HBA-JLV H.B. 3567 77(R)BILL ANALYSIS Office of House Bill AnalysisH.B. 3567 By: Marchant Financial Institutions 7/18/2001 Enrolled BACKGROUND AND PURPOSE Prior to the 77th Legislature, the Veterans' Land Board (VLB) was authorized to finance land purchases for veterans through a "contract for deed" method. This required VLB to purchase a tract designated by a veteran and then resell it to the veteran on a long-term contract at favorable interest rates. There was not a ready market for servicing of these transactions, so VLB was required to service all of these loan contracts in-house. All other VLB mortgage transactions with veterans were serviced by professional mortgage servicers on contract to VLB. Furthermore, since title to the land remained in VLB's name until completion of the contract, the purchaser could not obtain a mortgage loan for construction of a home on the land unless they could afford to purchase outright a portion of the land from VLB through a complex transaction known as a severance, which divided title to the original tract between VLB and the purchaser. This process sometimes resulted in undesirable boundaries, access, and frontage problems. The "contract for deed" method may better suit the veteran who plans to hold title long-term and not build on the land for many years, but it could be incompatible with the needs of a purchaser who plans to build within 5 years of purchase. If VLB were authorized to finance such tracts through a mortgage on the land, the potential problems associated with severance issues could disappear and the underlying mortgage could be merged with a new mortgage to finance the home construction. House Bill 3567 authorizes VLB to make or acquire a land mortgage loan from the Veterans' Land Fund secured by a mortgage on a veteran's land. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the Veterans' Land Board in SECTION 2 (Sections 161.503, 161.504, 161.506, 161.507, 161.512, and 161.513, Natural Resources Code) of this bill. ANALYSIS House Bill 3567 amends the Natural Resources Code to authorize the Veterans' Land Board (VLB) to provide land mortgage loans to veterans for the purchase of land that are secured by a mortgage, deed of trust, or other lien on the land (Sec. 161.501). VLB is required to make or acquire such loans with money from the Veterans' land fund (fund) to finance land purchases by eligible persons with accordance with rules adopted by VLB. The bill authorizes VLB to enter into contracts with lending institutions to assist in processing, originating, servicing, or administering loans. The bill sets forth provisions requiring VLB to obtain insurance covering at least 50 percent of all losses anticipated in connection with payment defaults on loans secured by first or second mortgages (Sec. 161.503). The bill sets forth additional money and interests included in the fund (Sec. 161.171). To qualify for a loan, the bill provides that a person must be a veteran at the time the person applies for the loan. The bill provides that if an eligible veteran dies after filing an application, the surviving spouse may complete the transaction (Sec. 161.504). The bill requires that the final principal payment on any loan be made not later than the 40th anniversary after the date of the loan. VLB is required to determine the maximum principal amount of loans to the same eligible person that may be outstanding at any time. The bill provides that payments on the loan must be made at times determined by VLB (Sec. 161.507). The bill provides that all fees to be charged to a person who receives a loan must be approved by VLB. The bill provides that any fees and expenses incurred in connection with a loan may be charged to the loan recipient and included in the principal amount of the loan. The bill authorizes VLB, by rule, to determine the number of loans that a veteran may receive. The bill authorizes VLB to permit a person to combine a loan with a home mortgage loan, provided that a portion of a land mortgage loan is funded from amounts on deposit in the fund and provided that the portion of the home mortgage loan is not to be funded from amounts in the fund. The bill sets forth provisions authorizing VLB to set the interest rate and requires VLB to adopt rules relative to the fees, charges, and interest rates charged by the lending institutions on the financing of the land with money other than from the fund and is required to limit, to the maximum extent practicable, such fees, charges, and interest rates (Sec. 161.308). The bill prohibits the disbursement of funds on a loan from being made unless the loan is secured by a mortgage, deed of trust, or other lien on the land purchased with the proceeds of the loan. The bill provides that a mortgage, a deed of trust, or other lien may be a participation in a lien securing any other loan for the purchase of the property, including a lien securing a home loan (Sec. 161.505). The bill authorizes VLB to require an initial payment on a loan or require an investment in the land by the loan recipient in an amount or amounts set by VLB's rules (Sec. 161.506). The bill prohibits a loan recipient from leasing, selling, or otherwise transferring in whole or in part any interest in land against which there is a mortgage, deed of trust, or any other lien securing a loan unless the loan recipient has owned the land for a three-year period beginning on the date of the purchase of the land and has complied with the requirements and the rules of VLB. The bill provides that after the three-year period, the land may be sold or otherwise transferred, subject to any lien securing a loan, if all interest, principal, and taxes that are due have been paid and if all terms, conditions, and rules of VLB have been met. VLB is authorized to waive this prohibition upon the death, bankruptcy, financial incapacity, or divorce of the loan recipient, in the event a loan recipient is forced to move due to a change in employment or because the recipient's home is condemned through no fault of the recipient, or at any other time VLB considers a waiver to be in the best interests of the program (Sec. 161.511). If land or any interest therein is transferred, sold, or conveyed in whole or in part before the original veteran purchaser has owned the land for a period of three years and if VLB does not waive the three year requirement, then VLB is authorized, by rule, to increase the rate of interest on the loan, accelerate all principal and interest on the loan, or provide any other remedy VLB considers appropriate (Sec. 161.512). VLB is required to adopt rules providing for the procedures governing foreclosure of a lien securing a loan (Sec. 161.513). EFFECTIVE DATE May 24, 2001.