Texas Commercial Law Firm
Lender Services: Home Equity Foreclosures
Home Equity Loan Foreclosures
History. To understand Texas’ unique laws relating to home equity loans, it is necessary to understand a bit of Texas history. Texas was settled in large measure by debtors fleeing their creditors and coming to Texas to start over with a “clean slate”. These were people who, in many cases, suffered through financial ruin and were dispossessed of their homes before fleeing to Texas to start anew.
Included among the financially bankrupt early leaders were Sam Houston and framers of the Texas Constitution. Having suffered the loss of their homes in many cases, protecting the homestead from foreclosure was a fundamental concern of Texas’ early leaders. So much so that the Texas Constitution incorporated an explicit ban against home equity loans. This ban remained in place for most of Texas’ history.
Prior to January 1, 1998, Texas law therefore prohibited loans secured by the equity in one’s home unless the loan was made for one of the following 5 purposes: (1) to purchase the homestead, (2) to pay taxes on the homestead, (3) pursuant to court order or settlement agreement concerning division of the marital estate in a divorce proceeding, (4) to pay for labor or materials for improvements to the homestead, and (5) to finance payment of federal tax liens against the homestead. Any other attempted incumbrance of the homestead was absolutely void. Toler v. Fertitta, 67 S.W. 2d 229 (Comm. App.-1934).
Several attempts to obtain passage of a home equity lending law were defeated because of fears too many people would lose their homesteads through foreclosure. In order to obtain passage of a home equity loan amendment, it was necessary to counter those fears by including provisions very protective of borrowers as well as provisions severely penalizing lenders for not complying with the protective provisions.
The Home Equity Loan amendment finally passed in 1998, and became effective January 1, 1999. There were many unusual protections and trade-offs required in order to finally win passage of the constitutional amendment. There are, for example, numerous specific requirements in the manner of closing, place of closing, timing of closing relative to certain notices, etc. Unfortunately, the penalty for failing to comply with any requirement in the Home Equity Loan amendments is severe:
A lender or any holder of the note for the extension of credit shall forfeit all principal and interest of the extension of credit if the lender or holder fails to comply with the lender's or holder's obligations under the extension of credit..; [emphasis added]
Art. XVI, §50(a)(6)(Q)(x).
Simply put, a lender will forfeit the entire loan for any error, even the most innocuous error without regard to whether the borrower is harmed in any way by the error.
With respect to foreclosure procedures, home equity loans are treated differently than any other mortgage in Texas. The Texas constitution requires home equity loans to be “secured by a lien that may be foreclosed upon only by a court order.” 50(a)(6)(D) While this can be interpreted to mean home equity loans may only be foreclosed through judicial foreclosure, the Texas legislature enacted special procedures relating to home equity loan foreclosures, (Rules 735 (Procedures) and Rule 736 (Expedited foreclosure Procedures), which utilize a “quasi-judicial” process to obtain a court order.
Rule 735 requires that home equity loans be foreclosed in one of two ways: 1. Through judicial foreclosure, (by way of suit or as a counterclaim)or, 2. Through an application under Rule 736 (Expedited Foreclosure) for an order allowing foreclosure.
The Rule 736 Expedited Foreclosure Procedure. As it’s name suggests, this procedure is intended to be a faster and more streamlined alternative to judicial foreclosure. Rule 736 requires, first of all, that proper notice of intent to accelerate and right to cure be provided to the borrowers in the same form and manner as in a non-home equity non-judicial foreclosure. Thereafter, the lender must file a verified application for foreclosure with the District Court. This application must meet certain specific requirements set out in Rule 736. In fact, Rule 736 includes a form of notice which is sufficient to meet its requirements. The Application must be sent to the Debtor via certified mail and regular mail.
The borrower’s response is due on or before 10:00 on the first Monday after the expiration of thirty-eight days after the date the application and notice are mailed to the borrower.
Time-lines: Of course, most lenders are not particularly concerned about specific procedural requirements for a home equity foreclosure so much as they are concerned with how quickly foreclosure may be concluded. What follows is a time-line representing the absolute, best-case scenario for accomplishing a home equity foreclosure in Texas followed by descriptions of what the reality is in terms of delays encountered.
The first required step is to provide notice of intent to accelerate and to provide the borrower a right to cure the default, (the “NOI”). This is the same step first step in both home equity and non-home equity non-judicial foreclosures. Although Texas law allows for as little as 20 days notice of intent to accelerate, because of the FDCPA, the language in many deed of trust forms and federal program requirements, the standard time-frame is 30 days. To be on the safe side, add 3 days for the mail to be delivered for a total of 33 days.
The next step is where home equity foreclosure procedures diverge from normal non-judicial foreclosure procedures. This is also where most of the delay enters the home equity foreclosure process. With a non-judicial foreclosure, after the NOI period expires, the matter is normally posted for foreclosure 21 days later. The home equity foreclosure will eventually reach that stage, but it must first cross several hurdles.
The procedural requirement at this stage sounds simple; Send the notice required under Rule 736 to the borrower and file the foreclosure application with the court. Rule 736 states that the borrower’s response is due on the first Monday after the expiration of 38 days after the date of mailing the application and notice to the borrower. Depending on the day of the week the notice is sent, the best case scenario for the running of this time-frame therefore is from about 38 days to about 45 days. Unfortunately, within this step are a surprising number of opportunities for delay. Matters are sometimes misfiled or lost at court, unnecessary hearings or mediation may be scheduled or the court may just not reach a matter for several weeks.
Once an Order of Foreclosure is obtained, however, a certified copy is filed in the real property records and the matter is then processed as a typical non-judicial foreclosure. A summary of the steps involved follows:
Texas Home Equity Timelines
I. Referral Received
A. Data extracted from referral package and input into database.
B. File is checked for data accuracy.
II. Demand Letter Requirement
A. After the referral process has been completed, a determination is made whether new demand letters are required.
1. If new demand letters are required, updated reinstatement figures are requested from client.
a. Upon receipt of figures, the 30-day demand letter is mailed to borrowers.
III. Affidavit in Support of Order for Foreclosure
A. Upon expiration of 10-day demand letter or if new demand letters are not required (in which case a "hello" letter is mailed to the borrower), the file is given to the paralegal to request updated reinstatement and payoff figures needed to prepare the Affidavit in Support of Order for Foreclosure.
B. Upon receipt of the payoff and reinstatement figures, the Affidavit is drafted and sent to client for execution, notarization and return.
IV. Application for Order for Foreclosure
A. Upon receipt of the executed Affidavit, the Application for Order for Foreclosure is prepared, filed with the court and the statutory notice of filing is sent to the borrowers along with a copy of the Application, pursuant to Rule 736(2)(A) of the Texas Rules of Civil Procedure.
V. Response Due Date
A. Rule 736(3) provides that the Respondent's response to the Application is due "on
or before 10:00 a.m. on the first Monday after the expiration of thirty-eight (38) days after the date of mailing of the application and notice to respondent, exclusive of the date of mailing."
VI. Entry of Order for Foreclosure
A. If the Respondent fails to file a written response with the court by the response due date, Rule 736(5) states that "'any time after a response is due, the court shall grant the Application without further notice or hearing if:
1. The application complies with Rule 736(1);
2. The Respondent has not previously filed a response; and
3. A copy of the Notice and Certificate of Service have been on file with the Clerk of the Court for at least ten (10) days exclusive of the date of filing.
Accordingly, upon confirmation that the Respondent has not filed a response, the paralegal submits the proposed Order For Foreclosure to the court requesting immediate execution of same by the court. The paralegal will continue to follow up with the court on a regular basis to check on status of entry of the Order.
B. If the Respondent files a written response with the court, according to Rule 73 6(6), the application shall be promptly heard after reasonable notice to the applicant and respondent. No discovery of any kind is permitted under Rule 736. Unless the parties agree to an extension of time, the issue shall be determined by the court not later than ten (10) business days after a request for hearing by either party. At the hearing, the applicant shall have the burden to prove by affidavits on file or evidence presented the grounds for the granting of the order sought in the Application.
C. Rule 736(7) states that the only issue to be determined under Rule 736 shall be the
right of the applicant to obtain an order to proceed with foreclosure under the security instrument and Tex. Prop. Code ~ 51.002.
VIII. Order to Proceed with Notice of Sale and Sale
A. Rule 736(8) provides that:
1. Grant or denial. The court shall grant the application if the court finds applicant has proved the elements of Rule 736(1)(E). Otherwise, the court shall deny the application. The granting or denial of the application is NOT an appealable order.
IX. Order for Foreclosure Entered
A. Filing of order. The applicant is required to file a certified copy of the Order in the Real Property Records of the county where the property is located within ten (10) business days of the entry of the Order. Failure to timely record the Order shall not affect the validity of the foreclosure or defeat the presumption of Tex. Const. Art. XVI § 50(i). Once confirmation is received that the Order has been entered, the paralegal will request a certified copy of the Order from the Court and, upon receipt, will record it in the Real Property Records of the county in which the property is located.
X. Transfer of File to Foreclosure Department to Post for Next Available Foreclosure Sale
A. The file is transferred to the Foreclosure Department simultaneously with sending the certified copy of the Order for recording.
B. The foreclosure department then posts the property for the next available foreclosure sale, depending upon what time of the month the file is received. The posting notices are required to be postmarked twenty-one (21) days prior to the actual foreclosure sale date. If the file is transferred to the foreclosure department after the posting deadline for the next sale, the property is scheduled for the next month's foreclosure sale.
The lawyers at Balcom Law Firm in Houston, Texas are experienced and successful dealing with these home equity foreclosures. Contact us today to get more information.
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