In the wake of the recent Home Equity Loan amendment to the Texas Constitution, Article XVI, Section 50(a)(6), its many ambiguities create a perilous course for attorneys advising clients as to the ramifications and implementation of the amendment. Attorneys need to exercise caution by advising both lenders and consumers of these uncertainties and the inevitability of litigation. Loan documentation prepared or reviewed for clients needs to be thorough in clarifying as many of the ambiguities as possible, in a manner that is reasonable for the consumer and practical for the lender. The cautious practitioner should document carefully all interpretations, caveats and advice given to clients, advising conservative rather than aggressive interpretation of the amendment. If lenders are vulnerable to suits from borrowers, as they surely will be, attorneys will be vulnerable to claims that they provided erroneous advice or flawed documentation during this period when the regulations and law have yet to be developed.
The Office of the Consumer Credit Commissioner is now circulating an informal draft of Regulatory Commentary, and formal commentary should be forthcoming soon in the Texas Register. The Texas Dept. of Banking and Texas Savings & Loan Dept. are expected to join in issuing the Regulatory Commentary according to information received from the OCCC shortly prior to press time.
Practitioners should not overlook the amendment to Section 50(a)(5) of Article XVI, affecting home improvement loans, and certain related statutory changes enacted to protect consumers dealing with residential construction contractors. Senate Bill No. 241 amended Section 162 and House Bill No. 740 amended Section 53 of the Texas Property Code in several particulars, for contracts entered into on or after September 1, 1997.
Most significantly, Sections 162.006 and 162.007 require that for homestead improvement contracts over $5,000, contractors must maintain a construction account at a financial institution, and maintain account records identifying charges and disbursements of each project. The contractor becomes a trustee of improvement funds and must deposit the trust funds in the account, which shall be identified with the institution as a "construction account." Failure to maintain such an account or records for that account is punishable as a Class A misdemeanor under Section 162.032(c).
Amendments to Section 53 changed some important requirements for the filing of lien affidavits and affidavits of payment (53.052-53.157), creating a mechanism for Summary Motions to remove an invalid or unenforceable lien (new sections 53.160-53.162), and creating new procedures for residential construction projects (adding Subchapter K as Section 53.251 et seq). Residential construction lien affidavits must be filed one month sooner, now no later than the 15th day of the third calendar month after the day on which the indebtedness accrued. Notice of the filing of a lien now must be sent to the owner no later than one business day after the lien affidavit is filed. Contractors and Sellers who file false or misleading affidavits of payment in full are now subject to criminal enforcement of a fine not to exceed $4,000, jail confinement not to exceed one year, or both.
Verified motions to remove invalid or unenforceable liens may be heard no sooner than the 21st day after the lien claimant has answered or appeared. Bond or deposit in lieu of a bond may be set by the court in an amount that is "a reasonable estimate of the costs and attorney's fees the movant is likely to incur in the proceeding to determine the validity or enforceability of the lien," and may not exceed the amount of the lien claim.
New Subchapter K now requires the residential construction contractor to provide a disclosure statement before a contract is signed by the owner, and periodic statements must be provided listing the bills or expenses paid or to be paid for which the contractor is requesting payment from the owner, unless a valid lien release or waiver has been obtained and a statement provided to that effect. Section 53.059, which previously set for requirements regarding mechanic's liens on homesteads, has been repealed.
Return to TLIE Home Page Return to Newsletter List © Texas Lawyers' Insurance Exchange 1996. This page was last updated on July 7, 1999.