When applying for a home equity loan, is there a law prohibiting a lender to add taxes and insurance to ones debt ratio when they own their home free and clear, or is this a legal practice?
Also, can you point me to where it states what the maximum debt to income ratio is for a fixed rate home equity loan? Or is this set by the lender?

prohibiting a lender to add taxes and insurance to ones debt ratio when they own their home free and clear, or is this a legal practice?

Legal? It depends on your perspective. There is nothing illegal about it on the surface, but if you are only doing it for borrowers when their home is free and clear, how is that not a fair lending issue? Why just them?

DTI ratios are always a lender decision.

Since this a home equity and not a HELOC 1026.43 would require it under the ATR rules.

(c) Repayment ability. (1) General requirement. A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.

i. Assume that a consumer will be required to pay property taxes, as described in comment 43(b)(8)-2, on a quarterly, annual, or other basis after consummation. Section 1026.43(c)(2)(v) includes these recurring property taxes in the evaluation of the consumer's monthly payment for mortgage-related obligations. However, if the consumer will incur a one- time charge to satisfy property taxes that are past due, § 1026.43(c)(2)(v) does not include this one-time charge in the evaluation of the consumer's monthly payment for mortgage-related obligations.

ii. Assume that a consumer will be required to pay mortgage insurance premiums, as described in comment 43(b)(8)-2, on a monthly, annual, or other basis after consummation. Section 1026.43(c)(2)(v) includes these recurring mortgage insurance payments in the evaluation of the consumer's monthly payment for mortgage-related obligations. However, if the consumer will incur a one-time fee or charge for mortgage insurance or similar purposes, such as an up- front mortgage insurance premium imposed at consummation, § 1026.43(c)(2)(v) does not include this up-front mortgage insurance premium in the evaluation of the consumer's monthly payment for mortgage-related obligations.