Texas allows nonjudicial foreclosure under a power of sale granted by a deed of trust for most real estate loans. Nonjudicial foreclosure is not available in Texas for certain loan types, like home equity loans and property tax loans. When nonjudicial foreclosure is unavailable, the foreclosure must be done through either judicial foreclosure or an Expedited Foreclosure Proceeding under Texas Rule of Civil Procedure 736. In a judicial foreclosure, a lawsuit must be filed, and the plaintiff’s petition in the lawsuit must ask the Court to grant an order for foreclosure. This is the slowest and most cumbersome method of foreclosure because the case will likely not go to trial for several months or years.
To expedite the process, some loans, like home equity loans under Article XVI Section 50(a)(6) of the Texas Constitution, or reverse mortgages under Article XVI Section 50(a)(7), can be foreclosed in an Expedited Foreclosure Proceeding under Rules 735 and 736 of the Texas Rules of Civil Procedure. The Expedited Foreclosure Proceeding is also known as a Quasi-Judicial Foreclosure because the proceeding bears little resemblance to an actual lawsuit. For example, personal service on the respondent is not required. Instead, all the petitioner needs to do under Rule 736 is mail the application for foreclosure to “each party who, according to the records of the holder of the debt is obligated to pay the debt.” Tex. R. Civ. P. 736(2)(A). Also, no discovery is allowed, the issues that can be raised are strictly limited, and the Court must hold a final hearing on the application within ten business days after a request for hearing by either party. Tex. R. Civ. P. 736(6), (7).
The nonjudicial foreclosure process is governed by Section 51.002 of the Texas Property Code entitled “Sale of Real Property Under Contract Lien.” Generally, the process involves filing a notice of sale with the county clerk’s office and posting it at the courthouse door. Then, on the first Tuesday of the following month, the property is sold at a live auction on the courthouse steps. The trustee conducting the sale will typically open the bidding with a credit bid on behalf of the noteholder. While the trustee may credit bid for the mortgagee, the “trustee is only responsible to the mortgagee in the mortgagee’s capacity as a creditor interested in satisfying the debt out of the proceeds of the sale; he is not responsible to the mortgagee in the capacity as a purchaser seeking to purchase the property for less than its fair value in opposition to the mortgagor’s interest.” Bonilla v. Roberson, 918 S.W.2d 17, 22 (Tex. App.—Corpus Christi 1996). The noteholder’s bid is referred to as a “credit bid” because the noteholder does not actually need to pay for the bid. The noteholder can bid up to the amount owed to the noteholder without needing to pay out-of-pocket since the funds would go to itself. If the credit bid wins the auction, then the creditor becomes the owner of the property. The buyer at the sale should be prepared to pay in certified funds on the spot. The purchaser at the sale acquires the property “as is,” without warranties, and at the purchaser’s own risk. Tex. Prop. Code § 51.009. Also, the purchaser cannot be considered a “consumer” for purposes of consumer-protection laws like the Texas Deceptive Trade Practices Act. Tex. Prop. Code § 51.009.
Acceleration of the Underlying Indebtedness on the Promissory Note. Many creditors do not fully understand the importance of the acceleration clause in the note and deed of trust. A typical promissory note provides for installment payments over time. Those payments are not due until the payment obligation matures by the passing of the payment due date. When a promissory note is accelerated, all of the remaining payments mature immediately. Unless a note has accelerated or matured, the creditor cannot demand payment for the full remaining principal balance due on the note. Instead, the creditor can only demand payment for the installments that have matured. The statute of limitations on the debt begins to run upon each installment as the installment matures. Tex. Civ. Prac. & Rem. Code § 16.035(a), (b). The statute of limitations does not run on the remaining balance of the note until the note matures or is accelerated. Hammann v. H.J. McMullen & Co., 122 Tex. 476, 62 S.W.2d 59, 61 (1933); Burney v. Citigroup Global Markets Realty Corp., 244 S.W.3d 900, 903–04 (Tex. App.—Dallas 2007, no pet.); Tex. Civ. Prac. & Rem. Code § 16.035(e) (limitations, in Texas, do not start running until acceleration or final maturity of the note). The creditor can, however, abandon or rescind acceleration any time, unilaterally, by notice. Tex. Civ. Prac. & Rem. Code § 16.038. Until Tex. Civ. Prac. & Rem. Code § 16.038 was enacted in 2015, there was some confusion about whether the statute of limitations could be reset by unilateral action of the creditor. Leonard v. Ocwen Loan Servicing, L.L.C., 616 F. App’x 677, 678 (5th Cir. 2015); Callan v. Deutsche Bank, 93 F. Supp. 3d 725, 727 (S.D. Tex. 2015). In the context of foreclosures, acceleration is eminently important because every creditor wants to credit bid at the foreclosure auction. If the loan is not matured or accelerated, then the creditor is, at least arguably (depending on the terms of the note and deed of trust, conduct of the parties, and other circumstances), barred from credit bidding the full remaining balance due on the note at the foreclosure auction. Accordingly, best practice for creditors is to always treat the acceleration process as a very important prerequisite to foreclosure.
Accepting the Arrearage to Cure Default Before Foreclosure. Many creditors are willing to accept the arrearage rather than the accelerated balance, plus attorney’s fees, before the foreclosure sale to reinstate the loan. Some Government-Sponsored Enterprises (GSEs) loan documents require the creditor to give various cure options to the borrowers. While the creditor, upon acceleration, may foreclose unless the entire note is paid off in full, the creditor can also waive acceleration and reinstate the loan. Lots of caselaw exists regarding waiver of acceleration or loan workouts and other negotiations with the borrowers. Best practice would be to put any agreements with or offers to the borrower in writing and to make those offers or agreements as clear as possible. If, for example, the borrower raises half of the funds necessary to cure the arrearage and promises to raise the remaining funds within thirty (30) days, and the lender is willing to accept the arrearage in lieu of the accelerated balance, but is willing to delay the foreclosure sale by only one month, then an agreement to delay the sale by one month in exchange for half of the arrearage now and to accept the remaining arrearage to cure default if paid within thirty (30) days, without waiving acceleration, should be put into writing to avoid any confusion. In a wrongful foreclosure lawsuit, clarity and simplicity tend to help the lender. Confusion and complexity open the door for the debtor to make all manner of equitable arguments regarding waiver or estoppel or other legal theories for avoiding the terms of the promissory note, deed of trust, and acceleration notices. When negotiating, the creditor should make clear to the debtor that the negotiations do not result in waiver of acceleration. Still, the creditor should work with the borrower. The creditor should not ignore the borrower or refuse to negotiate solely because the creditor is worried about miscommunications or equitable arguments subsequently raised by the borrower. The creditor who refuses to negotiate a default cure option with the borrower puts itself at greater risk of lawsuits than the creditor who negotiates default cure in good faith.
The Twenty (20) Day Cure Letter. Section 51.002(d) of the Texas Property Code states that “Notwithstanding any agreement to the contrary, the mortgage servicer of the debt shall serve a debtor in default under a deed of trust or other contract lien on real property used as the debtor’s residence with written notice by certified mail stating that the debtor is in default under the deed of trust or other contract lien and giving the debtor at least 20 days to cure the default before notice of sale can be given under Subsection (b).” The Subsection (b) notice is the public notice of sale that must be posted at the courthouse door and filed in the county clerk’s office. The twenty-day cure letter is a requirement that is separate and apart from any requirement to give notice of intent to accelerate and notice of acceleration. The twenty-day cure letter can, however, be combined with the acceleration notices.
Doing Acceleration the Right Way. Notice of intent to accelerate must be unequivocal, and even stating that failure to cure breach “may result in acceleration” is insufficient. Ogden v. Gibraltar Sav. Ass’n, 640 S.W.2d 232, 234 (Tex. 1982). The notices must not only state that the account is in default, but also demand payment for the delinquent installments. Tamplen v. Bryeans, 640 S.W.2d 421, 422 (Tex. App.—Waco 1982, writ ref’d n.r.e.). A proper acceleration notice should contain language tantamount to advising the debtor that the “entire debt [is] immediately due and payable.” EMC Mortg. Corp. v. Window Box Ass’n, 264 S.W.3d 331, 337 (Tex. App.—Waco 2008). While the creditor’s best practice is always to give written notices, oral notice can still be effective. Dillard v. Freeland, 714 S.W.2d 378, 380 (Tex. App.—Corpus Christi 1986). Also, acceleration can be accomplished without written notice of acceleration if the creditor takes “some unequivocal action, such as filing suit, which indicates the entire debt is due.” Burney v. Citigroup Global Mkts. Realty Corp., 244 S.W.3d 900, 903 (Tex. App.—Dallas 2008). Even a notice of a trustee’s sale may be sufficient to constitute notice of acceleration if preceded by the required notice of intent to accelerate. Id. at 904.
Waiver of Acceleration Notice Clauses Not Always Effective. “The exercise of the power of acceleration is a harsh remedy and deserves close scrutiny.” Vaughan v. Crown Plumbing & Sewer Serv., Inc., 523 S.W.2d 72, 75 (Tex. Civ. App.—Houston [1st Dist.] 1975). In a case where the deed of trust provided that the entire indebtedness may, upon default, “be immediately matured and become due and payable without demand or notice of any character,” the Court held that the creditor still needed to give notice of intent to accelerate. Bodiford v. Parker, 651 S.W.2d 338, 339 (Tex. App.—Fort Worth 1983). In Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex. 1991), the Texas Supreme Court reached a similar result, holding that when indebtedness could be accelerated “without prior notice or demand,” notice of acceleration was waived, but notice of intent to accelerate was not waived. “Where the holder of a promissory note has the option to accelerate maturity of the note upon the maker’s default, equity demands notice be given of the intent to exercise the option.” Ogden v. Gibraltar Sav. Asso., 640 S.W.2d 232, 233 (Tex. 1982). Best practice for creditors is to always give notice of intent to accelerate and notice of acceleration regardless of what the deed of trust or other instruments say. Giving the debtor an opportunity to cure default before acceleration is particularly important. Abraham v. Ryland Mortg. Co., 995 S.W.2d 890, 894 (Tex. App.—El Paso 1999); Allen Sales & Servicenter, Inc. v. Ryan, 525 S.W.2d 863, 866 (Tex. 1975).
Wrongful Foreclosure Suits. In a wrongful foreclosure suit, the debtor can elect one or the other, but not both, of the following remedies: “(1) set aside the void trustee’s deed; or (2) recover damages in the amount of the value of the property less indebtedness.” Diversified, Inc. v. Gibraltar Sav. Asso., 762 S.W.2d 620, 623 (Tex. App.—Houston [14th Dist.] 1988). If the debtor elects to recover monetary damages, then the debtor can only do so if “(1) title to the property has passed to a third party; or (2) the property has been appropriated to the use and benefit of the mortgagee.” Peterson v. Black, 980 S.W.2d 818, 823 (Tex. App.—San Antonio 1998); John Hancock Mut. Life Ins. Co. v. Howard, 85 S.W.2d 986, 988 (Tex. Civ. App.—Waco 1935). If the debtor does not leave the premises, then the debtor has not suffered any compensable damages. Id. If a foreclosure sale is void, then the purchaser bid “at his peril” and may not recover damages for lost profits. Id. Some mistakes, like sending foreclosure notices to the wrong address, can be grounds for undoing the foreclosure sale. Mills v. Haggard, 58 S.W.3d 164, 166 (Tex. App.—Waco 2001) (foreclosure sale set aside because loan servicing company had debtor’s new address, yet notices went to debtor’s old address and debtor did not receive them). The foreclosure notices must go to the debtor’s last known address. Tex. Prop. Code § 51.002(e); Tex. Prop. Code § 51.0001(2) (defining “last known address”). Other mistakes, like calculating the amounts due incorrectly, may be insufficient grounds for rescinding the foreclosure sale. Powell v. Stacy, 117 S.W.3d 70, 75–76 (Tex. App.—Fort Worth 2003, no pet.).
Borrower in Wrongful Foreclosure Suit Must Tender Amounts Due and Owing. When a borrower files a wrongful foreclosure lawsuit seeking rescission of the sale, the borrower must tender all amounts due and owing into the Court’s registry, and not merely plead that he will make a tender. Lambert v. First Nat’l Bank of Bowie, 993 S.W.2d 833, 835 (Tex. App.—Fort Worth 1999); French v. May, 484 S.W.2d 420, 426 (Tex. Civ. App.—Corpus Christi 1972) (“A mere offer to pay does not constitute a valid tender; it is required that the tenderer have the money present and ready, and produce and actually offer it to the other party. The tenderer must relinquish control over the funds for sufficient time and under such circumstances as to enable the tenderee without special effort on his part to acquire possession.”). “Tender of whatever sum is owed on the mortgage debt is a condition precedent to the mortgagor’s recovery of title from a mortgagee who is in possession and claims title under a void foreclosure sale.” Fillion v. David Silvers Co., 709 S.W.2d 240, 246 (Tex. App.—Houston [14th Dist.] 1986).
Purchaser’s Liability and Remedies in Wrongful Foreclosure Suit. The foreclosed-upon mortgagor, as a prerequisite to obtaining relief, may need to tender the winning bid to the purchaser at the sale. “A foreclosure sale to a good faith purchaser . . . will only be set aside if the one claiming equitable title tenders the amount of the bid.” Goswami v. Metropolitan Sav. & Loan Ass’n, 713 S.W.2d 127, 130 (Tex. App.—Dallas 1986), rev’d on other grounds, 751 S.W.2d 487 (Tex. 1988); Bracken v. Haid & Kyle, Inc., 589 S.W.2d 501, 502 (Tex. Civ. App.—Dallas 1979), but see Tex. Prop. Code § 51.009(1) (enacted in 2003, effective in 2004); Henke v. First S. Properties, Inc., 586 S.W.2d 617, 620 (Tex. Civ. App.—Waco 1979) (“the doctrine of good faith purchaser for value without notice does not apply to a purchaser at a void foreclosure sale”); Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985) (“Purchasers of land from a substitute trustee’s sale are not relieved from the necessity of inquiring whether the trustee had been empowered to sell.”). If the foreclosure sale is later deemed void by a Court, then the purchaser does not generally have the benefits of being a good faith purchaser for value because the purchaser bids “at his peril.” Henke, 586 S.W.2d at 620–21; Tex. Prop. Code § 51.009(1). If the sale is declared void, then the purchaser may be subrogated to the debt and lien of the foreclosing mortgagee. In re Niland, 825 F.2d 801, 813 (5th Cir. 1987).
Wraparound Note Foreclosures. When foreclosing a wraparound note, there is an implied covenant obligating the trustee to apply the proceeds to the underlying note. Summers v. Consol. Capital Special Trust, 783 S.W.2d 580, 583 (Tex. 1989).
Deficiency Judgments. If there is a deficiency on the note after the foreclosure sale, then the debtor has a statutory right to a fair market value determination and an offset against the deficiency. Tex. Prop. Code §§ 51.003, 51.004, 51.005. Section 51.003 of the Texas Property Code is, however, waivable in the loan documents. Moayedi v. Interstate 35/Chisam Rd., L.P., 438 S.W.3d 1, 8 (Tex. 2014). There are no deficiency judgments in Texas on home equity loans and the lender cannot get attorney’s fees as a personal judgment against the debtor if the debtor litigates the foreclosure. Erickson v. Wells Fargo Bank NA (In re Erickson), 2012 U.S. Dist. LEXIS 136501, *38-39 (W.D. Tex. Sept. 24, 2012); Tex. Const. Art. XVI, § 50(a)(6)(C) (no recourse for personal liability on home equity loan unless owner obtained credit by actual fraud). Deficiency suits have a two-year statute of limitations, starting on the date of the foreclosure. Tex. Prop. Code § 51.003(a).
The Dodd-Frank/RESPA 120-Day Foreclosure Cooling Period. Under 12 C.F.R. § 1024.41(f)(i), a mortgage loan servicer should not “make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless . . . A borrower’s mortgage loan obligation is more than 120 days delinquent.” The Real Estate Settlement Procedures Act (RESPA), represented in Regulation X (Reg X), amended the Dodd-Frank Act to include regulations on mortgage loan servicers. Most of Reg X does not apply to small servicers as defined by 12 C.F.R. 1026.41(e)(4), but according to 12 C.F.R. § 1024.41(j), the foreclosure waiting period still applies to small servicers. This rule only applies to a “mortgage loan that is secured by a property that is the borrower’s principal residence.” Reg X, 12 C.F.R. § 1024.30(c)(2), 1024.31 (excluding open-end lines of credit). The Consumer Financial Protection Bureau (CFPB) relied on Government-Sponsored Enterprises (GSEs) and National Mortgage Settlement rules in enacting this provision, but the CFPB’s reliance on these rules makes little sense for small servicers. 78 FR 10696, 10833. Failure to comply with this rule is probably not grounds for recission of the foreclosure sale, but there is no caselaw in Texas on this that the author could find as of May 2017. This rule is enforceable “pursuant to section 6(f) of RESPA (12 U.S.C. § 2605(f)).” 12 C.F.R. § 1024.41(a). Section 2605(f) provides for actual damages or statutory damages of no more than $2,000 if there is “a pattern or practice of noncompliance with the requirements of this section,” plus attorney’s fees. There is no provision for unwinding of a foreclosure sale conducted in violation of this rule, nor is there a statutory provision allowing for the foreclosure sale to be delayed, stayed, restrained, or abated. Under Comment 41(f), Supplement I to § 1024.41(d), the “first notice or filing” for nonjudicial foreclosure in Texas would be the “earliest document required to be recorded or published to initiate the foreclosure process,” which would be the notice of sale in Tex. Prop. Code § 51.002(b). 78 FR 10696, 10833; https://www.consumerfinance.gov/eregulations/1024-Subpart-C-Interp/2015-18239#1024-41-d-Interp-4; 78 FR 60381; CFPB Agncy/Docket No. DFPB-2013-0018. Reg X only applies to mortgage loans as defined in 12 C.F.R. § 1024.31, which defines mortgage loans as “any federally related” loan as defined in 12 C.F.R. § 1024.2, which defines “federally related” mortgage loans generally as loans by federally-regulated institutions or loans destined for sale to a GSE, but also as loans by a “‘creditor,’ as defined in section 103(g) of the Consumer Credit Protection Act (15 U.S.C. 1602(g)), that makes or invests in residential real estate loans aggregating more than $1,000,000 per year.” Consequently, some seller-financed notes would not be subject to this rule. 79 FR 74176, 74245. Most of the time, the acceleration process does not start until the borrower is sixty (60) days delinquent, and consequently, another sixty (60) days will pass while the note is being accelerated, which means that the notice of sale will be filed within the 120-Day Rule guideline regardless of whether Reg X applies or not. In many instances, this rule is pointless and would not result in any actual damages given that the rule exists so that “borrowers will have more time to submit loss mitigation applications before a servicer initiates the foreclosure process.” 78 FR 10696, 10803. Seller-finance noteholders do not have to have, and rarely do have, any particular loss mitigation procedures in place. The regulations never should have been drafted so broad that a “federally related” mortgage could be a seller-finance note because there is nothing federal about seller-finance, but we are stuck with what we have for now in terms of badly-drafted CFPB rules. Small businesses in general are probably extremely underrepresented in the rulemaking process as the CFPB tends to summarily dismiss their concerns. Because they are small creditors, they tend to be represented by trade organizations that are not organized or incentivized as effectively as the advocates for large creditors. The CFPB does not appear to go out of its way to ensure that small creditor’s interests are accounted for regardless of whether they are adequately represented. Ultimately, this hurts the consumers by forcing all creditors into a one-size-fits-all model designed solely for large financial institutions and wholly inappropriate for seller-finance.
Notice of Sale to the Internal Revenue Service (IRS). This is potentially the most important component of a nonjudicial foreclosure sale in Texas, while also being the most easily-overlooked component. IRS tax liens arise under federal law, which means that these federal liens can supersede state lien laws. For example, “Under the Supremacy Clause of the United States Constitution, the IRS may obtain a valid federal tax lien and enforce its lien against a Texas homestead.” Benchmark Bank v. Crowder, 919 S.W.2d 657, 660 (Tex. 1996); U.S. Const. art. VI, cl. 2. However, federal IRS liens can be discharged by foreclosure if proper notice of the foreclosure sale is given to the IRS. 26 U.S.C. § 7425 (April 2017); 26 C.F.R. § 301.7425-3 (April 2017); 26 C.F.R. § 400.4-1(a) (April 2017); IRS Publication 786, with IRS Form 14497. The notice should be in writing, to the correct place, and not less than twenty-five (25) calendar days prior to the sale. Id. The lien notice is generally required when the Notice of Federal Tax Lien has been filed more than thirty (30) days prior to the sale. Id. If the property is sold with the IRS lien, then the seller may consider rescinding the sale, if possible (see Tex. Prop. Code § 51.016), and redoing it, or looking at IRS Publication 783, which is an application to discharge the IRS lien.
Rescission of Nonjudicial Foreclosure Sales. Texas House Bill 2066 (84th Leg. (R) effective Sept. 1, 2015) (codified in Tex. Prop. Code § 51.016) created procedures for a foreclosure trustee to rescind foreclosure sales in certain situations. The rules generally allow the trustee to rescind the sale up to sixty (60) days after the date of sale if the statutory requirements of sale were not met, the default leading to the sale was cured before the sale, or for various other reasons. Before the 2015 law, the foreclosure trustee’s authority ended with the sale and the trustee could not rescind the sale without the mortgagor’s agreement. Bonilla v. Roberson, 918 S.W.2d 17, 22 (Tex. App.—Corpus Christi 1996).
Lawsuit Protections for Foreclosure Trustees. Under Section 51.007 of the Texas Property Code, a foreclosure trustee can be dismissed as a party from a wrongful foreclosure suit if “the trustee was named as a party solely in the capacity as a trustee under a deed of trust.” The trustee must file a verified denial. Id. The other parties must file a verified response within thirty (30) days of the trustee’s verified denial. Id. If a trustee is dismissed pursuant to this section of the property code, however, the dismissal is without prejudice. Id. at (c). Also, a foreclosure trustee may not be “held to the obligations of a fiduciary of the mortgagor or mortgagee” and may not be “assigned a duty . . . other than to exercise the power of sale in accordance with the terms of the security instrument.” Tex. Prop. Code § 51.0074. Issues arising under Tex. Prop. Code § 51.007 tend to be litigated in context of disputes regarding federal diversity jurisdiction because the trustee is going to be a resident of the same state as the plaintiff in a wrongful foreclosure suit.
Copyright 2017, Ian Ghrist, All Rights Reserved.
Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.