HBA-JLV C.S.H.B. 3567 77(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 3567 By: Marchant Financial Institutions 4/17/2001 Committee Report (Substituted) BACKGROUND AND PURPOSE Currently, the Veterans' Land Board (VLB) is authorized to finance land purchases for veterans through a "contract for deed" method. This requires 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 is not a ready market for servicing of these transactions, so VLB is required to service all of these loan contracts in-house. All other VLB mortgage transactions with veterans are serviced by professional mortgage servicers on contract to VLB. Furthermore, since title to the land remains in VLB's name until completion of the contract, the purchaser cannot obtain a mortgage loan for construction of a home on the land unless they can afford to purchase outright a portion of the land from VLB through a complex transaction known as a severance, which divides title to the original tract between VLB and the purchaser. This process sometimes results 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. C.S.H.B. 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 161.504, 161.505, 161.507, 161.508, and 161.509, Natural Resources Code) of this bill. ANALYSIS C.S.H.B. 3567 amends the Natural Resources Code to authorize the Veterans' Land Board (VLB) to make or acquire a land mortgage loan which shall be made from the Veterans' land fund (fund) secured by a mortgage on a veteran's land. The bill sets forth additional money and interests included in the fund. To qualify for a loan, the bill provides that a person must be a veteran at the time the persons applies for the loan. The bill provides that if an eligible veteran dies after filing an application, the surviving spouse may complete the transaction. 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 any veterans that may be outstanding at any time. The bill sets forth provisions requiring VLB to obtain insurance covering at least 50 percent of all losses anticipated in connection with veteran payment defaults on loans secured by first or second mortgages. The bill authorizes VLB to enter into contracts with lending institutions to assist in processing, originating, servicing, or administering loans. The bill provides that any fees and expenses incurred in connection with a loan may be charged to the veteran and made a part of the veteran's payments. The bill authorizes VLB, by rule, to determine the number of loans that a veteran may receive. The bill authorizes VLB to permit a veteran to combine a loan with a home mortgage loan, provided that the land mortgage loan is funded from amounts on deposit in the fund and provided that the home mortgage loan is not 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. The bill prohibits the disbursement of funds on a loan shall be made unless the loan is secured by a mortgage, deed of trust, or other lien on the land. The bill provides that a mortgage retained by, a deed of trust to the board, or any other lien may be a participation in a lien securing any other loan for the purchase of the property, including a lien for a home. The bill authorizes VLB to require an initial payment on a loan or require an investment in the land by a veteran in an amount or amounts set by VLB's rules. The bill prohibits a veteran from leasing, transferring, selling, or conveying 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 veteran 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. VLB is authorized to waive this prohibition upon the death, bankruptcy, financial incapacity, or divorce of the veteran or in the event a veteran is forced to move due to a change in employment or because his home is condemned through no fault of the veteran. 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 or accelerate all principal and interest on the loan. VLB is required to adopt rules providing for the procedures and the rules for foreclosure and resale of land financed with a loan. The bill provides that principal and interest that become delinquent are required to bear interest at a rate determined by VLB. EFFECTIVE DATE September 1, 2001. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 3567 modifies the original to conform to Texas Legislative Council style and format. The substitute provides an alternative method for a veteran to purchase land from the Veteran's Land Board (VLB) under the Veterans' Land Program using a purchase money mortgage instead of a contract for deed. The bill authorizes VLB, by rule, to provide for the escalation of the interest rate on the loan to a higher rate of interest.