Texas Foreclosure Legislation: A Trip Through the Sausage Maker

Once in every generation the “perfect storm” hits the Texas Legislature. The ongoing financial crisis and the resulting “foreclosure crisis” have created a flood of proposals in Austin during the 2009 legislative cycle.

Presently, Texas has one of the fastest and easiest foreclosure processes in the nation. Typically, with respect to a residential asset (which is not a home equity loan), a foreclosure can take place in as little as two months with a 20-day notice of default and a 21-day notice of sale. Texas is a non-judicial foreclosure state, with little if any oversight of the foreclosure process by the state government or courts. Foreclosure sales have historically been a “private” matter between the lender and the owner.

Pending Texas legislation seeks to change this and takes primarily four forms.

First, there are timeline bills. The purpose of these bills is to enlarge the timeline for the notice of default (issued with residential properties) and the notice of sale (the document posted at the court house). In general, these timelines are proposed to be enlarged to 45 days (notice of default) and 60 to 90 days (for notice of sale).

Second, there are “process” bills. These bills fall into two types. With respect to residential loan assets, it is proposed that notice of default will be given on a form mandated by the Texas Attorney General which contains various types of information about the foreclosure process and the loss mitigation alternatives available to the borrower. These bills also typically require that the lender attempt to make telephone contact with the defaulted residential consumer in order to counsel the consumer on loss mitigation options. The second type of process bill is more far reaching and attempts to change Texas from a non-judicial to a judicial foreclosure state. This would be a substantial departure from our historically hands-off foreclosure process requiring little, if any, governmental intervention. Judicial foreclosure bills are being strongly opposed by both the lending industry as well as the Texas judiciary, who do not desire to see a new influx of lawsuits into their courts.

Third are bills which attempt to aid tenants in property following a foreclosure. Under present Texas law, a tenant in a property following a foreclosure must vacate the property within 30 days of being requested to do so by the lender. Various bills seek to enlarge this time from 30 days to 60 or 90 days. And one pending bill even seeks to require an individual who acquires a property through foreclosure to honor a tenant lease.

Fourth are consumer protection bills. These bills seek to describe something called a “sub-prime” loan. Some of the “sub-prime” loan features are not normally associated with sub-prime loans. Sub-prime loans would include loans not only with a higher then average interest rate (measured against the prime lending rate), but also would include loans with balloon features and pre-payment penalties, as well as certain adjustable rate loans which allow for the interest rate to increase more than two percent per year. These consumer protection bills either outlaw loans within these features or severely restrict the lender’s ability to foreclose such a loan in default.

We are also keeping our eye on significant federal legislation. Specifically, a “cram down” bill could pass allowing residential consumers in bankruptcy to have a bankruptcy court reset the customer’s interest rate to a lower level. In addition, this “cram down” bill could allow a loan secured by a property with negative equity to be stripped of any debt in excess of the value of the property at the time the bankruptcy is filed. This session of the Texas Legislature draws to a close on June 1, 2009. Over seven thousand bills were filed by the filing deadline, and a great many of these bills will not become law. Nevertheless, with the economic crisis and foreclosures at record levels, we believe it likely that some form of foreclosure reform and consumer protection will be adopted by the Texas Legislature. After the Legislature adjourns, watch for a follow-up article in an upcoming SettlePou newsletter discussing the final set of laws enacted by the Legislature.

By Barry D. Johnson

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