The Basics of What a Foreclosure Is and How it Works

I am amazed sometimes at how often I am asked questions such as “If this mortgage loan forecloses, then when does the lender get the property back?” or “Can you please tell the lender that I want to buy the property?” Whenever the law firm posts a property for foreclosure auction, the phone will often ring and some person will be on the line wanting to try to buy the property that is being foreclosed upon from the mortgage lender. These people literally do not understand that the mortgage lender does not own the property. The mortgage lender holds a lien against the property, but the borrower on the loan owns the property itself. So, if you want to buy the property, then call the owner, not the law firm representing the mortgage holder.

Mortgage lenders on seller-financed properties sometimes ask questions like “If I start a foreclosure on this property, then when do I get my property back?” This question makes no sense because the lender may never get the property back. The person asking it probably does not understand what a foreclosure is, how a foreclosure works, or how seller-financing works.  The lender can never be assured that the lender will get the property back. It is true that the lender gets to make the opening bid at the foreclosure auction (referred to as the “credit bid”). It is true that if no one outbids the opening credit bid, then the lender will be the winning bidder and will get the property back. But, it is not true that the lender will always or inevitably get the property back. A mortgage lender has no surefire way to “get the property back.” That right does not exist. Instead, the mortgage lender has the right to auction the property off on the courthouse steps (or such other area as the County Commissioner’s Court has designated for the foreclosure auction to occur). The purpose of the auction is to sell the property to the highest bidder so that the proceeds from the auction can go towards paying down the balance owed on the mortgage loan.

Many people know the term “foreclosure,” but they do not know what it means. A “foreclosure” is a public auction. Sometimes people say, “I do not want to auction off the property, I just want to foreclose on it.” This is nonsense. A foreclosure and an auction are the same thing. A foreclosure auction is a type of auction. Every foreclosure is an auction, but not all auctions are foreclosure auctions.

Seller-finance mortgage lenders often think that foreclosures are a process for “getting their property back.” Public perception of foreclosures can be that foreclosures are a process for mortgage lenders to seize and acquire back their collateral. This public perception is faulty and inaccurate. At a foreclosure auction, the mortgage lender typically makes the opening bid. The mortgage lender can open the bidding at the amount owed on the loan without paying anything out-of-pocket to fulfil the bid. Lender’s opening credit bids are often winning bids. As a result, public perception suggests that lender’s bids are always a way to get collateral back. Public perception is flawed. The fact that many lender’s opening bids are winning bids does not mean that all lender’s opening credit bids are winning bids. To understand why many lender’s opening credit bids are winning bids, one must understand the concept of “home equity.”

The “equity” in a piece of real estate is the difference between the value of the real estate and the amount owed on mortgage liens. So, if the house is worth $200,000 and the house is encumbered by a $100,00 mortgage lien, then the owner of the house, who is also the borrower on the mortgage loan, has $100,000 in “home equity” or just “equity” in the house. Most homeowners can do basic math. If their house is getting foreclosed upon because they cannot pay a $100,000 mortgage, but the house is worth $200,000, then the homeowner will just sell the house. The mortgage will be paid off when the house sells. The homeowner will pocket $100,000. Thus, the homeowner can convert his/her home equity into cash.

Many foreclosures are initiated, but not consummated. The foreclosures that are consummated tend to be the foreclosures on the properties with very little “equity.” When there is “equity,” the homeowner is motivated to capture the equity by either (a) selling the house, (b) filing a bankruptcy case or a series of bankruptcy cases, (c) refinancing the mortgage, or (d) working out a bankruptcy-prevention payment plan and foreclosure deferral plan with the mortgage lender. All of the foregoing would result in the cancellation of the initiated foreclosure prior to the consummation of the foreclosure. Due to the foregoing, the foreclosures that are consummated tend to be the ones involving little “home equity.” The pool of buyers that haunt the monthly foreclosure auction sites know that the high equity properties are the best to purchase. The high equity properties present the least risk to the foreclosure sale buyer. The foreclosure sale buyer often cannot see the inside of the house, which makes determining an appropriate bid very difficult. Because the mortgage lender opens the foreclosure auction bidding with a credit bid, because the consummated foreclosures tend to be the foreclosures on low equity collateral, and because the foreclosure sale buyer pool tends to have very little information on the condition of the inside of the real estate that is being auctioned, among other reasons, the credit bids often prevail. However, on high equity foreclosures, the credit bid goes from being likely to prevail to being unlikely to prevail (except, possibly, for unique and difficult-to-use property like expensive property, vacant land, or unique commercial property). Some counties have a much more active foreclosure sale buyer pool than others. For the foregoing reasons, the general public may have a perception that foreclosures are a process for the mortgage lender to “get its property back,” but the truth is much more complicated. The truth is that mortgage lenders often get their collateral back when there is little equity and a high credit bid, which tends to happen often because the high equity foreclosures with low credit bids tend to not consummate as often.

Sometimes mortgage lenders will say things like “Can I bid more than my loan amount so that no one else gets my property?” The answer is yes, of course you can. All the lender needs to do is bring cash or certified funds to the foreclosure auction. The lender can bid the full amount owed on the mortgage loan without paying anything out-of-pocket. This is referred to as a “credit bid” because in a credit bid no money changes hands. The balance owed to the mortgage lender must be paid to the mortgage lender from the foreclosure auction proceeds. Accordingly, the mortgage lender can bid up to that balance without paying anything in cash out-of-pocket because the funds would simply go to the lender anyways. The law does not require the doing of a useless thing. Accordingly, the lender does not need to pay itself. If, however, the mortgage lender bids more than the balance owed on the mortgage, then the mortgage lender must pay the overage in cash or certified funds. The lender needs to raise some cash and bring the cash or certified funds to the foreclosure.

What Happens to the Foreclosure Sale Proceeds Above and Beyond the Mortgage Lender’s Credit Bid?

The foreclosure sale trustee who conducts the public foreclosure auction at the courthouse or place designated by the County Commissioner’s Court will take cash or certified funds as payment at the foreclosure auction. The bidders must pay in cash or certified funds on the spot, without delay. If a bidder wins the foreclosure auction, but does not immediately pay in cash or certified funds, then the trustee will typically verbally void the auction and immediately re-auction the property to a bidder that is prepared to pay on the spot. The trustee will usually do this up until the deadline specified in the Notice of Trustee’s Sale until a winning bidder makes good on a winning bid.

The trustee then takes the foreclosure sale proceeds and disburses them. First, the trustee will pay off the mortgage lender. If the mortgage lender has been paid in full and there are funds left over, then the trustee will search for junior lienholders, seek to confirm whether they have valid liens, and pay them using the foreclosure sale proceeds. If there are no junior lienholders to pay, then the trustee will disburse the overage funds to the borrowers on the mortgage loan, i.e., the former owners of the subject real estate.

The mortgage lender will never be paid more than what the mortgage lender is owed at a foreclosure auction. The “equity” in the house does not belong to the mortgage lien holder. If the mortgage lender bids more than the credit bid, then the mortgage lender must pay in cash or certified funds and those funds, above and beyond the credit bid, will be disbursed to the junior lienholders and/or the former owners of the property (the borrowers on the mortgage loan).

If there is a dispute as to who the foreclosure proceeds are supposed to be disbursed to, then the trustee might file a lawsuit called an “interpleader.” In an interpleader, the trustee will deposit the disputed funds into the registry of the Court, serve citations upon all interested parties, and then let those parties argue their case to the Judge as to why they should receive the funds.

How Long Does a Foreclosure Take?

Foreclosures always occur on the first Tuesday of the month unless that date would fall on a specified holiday. “If the first Tuesday of a month occurs on January 1 or July 4, a public sale under Subsection (a) must be held between 10 a.m. and 4 p.m. on the first Wednesday of the month.” Tex. Prop. Code Ann. § 51.002(a-1). In order to foreclose a property on the first Tuesday of the month, the mortgage lender must have a notice of foreclosure sale (also known as a “Notice of Trustee’s Sale”) posted and served “at least 21 days before the date of sale.” Id. at (b). So, you look at a calendar for the first Tuesday of the month, and then you count back three Tuesdays from that Tuesday. The foregoing date is your posting deadline if you want your property to be in the next monthly foreclosure auction.

On residential property, the mortgage lender must “serve . . . written notice . . . giving the debtor at least 20 days to cure the default” before the Notice of Trustee’s Sale is posted. So, on any residential foreclosure, there is a bare minimum of a 20-day cure notice, plus a 21-day posting notice. This is at least 41 days of notice that is required. The mortgage lender, however, cannot merely follow the notice provisions listed in Section 51.002 of the Texas Property Code. Instead, the mortgage lender needs to read the loan origination documents and give any additional notice that is required in those documents. Then, the lender needs to evaluate whether any consumer-protection laws would impose further notice requirements. Please see our other, more in-depth, foreclosure article here ( for more information about federal consumer-protection laws like Dodd-Frank or RESPA. If 12 C.F.R. § 1024.41(f)(i) applies, then the Notice of Trustee’s Sale should be posted when the “borrower’s mortgage loan obligation is more than 120 days delinquent.”

A common rule of thumb for when a seller-finance mortgage lender or servicer should transfer the file to a foreclosure law firm is to refer the file once the borrower’s mortgage loan account has been delinquent for sixty (60) days. This is not a requirement, just a commonly-used modus operandi for seller-financed mortgage loans.

As a result of the foregoing, without consideration for which consumer-protection laws apply or do not apply and not accounting for what any particular loan documents may require, a rule of thumb for many seller-financed mortgages would be for the foreclosing law firm to give a 20 day notice to cure and notice of intent to accelerate followed by a notice of acceleration. Between and after these notices, an additional 20 to 30 or so days may accrue. As a result of the foregoing, with these notices and a 60-day delinquency referral, the loan should roughly be at about the 120-day delinquency mark when it is time to go from the notice of acceleration to the posting of the Notice of Trustee’s Sale.

So, the answer to the question “How long does a foreclosure take?” is that “it depends on the facts and circumstances,” but generally the foreclosure would likely occur about 150 days after the seller-financed residential mortgage loan first became delinquent in a typical situation. Obviously, a bankruptcy or a series of bankruptcies by the borrower would greatly delay this. When bankruptcies are taken into account, the foreclosure process could take several years. In some extreme cases, over a decade.

Should I Take a Deed-in-Lieu of Foreclosure?

When it comes to taking a deed in lieu of foreclosure in Texas, the most important law that the lender mortgagee needs to be aware of is Section 51.006 of the Texas Property Code. Before reviewing Tex. Prop. Code § 51.006, however, the lender should be aware of some basic lien priority concepts. “We recognize the well-established rule that following the valid foreclosure of a senior lien, junior liens, if not satisfied from the proceeds of sale, are extinguished.” AMC Mortg. Services, Inc. v. Watts, 260 S.W.3d 582, 585 (Tex. App.—Dallas 2008, no pet.). “In a contest over rights or interests in property, the party that is first in time is first in right.” Id. As a result of the foregoing, when a seller-financed mortgage lien forecloses, the foreclosure will “extinguish” junior lienholders such as mechanic’s liens, judgment liens, or any other liens (subject to some notable exceptions) that arise after the date that the property was seller-financed. Notable exceptions include property tax liens (typically held by school districts, hospitals, and cities) and, to an extent, federal tax liens. Please see our other, less basic, article on foreclosures for more information about foreclosure’s effect on federal tax liens:

Based on the foregoing, the answer to the question “Should I take a deed-in-lieu of foreclosure?” is that you should probably (a) run a title search, and (b) if the title search reveals junior liens that would be “extinguished” by a foreclosure yet would not be “extinguished” by a deed in lieu, then you should probably foreclose rather than take a deed-in-lieu so as to avoid paying junior liens that the mortgagor should be responsible for. Under Section 51.006 of the Texas Property Code, a lender who qualifies and follows the proper procedures may get a mulligan. If the rules in Tex. Prop. Code § 51.006 apply, then the lender can go ahead and foreclose so as to extinguish junior liens even after the deed-in-lieu has been taken. Please note that Section 51.006 does not give every mortgagee a mulligan on the deed-in-lieu in every situation. Instead, you need to read that law, evaluate whether it applies, and follow the procedures listed therein.

Copyright, Ian Ghrist, 2020, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Probating a Will as a Muniment of Title in Texas

Texas is unique in allowing last wills and testaments to be probated as a “muniment of title.” Many states have no such equivalent. “The case law in Texas is quite liberal in permitting a will to be offered as a muniment of title after the statute of limitations has expired upon the showing of an excuse by the proponent for the failure to offer the will earlier.” In re Estate of Allen, 407 S.W.3d 335, 339 (Tex. App.—Eastland 2013, no pet.). Section 256.003(a) of the Texas Estates Code provides that “a will may not be admitted to probate after the fourth anniversary of the testator’s death unless it is shown by proof that the applicant for the probate of the will was not in default in failing to present the will for probate on or before the fourth anniversary of the testator’s death.” Section 256.003(b) of the Texas Estates Code provides that “letters testamentary may not be issued if a will is admitted to probate after the fourth anniversary of the testator’s death unless it is shown that the application for probate was filed on or before the fourth anniversary of the testator’s death.” Accordingly, a will can be admitted to probate after four years if the proponent was not in default in failing to present the will to the probate court, but letters testamentary cannot be obtained after four years. So, after four years, it generally makes sense to probate the will solely as a muniment of title since letters testamentary are not available. Chapter 257 of the Texas Estates Code covers Probate of a Will as a Muniment of Title. Under Texas law, anyone who “is entitled to property under the provisions of a will admitted to probate as a muniment of title” can “deal with and treat the property in the same manner as if the record of title to the property was vested in the person’s name.” Tex. Estates Code Ann. § 257.102(b) (West). Moreover, when a will is probated as a muniment of title, third parties who transfer custody of property to “a person described in the will as entitled to receive the asset” are shielded from any liability for doing so. Tex. Estates Code Ann. § 257.102(a) (West). When probating a will as a muniment of title, the notice requirements to beneficiaries and claimants under Chapter 308, Subchapter A of the Texas Estates Code do not apply. Tex. Estates Code Ann. § 308.0015. Citation in a muniment of title case typically occurs by posting. See Tex. Estates Code §§ 258.001, 303.001. Probate courts have discretion over whether to require additional notice. Tex. Estates Code § 51.001.

Copyright, Ian Ghrist, 2019, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

What to Know About the Dodd-Frank Act, the Truth in Lending Act, the Texas SAFE Act, TRID, and the Real Estate Settlement Procedures Act When Seller Financing Residential Real Estate in Texas

The Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter “Dodd-Frank”)[1] was signed into law on July 21st, 2010 in response to the mortgage loan crisis. Dodd-Frank made sweeping changes to the Truth in Lending Act (hereinafter “TILA”). TILA was first codified in 1968, but the 2010 Dodd-Frank changes revolutionized the mortgage lending business. It was Dodd-Frank, together with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (hereinafter the “SAFE Act”), that created Registered Mortgage Loan Originators (“RMLO”s). Before Dodd-Frank, mortgage loan officers often needed no licensure to practice their trade. Mortgage loan officers, before Dodd-Frank, had no legal duty to formally verify a borrower’s ability to repay (ATR) the loan.

This article should start with a disclaimer. The Dodd-Frank Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act (hereinafter “RESPA”) involve labyrinthian complexity. These laws require an intricate knowledge of the interplay between the Acts of Congress, the various sections of the United States Code where those Acts of Congress are codified as law, the regulations promulgated by the various federal agencies tasked with implementing the Acts of Congress, and the official regulatory commentary to those regulations and laws.

To start, when Congress enacts a law that law has a public law number attached to it. That public law becomes part of an Act of Congress, which usually has a statement of purpose and some organizational structure to it. Lawyers, however, do not use catalogues of Acts of Congress to do their jobs. Instead, for convenience, these Acts of Congress are incorporated into a single book of law called the Code of Laws of the United States of America, i.e., the United States Code, or “U.S.C.” for short. So, you might be reading an article about the ability-to-repay (ATR) rules that Dodd-Frank created and you might hear those referred to as Section 129C of the Truth in Lending Act; as Title 15, Section 1639c of the United States Code (15 U.S.C. § 1639c); or as Section 1411 of Dodd-Frank. Those all refer to the same law, just different ways to reference the same law. In connection with Dodd-Frank, you will also read about Regulation X (Real Estate Settlement Procedures Act), and Regulation Z (mostly the Truth in Lending Act). Title 12, Part 1026 of the Code of Federal Regulations is also known as Regulation Z (hereinafter “Reg Z”).[2] So, if you see a citation for 12 C.F.R. § 1026, then you know that the citation comes from Regulation Z. Similarly, Title 12, Part 1024 of the Code of Federal Regulations is known as Regulation X, so, 12 C.F.R. 1024 refers to regulations related to the Real Estate Settlement Procedures Act. This article in no way purports to comprehensively explain the various laws and regulations discussed, and accordingly, do not rely on this article without undergoing a comprehensive evaluation of every law and regulation that could apply to your situation. This article generally describes the foregoing laws and regulations yet does not explain what to do in any particular situation.

Codification. The Truth in Lending Act is contained in Title I of the Consumer Credit Protection Act, as amended, found in 15 U.S.C. 1601 et. seq. The Real Estate Settlement Procedures Act of 1974, as amended, can be found in 12 U.S.C. 2601 et. seq.

To make matters more confusing, the Code of Federal Regulations contains different, yet often identical, sections of TILA and Reg Z for different agencies. So, there are, in fact, two different versions of Reg Z—one for the Federal Reserve System and one for the Consumer Financial Protection Bureau. This gets very confusing when you are doing legal research and seeing both sections being cited. Chapter II of Title 12 of the Code of Federal Regulations is titled “Federal Reserve System” while Chapter X of Title 12 of same is titled “Bureau of Consumer Financial Protection” (hereinafter the CFPB). Section 226 of Title 12 is Reg Z for the Federal Reserve System while Section 1026 of Title 12 is Reg Z for the CFPB. But, if you look at the definitions, like the definition of “creditor,” in 12 CFR 1026.2 then you will see that it is nearly identical to the definitions in 12 CFR 226.2.

The Difference Between High-Cost Loans and Higher-Priced Loans and Why it Matters. “The Home Ownership and Equity Protection Act (hereinafter “HOEPA”) was enacted in 1994 as an amendment to TILA to address abusive practices in refinances and closed-end home equity loans with high interest rates or high fees.”[3] The Dodd-Frank Act expanded HOEPA coverage to include purchase-money mortgages and home equity lines of credit. Dodd-Frank also imposed extensive new requirements for HOEPA loans, like the requirement that all HOEPA loan borrowers must complete an approved homeownership counseling program. The Dodd-Frank Act uses the term “high-cost mortgages,” in Title XIV, Subtitle C, to refer to loans subject to HOEPA. These high-cost, HOEPA loans are also referred to as “Section 32 loans” because the section of Regulation Z covering such loans is 12 C.F.R. § 1026.32. Regulation Z has another category of loans called “higher-priced mortgage loans” found in 12 C.F.R. § 1026.35. So, you could refer to those as “Section 35 loans.” A detailed analysis of the regulatory requirements for High Cost Loans compared to Higher Priced Loans, or other loans, goes beyond the scope of this article.[4] For purposes of this article, the reader need only understand that High-Cost Loans have much higher interest rates and fees than Higher-Priced Loans. High-Cost Loans also have much more burdensome rules and regulations attached. Lenders generally consider the rules and regulations for Higher-Priced Loans to be an annoyance. Lenders generally consider the rules and regulations for High-Cost Loans to be extremely cumbersome and potentially deal-breaking. High-Cost Loan deals often fall apart due to the borrower’s inability to complete all requirements, like obtaining a homeownership counseling program completion certificate and delivering it to the lender. Because doing even one High Cost Loan can break a small lender’s de minimus Dodd-Frank exemption, many seller financiers avoid High-Cost Loans like the plague.

Damages in a TILA Private Cause of Action. A private cause of action exists for TILA violations. Generally, mortgage lending damages are actual damages plus twice the amount of any “finance charge,” capped at $4,000.00. 15 U.S.C. § 1640(a)(2)(A)(i). The term “finance charge” in TILA is a term of art, defined in 12 C.F.R. § 1026.4 and 15 U.S.C. § 1605. Finance charge generally means whatever the borrower pays to get the loan, including interest, points, origination fees, etcetera. Attorney’s fees and costs are also generally recoverable by the borrower on a TILA claim. The Section 1640(a)(2)(A)(i) damages are not particularly scary due to the cap on potential liability. Lenders have something to fear, however, in the uncapped Section 1640(a)(4) damages. The (a)(4) damages are “[A]n amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.” Section (a)(4) damages only apply for violations of Section 129 of TILA (codified at 15 U.S.C. § 1639) (laundry list of TILA requirements), Section 129B(c) ¶ (1) or (2) (codified at 15 U.S.C. § 1639b(c)) (prohibition on steering incentives for mortgage originators), or Section 129C(a) (codified at 15 U.S.C. § 1639c(a)) (Ability-to-Repay requirements). The standard TILA damages (15 U.S.C. 1640(a)(1) and (a)(2)) have a class action damages cap for the statutory portion of damages.

Creditor Defenses. Borrower fraud or deception can be a defense to a TILA cause of action. 15 U.S.C. § 1640(l). Creditors cannot be liable, generally, if the violation results from a bona fide error, despite reasonable procedures designed to avoid such errors. 15 U.S.C. § 1640(c). This generally includes clerical and calculation errors, but not errors of legal judgment. Id. Good faith compliance with CFPB rules or interpretations can also be a defense. 15 U.S.C. § 1640(f).

Statute of Limitations on Truth in Lending Act Claims. TILA claims related to mortgage loan origination have a one-year statute of limitations, unless the three-year exception applies. TILA Sec. 130; 15 U.S.C. § 1640(e). The three year exception applies to TILA Sec. 129 (codified at 15 U.S.C. § 1639) (a laundry list of various TILA requirements), TILA Sec. 129B (codified at 15 U.S.C. § 1639b) (mostly the prohibition on steering incentives for mortgage originators), and TILA Sec. 129C (codified at 15 U.S.C. § 1639c) (mostly the Ability-to-Repay rules).

From the foregoing information on private causes of action damages under TILA and the statute of limitations on those damages, you probably figured out which parts of TILA lenders worry most about—Sections 129, 129B, and 129C. In other words, lender’s primary liability concerns include: (1) the ability to repay rules, (2) the steering incentives, and (3) the laundry list of TILA requirements. Each of those three concerns needs their own article. Accordingly, this article glosses over them.

The Ability-to-Repay (ATR) Rules. In a nutshell, these rules require lenders to investigate whether their borrowers have the ability to repay a loan before the lender gives the loan. Congress found that lenders gave loans to borrowers who had no hope of ever repaying the loan only to sell the loan to a securitized fund and, thus, escape liability when the borrower inevitably defaulted. Congress found that putting such bad debt into securities that retirement funds purchased put the American public’s nest eggs in jeopardy. The ATR rules are supposed to address this problem. Now, doing ATR, generally, means checking the borrower’s income, assets, credit, expenses, and ability to repay the loan. Lenders must do this now or face a private cause of action under TILA.

Steering Incentives. “Before the financial crisis, many mortgage borrowers were steered towards risky and high-cost loans because it meant more money for the loan originator,” said CFPB Director Richard Cordray. “These rules will hold loan originators more accountable by banning the incentives that led so many of them to direct consumers toward disaster.”[5]

Laundry List of TILA Requirements. These rules regulate everything from balloon payments to late fees to negative amortization and everything in between. The rules also cover what disclosures the borrowers must receive and when the borrowers must receive them. Note that several of these rules apply only to high-cost mortgages.

Mortgage Note Buyers/Assignees. Mortgage note buyers care greatly about the statute of limitations on TILA claims. Even badly originated loans with subpar paperwork can become marketable after enough time passes. In the mortgage loan buying industry, sometimes referred to as the secondary market, this passage of time is referred to sometimes as “seasoning.” Prospective note buyers look favorably on the purchase of seasoned notes not just because the passage of time can cure origination deficiencies, but also because a solid payment history in the initial years demonstrates the borrower’s ability-to-repay better than any form of pre-origination underwriting. Mortgage underwriting generally refers to the process of measuring risk exposure from the lender’s standpoint, including analysis of the borrower’s ability-to-repay the loan. If you do a large volume of owner-financing and hope to resell notes or packages of notes into the secondary market, then paying attention to assignee liability is of critical importance. Assignees never totally escape exposure due to limitations because, under 15 U.S.C. § 1640(k), the borrower can always raise a § 1639b(c) (steering incentives) or § 1639c(a) (ability-to-repay) claim, regardless of limitations. However, borrowers can only raise a claim under § 1640(k) that would normally be barred by limitations “as a matter of defense by recoupment or set off” in a creditor’s or assignee’s “judicial or nonjudicial foreclosure . . . or any other action to collect the debt.” In other words, the borrower cannot file a private cause of action that survived limitations due to § 1640(k) against the lender. The borrower can only use such a claim to offset the amount owed to the lender in a foreclosure or other suit by the lender against the borrower.

Assignee Liability. Assignees of mortgage loans are generally only liable for TILA violations when “the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement.” 15 U.S.C. § 1641(a), (e). Under § 1641(c), assignees always take the mortgage subject to rescission claims under § 1635. Assignees of HOEPA High-Cost loans (TILA § 103(bb)) (15 U.S.C. § 1602(bb)) are “subject to all claims and defenses” that the original creditor is subject to “unless the . . . assignee demonstrates . . . that a reasonable person exercising ordinary due diligence, could not determine” that the loan was a High-Cost Mortgage. 15 U.S.C. § 1641(d)(1). Any person who assigns a high-cost loan “shall include a prominent notice of the potential liability.” 15 U.S.C. § 1641(d)(4).

Rescission Claims Under 15 U.S.C. § 1635. Borrowers have, under 15 U.S.C. § 1635, “an unconditional right to rescind for three days, after which they may rescind only if the lender failed to satisfy the Act’s disclosure requirements. But this conditional right to rescind does not last forever. Even if a lender never makes the required disclosures, the ‘right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first.’ § 1635(f).” Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790, 792 (2015). The borrower does not need to file suit to rescind. Id. The borrower can rescind merely by notifying the creditor of the borrower’s intention to rescind. Id.

Does Dodd-Frank Even Apply to Me? The private causes of action available under TILA apply only to “any creditor who fails to comply . . . .” 15 U.S.C. § 1640(a) (emphasis added). So, if you are not a “creditor,” as defined by the Code, then you can escape liability. The definition of “creditor” is found in 15 U.S.C. § 1602(g) (formerly 1602(f)); 12 C.F.R. § 1026.2(a)(17). Note that Section 1602(g) of the U.S. Code appears to currently refer to high-cost loans as “subsection (aa)” loans, but subsection (aa) was changed to (bb) apparently without updating Section 1602(g).[6] A person is a “creditor” for Reg Z purposes when:

  1. A person (1) “regularly extends” consumer credit . . . and (2) is the person “to whom the obligation is initially payable.”
  2. A person “regularly extends” consumer credit if it extended credit . . . “more than 5 times for transactions secured by a dwelling” in “the preceding calendar year,” or a person “regularly extends” consumer credit if, in any 12-month period, the person “originates more than one” high-cost loan, i.e., Section 32 loan or “one or more such credit extensions through a mortgage broker.”

12 C.F.R. § 1026.2(a)(17).

So, basically, Dodd-Frank applies if you do more than five owner finance deals annually, or you do two high-cost loans in a year or one high cost loan through a broker.

The creditor definition applies only to the “person to whom the debt arising from the consumer credit transaction is initially payable . . . .,” which has been interpreted as not applying to mortgage brokers even when the broker was a creditor in an unrelated transaction. Cetto v. LaSalle Bank Nat. Ass’n, 518 F.3d 263, 269 (4th Cir. 2008). Attorneys are also generally not creditors under the TILA definition. Mauro v. Countrywide Home Loans, Inc., 727 F. Supp. 2d 145, 157 (E.D.N.Y. 2010).

Seller-Finance Exemptions for the Truth-in-Lending Act. There are two Reg Z exceptions that specifically apply to seller finance. First, anyone who seller finances three or fewer properties in any 12-month period who is not a developer and who does fully amortizing loans with good faith ATR and meets the adjustable rate requirements is “not a loan originator.” 12 CFR 1026.36(a)(4). Second, anyone who provides seller-financing for only one property in any 12-month period is “not a loan originator” when the person is not a developer, meets the adjustable rate requirements, and “[t]he financing has a repayment schedule that does not result in negative amortization.” 12 CFR 1026.36(a)(5). So, basically, if you only do one seller-finance deal in a year then you do not have to do ATR. Note that the seller-finance exemptions to “loan originator” status only relate to the loan originator rules. Status as a “creditor” to which a TILA private cause of action can apply is different from status as a “loan originator” to which the loan originator rules apply.

What is the SAFE Act and What are Registered Mortgage Loan Originators (RMLOs)? The Secure and Fair Enforcement for Mortgage Licensing Act (hereinafter the “SAFE Act”) went into effect on July 30th, 2008. This federal law required all states to pass mortgage licensing laws meeting or exceeding federal standards. Texas passed the Texas Secure & Fair Enforcement for Mortgage Licensing Act (hereinafter the “Texas Safe Act” or “T-Safe”) in 2009 in response to the federal SAFE Act.[7] The SAFE Act gave rise to the Nationwide Mortgage Licensing System and Registry (hereinafter the “NMLS”). The NMLS is a database for licensure to conduct mortgage lending business. A licensee in Texas under the NMLS is commonly referred to as a Registered Mortgage Loan Originator (“RMLO”). Generally, to become an RMLO requires education, testing, and a background check.

When Do I Need an RMLO to Do an Owner-Financed Sale of Residential Real Estate? Usually, when you seller-finance “no more than five residential mortgage loans” in “any 12-consecutive-month period” then you are exempt from T-Safe. Tex. Fin. Code § 180.003(a)(5), (6); Tex. Fin. Code § 156.202(a-1)(3). If you are exempt and do not have to use an RMLO, then you should seriously consider using an RMLO anyways, just to make sure that you comply with the myriad other laws that may apply even if T-Safe does not. Under Tex. Fin. Code § 156.201(a), “A person may not act in the capacity of, engage in the business of, or advertise or hold that person out as engaging in or conducting the business of a residential mortgage loan company in this state unless the person holds an active residential mortgage loan company license, is registered under Section 156.2012, or is exempt under Section 156.202.” Essentially, if you “engage in business as a residential mortgage loan originator with respect to a dwelling located in [Texas],”[8] then you need to have a Texas RMLO license registered with the NMLS. Attorneys are exempt from RMLO registration, but only when they negotiate the terms of a residential mortgage loan on behalf of a client as an ancillary matter unless the attorney takes “a residential loan application,” and “offers or negotiates the terms of a residential mortgage loan.” Tex. Fin. Code § 180.003(a)(3). You can also offer or negotiate the terms of a residential mortgage loan “with or on behalf of an immediate family member” without having to become an RMLO. Tex. Fin Code § 180.003(a)(2). In sum, if you do more than five owner-finance deals in a year, then you have to use an RMLO. Even if you use an RMLO, you should avoid taking applications and negotiating the loan terms with the borrowers—let the RMLO do that. Tex. Fin. Code § 180.002(19)(A) (defining an RMLO as an individual that “takes a residential mortgage loan application” or “offers or negotiates the terms of a residential mortgage loan”).

Private Civil Causes of Action for T-Safe Violations. The government has a plethora of options for enforcement of T-Safe violations. Mortgage applicants, however, are limited to the statutorily authorized private civil cause of action, under T-Safe, for “recovery of actual monetary damages and reasonable attorney’s fees and court costs” together with “an action to enjoin a violation.” Tex. Fin. Code § 156.402.

When Does the Real Estate Settlement Procedures Act (RESPA) Apply? The Real Estate Settlement Procedures Act was enacted in 1974 and, like many statutes, got a makeover from the Dodd-Frank Act in 2010. RESPA was originally administered by the Department of Housing and Urban Development (HUD), but Dodd-Frank turned RESPA administration over to the Consumer Financial Protection Bureau (CFPB). The CFPB promptly replaced the HUD-1 Statements and Good Faith Estimates (GFEs) that everyone had become accustomed to seeing at nearly every real estate closing with the descriptively-named Closing Disclosure and Loan Estimate. While RESPA primarily governs the closing disclosures and loan estimates used at most real estate closings, RESPA also, in 12 U.S.C. § 2605, regulates mortgage loan servicers, particularly servicers of “federally related mortgage loans.” 12 U.S.C. § 2605. A “federally related mortgage loan” is defined at 12 U.S.C. § 2602(1); 12 C.F.R. 1024.2. Federally-related mortgage loans mostly consist of loans for residential property that are insured by the federal government or originated by an entity regulated by the federal government but can also consist of loans by any creditor (including seller-financiers) that makes or invests in residential real estate loans aggregating more than $1,000,000.00 per year. 12 C.F.R. § 1024.2(1)(ii)(D). A mortgage broker can originate a seller-financed loan without the loan becoming a “federally related loan” if the loan is not intended for assignment to an entity that originates federally related loans. 12 C.F.R. § 1024.2(1)(ii)(E).

RESPA Exemptions. Business purpose loans, temporary financing (like certain construction loans), vacant land loans, and some loan modifications where a new note is not required are all exempt from RESPA coverage. 12 C.F.R. § 1024.5(b).

Private Causes of Action Under the Real Estate Settlement Procedures Act (RESPA). Private causes of action exist only for certain categories of RESPA violations. Section 6 of RESPA (12 U.S.C. § 2605) (rules regarding mortgage loan servicing and qualified written requests for information from borrowers) allows a private action to recover actual damages and “any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance . . . in an amount not to exceed $2,000” and costs and attorneys fees. 12 U.S.C. § 2605(f). The circuit courts are split over whether Section 10 of RESPA (12 U.S.C. § 2609) (limiting lender requirements for advance escrow deposits) creates a private cause of action. The Fifth Circuit, which governs the State of Texas, subscribes to the majority view that no private cause of action exists for violations of Section 10 of RESPA. State of La. v. Litton Mortg. Co., 50 F.3d 1298, 1301 (5th Cir. 1995). An express private cause of action exists for violations of Section 8 of RESPA (12 U.S.C. § 2607) (Prohibition against kickbacks and unearned fees), including recovery of “three times the amount of any charge paid for such settlement service” and “court costs of the action together with reasonable attorneys fees.” 12 U.S.C. § 2607(d)(2), (5). Section 9 of RESPA (12 U.S.C. § 2608) prohibits sellers from telling the buyer which title company to purchase title insurance from and provides a private cause of action to buyers of “three times all charges made for such title insurance.” 12 U.S.C. § 2608(b). Limitations on RESPA private causes of action are one year for section 2607 or 2608 violations and three years for section 2605 violations. 12 U.S.C. § 2614. While private causes of action under RESPA are limited to certain sections of RESPA, the government has broad authority to enforce RESPA.

What is the TILA-RESPA Integrated Disclosure Rule (TRID)? TRID is a rule created by the Consumer Financial Protection Bureau, pursuant to Dodd-Frank, to combine existing disclosure requirements, implement new Dodd-Frank disclosure requirements, and guide entities making the transition to the new disclosures. TRID essentially created and governs, together with amendments to Reg Z and Reg X, the Closing Disclosure and the Loan Estimate. Most of the rules regarding the use of these forms are part of TRID. TRID can be found in the Federal Register at 78 FR 79730. TRID is very long and not easily summarized. Accordingly, a summary of TRID goes beyond the scope of this article. TRID is supposed to simplify and clarify real estate closings for borrowers. TRID requires that the Loan Estimate be delivered or placed in the mail no later than the third business day after receiving the consumer’s application and that the Closing Disclosure be provided to the consumer at least three business days prior to consummation of the transaction. TRID applies to “creditors” as defined by Reg Z, so persons making five or fewer mortgages in a year are generally exempt, though RESPA would still apply to them if the deal involves a “federally related mortgage loan.”

What is a Qualified Mortgage (QM)? Qualified Mortgage loans (QM loans) are presumed to comply with the ability-to-repay rules. Accordingly, the QM loan rules create a safe harbor for lenders. If lenders generate QM loans, then generally, such lenders have no need to fear ATR-related TILA lawsuits. The QM rules are generally found at 12 C.F.R. § 1026.43(e) (Reg. Z) and 15 U.S.C. § 1639c. Generally, QM loans cannot have an interest-only period, negative amortization, balloon payments, or terms longer than thirty years, among other things. Checking a borrower’s debt-to-income ratio (DTI) is particularly important for small creditors hoping to generate QM loans. Generally, higher-priced loans (as defined in 12 C.F.R. § 1026.43(b)(4)) receive only a rebuttable presumption of ATR compliance while non-higher-priced loans receive a conclusive presumption of compliance—a true safe harbor. A comprehensive explanation of the QM loan rules goes beyond the scope of this article. Hire a competent RMLO to help you generate QM loans.

Appraisal Rules. Appraisal requirements are in 15 U.S.C. § 1639e and 12 C.F.R. § 1026.35. They are generally not required for QM loans. 15 U.S.C. § 1639c.

Credit Checks. Credit checks are part of the ability to repay rule. 15 U.S.C. 1639c(a). Credit checks are not necessarily required if the lender uses other reasonably reliable third-party sources like rental payment history or public utility payments. 12 C.F.R. § 1026.43 requires that third-party records be used to verify ability to repay. Official interpretation 1026.43(c)(3)-7 states that “To verify credit history, a creditor may, for example, look to credit reports from credit bureaus or to reasonably reliable third-party records that evidence nontraditional credit references, such as evidence of rental payment history or public utility payments.”

Pre-Loan Counseling and Unintentional HOEPA Violations. The pre-loan counseling requirements are found in 15 U.S.C. § 1639(u). The Section 1640(a)(4) damages can apply to the failure to meet the counseling requirement, so even though counseling certificates are likely the easiest HOEPA rule to ignore, they are pretty important. Creditors and assignees in high-cost mortgages can, generally, cure violations of Section 129 of the Dodd-Frank Act by the procedures in 12 C.F.R. § 1026.31(h) if the creditor acted in good faith or the violation was unintentional.

Links to the Laws (Please Note That These May Not be the Most Up to Date Versions of the Laws):
The Dodd-Frank Act
The Truth in Lending Act
The Real Estate Settlement Procedures Act



[3] Small Entity Compliance Guide – 2013 Home Ownership and Equity Protection Act (HOEPA) Rule, Consumer Financial Protection Bureau (May 2nd, 2013)

[4]–Higher-Priced-Mortgages/ (list of differences between high-cost and higher-priced loans).

[5] CFPB Issuing Rules to Prevent Loan Originators from Steering Consumers into Risky Mortgages, CFPB Newsroom Press Release (Jan. 18, 2013) (

[6] DODD–FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT, PL 111-203, July 21, 2010, 124 Stat 1376 (Sec. 1100A. Amendments to the Truth in Lending Act provides that “The Truth in Lending Act (15 U.S.C. 1601 et seq.) is amended— (1) in section 103 (15 U.S.C. 1602)—<< 15 USCA § 1602 >> (A) by redesignating subsections (b) through (bb) as subsections (c) through (cc), respectively; and << 15 USCA § 1602 >> (B) by inserting after subsection (a) the following: “(b) BUREAU.—The term ‘Bureau’ means the Bureau of Consumer Financial Protection.”) (So apparently, a new subsection (b) was added to define the Consumer Financial Protection Bureau and all other sections were moved, so (f) became (g) and (aa) became (bb), but Congress seems to have forgotten to change the reference to high-cost loans in 1602(g) (formerly 1602(f)) to (bb) from (aa)).

[7] See Texas Finance Code, Title 3, Subtitle E, Chapter 180, Subchapter A. Additionally, Texas has the “Residential Mortgage Loan Company Licensing and Registration Act” located at Texas Finance Code, Title 3, Subtitle E, Chapter 156, Subchapter A.

[8] Tex. Fin Code § 180.051(a).

Copyright, Ian Ghrist, 2018, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.

Common Community Property Issues in Texas Real Estate Law

When buying and selling real property in Texas, a working knowledge of Texas marital property law can be helpful. Texas is one of nine of the United States using a community property system for marital property. The rest of the states have laws regarding equitable distribution. The equitable distribution laws govern how property is distributed to the spouses upon divorce. In states that do not have a community property system, all property of each spouse is treated as separate property, subject to equitable distribution upon divorce.

Community Property

In Texas, “property, other than separate property, acquired by either spouse during marriage” is community property. Tex. Fam. Code Ann. § 3.002. In Texas, just about any property acquired by either spouse during the marriage becomes community property owned by both spouses. Each spouse owns the community property jointly with the other spouse. In the case of real property acquired by the spouses during the marriage, Texas community property law allows for one spouse to own property jointly with the other as community property even when one spouse is left completely off of the deeds and other instruments in the chain-of-title. These unrecorded community property interests can cause some of the most pernicious Texas marital property issues that drive title attorneys wild. All community property that the spouses acquire during marriage is often referred to as the “community estate,” while the separate property of each spouse is referred to as that spouse’s “separate estate.”

Separate Property

Generally, separate property is property owned prior to the marriage or acquired during the marriage by gift or inheritance. In the event of a dissolution of marriage, a court cannot divest a spouse of his or her separate property. Eggemeyer v. Eggemeyer, 554 S.W.2d 137 (Tex. 1977); Leighton v. Leighton, 921 S.W.2d 365 (Tex. App.—Houston [1st Dist.] 1996); McElwee v. McElwee, 911 S.W.2d 182 (Tex. App.—Houston [1st Dist.] 1995, writ denied).

Economic Contribution or Reimbursement Claims—Typically Arising When One Spouse Buys Real Estate Prior to Marriage With a Loan, and Then Pays the Loan Off During the Marriage

Real property acquired before the marriage is separate property even if the property is refinanced during the marriage. In re Marriage of Jordan, 264 S.W.3d 850, 856 (Tex. App. 2008), overruled on other grounds by Matter of Marriage of Ramsey & Echols, 487 S.W.3d 762 (Tex. App. 2016). A refinance may give rise to a claim for economic contribution or reimbursement of any community funds paid toward the refinanced debt, but this contribution claim does not affect the characterization of the property as separate property. Id.; also see Tex. Fam. Code § 3.404. Property purchased before marriage remains separate property even when part of the unpaid purchase price is paid during marriage from community funds because the status of property as being either separate or community is determined at the time of its acquisition, and such status is fixed by the facts of its acquisition. Villarreal v. Villarreal, 618 S.W.2d 99 (Tex. Civ. App.—Corpus Christi 1981, no writ). The proceeds of the sale of separate property remain the separate property of the spouse whose property was sold. Scott v. Scott, 805 S.W.2d 835 (Tex. App.—Waco 1991, writ denied).

There is consensus among the courts of appeals that advances for interest expense, taxes, or insurance on property owned by either of the separate estates is offset by any benefit conferred on the community from use of the property. § 14.9.Establishing and measuring the right of reimbursement for funds advanced, 38 Tex. Prac., Marital Property And Homesteads § 14.9 (aggregating voluminous caselaw on the subject). This consensus appears to have been more-or-less codified in the 2009 reimbursement statute. Tex. Fam. Code Ann. § 3.402(c). Caselaw subsequent to the 2009 reimbursement statute acknowledges that the new statute continues the rule that benefits to the community estate must be recognized and offset where the community estate seeks reimbursement for interest, taxes, or insurance. Barras v. Barras, 396 S.W.3d 154, 177 n. 17 (Tex. App.—Houston 2013). “An equitable right of reimbursement is created where a marital estate advances moneys to pay expenses of another marital estate. This right of reimbursement is generally measured by the amount of the funds advanced. However, where moneys are advanced to benefit property owned by another estate and the property benefited is also used by the advancing estate, a right of offset for the benefit from such use may be created against the advancing estate. This offset right is most often asserted successfully where the advancing estate uses property rent-free for which it advances moneys to pay taxes and interest.” § 14.8.Introduction to the right of reimbursement for funds advanced, 38 Tex. Prac., Marital Property And Homesteads § 14.8. Furthermore, a reimbursement claim does not give the claimant a legal proprietary interest in the separate property, but rather merely a right of reimbursement. Id.; Marburger v. Seminole Pipeline Co., 957 S.W.2d 82, 139 O.G.R. 618 (Tex. App.—Houston [14th Dist.] 1997, pet. denied); Tex. Fam. Code Ann. § 3.404.

Rental Income

Income from separate property accruing during marriage is community property. In re Marriage of Cigainero, 305 S.W.3d 798, 802 (Ct. App.—Texarkana 2010). Accordingly, where a mortgage loan used for purchase of separate property prior to marriage is paid down using income accumulated during the marriage, the community estate may be entitled to reimbursement for those payments as the payments did not come from separate property. Id.


Separate property commingled with community property remains separate property as long as its identity can be traced. Jones v. Jones, 890 S.W.2d 471 (Tex. App.—Corpus Christi 1994, writ denied). However, where separate property has become so commingled with community property as to defy segregation and identification, the entire property is presumed to be community property. Estate of Hanau v. Hanau, 730 S.W.2d 663 (Tex. 1987); Gutierrez v. Gutierrez, 791 S.W.2d 659 (Tex. App.—San Antonio 1990, no writ). Thus, as long as the separate funds can be traced, they may be deposited in a joint account without losing their character as separate property. Celso v. Celso, 864 S.W.2d 652 (Tex. App.—Tyler 1993, no writ); Welder v. Welder, 794 S.W.2d 420 (Tex. App.—Corpus Christi 1990, no writ). § 8:217. Commingled property, 2 Tex. Prac. Guide Family Law § 8:217.

Personal Liability

With regard to personal liability, like credit card and other unsecured debt, a person is liable for debts incurred by such person’s spouse only where (1) one spouse acts as agent for the other, or (2) the debt was for necessaries. Tex. Fam. Code Ann. § 3.201. Moreover, a spouse does not act as agent for the other spouse solely because of the marriage relationship. Id.

Copyright 2018, 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.

HB 2066 and 2067: New Changes to Texas Foreclosure Laws

Two fairly major changes to Texas foreclosure law occurred recently. House Bill 2066 modifies Chapter 51 of the Texas Property Code to make it easier to rescind nonjudicial foreclosure sales and House Bill 2067 amends Chapter 16 of the Texas Civil Practice and Remedies Code to make it easier to rescind acceleration of promissory notes.

HB 2067 supposedly prevents debtors from obtaining windfalls in the form of having their mortgage debt extinguished because the bank took too long to foreclose. The bill allows banks to unilaterally reset the statute of limitations on foreclosure whenever they want to do so, without consulting the debtor. According to legislative records, banks complained that the Dodd-Frank Act causes them to delay foreclosure, often more than the four-year limitations period, and that it is not fair to lose their note due to Dodd-Frank compliance. While it is hard to comprehend why these debtors deserve such a windfall, this Act is likely to have unintended consequences. For example, many debtors attempt to make payments while the note is accelerated, only to have those payments returned. By the time the banks rescind acceleration, the banks typically add on tens of thousands of dollars in attorney’s fees, late fees, and other charges. Some banks likely even compound the interest while refusing to accept payments. The foregoing practices cause any equity that the debtor had to rapidly evaporate. In some cases, debtors may qualify for relief under loan modification programs, but in many cases, it is likely that this law will cause forfeiture of substantial equity built up over years of timely payments. Personally, I think that this bill gives too much power to the banks. Without reasonable limitations on the bank’s ability to tack on additional fees and interest, this bill likely removes windfalls from debtors while awarding windfalls to the banks.

The bill, furthermore, will contribute to urban blight by allowing foreclosure processes to drag on infinitely. Where I live, houses tend to have foundation problems that are expensive to treat. If those problems are not nipped in the bud early, then they can cause permanent, unfixable structural damage. If a foreclosure drags on for eight years and foundation problems are not addressed during those eight years because the owners believe that they will eventually lose their house to foreclosure, then the damage will be irreparable. Furthermore, we have all seen the houses on our streets that have been left vacant for years. Many of these houses are falling into disrepair. The owners have long gone, but the banks still have not foreclosed and taken possession of the property. In some cases the banks mow the lawns and perform the bare minimum maintenance to avoid municipal liens, but do little else, and the house deteriorates. Dodd-Frank or no Dodd-Frank, these foreclosures need to occur in a timely manner. We already have tolling laws to account for bankruptcies and the like. Allowing the foreclosure process to go on for an infinite period of time seems, to me, like it will contribute to more problems than it solves.

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.

Contracts for Deed: Do the Volume-Dealer Penalties of Section 5.077(d) Have an “Anchoring” Requirement?

One bankruptcy court says yes. Here is an argument for the answer being no.

Under Section 5.077(d), the volume-dealer penalties apply to “A seller who conducts two or more transactions in a 12-month period under this section . . . .” One bankruptcy court has interpreted this provision as meaning that the volume-dealer penalties apply only when a second Contract for Deed has been executed within twelve-months of the Contract for Deed that is the subject of the case currently before the court. Dodson v. Perkins (In re Dodson), 2008 Bankr. LEXIS 4647, 20; 2008 WL 4621293 (Bankr. W.D. Tex. Oct. 16, 2008).

While the Dodson court concluded that Section 5.077(d) must be “anchored” to the signing of the contract being enforced, the court admitted that that court was unable to locate “any case law or other authority, nor any legislative history that would clarify the meaning of the 2005 Statute in this respect.” Id. The statute clearly states that any seller who conducts two transactions in any twelve-month period falls under Section 5.077(d). Texas Courts should not add an additional “anchoring” requirement to an otherwise straightforward statute. Furthermore, the “anchoring” requirement does not make the statute “easier to comply with and to enforce.” Id. at 22. Instead, an “anchoring” requirement would make relief under Section 5.077(d) nearly impossible to prove for many plaintiffs without expending exorbitant time and effort on investigations outside of the discovery process in order to corroborate defendants’ production or lack thereof. If the legislature wanted to add an “anchoring” requirement, then such a requirement would have been easy enough to draft. The legislature did not, however, add an “anchoring” requirement and such a requirement should not be imposed judicially.

Before the statute was amended in 2005, the $250 penalty applied to all Contract for Deed sellers. Id. at 6. The new statute carves out a very narrow niche of sellers—sellers who never conduct more than one qualifying transaction within one year—to be exempted from the harsh penalties and assessed only a nominal penalty of $100 per year. Consequently, an unsophisticated individual who owner-carries financing on his own home to a buyer, generally, will not accidentally lose that home to the harsher penalties. Meanwhile, volume dealers who own multiple properties and sell all or many of the properties by Contracts for Deed will incur the full, normal penalties that were applicable to all Contract for Deed sellers before the 2005 amendments carved out a narrow niche of sellers to exempt under Section 5.077(c). See Tex. Prop. Code § 5.077; Acts 2005, 79th Leg., ch. 978 (H.B. 1823), § 5, effective September 1, 2005.

For most plaintiffs, proving the statutory requirement of two contracts within twelve months creates enough of a hurdle without adding an even more difficult “anchoring” element.

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.