what your texas legislature is doing for (or to) you · property, and the refinance of the purchase...

WHAT YOUR TEXAS LEGISLATURE IS DOING FOR (OR TO) YOU

ALLEN D. PLACE, JR. Attorney at Law, Gatesville

TLTA INSTITUTE December 2-3, 2004

Allen Place Allen Place has been a practicing attorney in central Texas for 24 years. He is the owner of Brown Abstract Company in Coryell County. Allen was in the Texas House of Representatives for 10 years, having retired in 1999. During that time, he chaired a committee for six years and was named one of the ten best legislators in 1993 by Texas Monthly magazine. Since 1999, Allen has served as legislative counsel to TLTA for the last three sessions of the legislature. Allen and his wife Tonya have five children, Ashley and Amber-19,Nicholas-18, Shea-12 and McKamie-10.

By: _______________________________ ___.B. No._________

A BILL TO BE ENTITLED 1 AN ACT

2 relating to the confidentiality of and access to certain personal information in instruments

3 recorded with the county clerk.

4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

5 SECTION 1. Sections 11.008 (a), (b), (d), (e), and (f), Property Code, are

6 amended to read as follows:

7 (a) In this section, “instrument” means a deed [,mortgage,] or deed of trust.

8 (b) An instrument [executed on or after January 1, 2004,] transferring an

9 interest in real property to or from an individual and disclosing that individual’s

10 social security number or driver’s license number must include [may not be recorded

11 unless] a notice that appears on the top of the first page of the instrument (notwithstanding

12 Subsections 191.007(c) and (h), Local Government Code) in 12-point boldfaced type or

13 12-point uppercase letters and reads substantially as follows:

14 NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON,

15 YOU MAY REMOVE OR STRIKE ANY OR ALL OF THE FOLLOWING

16 INFORMATION FROM THIS INSTRUMENT BEFORE IT IS FILED FOR

17 RECORD IN THE PUBLIC RECORDS: YOUR SOCIAL SECURITY NUMBER

18 AND/OR YOUR DRIVER’S LICENSE NUMBER.

19 (d) The county clerk shall [may] not reject an instrument presented for recording because

20 the instrument [contains or] fails to comply with this section [contain a social security number or

21 driver’s license number. If the county clerk accepts an instrument for recording, the recording of

22 the instrument creates a conclusive presumption that the requirements of this section have not

23 been met].

24 (e) The county clerk shall post a notice in the county clerk’s office stating that

25 instruments recorded in the real property or official public records or the equivalent of

26 the real property or official public records of the county [and executed on or after January

27 1, 2004]:

28 (1) are not required to contain either a social security number or driver’s license

29 number; and

30 (2) are public records available for review by the public.

1 (f) All instruments described by this section [recorded under this section] are subject to

2 inspection by the public.

3 SECTION 3. This Act takes effect immediately if it receives a vote of two-thirds of all

4 the members elected to each house, as provided by Section 39, Article III, Texas Constitution.

5 If this Act does not receive the vote necessary for immediate effect, this Act takes effect on the

6 91st day after the last day of the legislative session.

A JOINT RESOLUTION

proposing a constitutional amendment that creates a valid lien against the homestead to secure certain costs incurred by the purchaser at a tax sale if the tax sale is subsequently vacated. BE IT RESOLVED BY THE LEGISLATURE OF THE STATE OF TEXAS: SECTION 1. Section 50(a)(7), (a)(8), Article XVI, Texas Constitution, is amended, and new Subsection 50(a)(9)is added to read as follows:

(7) a reverse mortgage; or (8) the conversion and refinance of a personal property

lien secured by a manufactured home to a lien on real property, including the refinance of the purchase price of the manufactured home, the cost of installing the manufactured home on the real property, and the refinance of the purchase price of the real property. ; or

(9) a lien imposed by a court under Section 34.09 of the Texas Tax Code to secure costs incurred by a purchaser of property after an ad valorem tax sale, if the tax sale is later vacated by the court and if the property was the homestead of the taxpayer.

SECTION 2. This proposed constitutional amendment

shall be submitted to the voters at an election to be held November ___, 2005. The ballot shall be printed to permit voting for or against this proposition: “The constitutional amendment creating a lien against a homestead to secure costs incurred by a purchaser of the property after an ad valorem tax sale, if the tax sale is later set aside by a court.”

A BILL TO BE ENTITLED

AN ACT relating to ad valorem taxes. BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: SECTION 1. Subchapter A, Texas Tax Code, is amended to include the following new Section 34.09:

Sec. 34.09. PURCHASER’S LIEN TO SECURE COSTS. (a) If a tax sale is vacated in an action contesting its

validity, the purchaser other than a taxing unit of the real property at the tax sale, or the purchaser of the real property resold by a taxing unit following a tax sale, shall have a lien against the property to secure the lesser of: (i) the costs paid by the purchaser on the property before the entry of a final non-appealable judgment vacating the tax sale; or (ii) any increase in the value of the property as a result of such costs.

(b) “Costs” includes: (A) any of the costs described in Subsection

(g)(2)(A) of Section 34.21 of the Tax Code; and (B) the cost of any improvements, repairs, or

renovations to the property made by the purchaser after the expiration of the owner’s right of redemption under Section 32.06 or Section 34.21 of the Tax Code.

(c) The tax sale purchaser must be joined as a necessary part in the suit to vacate the tax sale. The lien described in Section (a) must be asserted by the purchaser in a pleading in the suit. After hearing and upon consideration of evidence establishing the costs incurred by the purchaser, the court shall determine the amount of costs incurred, and impose the lien in a separate order or in the judgment of the court that vacates the tax sale. The purchaser’s lien attaches upon entry of the court order or judgment, but is not effective against a bona fide purchaser or lender for value until a certified copy of the court order or judgment is recorded in the real property records of the county where the property is located.

Informational Note: The purpose of this proposed constitutional amendment and related bill is to protect an innocent purchaser of property after a tax sale who incurs various costs related to the property in the event the tax sale is later set aside by a court. Under current law, a purchaser is protected if the owner redeems the property under Section 34.21 of the Texas Tax Code, at least to the extent of the costs provided in Section 34.21. The Texas Tax Code does not provide a similar protection if a tax sale is set aside for other reasons. In addition, this proposed bill would include the cost of improvements, repairs, and/or renovations to the property made by the purchaser after the owner’s right of redemption has expired. Without this protection, the owner would be unjustly enriched in an amount equal to the increased value of the property if the tax sale is set aside for reasons unrelated to the exercise of the owner’s right of redemption. Under this proposed constitutional amendment and related bill, if the court sets aside a tax sale, the court may impose a lien in favor of the tax sale purchaser to secure certain costs incurred by the purchaser. The constitutional amendment is necessary to ensure such a lien would be valid against a homestead property. This proposed constitutional amendment and related bill would also create an incentive for title insurance companies to insure real property transactions after a tax sale. With the imposition of the lien to secure costs incurred by the purchaser at a tax sale, the liability of the title insurance underwriter would be dramatically reduced if the tax sale purchaser makes substantial improvements to the property, and the tax sale is subsequently vacated by the court.

A BILL TO BE ENTITLED AN ACT

relating to judgment liens. BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: SECTION 1. Section 52.001, Texas Property Code, is amended to read as follows: Except as provided by Section 52.0011, a first or subsequent abstract of judgment, when it is recorded and indexed in accordance with this chapter, if the judgment is not then dormant, constitutes a lien on and attaches to all the real property of the defendant not exempt under the Texas Constitution or other law located in the county in which the abstract is recorded and indexed, including real property acquired after such recording and indexing. SECTION 2. The change in law made by this Act applies only to an abstract of judgment that is recorded and indexed in accordance with Chapter 52, Texas Property Code, on or after the effective date of this Act. An abstract of judgment recorded and indexed before the effective date of this Act is governed by the law in effect at the time the abstract of judgment was recorded and indexed, and the former law is continued in effect for that purpose. SECTION 3. This Act takes effect September 1, 2005.

Informational Note: The purpose of this proposed bill is to resolve an existing conflict in the law as to when an abstract of judgment becomes a lien against a Texas homestead property. The proposed bill clarifies that the abstract of judgment does not attach and does not constitute a lien against a debtor’s exempt real property (i.e., homestead). It would only become a lien against said property when the property no longer constitutes the debtor’s homestead. Some cases in Texas have held that an abstract of judgment does not attach and does not become a lien against a homestead property until such time as the property no longer constitutes the debtor’s homestead. See Frappier v. Texas Commerce, 879 F. Supp. 715 (U.S. District Ct.- Houston Division 1995), affirmed 71 F 3d 878 (5th Cir.); Wilcox v. Marriott, 103 S.W. 3d (Tex. App.- San Antonio 2003, writ denied); Harms v. Ehlers, 179 S.W. 2d 582 (Tex. Civ. App. 1944, writ ref’d). Conversely, see Exocet Incorporated v. Cordes, 815 S.W. 2d 350 (Tex. Ct. App.- Austin 1991, no writ), where the court distinguished the Harms v. Ehlers decision and held that under the statutory provisions of the Texas Property Code a judgment lien against the debtor’s homestead is perfected, or brought into existence against the debtor’s homestead property, by the recording and indexing of the abstract of judgment. However, it is exempt from any seizure attempting to enforce the perfected lien as long as the property constitutes the debtor’s homestead. This distinction, the attachment of the lien immediately against a homestead or only at the moment the property no longer constitutes the debtor’s homestead, is a very important one. Consider the request for a title insurance company to insure a home equity lien and not take exception to a pre-existing abstract of judgment lien against the owner/borrower’s real property. If the abstract of judgment lien attaches immediately upon recording and indexing, the abstract of judgment lien would be superior to the newly created home equity lien even if the property is the debtor’s homestead. It is simply a non-enforceable lien as long as the property constitutes the debtor’s homestead. If the owner/borrower subsequently abandons the property as his homestead, the abstract of judgment now represents a superior and enforceable lien. For example, this circumstance would be presented in the following scenarios:

1. The owner/borrower defaults under the home equity lien and moves out of the homestead (i.e., “abandons the homestead”) prior to the home equity lien foreclosure. In this scenario, the home equity lien foreclosure would not extinguish the judgment lien as the judgment lien is a superior lien and is now enforceable.

2. The owner/borrower moves out of the homestead (i.e., “abandons the homestead”), and acquires

and occupies a new homestead property. The former homestead is maintained as an investment property. As with the first scenario above, the judgment lien is now a superior and enforceable lien against the property.

For the reasons noted above, the amendment to Section 52.001, Texas Property Code, is recommended.

A BILL TO BE ENTITLED AN ACT

relating to manufactured homes. BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: SECTION 1. Section 1201.2055, Texas Occupation Code, is amended to read as follows:

Sec. 1201.2055. ELECTION BY OWNER. (a) In completing an application for the issuance of a

statement of ownership and location, an owner of a manufactured home shall indicate whether the owner elects to treat the home as personal property or real property. An owner may elect to treat a manufactured home as real property only if the home is attached to:

(1) real property that is owned by the owner of the home; or

(2) land leased to the owner of the home under a long-term lease, as defined by department rule.

(b) A statement of election under Subsection (a) must be made by affidavit.

(c) If the department issues a statement of ownership and location to an owner who has elected to treat a manufactured home as personal property, the statement of ownership and location on file with the department is evidence of ownership of the home. A lien, charge, or other encumbrance on a home treated as personal property may be made only by filing the appropriate document with the department.

(d) If the department issues a statement of ownership and location to an owner who has elected to treat a manufactured home as real property, the manufactured home is not considered to be real property until a certified copy of the statement of ownership and location has been filed in the real property records of the county in which the manufactured home is located. After the certified copy has been filed in the real property records of the county, the manufactured home is considered to be real property in the form of an improvement to the underlying real property on which the manufactured home is located. If a real property election has been made but a certified copy of the statement of ownership and location has not been filed as required by this subsection, the manufactured home continues to be treated as personal property until the certified copy is filed. Once the manufactured home is considered to be real property, ownership of the manufactured home and the underlying real property shall vest in a purchaser or transferee upon execution of a deed by the owner, or shall vest in the heirs at law or devisees of the owner upon the death of said owner. A manufactured home shall remain real

property until the owner files a certified copy of a new statement of ownership in the real property records of the county in which the manufactured home is located that states the owner has elected to treat the manufactured home as personal property. SECTION 2. Section 1201.206, Texas Occupation Code, is amended to read as follows:

Sec. 1201.206. APPLICATION FOR ISSUANCE OF STATEMENT OF

OWNERSHIP AND LOCATION. (a) Before the first retail sale of a manufactured home, the

retailer shall timely provide to the consumer an application for the issuance of a statement of ownership and location and any information necessary to complete the application.

(b) At the first retail sale of a manufactured home, the retailer shall provide for the installation of the manufactured home and ensure that the application for the issuance of a statement of ownership and location is properly completed. The consumer shall return the completed application to the retailer.

(c) Not later than the 30th day after the date of the retail sale, the retailer shall provide to the department the completed application for the issuance of a statement of ownership and location.

(d) At a subsequent sale or transfer of the manufactured home, the purchaser or transferee shall apply for the issuance of a new statement of ownership and location if: (i) the manufactured home is personal property as evidenced by an existing statement of ownership and location, or (ii) the manufactured home is real property as evidenced by a statement of ownership and location or certificate of attachment filed in the real property records of the county in which the manufactured home is located, and the purchaser or transferee elects to treat the manufactured home as personal property, or (iii) the purchaser or transferee relocates the manufactured home. A purchaser or transferee may apply for the issuance of a new statement of ownership and location, but the issuance of a new statement of ownership and location is not required, if, at the time of the sale: (i)the manufactured home is real property as evidenced by a statement of ownership and location or certificate of attachment previously filed in the real property records of the county in which the manufactured home is located, (ii) it is the intent of the new purchaser or transferee that the manufactured home remain real property, and (iii)the purchaser or transferee does not relocate the manufactured home.

(e) Ownership of a manufactured home does not pass or vest at a sale or transfer of the manufactured home until a completed application for the issuance of a statement of ownership and location is filed with the department if the purchaser or transferee relocates the manufactured home, or the sale or transfer is: (i) the first retail sale of the manufactured home, or (ii) a subsequent sale of the manufactured home where the purchaser or transferee elects to treat the manufactured home as personal property. On a subsequent sale of the manufactured home, ownership of the manufactured home shall pass or vest in the purchaser or transferee upon the execution of a deed

conveying the real property if: (i) the manufactured home is real property as evidenced by a statement of ownership and location or certificate of attachment previously filed in the real property records of the county in which the manufactured home is located, (ii) it is the intent of the new purchaser or transferee that the manufactured home remain real property, and (iii) the purchaser or transferee does not relocate the manufactured home.

(f) If the owner of a manufactured home relocates the home, the owner shall apply for the issuance of a new statement of ownership and location not later than the 30th day after the date the manufactured home is relocated. The department shall require that the owner submit evidence that the manufactured home was relocated in accordance with the requirements of the Texas Department of Transportation.

SECTION 3. Section 11.432, Texas Tax Code, is amended to read as follows:

Sec. 11.432. HOMESTEAD EXEMPTION FOR MANUFACTURED HOME. (a) For a manufactured home to qualify for an exemption under Section 11.13 of this code, the application for the exemption must be accompanied by: (i) a copy of the statement of ownership and location for the manufactured home issued by the manufactured housing division of the Texas Department of Housing and Community Affairs under Section 1201.207, Occupations Code, showing that the individual applying for the exemption is the owner of the manufactured home or be accompanied by a verified copy of the purchase contract showing that the applicant is the purchaser of the manufactured home., or (ii) a verified copy of a statement of ownership and location or a certificate of attachment issued to a prior owner showing the manufactured home is real property, and if applicable, any deed, affidavit of heirship, order admitting a last will and testament to probate, or other legal instrument showing the individual applying for the exemption is the owner of the real property on which the manufactured home is located.

(b) The land on which a manufactured home is located qualifies for an exemption under Section 11.13 only if:

(1) the manufactured home qualifies for an exemption as provided by Subsection (a); and

(2) the manufactured home is listed together with the land on which it is located under Section 25.08.

(c) In this section, "manufactured home" has the meaning assigned by Section 1201.003, Occupations Code.

SECTION 4. This Act takes effect September 1, 2005.

Informational Note: The primary purpose of this proposed bill is to clarify that once an owner elects to treat a manufactured home as real property as evidenced by a certified copy of a statement of ownership and location (SOL) filed in the real property records of the county where the manufactured home is located, a new SOL is not required upon the subsequent sale of the manufactured home to a new purchaser or transferee when the manufactured home is not being relocated, and the new purchaser or transferee intends that the manufactured home remain as real property (I.e., a deed executed by the owner to a subsequent purchaser or transferee shall vest title to the manufactured home and the underlying real property in the new purchaser or transferee). A contrary result would undermine the primary advantage of converting a manufactured home to real property.

Under the current version of the statutes, the Texas Department of Housing and Community Affairs (TDHCA) originally took the position that a new SOL was required on a subsequent sale even if the manufactured home was already real property and the new purchaser or transferee did not intend to relocate the manufactured home or elect to treat it as personal property. Subsequently, the TDHCA backed off this approach, but has now issued proposed rules that would take the TDHCA back to its original position. This proposed bill will resolve this issue and facilitate manufactured home transactions.

A BILL TO BE ENTITLED

AN ACT relating to independent executors and administrators. BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: SECTION 1. Section 331, Texas Probate Code, is amended to read as follows:

Sec. 331. Court Must Order Sales Of Property (a) Except as hereinafter provided, no sale of any

property of an estate shall be made without an order of court authorizing the same. The court may order property sold for cash or on credit, at public auction or privately, as it may consider most to the advantage of the estate, except when otherwise specially provided herein.

(b) Any independent executor or independent administrator appointed by the court, including any independent successor thereof, may sell property of the estate without order of the court for cash or on credit, at public auction or privately, as the independent representative deems to be in the best interest of the estate, subject to:

(i) any limitation or qualification of the power of sale imposed by court order; or

(ii) any limitation of the power of sale as provided in Section 332 of this Code.

The power of sale provided by section (b) herein applies to any independent representative appointed by the court on or after September 1, 2005.

SECTION 2. This Act takes effect September 1, 2005.

Informational Note: The purpose of this proposed bill is to resolve an existing conflict among attorneys and various Texas probate court personnel related to the power of an independent representative to sell property without an order from the court. Many attorneys and Texas probate court personnel believe an independent executor or administrator has the power to sell property of the estate without a court order, even if the decedent dies intestate, or dies testate, but the Will does not give a power of sell. The current case law in Texas indicates the independent representative does not have this power unless the decedent dies testate and the Will gives this power, of if the sale is necessary to pay debts of the estate. See for example Gatesville Redi-Mix, Inc. v. Jones, 787 S.W. 2d 443 (Ct. App.- Waco 1990, writ denied). This proposed bill makes it clear that any independent representative, including any successor independent representative appointed by the court has the power to sell property of the estate without court order, subject to the power of the court to impose a limitation upon the power, or subject to the limitations set forth in Section 332 of the Texas Probate Code.

DRAFT 07/02/04 Page 1 of 8

Article 1. Sales Price Disclosure SECTION 1. Subchapter C, Chapter 22, Tax Code is amended

by adding a new Section 22.42 to read as follows:

Sec. 22.42. SALES PRICE DISCLOSURE REPORT. (a) The buyer

or grantee of real property under a recorded deed conveying an

interest in real property shall, not later than 3 days after the

date the deed is recorded in the real property records in which

the property is located, file a sales price disclosure report

with the chief appraiser of the appraisal district for the

county in which the property is located.

(b) This section does not apply to a sale or transfer of

real property:

(1) made pursuant to a court order;

(2) to or from a trustee in bankruptcy;

(3) made pursuant to a power of sale under a deed of

trust by a mortgagee or a beneficiary under a deed of trust or

other encumbrance secured by the property;

(4) made under a deed in lieu of foreclosure;

(5) made by one or more co-owners to one or more other

co-owners; or

(6) to a spouse or to a person or persons in the

lineal line of consanguinity of one or more of the transferors


(c) The buyer or grantee shall complete the sales price

disclosure report, sign it, and deliver it to the chief

appraiser. The sales price disclosure report shall read:

“SALES PRICE DISCLOSURE REPORT

Section 22.24, Tax Code requires a buyer or grantee under a deed

to complete, sign, and deliver this report to the chief

appraiser of the county in which the property is located. The

report must be submitted not later than 3 days after the deed is

recorded. This report does not need to be submitted if the sale

or transfer is:

(1) made under a court order;

(2) to or from a trustee in bankruptcy;

(3) a foreclosure sale;

(4) made under a deed in lieu of foreclosure;

(5) is between co-owners; or

(6) is between spouses or between family members within the

first degree of lineal consanguinity.

Seller’s or Grantor’s Name: ______________________________

Buyer’s or Grantee’s Name:________________________________

Buyer’s or Grantee’s Address: ____________________________

________________________________________________________________

Property Description (as stated in deed):_________________


________________________________________________________________

________________________________________________________________

________________________________________________________________

The sales price or consideration paid for the property:___

________________________________________________________________

The method used to finance the sales price or consideration

was: none (cash sale) cash and third-party purchase money

mortgage(s) cash and purchase money mortgage by owner

exchange of other property other, describe:

________________________________________________________________

Describe any unusual or extraordinary terms of the sale or

transfer that impacted the amount of the sales price or

consideration:__________________________________________________

________________________________________________________________

To the best of my knowledge, this statement is true and

accurate.

Buyer’s Signature: ________________________________________

Date: ________________________________”

(d) An appraisal district, chief appraiser, the

comptroller, or any other governmental official or entity may

not add additional information to the form of the sales price

disclosure report.

(e) The buyer or grantee may submit the sales price

disclosure report to the chief appraiser in printed form by


mail, hand delivery, facsimile machine or, if permitted by the

chief appraiser, by other electronic means.

(f) Upon receipt of the completed sales price disclosure

report, the chief appraiser shall provide to the buyer or

grantee an acknowledgement of receipt of the report. If the

chief appraiser mails the receipt, the chief appraiser shall

mail it to the buyer or grantee at the buyer’s or grantee’s

address stated in the report.

(g) The sales price disclosure report filed with the chief

appraiser is confidential and not open to public inspection.

The sales price and disclosure report and the information in the

report may not be disclosed to another person other than an

employee of the chief appraiser who appraises real property

except that the report or its contents may be disclosed:

(1) in a judicial or administrative proceeding under a

lawful subpoena;

(2) to the buyer, grantee, or seller, or grantor named

in the report or in the deed to which the report applies or to a

representative of the buyer, grantee, seller, or grantor under a

written authorization signed by the buyer, grantee, seller, or

grantor;

(3) to the comptroller or an assessor;

(4) in a judicial or administrative proceeding related

to real property taxation:


(A) in which the buyer, grantee, seller, or

grantor is a party;

(B) in which the owner of the property described

in the report is a party;

(C) by the appraisal district for the purpose of

establishing a value of the property or for the purpose of

providing evidence of comparable sales to appraiser another

property;

(5) for statistical purposes if the information is

provided in a form that does not identify a specific property or

specific buyer, grantee, seller, or grantor;

(6) if and to the extent the information is required

to be included in a public document or record that the appraisal

office is required to prepare or maintain; or

(7) to a taxing unit or its legal representative that

is engaged in the collection of delinquent taxes on the property

that is described in the report.

(h) A person, other than the buyer, grantee, seller, or

grantor, who obtains the sales price disclosure report or

information from the sales price disclosure report and discloses

the report or its content to a person who is not authorized by

this section to receive it or permits such persons to inspect

the report is guilty of a Class B misdemeanor. It is a defense


to prosecution under this subsection that the person obtained

the information from:

(1) the buyer, grantee, seller, or grantor; or

(2) a document or record that is not the sales price

disclosure report.

(i) Except as provided in Subsection (j), a person who

prepares the sales price disclosure report is not liable to any

person for completing the report or for any unintentional errors

or omissions in the report.

(j) If the chief appraiser seeks injunctive action to

compel a person to comply with this section and prevails in the

injunctive action, the court may assess costs and reasonable

attorney’s fees against the person required to comply with this

section.

Article 2. Property Appeals Arbitration Process Chapter 42, Tax Code is amended by adding new Section

42.226 to read as follows:

“(a) As an alternative to any other remedies, rights, or

procedures a property owner is entitled to pursue under this

chapter, the property owner may appeal an appraisal review board

order under this section if:

(1) the appraisal review board determined that the

appraised value, market value, or taxable value of the property

is less than $1,000,000.00; and


(2) the property owner files a request for binding

arbitration in accordance with Subsection (b).

(b) A property owner may file a request for binding

arbitration under this section by:

(1) submitting a written request for binding

arbitration to the appraisal district not later than the 15th

day after the property owner receives notice of the appraisal

review board order; and

(2) paying an arbitration deposit along with the

written request to the appraisal district in the amount of

$500.00.

(c) Not later than 10 days after receiving the written

request, the appraisal district shall request a county court

judge or district court judge in the county in which the

property is located to appoint an impartial third party to

conduct the arbitration who is willing to conduct the

arbitration for an amount not more than the arbitration deposit

or a higher amount if acceptable to the appraisal district. The

appraisal district shall pay the cost of the arbitration.

(d) The arbitration shall be conducted in accordance with

Chapter 154, Civil Practices and Remedies Code.

(e) If the market value, appraised value, or taxable

value, whichever applies, is less than 90 percent of the amount

determined by the appraisal review board, rounded down to the


nearest whole number, the appraisal district shall refund the

arbitration deposit to the property owner. If the applicable

value is 90 percent or more than the amount in the appraisal

review board order, the appraisal district may retain the

arbitration deposit.

(f) The parties may be represented in the arbitration by

an attorney or a property tax consultant, real estate appraiser,

or real estate broker acting under power of attorney. Each

party shall bear the cost of its own representatives.

(g) The appraisal review board shall notify the property

owner of the owner’s rights under this section at the time it

sends the appraisal review board order to the property owner.

(h) The arbitration award under this section may include

any remedy or relief a court may order under this chapter.”

BROWN, FOWLER & ALSUP

A Professional Corporation Attorneys at Law

J. Alton Alsup 8955 Katy Freeway, Suite 305 Telephone 713/468-0400 Board Certified in Residential Real Estate Law Houston, Texas 77024 Facsimile 713/468-5235 Texas Board of Legal Specialization www.LoanLawyers.com [email protected] August 21, 2000 STATE BAR OF TEXAS ATTN: Mr. Brent Clifton, Chairman Unauthorized Practice of Law Task Force 1414 Colorado Austin, Texas 78711 Re: Supplemental Comment in Opposition to State Bar of Texas Task Force Preliminary Recommendation of a New Statutory Definition for the Practice of Law Dear Members of the UPL Task Force: This letter is a supplement to my written comment to the UPL Task Force on behalf of the Texas Association of Mortgage Attorneys dated August 2, 2000, and addresses the question posed by the UPL Task Force in its open hearing on August 2, regarding the effect and implications of its proposed Section 81.102 B. 2., Texas Government Code, which would authorize attorneys licensed in this or another state, while employed as staff counsel by corporations, to prepare documents affecting title to real property solely on behalf of their corporate employers. Specifically, the UPL Task Force asked several of the last witnesses at its open hearing what objection, if any, would there be to authorizing licensed attorneys employed as staff counsel by corporations or other business entities to prepare documents affecting title to real property solely for, and on behalf of, their corporate employers. The context of the question necessarily assumes that the corporate employer itself would be prohibited from practicing law to this limited extent and that the staff attorney would be preparing the documents only with respect to transactions to which the corporate employer is a party. Certainly, if the corporate employer itself were authorized by law to prepare conveyancing documents for transactions to which it is a party, as suggested by proposed Section 81.102 B.11., its staff counsel, or any other employee for that matter, would be authorized to prepare the documents on behalf of the corporation because corporations can act only through their officers, employees, and authorized agents. The Texas Association of Mortgage Attorneys (TAMA) has earlier stated its opposition to proposed Section 81.102 B.11., which would authorize financial institutions, mortgage lenders, mortgage brokers, or other corporations or business entities to prepare conveyancing documents for transactions to which they are parties, and TAMA similarly opposes proposed Section 81.102 B.2., which would allow these corporations or other business entities to accomplish the same end indirectly through employment of staff counsel who prepare, or purport to prepare, the conveyancing documents on behalf of their corporate employers. Even assuming the prohibitions of § 83.001, Texas Government Code, against the unauthorized practice of law are fully preserved, as we urge, and corporations accordingly are prohibited from preparing conveyancing documents for transactions to which they are parties, any financial institution, mortgage lender, mortgage broker, and other

Attn: Mr. Brent Clifton, Chairman Unauthorized Practice of Law Task Force August 21, 2000 Page 2 corporation or business entity under proposed Section 81.102 B. 2. could evade the prohibitions of §83.001 simply by employing an attorney on its staff who ostensibly prepares the mortgage loan or other conveyancing documentation on its behalf. These provisions of proposed Section 81.102 B.2 accordingly would create a loophole that would render the prohibitions of §83.001 meaningless and would foster an artifice on the part of corporations doing business in Texas who seek to prepare conveyancing documents as a matter of their own convenience and cost benefits by nominal compliance with the exemption created by proposed Section 81.102 B.2. The pretense of these corporations seeking to prepare their own documents under this loophole would be two-fold: 1) that the documents are in fact prepared by, or under the direct care, supervision, and control of, its licensed staff attorney, and 2) that no fee or other charge is being imposed on the consumer for the document preparation service. Nationwide industry practices suggest just the opposite to be true. Document preparation for most national lenders is a profit center, and in the many states that have no prohibitions on a lender’s charging of fees for document preparation services, mortgage lenders in my experience routinely charge the borrower from $100 to $250 for document preparation services. Often the fee is a mark-up, or so-called upcharge, to a typical $55 to $75 charge to the lender by a national document services vendor to which the work has been outsourced and in those cases raises questions of legality under the provisions of RESPA, Section 8, which prohibits the splitting of settlement service fees for which no, nominal, or duplicative services have been performed. These lenders also must contend with regulations of the Department of Housing and Urban Development (HUD) that prohibit the charging of document preparation fees to the borrower unless performed by a third party not controlled by the FHA-approved lender (HUD Guide 4000.2, REV-2, Chapter 5, Section 5-3 G.), and, in Texas, with the statutory prohibitions against any person other than a licensed Texas attorney charging a document preparation fee to the borrower generally (Texas Government Code, §83.001) and additionally, in connection with a secondary mortgage loan, charging a document preparation fee unless the service is performed by an attorney who is not a salaried employee of the mortgage lender and whose charge is supported by an invoice for services rendered (Texas Finance Code, Section 342.308). But even in the states that prohibit a lender’s direct charging of a fee for preparation of documents, mortgage lenders seem to achieve substantially the same yields without expressly denominating a particular charge as a “document preparation fee”. It is axiomatic that the borrower to a mortgage loan transaction pays all costs of loan origination, and the lender achieves a market yield through the charging of interest and an array of fees to the borrower, including origination fees, points, and variously denominated direct settlement service fees, such as processing fees, underwriting fees, administrative fees, closing fees, and the like. Moreover, under the Hexter Title rationale discussed in my earlier written comment, even though a separate charge is not set out and denominated as a document preparation fee, the document preparation services performed by the corporation would constitute a part of the total service for which the borrower pays and, therefore, would be “a consideration, reward or pecuniary benefit flowing to the [lender] for the legal services so rendered.” Furthermore, under nationwide industry practices, corporate staff attorneys in my experience perform no role in the daily operations of the document preparation process. Not only do staff attorneys not prepare the legal documents affecting title as may be contemplated by proposed Section 81.102 B.2., they do not supervise or even monitor the process and are not accountable for the accuracy or legal sufficiency of the documents. Instead, clerical staffs assigned this responsibility typically operate as

Attn: Mr. Brent Clifton, Chairman Unauthorized Practice of Law Task Force August 21, 2000 Page 3 centralized profit centers under the direction and supervision of corporate operations managers — not the general counsel’s office. Documents typically are produced in these centers by clerical staffs responsible for high-volume, multi-state operations using a centralized computer system that captures and integrates data from loan application and processing modules, and Texas documents, under the Section 81.102 B.2. loophole, may be expected to be prepared in these same centers at remote coast-to-coast locations from California to New Jersey. Documents purportedly prepared by staff counsel in Texas on behalf of their corporate employers undoubtedly would be prepared in the same manner as, and the process would be indistinguishable from, documents that are directly prepared by corporations for their operations in other states without the care, supervision and control of staff counsel presumably contemplated by proposed Section 81.102 B.2. It also is important to note that any corporate employee, such as a staff attorney, acts in a representative capacity only and the staff attorney’s acts would be imputed to his employer. A corporation acts through its officers, employees, and authorized agents and the acts of such an employee are attributed to, and indistinguishable from, his employer’s. That is to say, the acts of the staff attorney are acts of the corporation. Prohibiting corporations from practicing law on the one hand but, on the other, permitting staff counsel to accomplish the same end through nominal compliance with proposed Section 81.102 B.2.would be a distinction without a difference and would invite a subterfuge by corporations seeking to enhance their profitability through contrived compliance with proposed Section 81.102 B.2. by employing staff counsel purporting to prepare Texas documents, while in fact conforming the process to their national document preparation practices in which staff counsel is uninvolved in any meaningful way. Policing this practice would be impractical in any case. The legal standard for compliance with the requirements of proposed Section 81.102 B.2. necessarily would be so vague and undefined that any enforcement action by the State Bar against a corporation preparing its own conveyancing documents that employs any staff attorney at all seemingly would be impossible to sustain. Nothing more than the employment on staff of a licensed attorney would be required to achieve apparent compliance with Section 81.102 B.2. and to immunize the unlawful activities of corporations preparing conveyancing documents for their own purposes and advantage. Furthermore, the Section 81.102 B.2. loophole would favor national banking centers and wholesalers with nationwide lending operations, and would be inherently discriminatory against the many smaller Texas independent banks, mortgage brokers and regional mortgage lenders who do not, and feasibly cannot, employ an in-house legal staff. Ethical issues as well are raised by a corporation’s employment of a staff attorney for this purpose that could compromise the very core values and ideals of the legal profession. Our Disciplinary Rule 5.05(b), for example, prohibits a lawyer from assisting a person that is not a member of the Bar in the performance of activities that constitute the unauthorized practice of law, and presents a particular ethical dilemma to the staff attorney cooperating with his corporate employer in the contrivance of compliance with proposed Section 81.102 B.2. Rules 5.04 and 7.03, furthermore, prohibit an attorney from splitting legal fees with a non-lawyer. The charging of a fee by a corporation for preparation of documents affecting title to real property, which we contend occurs in practical terms in any mortgage loan transaction whether charged directly or indirectly, is tantamount to a fee split with the staff attorney employed by the corporation to prepare the documents and paid a salary and benefits

Attn: Mr. Brent Clifton, Chairman Unauthorized Practice of Law Task Force August 21, 2000 Page 4 derived in part from the revenues from those fees. The ethical dilemma is exacerbated when the corporate employer’s fees are for legal services that in fact are not performed by the staff attorney or under his direct care, control, and supervision. Beyond these ethical considerations, the UPL Task Force should consider whether it is in the public interest that the Texas homeowner lose the significant consumer protections we believe are inherent in today’s traditional Texas practice should either of proposed Sections 81.102 B.11 or 81.102 B.2 be enacted into law. Texas public policy favors protection of consumers in their dealings with creditors – particularly with respect to transactions secured by the family homestead. The Texas Constitution to that end establishes the most protective homestead rights in the nation, and the Texas Government Code, §83.001, which reserves the authority to prepare documents affecting title to real property to licensed Texas attorneys, is a further expression of that public policy. Beyond its importance in sheltering and providing for the security of family members, the homestead is the largest investment and most significant asset of most Texas families. Yet, Texas homeowners seldom are represented by their own counsel when mortgaging their homes. Under today’s traditional Texas practice, however, the homeowner benefits from the significant role and scope of services described in my earlier written comment that is routinely provided by independent Texas counsel to mortgage lenders in the document preparation and closing process and is of particular importance in consumer transactions in which a security interest is taken or extended in a family’s homestead. The Texas attorney assumes responsibility for the legal sufficiency of the conveyancing documents transferring title to, and impressing liens on, the homestead, assures that the loan documents accurately and fairly reflect agreed contract terms committed to by the lender, and polices the lender’s compliance with the myriad of state and federal consumer protection laws and regulations, including notably the federal Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act, all of which inure to the benefit of the consumer and the other settlement service providers in the process and may be thought of as the glue that holds the home loan closing process together in Texas. Importantly, in the performance of these legal services, the Texas practitioner is held to a high standard of care and ethical conduct as an attorney and officer of the legal system. This accountability of the Texas practitioner to such a high standard of performance serves the public interest by assuring that the Texas practitioner in any case, under threat of a claim of malpractice by his client or professional misconduct by the State Bar, will carry out his duties ethically and competently and will tend to channel his client’s conduct into compliance with applicable law and regulations as well. Finally, we would remind the UPL Task Force that Texas homeowners are not an underserved class of consumer that requires the State Bar’s loosening of standards regarding the unauthorized practice of law to assure their access to legal services. As a matter of illustration, a recent survey of the National Association of Realtors of some 20,000 people nationwide who bought or sold a home in 1999 revealed that the median age of home buyers is 39 and that their annual income is 55% higher than an average American household ($49,700 for first-time home buyers, who account for 42% of all home buyers, and $68,900 for repeat buyers). The typical $150-$200 fee charged by the Texas practitioner for its document preparation and related legal services is neither significant in relation to the costs of settlement on the average $135,000 home purchase that may, and most often would, exceed $5,000, nor are the legal services a burden on the process of home ownership. In any case, for the reasons discussed in my earlier comment, the Texas homeowner would realize no benefit in terms of convenience or cost savings under the effects of either proposed Sections 81.102 B.2 or 81.102

Attn: Mr. Brent Clifton, Chairman Unauthorized Practice of Law Task Force August 21, 2000 Page 5 B.11. On the contrary, under the UPL Task Force’s recommendations, the Texas homeowner would pay as much, or more, for document preparation services, whether charged by the lender directly or indirectly, while being deprived of the benefit of consumer protections inherent under our traditional Texas practices. Considering the absence of any competing public interest and the risk of public harm that we believe would result under these proposed changes to the definition of the practice of law, we urge the UPL Task Force to amend its recommendations so as to fully preserve the substantive protections against the unauthorized practice of law contained in §83.001, Texas Government Code, and to exclude the conveyancing of real property from the authority extended corporate staff attorneys to provide legal advice solely to their corporate employers. Sincerely, J. Alton Alsup State Bar No. 01116000 .

TEXAS ASSOCIATION OF MORTGAGE ATTORNEYS PAGE 1 OF 10 AUGUST 2, 2000

COMMENT IN OPPOSITION TO RECOMMENDED REVISION OF THE STATUTORY DEFINITION FOR THE PRACTICE OF LAW

BY J. ALTON ALSUP State Bar No. 01116000

On Behalf of the

TEXAS ASSOCIATION OF MORTGAGE ATTORNEYS

INTRODUCTION

In its May, 2000, report “State Bar of Texas Task Force Preliminary Recommendation of a New Statutory Definition for the Practice of Law” (the “Report”), the State Bar of Texas Unauthorized Practice of Law Task Force (the “UPL Task Force”) invited comment by members of the State Bar and other interested persons regarding the present effect and future implications of the recommended changes to the statutory definition for the practice of law in Texas contained in the Report. The Texas Association of Mortgage Attorneys (TAMA) is a Texas non-profit corporation whose members are licensed Texas attorneys engaged principally in the practice of mortgage banking and residential real estate law on behalf of financial institutions, mortgage bankers, and mortgage brokers with respect to their Texas mortgage lending activities. The scope of professional services offered by TAMA members includes preparing real estate and mortgage loan documents and providing related legal advice regarding federal and state regulatory compliance issues and real estate, title, and closing matters. TAMA is vitally interested in public policy and legislative issues affecting Texas mortgage lending law and practices and the regulation of housing finance. This comment is made on behalf of TAMA in opposition to the preliminary recommendation of the UPL Task Force that current §§ 81.101, 81.102 and 83.001, Texas Government Code, be replaced with new §§ 81.101, 81.102 and 81.107, Texas Government Code, which among other things would authorize persons other than licensed Texas attorneys to engage in the practice of law to the limited extents specified in proposed § 81.102 B. 2, 3, 8 and 11, respectively, of the Report.

EXECUTIVE SUMMARY

If enacted in the form recommended by the UPL Task Force in the Report, the proposed revisions to the statutory definition of the practice of law would authorize any of a new class of banking, credit union, and thrift institutions, mortgage bankers, and mortgage brokers (closing loans in their own names under table funding practices), or any corporate affiliate, agents, or sub-contractors of these parties, to prepare legal documents, including promissory notes, mortgages, deeds of trust, deeds of conveyance, and transfers or releases of lien, in connection with any home or other mortgage loan to which these entities, or their affiliates, are named a party, or to accomplish the same effect through the employment of staff attorneys licensed in this state or another state who purport to be the preparer of such documents on behalf of these business entities. TAMA resolutely opposes these proposed revisions to the statutory definition of the practice of law that would repeal established Texas law reserving the practice of law in this regard to licensed Texas attorneys.


The preparation of residential mortgage loan documents and other legal instruments affecting title to real estate constitutes the practice of law in Texas. Texas attorneys exercise legal skill and judgment in the process of preparing these legal documents and must give careful consideration to the legal rights and obligations of the parties to the transactions. The selection and completion of legal documents with respect to any residential mortgage loan requires an expert understanding of loan product types and variables, the underlying conveyancing and property laws of Texas, and the particular legal, title and closing issues raised upon examination by the attorney of the related title insurance commitment, property survey, and other source documents. Attorneys are uniquely trained and qualified for this role through education, experience, and licensure and are held accountable to a high standard of care and ethical conduct in performing these services. Residential real estate law is recognized as a distinct field of specialized practice by the Texas Board of Legal Specialization, and most Texas attorneys certified by the board for their special competence in this field are believed to have transactional practices involving the preparation and review of documents affecting title to real estate. The legal and regulatory issues arising out of residential mortgage loan transactions are complex — requiring an attorney’s expert understanding variously of mortgage loan products and standards, unique Texas marital and property law, Texas title and closing practices, and compliance requirements for state and federal law regulating the making of residential mortgage loans. Conveyancing requirements particularly for Texas home equity, home improvement, and home refinancing loan transactions are unique in all the nation and require specialized knowledge of the Texas Constitution and its implementing statutes relating to our state’s uniquely protective homestead laws. Texas attorneys in performing document preparation services accept responsibility for the integrity of the legal documents and their ongoing legal sufficiency and enforceability. In an ever changing legal and regulatory environment, Texas attorneys must continually monitor legislative and judicial developments and prepare necessary revisions to, or design new, legal documents and consumer disclosures and place the instruments in service by mandatory compliance dates under applicable law. Although the Texas attorney responsible for loan document preparation expressly represents the legal interests of the mortgage lender, the borrower and third-party settlement service providers also benefit from the legal expertise and discipline the lender’s attorney lends to the documentation and closing process. Attorney oversight is particularly important in consumer transactions in which the family home is mortgaged and at risk. Homeowners often lack sophistication in such financial matters or equal bargaining power with the mortgage lender – yet are seldom represented by their own counsel under Texas practice when purchasing or refinancing their homes. The attorney under Texas practice provides no small measure of consumer protection by policing compliance of the documents and closing process with state and federal consumer protection laws, such as the federal Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act, and by assuring that documents accurately and fairly reflect agreed contract terms and are legally sufficient. Mortgage brokers — small business men and women who today are said to account for almost 60% of all residential mortgage loan originations — also rely on the legal guidance and counsel of the mortgage lender’s Texas attorney and arguably could not otherwise afford legal counsel given the realities of their high volume – low margin loan brokerage businesses. Similarly, real estate brokers and salesmen and title agencies find the attorney’s involvement in the documentation and closing process of particular value when open contract and title issues must be resolved as a condition of loan settlement. The Texas attorney informs the process and, as part of the attorney’s related services on


behalf of the mortgage lender, seeks to satisfy open issues by lending expert legal knowledge and problem solving skills to resolution of the inevitable contract, title and closing issues that arise. Texas public policy favors protection of consumers in their dealings with creditors – particularly with respect to transactions secured by the family homestead. The Texas Constitution to this end establishes the most protective homestead rights in all the land, and our legislature notably has enacted aggressive consumer protection legislation that provides for private actions by consumers and public enforcement by the Texas Attorney General for the commission of deceptive trade practices in transactions with consumers. The Texas Government Code, § 83.001, which reserves the authority to prepare documents affecting title to real property to licensed Texas attorneys, is a further expression of that public policy and was enacted for the protection of the public against the incompetent or unethical conduct of unlicensed persons who lack sufficient legal knowledge, training, skill, or accountability for the task. At a time when Congress and federal regulators are clamoring for aggressive new legislation to protect consumers against so-called “predatory lending” practices of some mortgage lenders and brokers, the UPL Task Force’s recommendation to remove the consumer protections inherent in current Texas practice is both contrary to established Texas public policy and ironically out of step with national trends favoring enhanced consumer protections for homeowners in their dealings with creditors. Although the legislature, acting in the “public interest of convenience and limiting costs”, has made a limited exception to the applicability of §83.001 in the case of real estate brokers and salesmen when merely filling in the blanks of comparatively simple, standardized forms of Earnest Money Contracts and related documents that are prepared by attorneys and approved by the Texas Real Estate Commission (in large part because the contracts must be negotiated and prepared for execution in the evenings and weekends at the homes of consumers when it would be impractical and burdensome on the home sales process to require the intervention of an attorney for that purpose), no similar overriding public policy considerations exist in the case of financial institutions and other mortgage lenders that seek to prepare legal documents as a matter of their own convenience and cost benefits. It is axiomatic that the borrower pays all costs of loan origination, and the recommendations of the UPL Task Force in fact would provide the consumer no savings in time or costs. The legislature has also made exceptions for individuals to represent themselves in courts of law in matters of criminal prosecutions and defenses of actions of a civil nature to the extent they are acting pro se. But it cannot be said that the proposed exemption in the Report for mortgage lenders from the unauthorized practice of law is analogous to a pro se exception by which a natural person is permitted to represent himself in such a legal proceeding. A corporate mortgage lender would neither be acting solely in its own interests in preparing mortgage loan documents, since the rights and obligations of the borrower and third-party assignees are also affected by the documents, nor acting as a party to the transaction, since a corporation acts through its officers, employees and agents, all unlicensed and unregulated individuals, who themselves are not parties to the loan transactions. Furthermore, mortgage brokers, which account for a majority of all home loan originations nationwide, are mere nominal parties to the loan transactions in any event under modern “table funding” practices in which brokered loans are funded by wholesale lenders and typically pre-sold for contemporaneous delivery in the secondary market to investors that are the true parties in interest. The mortgage broker preparing conveyancing documents for a home loan under the authority of the UPL Task Force’s recommendation, therefore, would be permitted to engage in the practice of law for another – the holder and true party in interest. Moreover, the broad sweep of the proposed exemption in the Report would undoubtedly open the practice of law in Texas in this regard to the various national forms and document services companies performing document preparation services


purportedly as agents or sub-contractors of mortgage lenders and brokers under outsourcing contracts. In any case, the UPL Task Force’s recommendation effectively would substitute the legal judgments and discretion of lay employees of these mortgage lenders, brokers, and document preparation vendors for that of licensed Texas attorneys. Considering the risk of public harm that could result under the recommendations of the UPL Task Force by permitting employees of financial institutions, mortgage companies, and mortgage brokers, or their affiliates, agents, or sub-contractors (who themselves have no showing of special competence in the field or accountability as licensees supervised by any state agency) to supplant licensed Texas attorneys in preparing mortgage loan documents and other instruments that affect title to real property and legal rights and obligations of Texas homeowners, and given the absence of any competing public interests in convenience and cost savings to homeowners, the recommendations of the UPL Task Force accordingly should be rejected by the State Bar of Texas and the protections to the public against the unauthorized practice of law under §83.001, Texas Government Code, fully preserved. ν

DISCUSSION

1. Under Current Law, Preparation of Mortgage Loan Documents and Other Legal Instruments Affecting Title to Real Property Constitutes the Practice of Law in Texas. Although it has been suggested that the recommendations of the UPL Task Force are merely intended to clarify current law regarding the unauthorized practice of law, the Report would instead change substantive Texas law in that it would permit a new class of persons other than licensed Texas attorneys to prepare legal instruments affecting title to real property. The Texas Government Code, §83.001, regarding the unauthorized practice of law, prohibits persons other than licensed Texas attorneys from charging or receiving, either directly or indirectly, any compensation for all or any part of the preparation of a legal instrument affecting title to real property, including a deed, deed of trust, note, mortgage, and transfer or release of lien.

It is immaterial in applying the statute whether a person preparing such a legal instrument is a party to the transaction. The Attorney General of Texas in Opinion JM-943 dated August 22, 1988, found that whether the person preparing the legal instruments in any case is a party to the real estate transaction to which the instruments relate is irrelevant to applying the statute, which by its terms covers any person, including lenders and other parties to a real estate transaction. And it is not sufficient for compliance that a person preparing such a legal instrument simply purport not to charge any compensation for the service. The Attorney General in his 1988 opinion observes that by prohibiting any compensation, direct or indirect, the statute envisages a liberal interpretation of what constitutes compensation. If compensation for the work of persons other than an attorney for preparation of legal documents is recouped in a charge, regardless of how the charge is labeled or denominated, the Attorney General cautioned, the prohibitions of the statute apply.

The Supreme Court of Texas has also taken a liberal view of what constitutes a charge for preparation of legal documents in the landmark case of Hexter Title & Abstract Co., Inc. v. Grievance Committee, 179 S.W.2d 946 (Tex. 1944). The title company in this case routinely prepared legal documents for transactions in which it was to issue an abstract or policy of title insurance and contended that it was not practicing law in violation of Texas law because it was not charging for the service. The Supreme Court found, however, that even though a separate charge was


not set out and denominated as legal fees, the legal services performed by the title company “constitutes a part of the total service for which the customer pays” and there is therefore “a consideration, reward or pecuniary benefit flowing to the defendant for the legal services so rendered”:

The defendant apparently advertises and holds itself out as furnishing this legal service without charge. However, it is not true in fact that such services are furnished free of cost to the consumer. This legal service is advertised as a leader to induce prospective customers to come in and transact other business in which there is a greater profit. It is offered as an inducement to contract for an abstract of title, for which a direct charge is made, or to allow the defendant’s principal to insure the title to the property involved, for which the defendant receives a commission. The furnishing of such legal services consti-tutes a part of the cost of obtaining the business transacted by the defendant. Evidently it pays, or the practice would be discontinued. It constitutes a part of the total service for which the customer pays. There is therefore “a consideration, reward or pecuniary benefit” flowing to the defendant for the legal services so rendered.

Because of the liberal interpretation under Texas law of what constitutes compensation, §83.001 of the Texas Government Code effectively prohibits mortgage lenders from preparing their own legal instruments affecting title in Texas real estate sales and mortgage transactions. Under the Hexter Title rationale, the interest rate, discount points, and yield-enhancement fees routinely charged by mortgage lenders and denominated variously as an underwriting fee, processing fee, review fee, and the like would constitute compensation for purposes of §83.001, Texas Government Code. Finally, under the general definition set out in § 81.101, Texas Government Code, the “practice of law” may include the rendering of any service requiring the use of legal skill and knowledge, including preparing a contract or other instrument “the legal effect of which under the facts and conclusions involved must be carefully determined” – including a contract or instrument affecting the title to real property. Moreover, Texas courts have held that the preparation of legal instruments of all kinds involve the practice of law, including in the case of Palmer v. Unauthorized Practice of Law Committee, 438 S.W. 2d 374 (Tex. App. – Houston, 1969 no writ) the sale of will forms containing blanks to be filled in by the user, along with instructions for completion of the forms. But in 1999, the Texas Legislature amended § 81.101 to add a new subsection (c) clarifying that the practice of law does not include the sale and distribution of legal “self help” books, written materials, computer software, or similar products if the products are clearly and conspicuously labeled that the products are not a substitute for the advice of an attorney. This amendment appears to override the decision of a Dallas federal district court in January, 1999, granting summary judgment for the plaintiff in Unauthorized Practice of Law Committee v. Parsons Technology, Inc. d/b/a Quicken Family Lawyer [1999 WL 47235 (N. D. Tex.)], which found that the Quicken Family Lawyer software program went beyond the mere publishing of a sample form book with instructions and constituted the unauthorized practice of law. After enactment of § 81.101(c) and while pending appeal, the judgment in Parsons Technology was accordingly vacated and remanded by the Fifth Circuit Court of Appeals in light of the amended statute [179 F.3d 956 (5th Cir. 1999)]. Nevertheless, such “self help” sample forms, software, and similar materials may not be used by non-attorneys to prepare documents affecting title to real property in violation of § 83.001. While authorizing the publication and sale of self-help legal materials, § 81.101(c) expressly preserves the prohibitions of § 83.001 by providing: “This subsection does not authorize the use of the products or similar media in violation of Chapter 83 and does not affect the applicability or enforceability of that chapter.”


2. Preparation of Mortgage Loan Documents Requires the Exercise of Legal Skill and Knowledge and Careful Consideration of Legal Rights and Obligations for which Licensed Texas Attorneys are Uniquely Qualified.

Texas law recognizes that the preparation of legal instruments affecting title to real property involves careful consideration of important legal rights and obligations of the parties that by its very nature constitutes the practice of law. Attorneys use specialized legal skill and knowledge in the design, creation, selection and preparation of mortgage loan documentation evidencing and securing these legal rights and obligations and in the performance of related legal services traditionally provided their mortgage lender clients. The basic service performed by Texas attorneys on behalf of mortgage lenders and mortgage brokers is the timely and accurate preparation of legally sufficient mortgage loan documents in accordance with lender instructions and the standard of care imposed at law on licensed attorneys and delivery of the originals of the documents to a specified title or other settlement agent to accommodate scheduled loan closings. Typical loan document sets often contain 25, or more, separate documents, consisting generally of legal documents evidencing and securing the indebtedness, regulatory compliance documents required under applicable state and federal law, and numerous ancillary documents required by the lender and typically created or edited by its Texas counsel. Selection of the basic forms of documents in each case is influenced by the source of loan origination (retail, wholesale, or correspondent), investor type (conforming conventional, non-conforming, or government insured or guaranteed), and loan program type (fixed-rate, variable rate or ARM, or custom alternative mortgage transactions, such as loans with balloon, graduated payment, or negative amortization features). The selection and completion of legal documents with respect to any residential mortgage loan requires an expert understanding of these loan product variables, the underlying conveyancing and property laws of Texas, and the particular legal, title and closing issues raised upon examination of each loan by the attorney of the title insurance commitment, property survey, and other source documents. The judgment and discretion of an attorney is particularly required in the evaluation and application of the law in securing the rights and obligations of the parties to a residential mortgage loan transaction. Texas law notably recognizes both community property rights and the most restrictive homestead rights of any state. Texas’ uniquely protective homestead laws in fact were only recently amended to allow homeowners to borrow against the equity in their homes — but then only subject to 25, or more, exacting documentation and procedural conditions to the creation of a valid homestead lien that today daunt even the legal community. Restrictions on refinancing the venerable Texas homestead also confound the uninitiated entering the Texas market who are surprised to learn that Texas law uniquely restricts the loan size of home refinancings while adding to the lender’s documentation and title closing burden. Conveyancing requirements in home equity loans, home improvement loans, and home loan refinancings are unique in all the nation and require specialized understanding of the Texas Constitution and its implementing statutes. Moreover, particular legal custom and practices have developed over the years in Texas to adequately address these unique Texas marital and real property conveyancing issues (such as the use of so-called Renewal and Extension Riders in homestead refinancings, retention and assignment of so-called Vendor’s Liens in Warranty Deeds for the benefit of the lender advancing purchase money proceeds, and the use of Owelty Deeds of partitioning to finance, for example, the buy-outs of the homestead by vacating spouses to a divorce). Texas additionally regulates the financing of manufactured housing, which is said to account for over 25% of all new home sales in Texas today, and secondary lien financings


under consumer credit statutes. Moreover, Texas title insurance practice differs from the rest of the nation under its title commitment practice, promulgation of its own forms of title insurance, and unique title issues arising out of its marital and property laws, such as outstanding oil, gas and mineral interests and gas pipeline easements and right of ways across our state. In addition to preparation of loan documentation, Texas attorneys routinely counsel their mortgage lender clients in the often complex regulatory, title, underwriting, and closing issues in connection with the loan transactions for which they prepare documents — often clearing open issues in title and survey matters and, when necessary, preparing curative documents in title matters or special documents considered necessary to protect the lender’s particular interests in any case, as well as reviewing on behalf of the mortgage lender the sufficiency of powers of attorney, affidavits of marital status, escrow agreements, subordination agreements, and similar documents prepared by attorneys for other parties. Texas attorneys representing mortgage lenders in this highly technical field necessarily must be responsible for monitoring of developments in federal and state law and regulations affecting the mortgage lending industry to assure that any revisions of loan documents or creation of new forms necessitated by regulatory changes are accomplished accurately and timely and programmed on the attorneys’ computer systems to be placed in service prior to the mandatory compliance date, and that the mortgage lender client is appropriately informed and counseled with respect to all such developments. Moreover, in an ever evolving legal and regulatory environment, Texas attorneys are responsible for the integrity of the legal documents and their ongoing legal sufficiency and enforceability. In this short year alone, Fannie Mae and Freddie Mac have announced comprehensive revisions of their industry standard forms of note, security instrument, and riders to these instruments, for Texas and nationwide; federal legislation has required the introduction of yet another consumer disclosure at loan settlement regarding automatic cancellation of private mortgage insurance, which also requires amendments to the method of calculation and forms of related Truth in Lending disclosures; and, HUD has issued an interpretive rule regarding required disclosures of lender-paid mortgage broker compensation under federal legislation — all of which require that attorneys responsible for the integrity of the legal documents evaluate and revise the forms of loan documentation accordingly. The scope of the services typically performed by the Texas attorney under the rubric “document preparation”, therefore, encompasses not merely the completion of standardized forms of legal documents, but legal advice at each stage of the documentation and closing process with regard to the complex regulatory, legal, title, survey, and closing issues related to each loan for which documents are prepared. Legal advice is inherent in the document preparation and closing process, and these various services of the Texas attorney may be said to be inextricably intertwined in that recognition of the need for legal advice in any case requires an attorney’s knowledge of controlling legal principles and an understanding of underlying facts about the loan that is gained by the attorney from the document preparation, review, and closing process itself. 3. Consumers Mortgaging their Homes, Mortgage Brokers, Real Estate Brokers, Title Companies and Other Settlement Service Providers in Connection with Texas Home Loans Benefit From the Expert Knowledge, Skill, Oversight, and Discipline that the Mortgage Lender’s Texas Attorney Lends to the Document Preparation and Loan Closing Process. In the performance of its document preparation and related legal services, Texas attorneys uniquely are held to high standards of care and ethical conduct. Although expressly representing the legal


interests of the mortgage lender with respect to any loan transaction, the borrower and third-party settlement service providers, such as mortgage brokers, real estate brokers and salesmen, and title insurance agencies also benefit from the legal expertise and discipline brought to the documentation and closing process by the attorney. Attorney oversight in the process is particularly important in consumer transactions in which a security interest is taken in a family’s homestead. The homestead for most families, beyond sheltering and securing their own, is the largest investment of their lives and by far the most significant asset of their estates. Yet, under Texas practice homeowners are seldom represented by their own counsel when mortgaging their homes. Unlike commercial real estate transactions in which it is assumed that both parties are sophisticated and have substantially equal bargaining power, homeowners often are not sophisticated in finance and real estate matters and are powerless to negotiate terms. The attorney, by assuming responsibility for assuring that loan documents accurately and fairly reflect agreed contract terms and for policing compliance with state and federal consumer protection laws such as the federal Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act on behalf of the lender, contributes a large measure of reliability and credibility to the loan documentation and closing process that benefits the consumer and third-party settlement service providers as well. Mortgage brokers (who originate mortgage loans for sale and assignment to mortgage lenders either as intermediaries or under table funding practices in which the loan is assigned to mortgage lenders contemporaneously with the closing) are said today to account for almost 60% of all mortgage loan originations nationwide. Yet, under Texas practice mortgage brokers are seldom represented by their own counsel — instead choosing to rely vicariously on the legal advice and counsel given the lender by its Texas counsel with respect to any loan. Mortgage brokers generally are small business men and women working on high volumes and thin margins of profitability and arguably could not otherwise afford legal oversight of the complex documentation, regulatory compliance, and closing process. Other settlement service providers in the process as well, such as title agencies, both in their capacities of insurer and settlement agents, and real estate agents, find the attorney’s involvement in the documentation and closing process of real value when open contract and title issues must be resolved to satisfy conditions to loan closing and consummation of the purchase and sale of the secured property. The Texas attorney informs the process and seeks to resolve open issues with these service providers on behalf of the mortgage lender by lending his expert knowledge and skill to resolution of the inevitable open contract, title, or other issues. 4. No Overriding Public Policy Considerations Exist for Exempting Mortgage Lenders, Mortgage Brokers, and Private Document Preparation Vendors from Unauthorized Practice of Law Prohibitions of § 83.001, Texas Government Code. Texas public policy favors protection of consumers in their dealings with creditors – particularly with respect to transactions secured by the family homestead. The Texas Constitution to this end establishes the most protective homestead rights in all the land, and our legislature notably has enacted aggressive consumer protection legislation that provides for private actions by consumers and public enforcement by the Texas Attorney General for the commission of deceptive trade practices in transactions with consumers. The Texas Government Code, § 83.001, which reserves the authority to prepare documents affecting title to real property to licensed Texas attorneys, is a further expression of that public policy and was enacted for the protection of the public against the incompetent or unethical conduct of unlicensed persons who lack sufficient legal knowledge, training, skill, or accountability for the task.


Although the legislature has seen fit to make a limited exception to the applicability of § 83.001 prohibitions in certain cases, such as for real estate sales agents and oil and gas leasing agents, in which there were overriding public policy considerations, no similar considerations exist for exempting financial institutions and other mortgage lenders, mortgage brokers, and the third-party document preparation vendors to which these services may be “outsourced” from the unauthorized practice of law in connection with the preparation of documents affecting title to residential real property. In the case of real estate brokers and salesmen, the legislature has made a limited exception to the applicability of §83.001 when, in connection with real estate sales transactions for which they serve as listing or selling agents, the brokers or salesmen merely fill in the blanks of standardized and preprinted forms of Listing Agreements and Earnest Money Contracts that are prepared by licensed Texas attorneys and approved by the Texas Real Estate Commission. However, the overriding public policy concerns of convenience and limiting costs for the consumer upon which this narrow exception is based are not existent in the case of financial institutions and other mortgage lenders seeking to prepare legal documents as a matter of their own convenience and cost benefits. Mortgage lenders, mortgage brokers, and their third-party “doc prep” vendors purporting to act as their agents or sub-contractors would not be held to the same accountability or standard of care in these endeavors nor have similar duties of care to the consumer as imposed by law on real estate brokers and salesmen, as agents and fiduciaries. Furthermore, unlike real estate brokers and salesmen, mortgage lenders and brokers are not required as a matter of ordinary business practice to negotiate and complete contract documents at the homes of consumers in the evenings after normal business hours or on weekends that makes the required use of an attorney under those conditions impractical and burdensome to the home sales process. Instead, attorneys typically have a period of one to three business days in advance of a scheduled loan closing in which to prepare mortgage loan documentation and deliver loan documents to the designated settlement agent without burdening the process. Moreover, homeowners would enjoy no cost reduction benefits. Legislation recommended by the Report should not be mistaken for a consumer protection bill in which the homeowner would benefit from enhanced convenience and reduced costs as they may when real estate brokers and agents are permitted to complete the blanks of comparatively simple contract documents under §83.001. Corporate overhead costs of producing documents (salaries and wages, computer equipment, paper stock, etc.) undoubtedly would be passed on the consumer in the form of additional fees, whether or not separately denominated as “document preparation” fees, or premium interest rates that allow the lender to recover these costs over time. It is axiomatic that the consumer pays all costs of the transaction plus interest producing the desired yield to the lender either through front-end fees at or before settlement or a yield enhanced interest rate. Consequently, under the recommended revisions to the statutory definition of the practice of law, the Texas homeowner would pay as much, or more, for the service as under current Texas practices but without the benefits inherent in the attorney’s expertise and oversight lent to the document preparation and closing process. The legislature has also made exceptions for individuals to represent themselves in courts of law in matters of criminal prosecutions and defenses of actions of a civil nature to the extent they are acting pro se. But it cannot be said that the proposed exemption in the Report for mortgage lenders from the unauthorized practice of law is analogous to a pro se exception by which a natural person is permitted to represent himself in such a legal proceeding. A corporate mortgage lender or mortgage broker would neither be acting solely in its own interests in preparing mortgage loan documents, since the rights and obligations of the borrower and third-party assignees are also affected by the documents, nor acting as a party to the transaction, since a corporation acts through its officers,


employees and agents — all unlicensed and unregulated individuals, who themselves are neither parties to the loan transactions nor agents required to demonstrate any special competence in the performance of these specialized document preparation duties on behalf of the corporation or held accountable under any particular standard of care imposed at law or by a supervising regulatory agency. Moreover, the broad sweep of the proposed exemption in the Report undoubtedly would open the practice of law in Texas to the various out-of-state national document services companies performing mortgage document preparation services as agents or subcontractors to these mortgage lenders and mortgage brokers under outsourcing contracts. In any case, the legal judgments and discretion of unlicensed and unregulated employees of these mortgage lenders, mortgage brokers, and private document preparation vendors inherent in the document preparation and closing process would be substituted for that of licensed Texas attorneys under the UPL Task Force recommendations. Considering the risk of public harm that could result under the recommendations of the UPL Task Force by permitting employees of financial institutions, mortgage companies and mortgage brokers, or their third-party document preparation vendors (who themselves have no showing of special competence in the field or accountability as licensees supervised by any state agency) to supplant licensed Texas attorneys in preparing mortgage loan documents and other instruments that affect title to real property and legal rights and obligations of Texas homeowners, and given the absence of any competing public interests in convenience and cost savings to homeowners, the recommendations of the UPL Task Force accordingly should be rejected by the State Bar of Texas and the protections to the public against the unauthorized practice of law under §83.001, Texas Government Code, fully preserved.

Bill Number: TX79RHB 89 Filed: 11-08-2004 Author: Rodriguez A BILL TO BE ENTITLED 1 AN ACT 2 relating to requiring a person closing a real estate transaction to 3 assist a purchaser or owner in applying for a residence homestead 4 tax exemption. 5 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 6 SECTION 1. Subchapter C, Chapter 11, Tax Code, is amended by 7 adding Sections 11.49 and 11.50 to read as follows: 8 Sec. 11.49. ASSISTANCE WITH EXEMPTION APPLICATION. A 9 person who for compensation prepares the closing documentation on a 10 sale, encumbrance, or transfer of a single-family residential 11 structure or a single unit of other residential property shall: 12 (1) provide to the purchaser or, in the case of an 13 encumbrance, the owner of the property a copy of the form used by 14 each appraisal district in which the property is located for 15 applying for exemptions provided under Section 11.13; and 16 (2) disclose to the purchaser or owner, as applicable, 17 the following information: 18 (A) the type of exemptions available under 19 Section 11.13 and instructions on how to file an application for 20 applicable exemptions with each appraisal district in which the 21 property is located; 22 (B) the location, including the mailing and 23 physical address, of each appraisal district in which the property 24 is located; and 1

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1 (C) the period in which the appraisal district 2 must receive the application for the purchaser or owner to qualify 3 for any applicable exemptions under Section 11.13. 4 Sec. 11.50. FEE FOR ASSISTANCE WITH RESIDENCE HOMESTEAD 5 APPLICATION. (a) A person who assists another person by preparing 6 or filing on behalf of the other person an application for an 7 exemption under Section 11.13: 8 (1) may not charge a fee of more than $25 for that 9 service; and 10 (2) must timely file the application with the chief 11 appraiser for each appraisal district in which the property is 12 located. 13 (b) A fee under Subsection (a) must be paid directly by the 14 person who receives the service. A person providing a service 15 described by Subsection (a) may not accept any part of a refund of 16 taxes on any property in payment for those services. 17 (c) A person who violates this section is liable to the 18 purchaser or owner, as applicable, for: 19 (1) actual damages; 20 (2) $1,000 in punitive damages; and 21 (3) reasonable court costs and attorney's fees. 22 SECTION 2. Section 11.49, Tax Code, as added by this Act, 23 applies only to a sale, encumbrance, or transfer of real property 24 that occurs on or after the effective date of this Act. 25 SECTION 3. This Act takes effect September 1, 2005. 2

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