Most Texans understand that a mortgage lender can charge interest and impose substantial contractual obligations on a borrower. What is less widely understood is that Texas law places additional restrictions on certain particularly expensive residential loans.

Texas Finance Code Chapter 343 regulates home loansand contains special protections for loans classified as high-cost home loans. These provisions can matter to homeowners, lenders, investors, and attorneys dealing with mortgage disputes because Texas law restricts several loan terms that might otherwise appear in a written agreement.

What Is a Home Loan Under Texas Finance Code Chapter 343?

Texas Finance Code § 343.001 generally defines a "home loan" as a loan made to one or more individuals for personal, family, or household purposes and secured by certain residential property used or intended to be used as the borrower's principal residence.

This distinction matters. Chapter 343 is not simply a general statute governing every loan secured by Texas real estate. The purpose of the loan, nature of the collateral, use of the property, and particular loan terms can all affect whether the chapter applies.

The statute also generally excludes reverse mortgages and open-end accounts from Chapter 343.

What Makes a Texas Mortgage a "High-Cost Home Loan"?

Texas Finance Code § 343.201 creates a more specific category known as a high-cost home loan.

The statutory definition is technical and incorporates federal lending regulations, including 12 C.F.R. § 1026.32. Among other requirements, the definition looks to the annual percentage rate and the points and fees charged in connection with the transaction.

Accordingly, a mortgage does not become a "high-cost home loan" merely because the borrower believes the interest rate is high or the loan is financially burdensome. The loan must satisfy the statutory criteria.

That classification is important because Subchapter C imposes restrictions specifically on high-cost home loans.

Texas Restricts Certain Balloon Payments

Balloon payments can create obvious problems for borrowers.

A borrower may make regular monthly payments for years only to discover that an unusually large payment becomes due later in the loan.

Texas Finance Code § 343.202 addresses this issue. As a general rule, a high-cost home loan may not schedule a payment exceeding twice the average of the earlier scheduled monthly payments unless the balloon payment becomes due at least 60 months after the loan was made.

There are statutory exceptions, including circumstances involving irregular or seasonal income and certain bridge loans.

This provision is a good example of why the actual loan documents matter. A large final payment is not necessarily illegal, but the amount, timing, and type of loan can determine whether Texas law permits it.

Negative Amortization Is Also Restricted

Negative amortization occurs when scheduled payments are insufficient to cover the amount necessary to prevent the principal balance from increasing.

In simple terms, you can make your required payments and still owe more money than you owed before.

Texas Finance Code § 343.203 states:

"A high-cost home loan may not provide for a payment schedule with regular periodic payments that cause the principal balance to increase."

The statute provides exceptions involving temporary forbearance, bridge loans, and certain restructures sought by the borrower.

This prohibition is particularly important because negative amortization can be difficult for consumers to understand. A borrower accustomed to a conventional amortizing mortgage ordinarily expects the principal balance to decline over time. A loan structured in the opposite direction can create significant financial consequences.

A Lender Cannot Simply Rely on the Value of the House

One of Chapter 343's most important provisions concerns a borrower's ability to repay.

Texas Finance Code § 343.204 prohibits a lender from engaging in a pattern or practice of making high-cost home loans based on the consumer's collateral without regard to repayment ability.

The statute directs attention to matters including the obligor's income, obligations, employment status, and other financial resources.

This is important because a house can contain substantial equity even when its owner lacks sufficient income to service a new loan.

A lending model based primarily upon the idea that the house is valuable enough to secure the debt anyway can create an obvious danger: if the borrower predictably cannot make the payments, foreclosure may become the practical means through which the lender ultimately receives payment.

Section 343.204 is designed to address that concern in the high-cost home-loan context.

Prepayment Penalties Are Prohibited on High-Cost Home Loans

Some loan agreements impose a charge when the borrower pays the debt early. Economically, a prepayment penalty can discourage refinancing or prevent a borrower from escaping an expensive loan when better financing becomes available.

Texas law takes a particularly straightforward approach to high-cost home loans.

Texas Finance Code § 343.205 provides:

"A lender may not make a high-cost home loan containing a provision for a prepayment penalty."

This can become important when reviewing loan documents after a dispute arises. The fact that a borrower signed a contract does not necessarily mean every contractual provision is enforceable. Lending contracts remain subject to statutes regulating the transaction.

Borrowers Cannot Be Charged for Products or Services They Never Receive

Texas Finance Code § 343.206 also addresses fees associated with high-cost home loans.

The statute prohibits a lender from charging the borrower for a service or product that the borrower does not actually receive.

This provision may seem obvious, but mortgage transactions can involve numerous charges, fees, services, and third parties. When a dispute arises, the closing documents and itemized charges should be examined rather than treating the total closing cost as a single undifferentiated number.

Why Chapter 343 Matters in a Mortgage Dispute

Mortgage disputes can involve several overlapping bodies of law.

Depending upon the circumstances, a dispute may implicate the loan agreement, deed of trust, Texas Property Code, Texas Finance Code, federal lending laws, foreclosure procedures, common-law claims and defenses, or other statutes.

Chapter 343 adds another important question:

Was the transaction a high-cost home loan, and if so, did the lender comply with the special restrictions Texas law places on that loan?

That question can change the legal analysis.

For example, an attorney reviewing a disputed residential loan may need to determine:

• whether Chapter 343 applies to the transaction;
• whether the loan satisfies the statutory definition of a high-cost home loan;
• whether the payment schedule contains a prohibited balloon payment;
• whether the loan improperly creates negative amortization;
• whether the lender considered repayment ability;
• whether the agreement contains a prohibited prepayment penalty; and
• whether the borrower was charged for products or services never actually received.

The answers depend on the actual transaction and documents.

A Signed Mortgage Contract Is Not the End of the Legal Analysis

People sometimes assume that if a borrower signed the note and deed of trust, the only remaining question is whether the borrower made the payments.

Texas lending law can be considerably more complicated.

Freedom of contract remains important, but the Legislature has placed substantive limits on certain lending practices. Texas Finance Code Chapter 343 is an example of the law intervening when a residential loan crosses statutory thresholds associated with high-cost lending.

For borrowers, this means an unusually expensive or unusual mortgage should not necessarily be evaluated solely by reading the payment amount.

For lenders, it means loan documents and underwriting practices must be evaluated against applicable Texas and federal requirements rather than ordinary contract principles alone.

And when litigation develops, determining exactly what kind of loan was made may be just as important as determining whether a payment was missed.

Conclusion

Texas Finance Code Chapter 343 provides important protections governing certain residential loans, particularly high-cost home loans. Among other things, Texas law restricts balloon payments and negative amortization, prohibits prepayment penalties on high-cost home loans, addresses repayment ability, and prohibits charges for products or services borrowers never receive.

These provisions demonstrate a broader principle of Texas lending law: a loan agreement does not exist in a legal vacuum simply because the borrower signed it.

Homeowners facing disputes involving unusually expensive mortgages, questionable loan terms, foreclosure, or substantial closing charges may benefit from having the complete loan documents reviewed to determine which Texas lending laws apply.

Likewise, lenders and businesses involved in residential financing should understand that the enforceability of a loan depends not only on what the contract says, but also on whether the transaction complies with applicable law.

This article is for general informational purposes only and does not constitute legal advice. The application of Texas lending law depends upon the particular loan, property, documents, parties, and circumstances involved.

At David C. Barsalou, Attorney at Law, PLLC, we help clients navigate business, family, tax, estate planning, and real estate matters ranging from document drafting to litigation with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call us at (713) 397-4678, email barsalou.law@gmail.com, or reach us through our Contact Page. We’re here to help you take the next step.