The 2007 Legislative Session created several new or revised requirements for real estate documents.  Although these have been addressed in the White Paper, this bulletin is intended to remind real estate lenders of the importance of revising forms to comply and assure lien validity.

TRCC Disclosures

HB 1038 was the Legislature’s response to public outcry about the lack of meaningful of oversight of builders through the Texas Residential Construction Commission.  It creates some additional fine tuning of the Commission.  However, more importantly for lenders, it requires some additional disclosures in Mechanic’s Lien Contracts.

Homestead Improvements.  First, a home improvement contract must include the contractor’s Residential Construction Commission registration number if the contractor is required to register with the Commission, and the Commission’s address and phone number.  This information must be in at least 10 point type and should be conspicuously printed or typed.  The existing “important notice” to home buyer is still required to be included.  The Commission’s address is:

Texas Residential Construction Commission
311 East 14^th Street
P.O. Box 13144
Austin, Texas  78711
877-651-TRCC (8722)

Disclosure for Transactions Subject to TRCC Registration.  In addition, there is a new disclosure for contracts subject to the residential construction registration process.  This disclosure must be in at least 10 point bold type or the computer equivalent and reads as follows:

STATE LAW REQUIRES THAT A PERSON HOLD A CERTIFICATE OF REGISTRATION FROM THE TEXAS RESIDENTIAL CONSTRUCTION COMMISSION IF THE PERSON CONTRACTS TO CONSTRUCT A NEW HOME OR IF THE PERSON CONTRACTS TO CONSTRUCT A MATERIAL IMPROVEMENT TO AN EXISTING HOME OR CERTAIN IMPROVEMENTS TO THE INTERIOR OF AN EXISTING HOME AND THE TOTAL COST OF THE IMPROVEMENT IS $10,000 OR MORE (INCLUDING LABOR AND MATERIALS).

YOU MAY CONTACT THE COMMISSION AT 877-651-TRCC (8722) TO FIND OUT WHETHER THE BUILDER HAS A VALID CERTIFICATE OF REGISTRATION. THE COMMISSION HAS INFORMATION AVAILABLE ON THE HISTORY OF BUILDERS, INCLUDING SUSPENSIONS, REVOCATIONS, COMPLAINTS, AND RESOLUTION OF COMPLAINTS.

THIS CONTRACT IS SUBJECT TO CHAPTER 426, PROPERTY CODE. THE PROVISIONS OF THAT CHAPTER GOVERN THE PROCESS THAT MUST BE FOLLOWED IN THE EVENT A DISPUTE ARISES OUT OF AN ALLEGED CONSTRUCTION DEFECT.  IF YOU HAVE A COMPLAINT CONCERNING A CONSTRUCTION DEFECT YOU MAY CONTACT THE COMMISSION AT THE TOLL-FREE TELEPHONE NUMBER TO LEARN HOW TO PROCEED UNDER THE STATE-SPONSORED INSPECTION AND DISPUTE RESOLUTION PROCESS.

Impact on Lien Validity.  The most important thing about these two new disclosures is that if they are not in the contracts as required, then the contract cannot be enforced by the builder and is not valid.  If the builder does not have a lien, then there is no lien for the lender either since the lender’s position is derived from that of the builder.  Also, since the registration number is required on the mechanic’s lien contract, any attempt to use a “straw contractor” to satisfy the Texas requirements of a third party contractor on improvements for a homestead is in trouble now.  The contractor for constructing a home or renovating in the amount of $10,000 or more must be registered, and it is not likely that a “brother in law” builder will be willing to do so.

Definition of “Contractor.”  The bill also changes some of the exemptions and requirements for who must register as a contractor.  The requirement for home improvements is dropped from $20,000 to only $10,000.  However, homeowners are still exempt from registration provided that they live in the home for at least a year after the construction.

Action.  These changes go into effect September 1, 2007 as noted above.  Title companies around the state have been notifying various parties of this requirement since failure to comply results in an invalid lien.  It is critical that documents are in compliance, so IBAT has contacted some of the major form providers to confirm that appropriate action is being taken.

Another solution to the problem of these disclosures and potential lien validity is to simply make the homeowner a home equity loan and then allow the homeowner to use the proceeds as desired for construction or otherwise. 

Mortgage Fraud

As part of HB 716, which addresses the problems of mortgage fraud, real estate lenders are required to provide applicants for a home loan a written notice at closing.  This is an addition to Chapter 343 of the Finance Code, which defines a “home loan” as a loan secured in whole or part by manufactured housing or real property improved by a one to four family dwelling used or to be used as the borrower’s principal residence.  Thus, it doesn’t apply to rental houses or second homes.

Here is the text of the notice, which must be on a separate document in at least 14-point type:

Warning: Intentionally or knowingly making a materially false or misleading written statement to obtain property or credit, including a mortgage loan, is a violation of Section 32.32, Texas Penal Code, and, depending on the amount of the loan or value of the property, is punishable by imprisonment for a term of 2 years to 99 years and a fine not to exceed $10,000.  "I/we, the undersigned home loan applicant(s), represent that I/we have received, read, and understand this notice of penalties for making a materially false or misleading written statement to obtain a home loan.  "I/we represent that all statements and representations contained in my/our written home loan application, including statements or representations regarding my/our identity, employment, annual income, and intent to occupy the  residential real property secured by the home loan, are true  and correct as of the date of loan closing.

Information Security

In HB 2061, the legislature protected the ability of title companies to access public records—even if they contain social security or driver’s license numbers.  In the same bill, the notice that is required at the top of recorded documents was revised.  This notice should be in 12-point boldface type as follows:

NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY OR ALL OF THE FOLLOWING INFORMATION FROM ANY INSTRUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY BEFORE IT IS FILED FOR RECORD IN THE PUBLIC RECORDS:  YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER'S LICENSE NUMBER.

The law still provides that a clerk can’t refuse to record a document because it lacks this notice.  However, considering the firestorm over this issue, it is probably prudent to include it!

Unlike the first two bills discussed, this requirement was revised March 28, 2007 rather than September 1, 2007.

Action Plan

Be sure that your document preparer is familiar with these requirements. 

Karen M. Neeley
IBAT General Counsel
Cox Smith Matthews Incorporated