follows:
        To the extent   specified in regulations of the
        Director [of the Office of Thrift Management], a
        Federal savings association may invest in, sell,
        or otherwise deal in the following loans and other
        investments:
                                           (Footnote Continued)



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          In order to provide thrift institutions
       for the the deposit of funds and for the
       extension of credit for homes and other goods
       and services, the Director [of the Office of
       Thrift Management] is authorized, under such
       regulations as the Director may prescribe --

            (1)   to provide for the organization,
            incorporation, examination, operation, and
            regulation of associations to be known as
            Federal savings associations (incl~uding
            Federal savings banks), and

            (2)    to issue charters therefore,
       giving primary consideration of the best
       practices of thrift institutions in       the
       United States.   The lending and investment
       powers conferred by this section are intended
       to encourage such institutions to provide
       credit for housing safely and soundly.
12 U.S.C. 5 1464(a).
     The letter from the Bank Board provides the following
discussion of the regulations promulgated to implement this
provision:
          The history of 12 C.F.R. pt. 545, which
       governs the operations of Federal associa-
       tions, is crucial to this analysis. Prior to
       the Garn-St Germain Act, Federal associations
       were specifically authorized by 12 C.F.R. s&Y
       545.6-2(a)(7) and 545.6-4(d) (1981) to offer
       reverse mortgages to homeowners.
          After the Garn-St Germain Act was enacted,
       the Board substantially revised 12 C.F.R. pt.
       545. Explicit provisions governing reverse
       mortgages were removed from the regulation,

(Footnote Continued)
     (1)   . . .
     (B) Residential real property loans
           Loans on the security of liens upon
           residential real property.




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        and 12 C.F.R. 5 545.1 (1988), which reads   as
        follows, was added:
              A Federal association may exercise all
           authority granted it by the Home Owners '
           Loan Act of 1933, 12 U.S.C. 1464, as
           amended . . . whether or not implemented
           specifically by Rank Board regulation,
           subject to the limitations and interpreta-
           tions contained in this part.
Thus, the letter concludes that the regulation authorizes
the federally-chartered associations to exercise powers that
are not specifically set out by regulations, including
powers that are inconsistent with state law.
     The letter quotes the preamble to 12 C.F.R. 5 545.1 on
the Bank Board's approach to exercise of its regulatory
power:
       Current Part 545 is based upon the premise
       that the investment authority of the HOLA
       must be implemented expressly by regula-
       tion . . . . In order to grant associations
       the maximum flexibility ,to exercise      the
       authorities granted by the HOLA, the Board
       has determined to revise the general approach
       to regulating    investment   activities   of
       Federal associations. Accordingly, Part 545
       now addresses the authority of associations
       only to limit, interpret or recognize inci-
       dental authority.   Federal associations may
       exercise all authority granted by the HOIA
       subject only to limitations contained in the
       regulations. Because this approach differs
       from the current treatment, these amendments
       to Part 545 include a section specifically
       stating that Federal associations may exer-
       cise all statutory authority subject to the
       limitations in this Part. The Board empha-
       sizes that deletion of sections specifically
       implementing existing authority does not mean
       that any authority can no longer be exer-
       cised.

Bank Board letter of August 4, 1989    (quoting 48 Fed.   Reg.
23032 (May 23, 1983)).
     The opinion letter states that federally-chartered
associations may offer reverse mortgages to homeowners. It
goes on to express the opinion that Texas homestead laws
have been preempted with respect to federal institutions,

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relying on Fidelitv                                   de
Cuestg, 458 U.S. 141 (1982) and the provisions Lf gOhA:
       Congress by statute has explicitly permitted
       Federal associations to secure loans with
       real estate. 12 U.S.C. f 1464(o)(l)(B).   It
       is axiomatic that the authority to secure
       loans protects lenders in the event       of
       default on such loans by foreclosing on the
       property constituting the security.    State
       laws which prevent or otherwise restrict
       Federal associations from engaging in trans-
       actions involving such mortgages, are in
       conflict with Sank Board regulations.
          The Texas laws in question clearly prevent
       Federal associations from exercising      the
       authority granted to them by the HOIA and the
       Board's regulations. Therefore, this Office
       concludes that the constitution and statutes
       of Texas under review are *an obstacle to the
       accomplishment and execution of the purposes
       and objectives' of 12 C.F.R. pt. 545 to the
       extent that they prevent Federal associations
       from securing line of credit       conversion
       mortgages with real estate consisting of
       homesteads, and foreclosing on such mortgages
       in the event of default. According to de la
       Cuestg, the HOLA authorizes the Board to
       enact regulations that preempt substantive
       state real property laws purporting to govern
       the mortgage lending operations of Federal
       associations. The regulatory history of 12
       C.F.R. 5 545 reveals that the Board exercised
       this authority to preempt state real property
       laws, insofar as     reverse mortgages    are
       concerned.
     The "doctrine of preemption" is rooted in the Supremacy
Clause of the United States Constitution. U.S. Const. art.
VI, cl. 2; wtv        Federal Sa . & Loan Ass‘n v. de la
Cuesta, 458 U.S. 141, 152 (19Z2). The Supremacy Clause
requires inconsistent state laws to yield to valid federal
laws and regulations. Fidelitv Federal Sa . & Loan A
d la Cuesta, m;      Seiter v. v tia, 756VS.W.2d 303Ss;~e~:
lZ88).
     The de la Cuesta case arose out of a conflict between a
regulation of the     Federal Home Loan     Bank Board    on




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    wdue-on-saleH clauses4 in mortgages and California common
    law. The federal regulation authorized federal savings and
    loan associations to include a "due-on-sale" clause in the
    loan document, while the California Supreme Court had
    declared that such clauses could be exercised only under
    limited circumstances.   The United States Supreme Court
    found that the California rule created an obstacle to the
    accomplishment and execution of the full purposes and
    objectives of the due-on-sale regulation. 458 U.S. at 156.
    It also found that the Bank Board expressly intended to
    preempt contrary state laws and that it acted within its
    authority in issuing the preemptive regulation, reviewing
    the language and legislative history of the HOLA to reach
    the latter conclusion.
         We are not persuaded that the Be la Cuestg case re-
    solves the question before us.   That case involved a board
    rule specifically authorizing the federal associations to
    include a O1due-on-salellclause in loan documents. It did
    not address the current system of regulation, which allows
    federal associations to exercise all statutory authority
    subject only to express limitations. Moreover, the Finan-
    cial Institutions Reform, Recovery, and Enforcement Act of
-   1989, P.L. 101-73, adopted amendments to HOLA directed at
    providing closer supervision of federal.thrift institutions.
    1989 U.S. Code Cong. & Admin. News 432 (House Conf. Rep. No.
    101-222, 101 Cong. 1st Sess.). Thus, the relevant federal
    provisions differ in some ways from those at issue in de la
    Cuesta. Expressions of congressional intent in connection
    with the 1989 amendments may also be relevant to the preemp-
    tion question.
         The 1982 case dealt with the timing of repayment of a
    loan secured by real property. The Texas homestead laws,
    however, forbid the use of equity in a homestead to securing
    loans for any purpose not authorized by the constitution.
    We are faced with a question of whether the transaction may
    be made at all, not merely a question of the terms of a
    transaction. Thus, preemption of the Texas constitutional
    protection for the homestead raises a different, and possi-
    bly more difficult, question than the one addressed in de la
    Cuesta.




         4. A due-on-sale clause allows the lender to declare
    the balance on a mortgage loan immediately due and payable
    when the property is sold.    If the lender exercises this
    option, the purchaser cannot assume the loan.


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     Supreme Court decisions on preemption questions decided
subsequent to de la Cuesta must also be considered.
California V.   C America Corn., 109 S.Ct. 1661 (1989), 2:
Court reiterated the presumption against finding preemption
of state law in areas traditionally regulated by the states:
       When Congress legislates in a field tradi-
       tionally occupied by the States, 'we start
       with the assumption that the historic police
       powers of the States were not to be supersed-
       ed by the Federal Act unless that was the
       clear and manifest purpose of Congress.'
109 S.Ct. at 1665.
     In Goit -Joint              Venture v. Federal Sav. &
Loan Ins. CON,     109 s.ct. 1361 (1989), the Bank Board
claimed that HOL    and the enabling legislation of the
Federal Savings and Loan Insurance Corporation (FSLIC)
preempted Texas law on the adjudication of claims against
federal associations and conferred this power on the FSLIC.
The Supreme Court interpreted provisions governing the FSLIC
and the Bank Board, adopted over a span of fifty years, to
determine the Congressional intent underlying the specific
provision in question. It concluded that Congress did not
intend to authorize the FSLIC to adjudicate claims and that
state law was not preempted.
     Finally, preemption cases can be difficult to recon-
cile. Levy, Karst, Mahoney, Encvclowedia of the American
ConstitutioQ at 1438. Preemption questions arise because
Congress has ignored the existence of related state laws and
the court must deal with the factors that would have con-
fronted the legislature had it thought about related state
laws. The judges* views as to the wisdom of the federal and
state laws are among the factors that may in fact be deci-
sive in a preemption question. Id.
     In answer to your  second question, neither the deputy
general counsel's opinion letter nor the authorities he
cites convince us that the Texas homestead provisions are
preempted as to federally-chartered associations by regula-
tions issued under HOLA.   Because this question ultimately
cannot be resolved solely by analyzing statutes and judicial
decisions, it cannot be resolved in an advisory opinion. It
is a question for judicial resolution in an adversary
proceeding, in which the relevant state and federal policies
can be thoroughly briefed and argued. We cannot advise you
that the courts would follow the approach taken by the
opinion letter written by the deputy general counsel of the
Bank Board.



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         We can, however, advise you as to the intended   effect
    of the Parity Act, about which you inquire in your third
    question. Even if regulations issued under HOLA preempted
    the Texas homestead provisions with respect to home equity
    loans made by federally-chartered savings and loan associa-
    tions, the Parity Act would not give state-chartered associ-
    ations similar  authority to make such loans.     A careful
    reading of the Parity Act shows that it deals with interest
    rates and repayment terms of mortgage loans, and does not
    relate to the use of the equity in a homestead as security
    for a loan.
          The Parity Act, 12 U.S.C. 55 3801-3806, was enacted as
    title VIII of the Garn-St. Germain Depository Institutions
    Act of 1982. It was adopted to give state-chartered mort-
    gage lenders parity with federally-chartered lenders with
    respect to "alternative mortgage loans.H m       12 U.S.C. §
    3801. It allows state-chartered mortgage lenders to make
    such transactions to the extent that they are authorized for
    federally-chartered institutions by valid regulation of the
    appropriate federal agency: that is, the Comptroller of the
    Currency for national banks, the National Credit Union
    Administration Board for federal credit unions, and the
    Director  of the Office of Thrift Supervision (formerly the
    Federal Home Loan Bank Board) for         federally-chartered
    savings and loan associations. 12 U.S.C. 5 3803(a).       The
    Parity Act thus makes applicable to state lenders certain
    valid regulations issued under other law by a federal
    regulatory agency.    &     It expressly preempts contrary
    provisions in state constitutions, laws, or regulations,
    except for states    that opted out of its provisions by
    October 15, 1985. 12 U.C.S. 50 3803(c), 3804.
         The Congressional purpose in adopting the Parity Act is
    stated in section 3801 of title 12 of the United States
    Code, which provides as follows:

               (a    The Congress hereby finds that --

                     (1)  increasingly volatile and dynamic
                    changes     in     interest    rates    have
                    seriously impaired         the ability    of
                    housing  creditors
                      ._. -. _            to  provide  consumers
                    Wllxl fixed-tern,,       fixed-rate   credit
                    secured by interests in real prope~y,
                    cooperative        housing,     manufactured
                    homes, and other dwellings;

                    (2)   alternative mortgage transactions
                    are essential to the provision of an
                    adequate supply of credit secured by
                    residential property necessary to meet
                    the demand expected during the 1980's;
                    and
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                   (3)    the Comptroller of the Currency,
                   the      National      Credit      Union
                   Administration, and the Director of the
                   Office of     Thrift Supervision    have
                   recognized     the     importance     of
                   alternative mortgage transactions and
                   have adopted regulations authorizing
                   federally      chartered      depository
                   institutions to engage in alternative
                   mortgage financing.

          (b) It is the purpose of thiTm;kzEter to
       eliminate the discriminatory             that
       those regulations have upon      nonfederally
       chartered housing creditors and provide them
       with parity with federally chartered institu-
       tions by authorizing all housing creditors to
       make, purchase,    and enforce    alternative
       mortgage transactions so lona as the transac-
       tions are in conformitv with the reations
       issued bv the Federal =-icisi .     (Emphasis
       added.)
     As subsection    (b)   of section    3801   indicates,5
federally-chartered depository institutions were already
authorized by agency regulations to engage in such "alterna-
tive mortgage transactions" before the Parity Act was
adopted. The purpose of the Parity Act was to enable
state-chartered institutions to engage in such transactions
on an equal basis with the national institutions.        The
Parity Act can effect a preemption of a Texas constitutional
provision only if regulations issued under other federal law
authorizing federally-chartered institutions to engage in
alternative mortgage transactions preempt the Texas provi-
sion. &g    12 U.S.C. 5 3803(a)(3).    To determine whether
state-chartered lenders have authority pursuant to the
Parity Act to make loans secured by a home owner's equity,



     5. Section 3801, indicating the intent of Congress,
has not been amended since its enactment in 1982, except for
the substitution in 1989 of Vhe Director of the Office of
Thrift Supervision" for the "Federal Home Loan Bank Board"
when the Bank Board was abolished and the Office of Thrift
Supervision was created. &g pub. L. 101-73, 9 744(c). The
new agency published, transferred, and recodified Bank Board
regulations as its own on November 30, 1989. 54 Fed. Reg.
49411. See aeneral.& Malloy, mna        to Fear But FIRREA
Itself:   e-f's
Federal Bank Reoulation, 50 Ohio State L.J. 1117 (1989).


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    we must inquire whether such loans are encompassed by        the
    term "alternative mortgage transactions.W
         Section 3801(a)(l) indicates that the "alternative
    mortgage transactions" and "alternative mortgage financing"
    referred to are transactions employing an        alternative
    interest rate structure     that depart    from  the   usual
    "fixed-term, fixed-rate" structure. Congress was referring
    only to regulations dealing with flexible interest rates, as
    is further demonstrated by the definition of "alternative
    mortgage transaCtion in section 3802:
            As used in this chapter --

                    (1)   the term 'alternative mortgage
                 transaction' means a loan or credit sale
                 secured by'an interest in residential real
                 property, a dwelling, all stock allocated
                 to a dwelling unit in a        residential
                 cooperative housing corporation, or      a
                 residential manufactured home . . .

                       (A)   in which the interest rate    or
                       finance charge may be adjusted      or
                       renegotiated:

                       (B)   involving a fixed-rate, but which
                       implicitly   permits    rate    adjust-
                       ments . . . or

                       (C)   involving any similar type of
                       rate, method of determining return,
                       term, repayment, or other variation not
                       common   to   traditional   fixed-rate,
                       fixed-term   transactions,    including
                       without limitation, transactions that
                       involve the sharing     of equity    or
                       appreciation;
            described and defined      by applicable   regula-
            tion.
    12 U.S.C. 5 3802(l).
         The emphasis in section 3802, as in section 3801, is on
    variations of interest rates and repayment schedules as
    contrasted to the "traditional fixed-rate, fixed-term" loan
    on residential property.     Nothing in the section 3802
    definition of "alternative mortgage transaction" suggests
    that Congress intended "applicable regulationsW describing
    and defining such transactions to embrace any subject matter
    other than matters relevant to determining the interest rate

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Honorable Bruce Gibson - Page 12 (JM-1269)




for transactions that could otherwise be fixed-rate transac-
tions under existing law.
     Section 3802(1)(C) defines a category of alternative
mortgage transactions as nincluding without limitation,
transactions that involve the sharing of equity or apprecia-
tion." We have received briefs arguing that this language
refers to a mortgage secured by a homeowner's equity in his
residence. However, the word nincluding00shows that the
language refers only to a sub-category of transactions
involving a variable  interest rate, repayment period, or
other variation from the traditional fixed-rate, fixed-term
residential mortgage. In addition, the phrase "a sharing of
equity or appreciation" would be an unusual and inaccurate
description of a mortgage secured by a homeowner's equity in
his home. The mortgage lender does not receive a tOsharellof
equity (unless the money he receives in a foreclosure sale
can be characterized in this way). The phrase "transactions
that involve the sharing of equity or appreciation" refers
instead to a joint venture in which both the lender and
developer of real estate share in the profits of a project.
a   Annot., Aareement for Share in Earninas of or Income
from Prowertv in Lieu of. or in Addition to, Interest as
Usurious, 16 A.L.R. 3d 475 (1967); see also Coit Indewen-
Pence Joint Venture      Feder 1 Sa . 8 Loan Ins. co
m,     at 1364-65 (fZera1 s&ingsv and loan associatio;
required a profit sharing interest as a condition of lending
money to purchase undeveloped land). The final clause of
section 3802(1)(C) deals with how loans may be structured,
not with the kind of residential property interest that may
secure them.
     Accordingly, the Parity Act does not address the
authority of state savings and loan associations to make
loans secured by a homeowner's equity in his homestead; nor
does it purport to preempt provisions of the Texas Constitu-
tion and statutes protecting the homestead from foreclosure
for any purpose not constitutionally authorized.




                      SUMMARY
             The federal Parity Act, 12 U.S.C. 9.8
        3801 et. sea,, does not attempt to authorize
        state savings and loan associations to make
        loans secured by a homeowner's equity in his
        residence, and accordingly does not purport



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            to authorize    preemption of      the Texas   home-
            stead laws.




                                           JIM     MATTOX
                                           Attorney General of Texas
    MARYKELLKR
    First Assistant Attorney General
    mu MCcREARY
    Executive Assistant Attorney General
    JUDGE ZOLLIE STEAKLEY
    Special Assistant Attorney General
    RENEA HICKS
    Special Assistant Attorney General
    RICK GILPIN
    Chairman, Opinion Committee
    Prepared by Susan Garrison
    Assistant Attorney General




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