Part 2. TEXAS DEPARTMENT OF BANKING
Chapter 12. LOANS AND INVESTMENTS
The Finance Commission of Texas (commission) adopts amendments to §12.1, concerning purpose and scope; §12.3, concerning loans and extensions of credit; §12.5, concerning percentage lending limits; §12.6, concerning loans not subject to lending limits; §12.8, concerning other exceptions; §12.9, concerning aggregation and attribution; §12.10, concerning nonconforming loans; §12.33, concerning debt cancellation contracts and debt suspension agreements; and §12.91, concerning other real estate owned; the repeal of §12.2, concerning general definitions; §12.61, concerning transition provisions; and §12.62, concerning definition of equity capital; and new §12.2, concerning definitions; §12.11, concerning calculation of lending limits; §12.61, concerning calculation of investment limits; and §12.62, concerning hedging investments. The amendments, repeal and new sections are adopted without changes to the proposed text as published in the June 29, 2007, issue of the Texas Register (32 TexReg 3919). The text will not be republished.
The adopted revisions implement certain provisions of House Bill 2007, passed by the 80th Texas Legislature. Most notably, House Bill 2007 deletes the concept of "certified surplus" in state law to create uniformity with federal standards and reduce regulatory burden. Effective September 1, 2007, state bank loan and investment limits will be calculated based on "unimpaired capital and surplus" instead of "capital and certified surplus." Under the revised law and the adopted amendments to Chapter 12, in most circumstances a bank will be able to calculate legal and investment limits quarterly, based on the quarterly calculation of capital contained in its call report.
Other adopted revisions relate to modernization and clarification as a result of a completed rule review, as periodically required by the Government Code, §2001.039.
Chapter 12, Subchapter A (§§12.1 - 12.11), implements Finance Code, §34.201, by providing detailed standards for calculating and applying a bank's legal lending limit.
The amendment to §12.1(b)(1) deletes as unnecessary the "grandfather" provision for bank investments currently held that were acquired prior to September 1, 1995.
Citations to federal law in §12.1(b)(1) and (2) are conformed to a standard format. Similarly, citations to federal law in §§12.3(b)(4), 12.5(d)(2), 12.6(b), and 12.91(b)(5) are amended to conform to the standard format.
Existing §12.2, concerning definitions, is repealed and replaced by new §12.2. As adopted, new §12.2(1) defines "unimpaired capital and surplus" as equivalent to Tier 1 capital, determined under federal risk-based capital standards. New §12.2 also defines "call report," "federal risk-based capital standards," "Tier 1 capital," and "control." Finally, the two definitions formerly in repealed §12.2 are included in new §12.2 without material change.
Because references to capital and certified surplus in Chapter 12 are obsolete, amendments to §§12.5(a), (b)(1), (c)(1), (d)(1), (e)(1), (f), 12.8(b), 12.9(e), and 12.10(a)(1) substitute "Tier 1 capital" in place of "capital and certified surplus" as the applicable measurement base.
Section 12.3 defines loans and extensions of credit. As amended, §12.3(a)(1) clarifies that intra-day overdrafts are not considered loans or extensions of credit.
Section 12.3(b)(2) formerly provided that accrued and discounted interest are not considered loans and extensions of credit. As amended, §12.3(b)(2) adds exclusions for interest that has been capitalized from prior notes and interest that has been advanced under a loan agreement, consistent with similar federal law that applies to national banks.
Section 12.6 implements certain exemptions for which no statutory limits apply. Under §12.6(c), a loan to state or local government is excluded from the lending limit to the extent the loan constitutes a legally created general obligation, if the bank obtains an opinion of counsel that the loan is a valid and enforceable general obligation. Similarly, under §12.6(f), a loan is excluded from the lending limit to the extent it is secured by an unconditional takeout commitment, insurance, or guarantee of a governmental entity, if the bank obtains an opinion of counsel that the unconditional takeout commitment, insurance, or guarantee is a valid and enforceable general obligation of the purchasing, insuring, or guaranteeing entity. The requirement in these two exemptions for an opinion of counsel is not statutorily required.
Accordingly, adopted amendments to §12.6(c) and (f) allow a bank to rely on a bond counsel letter of the attorney general with respect to the validity and enforceability of the obligation, extension of credit, or guarantee in question, in lieu of obtaining its own opinion of counsel. Obtaining an opinion of counsel can be expensive and time consuming for community banks. Pursuant to Government Code, Chapter 1202, the attorney general reviews and approves all bonds and similar obligations issued by state agencies, cities, counties, school districts, municipal utility districts, hospital districts, institutions of higher education and all other governmental entities or instrumentalities of the state, plus certain nonprofit corporations created to act on behalf of political subdivisions. Allowing community banks to rely upon the attorney general's bond counsel letters will significantly reduce regulatory burden.
Former §12.6(f) provided that protection against loss is not materially diminished or impaired by a procedural requirement, such as "an agreement to take over only in the event of default." As amended, §12.6(f) clarifies that the phrase "an agreement to take over" means an agreement to pay on an obligation.
Under §12.9(c)(1), the common enterprise test for aggregation and attribution is stated in one instance as the existence of substantial financial interdependence between or among affiliated borrowers. Under §12.9(d), the independent source of repayment test for aggregation and attribution provides that an employer will not be considered a primary source of repayment solely because of wages and salaries paid to an employee. Because of confusion regarding whether wages and salaries paid to an owner-employee should be considered in determining whether substantial financial interdependence exists among the employer and the owner-employee for purposes of applying the common enterprise test, amended §12.9(d) clarifies that the common enterprise test and the source of repayment test are independent of one another.
Adopted new §12.11 provides direction concerning calculation of lending limits. Generally, a bank may rely on its quarterly calculation of capital found in its call report. However, to prevent a bank from lending in excess of a shrinking capital base, the section requires a bank to recalculate its lending limit between quarters if there were a change in its capital category for purposes of prompt corrective action under federal law. In addition, the banking commissioner may address unsafe or unsound lending practices or other supervisory concerns by directing any bank to calculate its lending limit more frequently than quarterly. The banking commissioner may also permit recalculation of lending limits during a quarter based on a material change in a bank's capital arising from corporate activities, such as a merger or stock issuance.
Section 12.33, concerning debt cancellation contracts and debt suspension agreements, is modeled on federal rules of the Office of the Comptroller of the Currency (OCC) addressing the same subject, for reasons expressed in the adoption preamble published in the April 25, 2003, issue of the Texas Register (28 TexReg 3494). However, shortly after adoption of §12.33, the OCC suspended certain aspects of its rules to consider how to address some difficulties that had arisen in the context of closed-end consumer loan transactions where debt cancellation contracts and debt suspension agreements are offered through unaffiliated, non-exclusive agents, see 68 Fed. Reg. 35283 (June 13, 2003). That suspension has never been lifted.
Accordingly, adopted §12.33(i) suspends specified aspects of §12.33 with respect to the offer and sale of debt cancellation contracts and debt suspension agreements through an unaffiliated, non-exclusive agent, in connection with closed-end consumer credit (other than residential mortgage loans) extended by the bank through the agent.
The submitted comment letter expressed support for adoption of proposed §12.33 without changes, but raised a concern regarding its interaction with other applicable law. Specifically, the commenter observed that the authorized fee for a debt cancellation contract or a debt suspension agreement cannot be added to a motor vehicle finance contract in Texas because it is not a permissible itemized charge under Chapter 348 of the Finance Code. The commenter expressed hope that others within Texas government might be encouraged into conforming their rules and statutes to allow state banks to add this charge to dealer financed contracts.
Existing §12.61 and §12.62 are repealed. The transition provisions set out in §12.61 are no longer necessary. The definition of equity capital set forth in §12.62 related to the law prior to House Bill 2007.
Adopted new §12.61 provides direction concerning calculation of investment limits. A state bank will determine its investment limit at the same time and in the same manner as it determines its lending limit under new §12.11.
Adopted new §12.62 addresses the permissibility of hedging investments, and authorizes a state bank to make an otherwise prohibited investment or exceed the statutory limits for an investment if the investment is solely for hedging existing bank risks and not for engaging in speculative activities.
Section 12.91, concerning other real estate owned (OREO), addresses the permissible means by which a bank acquires, manages, and disposes of OREO. Finance Code, §34.004, a new law enacted by House Bill 2007 effective September 1, 2007, may permit a state bank to retain ownership of nonworking royalty interests by classifying the interests as personal property instead of real property for bank regulatory purposes. Accordingly, §12.91(a)(10) is amended to remove royalty interests approved under Finance Code, §34.004, from the definition of OREO.
A state bank's ability to acquire and hold OREO is subject to 12 U.S.C. §1831a, which restricts and prohibits insured state banks and their subsidiaries from engaging in activities and investments that are not permissible for national banks and their subsidiaries, subject to exceptions. A national bank is required to treat a royalty interest as real estate and dispose of it no later than 10 years after acquisition. Accordingly, a state bank that seeks to retain direct ownership of royalty interests beyond 10 years after acquisition must apply to and obtain approval of both the banking commissioner under Finance Code, §34.004, and the Federal Deposit Insurance Corporation under 12 C.F.R. §362.3(a)(2)(i).
Finally, amended §12.91(h)(4) provides that permissible means of disposing of OREO include the transfer of OREO from the bank to a passive investment subsidiary in the manner authorized by 12 C.F.R. §362.4(b)(5)(i). State bank ownership of OREO beyond 10 years after acquisition is prohibited by 12 U.S.C. §1831a.
As required by Finance Code, §31.003(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive position of state banks with regard to national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development in this state.
The commission received one comment expressing support for the proposal.
Subchapter A. LENDING LIMITS
7 TAC §§12.1 - 12.3, 12.5, 12.6, 12.8 - 12.11
The amendments and new sections are adopted under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.201(d), which authorizes the commission to adopt rules regarding legal lending limits, including rules to define or further define terms used in the statute, or establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of loans or extensions of credit. The amendments and new sections are also adopted under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703693
Sarah J. Shirley
General Counsel
Texas Department of Banking
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 475-1300
The repeal of §12.2 is adopted under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.201(d), which authorizes the commission to adopt rules regarding legal lending limits, including rules to define or further define terms used in the statute, or establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of loans or extensions of credit. The repeal is also adopted under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703694
Sarah J. Shirley
General Counsel
Texas Department of Banking
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 475-1300
The amendments are adopted under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Government Code, §2001.039, which requires a state agency to review each of its rules every four years and readopt, readopt with amendments, or repeal a rule based upon its rule review.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703695
Sarah J. Shirley
General Counsel
Texas Department of Banking
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 475-1300
The repeal is adopted under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.101(h), which authorizes the commission to adopt rules regarding investments, including rules to define or further define terms used in the statute, to establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of securities, or to limit or expand investment authority for state banks for particular classes or categories of securities. The repeals are also adopted under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703696
Sarah J. Shirley
General Counsel
Texas Department of Banking
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 475-1300
The sections are adopted under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.101(h), which authorizes the commission to adopt rules regarding investments, including rules to define or further define terms used in the statute, to establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of securities, or to limit or expand investment authority for state banks for particular classes or categories of securities.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703697
Sarah J. Shirley
General Counsel
Texas Department of Banking
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 475-1300
The amendments are adopted under Finance Code, §31.003(a), which authorizes the commission to adopt rules to accomplish the purposes of Finance Code, Title 3, Subtitle A, including rules necessary or reasonable to implement and clarify applicable law, preserve or protect the safety and soundness of state banks, and grant at least the same rights and privileges to state banks that are or may be granted to national banks domiciled in this state. The amendments are also adopted under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703698
Sarah J. Shirley
General Counsel
Texas Department of Banking
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 475-1300
Subchapter C. HOLDING COMPANIES
The Finance Commission of Texas ("Finance Commission") adopts an amendment to 7 TAC §79.47, Mutual Holding Companies to add a new subsection (e). The new subsection is adopted to clarify that a mutual holding company may own one or more intermediate subsidiary holding companies. The new subsection permits the organization of the subsidiary holding company either as part of the initial reorganization of a mutual savings bank as a mutual holding company or at any subsequent time subject to approval of the Department of Savings and Mortgage Lending (the "Department"). The amendment to the rule is adopted without changes to the proposed text as published in the June 29, 2007, issue of the Texas Register (32 TexReg 3926). The text of the rule will not be republished.
Finance Code Chapter 97, Subchapter B, provides that a mutual savings bank may organize a subsidiary stock savings bank and transfer the assets of the mutual savings bank to the new subsidiary, thus converting the existing entity into a mutual holding company. The result is a two-tiered structure with a mutual holding company parent (the first tier) and a subsidiary stock savings bank (the second tier). Frequently, however, savings banks may prefer to reorganize using a three-tiered structure. Under this structure the mutual holding company parent (first tier) may own as much as 100% but must own more than 50% of a stock subsidiary holding company (the second tier). The stock subsidiary holding company must own 100% percent of the stock savings bank (the third tier).
The Department believes that the use of a three-tiered structure is permitted under Finance Code Chapter 97 and current rules. However, the Department believes that amending 7 TAC §79.47 to more clearly set forth this position is advantageous because it provides better guidance as to permissible structures for those mutual savings banks considering reorganization as mutual holding companies. Because federally chartered mutual holding companies may use a three-tiered structure, the Department believes this furthers the goal of preserving parity with federal charters for state chartered savings banks.
The Department received no comments on the proposed rule.
The proposal is made pursuant to Finance Code §11.302(a) authorizes the Finance Commission to adopt rules applicable to savings associations and savings banks.
The sections of the Finance Code affected by the proposed new subsection are Finance Code , Chapter 97, Subchapter B, Mutual Holding Companies (Finance Code §§97.051 et seq.).
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 20, 2007.
TRD-200703746
John Fleming
General Counsel
Texas Department of Savings and Mortgage Lending
Effective date: September 9, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 475-1352
Chapter 84. MOTOR VEHICLE INSTALLMENT SALES
Subchapter B. INSTALLMENT SALES CONTRACT PROVISIONS
The Finance Commission of Texas (commission) adopts amendments to 7 TAC §84.209, concerning Model Clauses for motor vehicle installment sales contracts. The amendments are adopted without changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3927) and will not be republished.
The purpose of the amendments to 7 TAC §84.209 is to correct errors in a Spanish translation of the documentary fee clause. The first translation option contained in §84.209(9)(B) has been revised to include the most accurate Spanish translation.
These amendments, as well as all of the rules contained in 7 TAC, Chapter 84, Subchapter B (§§84.201 - 84.210), provide model clauses and a model contract. Licensees are not required to adopt the model language contained in the rules. However, for those licensees utilizing the model clauses or contract, the prior model language (as contained in former 7 TAC, Part 1, Chapter 1, Subchapter R) is acceptable and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §84.209 and §84.210 in the Texas Register on March 9, 2007 (32 TexReg 1231) listed the agency's implementation date as October 1, 2007. Given these additional amendments, the agency intends to provide licensees until January 1, 2008, for compliance.
The commission received no written comments on the proposal.
The amendments are adopted under Texas Finance Code §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §348.513 grants the commission the authority to adopt rules to enforce the motor vehicle installment sales chapter.
The statutory provisions (as currently in effect) affected by the adopted amendments are contained in Texas Finance Code, Chapter 348.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703677
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640
Subchapter A. REGISTRATION PROCEDURES
The Finance Commission of Texas (commission) adopts amendments to 7 TAC §88.102, concerning Filing of New Application for debt management services providers. The amendments are adopted with changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3928).
The purpose of these amendments is to establish a workable foundation to begin the regulation of for-profit entities that provide debt management services, including new filing requirements and clarification regarding information to be provided about accreditation organizations. Along with adopted amendments to 7 TAC §88.202 and §88.304, as well as adopted new 7 TAC §88.306 and §88.307 published elsewhere in this issue of the Texas Register, the adopted amendments serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature. With SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities.
Section 88.102(b) has been revised to reflect the new filing requirements contained in SB 884, including certain names, business addresses, email and website addresses of the applicant's debt management business. Language has been added to §88.102(b) to implement the new statutory requirement that each applicant provide the name and home address of each officer and director and each person holding 10% ownership or more. In the disclosure of principal parties, the detailed description of ownership and the disclosure of the for-profit affiliates have been limited to nonprofit or tax exempt organizations, as required by SB 884. Regarding accreditation organizations, paragraph (8) has been added, outlining the requirement that the applicant provide the name and contact information for the accreditation organizations for both the provider itself and its credit counselors.
Additionally, some technical corrections have been made to §88.102(b) to streamline its language for better clarity. Since the proposal, §88.102(b) has been revised further to enhance the streamlining process.
The commission received no written comments on the proposal.
These amendments are adopted under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to implement Texas Finance Code, Chapter 394, Subchapter C.
The statutory provisions (amendments effective September 1, 2007) affected by the adopted amendments are or will be contained in Texas Finance Code, Chapter 394, Subchapter C.
§88.102.Filing of New Application.
(a) An application for issuance of a new debt management services provider registration must be submitted as prescribed by the commissioner at the date of filing and in accordance with the commissioner's instructions. Applications may be submitted electronically by Internet or e-mail, or by mail.
(b) The application shall include the following required forms and filings. All questions must be answered.
(1) Application for Registration of Debt Management Services Provider.
(A) Required names and addresses. An applicant for a debt management services provider registration must provide the following:
(i) the applicant's name;
(ii) all other names under which the applicant conducts business;
(iii) a physical street address for the applicant's principal business address and that location's telephone number;
(iv) the address of each location in this state at which the applicant will provide debt management services, or if the applicant will have no such location, a statement to that effect;
(v) all other business addresses of the applicant in this state;
(vi) the electronic mail address of the applicant's responsible person listed in subparagraph (B) of this paragraph; and
(vii) the applicant's primary Internet website address.
(B) Responsible person. The person responsible for the day-to-day operation of the applicant's proposed business location must be named.
(C) Authentication. An officer must authenticate the application.
(2) Application Questionnaire for Debt Management Services Provider. All applicable questions must be answered.
(3) Disclosure of Owners and Principal Parties of Debt Management Services Provider.
(A) Detailed ownership and for-profit affiliate disclosure of nonprofit or tax exempt organizations. If the applicant is a nonprofit or tax exempt organization, a detailed description of the ownership interest of each officer, director, agent, or employee of the applicant must be provided. Any member of the immediate family of an officer, director, agent, or employee of the applicant, in a for-profit affiliate or subsidiary of the applicant, or in any other for-profit business entity that provides services to the applicant or to a consumer in relation to the applicant's debt management business must also be provided.
(B) Ownership disclosure. The section inquiring about owners requires an answer based upon the applicant's entity type. If an individual's interest in an entity is community property, then spouses with a community property interest must also be listed. If the business interest is owned by a married individual as separate property, then a statement authenticating that fact should be provided.
(i) All entity types. All applicants must disclose the name and home address of each officer and director of the applicant and each person that holds at least a 10% ownership interest in the applicant.
(ii) Corporations. All shareholders holding 5% or more voting stock must be named. If a parent corporation is the sole or part owner of the proposed business, a narrative or diagram must be attached that describes each level of ownership and management. This narrative or diagram requires the listing of the names of all officers, directors, and stockholders owning 5% or more stock at each level.
(iii) Other organizations. The owners, trustees, or governing persons must be named.
(4) Statutory Agent Disclosure. The statutory agent is the person or entity to whom any legal notice may be delivered. The agent must list a Texas address for legal service. If the statutory agent is an individual, the address must be a residential address.
(5) Surety bond or insurance. An applicant must file with the commissioner either:
(A) a Surety Bond in the prescribed form:
(i) At initial application:
(I) If the average daily balance of the provider's trust account serving Texas consumers over the six-month period preceding the issuance of the bond is less than $50,000 or if the provider does not have any trust account history for Texas consumers, then a $50,000 bond is required.
(II) If the average daily balance of the provider's trust account serving Texas consumers over the six-month period preceding the issuance of the bond is $50,000 or more, then a $100,000 bond is required.
(ii) At annual renewal:
(I) If the average daily balance of the provider's trust account serving Texas consumers over the six-month period preceding the issuance of the bond is less than $100,000, the bond amount must be equivalent to or exceed the average daily balance, but not be less than $25,000.
(II) If the average daily balance of the provider's trust account serving Texas consumers over the six-month period preceding the issuance of the bond is $100,000 or more, then a $100,000 bond is required; or
(B) evidence of insurance meeting the requirements of Texas Finance Code, §394.206 and clauses (i) - (iii) of this subparagraph, as follows:
(i) a fidelity insurance policy, in the aggregate amount of $100,000 that provides coverage for:
(I) employee dishonesty;
(II) depositor's forgery;
(III) computer fraud; and
(ii) a professional liability insurance policy in the aggregate amount of $100,000.
(iii) The fidelity insurance policy and the professional insurance policy must cover losses sustained by a Texas resident that are attributable to a debt management service or a debt management services agreement. Both the fidelity insurance policy and the professional insurance policy must contain a loss payee clause or rider stating that any loss or claim arising out of an action which occurred within the scope of Texas Finance Code, Chapter 394 may be payable in favor of the State of Texas.
(6) Assumed name certificates. For any applicant that does business under an assumed name as that term is defined in Texas Business & Commerce Code, §36.02(7), the applicant must provide all assumed names used.
(7) Debt management services agreement. The applicant must provide a blank copy of the written debt management services agreement as described in Texas Finance Code, §394.209.
(8) Accreditation organizations. The applicant must provide the names and contact information for:
(A) the independent, third-party accreditation organization of the provider; and
(B) the accreditation organization or program that certifies the provider's credit counselors.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703678
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640
The Finance Commission of Texas (commission) adopts amendments to 7 TAC §88.202, concerning Annual Report for debt management services providers. The amendments are adopted without changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3929) and will not be republished.
The purpose of these amendments is to establish a workable foundation to begin the regulation of for-profit entities that provide debt management services, including new clarification regarding information to be provided about accreditation organizations and credit counselors. Along with adopted amendments to 7 TAC §88.102 and §88.304, as well as adopted new 7 TAC §88.306 and §88.307 published elsewhere in this issue of the Texas Register, the adopted amendments serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature. With SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities.
Section 88.202(b) has been amended to include the number of counselors and their certifying organization or program within the annual report information. Coordinating revisions have been made to §88.304(b) so that a provider will only be required to submit actual documentation of its counselors' certification upon request by the commissioner, with the annual report now including the basic information concerning a provider's credit counselors.
The commission received no written comments on the proposal.
These amendments are adopted under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to implement Texas Finance Code, Chapter 394, Subchapter C.
The statutory provisions (amendments effective September 1, 2007) affected by the adopted amendments are or will be contained in Texas Finance Code, Chapter 394, Subchapter C.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703679
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640
The Finance Commission of Texas (commission) adopts amendments to 7 TAC §88.304, concerning Credit Counseling Standards for debt management services providers. The amendments are adopted without changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3930) and will not be republished.
The purpose of these amendments is to establish a workable foundation to begin the regulation of for-profit entities that provide debt management services, including clarification regarding information to be provided about accreditation organizations and credit counselors, and limits on compensation for credit counselors. Along with adopted amendments to 7 TAC §88.102 and §88.202, as well as adopted new 7 TAC §88.306 and §88.307 published elsewhere in this issue of the Texas Register , the adopted amendments serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature. With SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities.
Revisions have been made to §88.304(b) so that a provider will only be required to submit actual documentation of its counselors' certification upon request by the commissioner, with the annual report now including the basic information concerning a provider's credit counselors. (See adopted amendments to 7 TAC §88.202, published separately in this issue.)
Subsection (c) has been added to §88.304 and prohibits the credit counselors of debt management services providers from receiving commissions or bonuses based on the number of debt management services agreements initiated, or on the sale of counseling sessions, educational programs, or materials and supplies provided. A subcommittee of the U.S. Senate performed a study regarding abusive practices in credit counseling and made a specific recommendation that employees not receive any improper incentives, including that employees should not be compensated "based upon the number of clients enrolled in debt management plans . . . ." Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate, Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling , p. 54 (S. Rept. 109-55, Apr. 13, 2005). This amendment is intended to implement that recommendation and prevent abusive sales tactics, as counselors will not be compensated based on the number of consumers induced to sign debt management services agreements with the employing provider. The concept for the adopted amendments to §88.304 stems from provisions contained in the 2005 bankruptcy reform regulations from the U.S. Department of Justice, as well as the Uniform Debt-Management Services Act (UDMSA) drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL).
The commission received one written comment on the proposal from Money Management International, Inc. The commenter is "very supportive" of the credit counseling requirements contained in §88.304.
These amendments are adopted under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to implement Texas Finance Code, Chapter 394, Subchapter C.
The statutory provisions (amendments effective September 1, 2007) affected by the adopted amendments are or will be contained in Texas Finance Code, Chapter 394, Subchapter C.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703680
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640
The Finance Commission of Texas (commission) adopts new 7 TAC §88.306, concerning Fees for Debt Management Services, and §88.307, concerning Consumer Education for debt management services providers. The rules are adopted with changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3931).
The purpose of the new rules is to establish reasonable fees and minimum standards for the delivery of education to consumers. Along with the adopted amendments to §§88.102, 88.202, and 88.304 published elsewhere in this issue of the Texas Register , the adopted new rules serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature.
With the enactment of SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities. In particular, the bill added subsection (f) to §394.210, which provides specific rulemaking authority to the commission to "establish maximum fair and reasonable fees" for debt management services providers. Section 88.306 executes that intent by instituting reasonable fee provisions. The concepts for many of the fees provided by §88.306 stem from fee provisions contained in the Uniform Debt-Management Services Act (UDMSA) drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL). The fees outlined by adopted §88.306 below, however, have been modified as a result of industry input in order to incorporate the best possible balance of necessary fee limitations that will be practical in application.
Since the proposal, §88.306(a) has been reorganized and revised in order to clarify the initial intent of the timing of the fees allowed to be charged by debt management services providers. The agency believes that this revised version as presented for adoption outlines the fees with better clarity and in a more chronological fashion. The reorganized and revised §88.306(a) first lists the fee that can be charged to consumers who do not enter into debt management services agreements, and then describes the fees allowed for consumers who do enter into agreements.
The commission received one written comment on the proposal from Money Management International, Inc. While fully supportive of §88.307, the commenter outlines several suggested changes to §88.306. The commission agrees with some of the suggestions, declines to adopt other suggestions and though not including the commenter's recommended wording, has also incorporated some of the concepts offered by the commenter. The specifics regarding each suggestion are outlined below. Please note, however, that since §88.306(a) has been reorganized, the commission will refer to the reorganized subsection designation, or to the concept contained in the particular provision.
Section 88.306(a)(1) contains the fee that can be charged to consumers who do not enter into debt management services agreements. Subsection (a)(1)(A) lists the fee which compensates for counseling sessions, educational programs, or materials and supplies provided to consumers who do not enter into agreements with the provider. For consumers who are provided these services and who do not enter into agreements, the provider may charge a maximum fee of $50. The adopted language of §88.306(a)(1)(A) is modeled after a statutory provision from the State of Kansas. The language of §88.306(a)(1)(B), however, modifies subparagraph (A) to exclude from the fee limitation services provided under federal mandates or programs.
The commenter recommends deletion of the language "if the consumer does not enter into a debt management services agreement with the provider" in reorganized subsection (a)(1)(A), in order "to account for . . . the sale of valuable and worthwhile educational material to clients who enter a debt management plan . . . ." The very purpose of this fee is to compensate providers for counseling and educational services and materials provided to those consumers who do not enter into agreements with the provider. For those consumers who do enter into agreements, the cost of these counseling and educational services and materials is included within the initial enrollment fee, as outlined below in reorganized subsection (a)(2)(A). Consequently, the commission declines to delete this language.
Section 88.306(a)(2) next outlines the fees that can be charged to consumers who do enter into debt management services agreements. Subsection (a)(2)(A) provides for a maximum fee of $100 for initial enrollment services associated with the establishment of a debt management services agreement with the provider.
Section 88.306(a)(2)(B) outlines an allowable monthly service or maintenance fee not to exceed 10% of the consumer's monthly payment, with a minimum of $10 and a maximum of $50 per month.
Since the proposal, reorganized subsection (a)(2)(B) has been revised by deleting the "of" before "10%" and replacing it with "not to exceed." This revision maintains parallel phrasing with the other fee limitations listed throughout §88.306.
The commenter suggests that a minimum of $20 be added to the monthly service or maintenance fee provision. The commission agrees with the concept of adding a minimum fee in order for providers to cover their monthly servicing costs. The commission believes, however, that the suggested minimum amount of $20 is too high, as a balance must be achieved between cost recovery for providers and not overcharging consumers who have smaller monthly payments. When compared with the charges currently offered for monthly electronic bill-pay by major banks (a range of $5.00 - $7.00), the commission maintains that a minimum of $10 is the proper amount to align with Chapter 394, Subchapter C's purpose of consumer protection, while allowing providers to recoup costs. Thus, a minimum of $10 has been added to reorganized subsection (a)(2)(B).
Also with regard to §88.306(a)(2)(B), the commission agrees with the commenter's suggestion of adding "scheduled" as a modifier to the monthly payment. Calculating the monthly service or maintenance fee based on the scheduled monthly payment will provide more clarity and stability to both consumers and providers.
The commenter recommends the addition of language addressing situations where a consumer either makes an additional unscheduled payment one month or deposits less than the monthly scheduled amount. The commission agrees with providing direction for these situations. Therefore, under §88.306(a)(2)(B), clauses (i) and (ii) have been added incorporating these concepts and outlining the permissible fees for these circumstances.
Subsection (a)(2)(C) adds a provision concerning credit reports provided to consumers, as recommended by the commenter. As opposed to the commenter's suggested "reasonable fee," the adopted language permits providers to recover their out-of-pocket costs for providing credit reports to consumers who enter into agreements. The commission believes that this cost recovery limitation will appropriately compensate providers while serving the statute's purpose of protecting consumers.
The commenter offers a provision stating the following: "A provider will not be in violation of any fee limits promulgated by these regulations in the event . . . a client entered into a contract with the provider while residing in another state and then relocates his or her residence to Texas . . . ." The commenter's language indicates that the reason a provider would not be in violation of Texas fee limitations is because the fee regulations of the consumer's state of origin where the agreement was executed would govern. Accordingly, the commission views this recommended language to constitute a choice of law provision. The commission is unable to adopt such a provision at this time under the Administrative Procedure Act (APA), as this choice of law issue was not addressed in the proposal. The commission will consider proposing a rule incorporating choice of law concepts at a later date.
A provision concerning the refunding of overcharges made in error is also suggested by the commenter. Through Texas Finance Code, §349.201, the option to cure is specifically available to any lender or creditor who makes a transaction subject to Texas Finance Code, Title 4, Subtitle B. Likewise, Texas Finance Code, §305.103 provides Subtitle A creditors and lenders similar cure provisions. These cure provisions have been consistently applied by the courts to Title 4 licensees. Furthermore, in the administrative context, the agency routinely allows its licensees under Title 4 to provide restitution to debtors. While there is no analogous statutory provision in Title 5, the agency, in its administrative enforcement efforts, anticipates continuing this policy to allow a debt management services provider who violates a fee limitation, the ability to provide restitution in order to bring the fee within regulatory compliance.
Although the commission agrees with the commenter's concerns and desire to correct errors, the commission believes that adopting this suggestion is outside the agency's statutory authority. The commenter's recommended provision would serve to reduce the amount of protection for consumers by potentially eliminating private remedies available under Texas Finance Code, §394.215. The commission cannot legislate the rights of third parties through the rulemaking process. While the commission agrees that it is a prudent business practice to correct errors promptly upon discovery, allowing refunds within 10 days of detection could result in corrections being made after years of overcharging, without an opportunity for further redress of the violation. As outlined above, nothing in Title 5 of the Texas Finance Code, or in Chapter 394, creates this sort of statutory protection for debt management services providers. Thus, the commission declines to adopt the commenter's provision regarding the refunding of errant overcharges.
The commenter lastly recommends a subsection granting the agency authority to adjust all fee restrictions by providing notice on the commission's website. Adjusting fees in this manner is outside the agency's statutory authority and would violate the APA by not providing proper notice and public comment on changes to fee limitations contained in the rule. Furthermore, frequently changing fees with only notice posted on the agency's or commission's website would not be in harmony with the purpose of the statute. The commenter's suggested provision would work against proper consumer notice and not provide consumers with a reasonable expectation of fee amounts. The commission may amend the fee limitations through the rulemaking process as necessary. Also, interested persons may submit a petition for rulemaking under Texas Government Code, §2001.021 if an interested party believes the fees require adjustment. Therefore, the commission declines to adopt this suggestion.
Section 88.306(b) prohibits a provider (without advance approval) from charging a fee or providing credit or other insurance, coupons, club memberships, Internet or computer access, or any other services not directly related to debt management or education about personal finance. The adopted language of §88.306(b) is modeled after both the UDMSA and a recently passed bill from the State of Colorado, although this adoption has an added modifier to allow pre-approval by the commissioner.
Additionally, since the proposal, descriptive taglines have been added to §88.306 to introduce each subsection, offering clarity and direction for the reader.
The adoption of §88.307 serves to address the wide disparity in the amount of education provided to consumers seeking debt management services in Texas. In fact, financial consumer education is greatly needed throughout the country, as "[t]he Department of the Treasury, as well as consumer and industry groups, have identified the lack of financial literacy in the United States as a serious, widespread problem." United States General Accounting Office, Report to the Chairman and Ranking Minority Member, Special Committee on Aging, U.S. Senate, Consumer Protection: Federal and State Agencies Face Challenges in Combating Predatory Lending , p. 89 (GAO-04-280, Jan. 2004) (footnote omitted). Furthermore, a subcommittee of the U.S. Senate performed a study regarding abusive practices in credit counseling, where "current and former credit counselors and CCA [credit counseling agency] clients were interviewed and Subcommittee staff responded to advertisements from various agencies to see what advice was being given." Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate, Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling , p. 2 (S. Rept. 109-55, Apr. 13, 2005). The Subcommittee found that the actions of some recent entrants into the credit counseling industry had resulted in an increasing number of consumer complaints about, among other things, "non-existent education." Id. The Subcommittee specifically recommended that credit counseling agencies provide consumer education in the form of "affirmative financial counseling and educational programs designed to reduce excessive indebtedness . . . ." Id. at 53.
Thus, it has become evident that minimum standards need to be set for the industry so that consumers will have an expectation of receiving consistent content and quality information in the education supplied by debt management services providers. Armed with the same high level of reliable information, consumers throughout the state can make more informed choices regarding the management of their debt. The purpose of §88.307 is to provide one set of minimum standards, across the entire industry of debt management services providers, for the delivery of consumer education.
Section 88.307(a) outlines the required consumer education, including topics, analysis, and instruction, that must be provided by a debt management services provider to a consumer in conjunction with the consumer's entering into a debt management services agreement with the provider. Since the proposal, a minor revision has been made to §88.307(a) to clarify the timing of when the required consumer education must be provided, as originally intended. In §88.307(a), the word "Before" has been replaced with the phrase "In conjunction with" to best reflect the applicability of §88.307(a) to consumers who execute debt management services agreements with the provider. The adopted language of §88.307(a) is partly modeled after provisions contained in the 2005 bankruptcy reform regulations from the U.S. Department of Justice.
Section 88.307(b) establishes that the education provided under §88.307(a) must give the consumer an adequate opportunity to obtain a complete financial assessment and comprehensive counseling, relative to the consumer's personal financial situation.
Section 88.307(c) provides some suggested guidelines regarding the amount of consumer education that should be provided to consumers who enter into debt management services agreements.
Since the proposal, a technical correction has been made to §88.307(c)(2) by inserting the word "for" after "optimum guideline."
Section 88.307(d) encourages debt management services providers to provide community-based financial education initiatives in addition to the required counseling for consumers who enter into agreements.
The commenter is "very supportive" of the consumer education requirements contained in §88.307.
These new sections are adopted under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to implement Texas Finance Code, Chapter 394, Subchapter C. Additionally, Texas Finance Code, §394.210(f) grants the commission the authority to "establish maximum fair and reasonable fees" for debt management services providers.
The statutory provisions (amendments effective September 1, 2007) affected by the adopted new sections are, or will be, contained in Texas Finance Code, Chapter 394, Subchapter C.
§88.306.Fees for Debt Management Services.
(a) Allowable fees. A provider may not charge or receive from a consumer, directly or indirectly (except for "fair share" and other such creditor or lender fees or contributions), a fee except for the following:
(1) if the consumer does not enter into a debt management services agreement with the provider:
(A) a fee, not to exceed $50, for a counseling session, an educational program, or materials and supplies provided by the provider to the consumer;
(B) subparagraph (A) of this paragraph does not apply to any services provided pursuant to a federal mandate or program;
(2) if the consumer enters into a debt management services agreement with the provider:
(A) an initial enrollment fee not to exceed $100, for services associated with the establishment of a debt management services agreement with the provider (e.g., setting up an account and consultation);
(B) a monthly service or maintenance fee not to exceed 10% of the consumer's scheduled monthly payment to creditors, allowing a minimum of $10, up to a maximum of $50 per month;
(i) if the consumer makes a payment in an amount less than the amount scheduled, the provider may charge a monthly service or maintenance fee that is calculated on the scheduled amount;
(ii) if the consumer makes a payment in addition to the scheduled payment during the month of the scheduled payment, the provider may charge an additional fee that is calculated on the monthly service or maintenance fee for the scheduled amount;
(C) a fee to cover the provider's out-of-pocket costs for providing credit reports to the consumer.
(b) Services not directly related to debt management services or educational services concerning personal finance. A provider may not charge a consumer for or provide credit or other insurance, coupons for goods or services, membership in a club, access to computers or the Internet, or any other matter not directly related to debt management services or educational services concerning personal finance, unless approved by the commissioner in advance.
§88.307.Consumer Education.
(a) Required counseling for consumers who enter into debt management services agreements. In conjunction with entering into a debt management services agreement with a consumer, the provider's credit counselors must provide education to the consumer regarding budget analysis and credit counseling services that include:
(1) an outline of available opportunities to resolve the consumer's credit problems;
(2) an analysis of the consumer's current financial condition;
(3) discussion of the factors that caused such financial condition;
(4) assistance in developing options in responding to the consumer's problems without incurring negative amortization of debt; and
(5) information and instruction on the following topics:
(A) budget development;
(B) money management; and
(C) wise use of credit.
(b) Adequate opportunity for consumers. Credit counseling provided under subsection (a) of this section must give the consumer an adequate opportunity to obtain a complete financial assessment and comprehensive counseling, relative to the consumer's personal financial situation.
(c) Suggested guidelines.
(1) This subsection provides suggested guidelines for the amount of credit counseling to be provided to consumers who enter into debt management services agreements. These suggested guidelines are intended to give debt management services providers considerable flexibility to fit individual needs while providing some guidance.
(2) An optimum guideline for the amount of credit counseling to be provided to consumers who enter into debt management services agreements is 45 - 90 minutes, depending on the unique circumstances of the consumer's debt and financial situation.
(d) Community-based financial education encouraged. Debt management services providers are encouraged to provide community-based financial education initiatives in addition to the counseling required by this section for consumers who enter into debt management services agreements.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703681
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640
Subchapter D. SECOND LIEN HOME EQUITY LOANS (SUBCHAPTER G)
The Finance Commission of Texas (commission) adopts amendments to 7 TAC §90.403, concerning Model Clauses and §90.404, concerning Permissible Changes for second lien home equity loans. The amendments are adopted with changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3933).
The purpose of the amendments to these rules governing plain language contract provisions for Chapter 342 transactions is to implement changes required by recently passed legislation, and to make revisions enhancing consistency and clarity.
In reference to the recent legislation, House Bill 2061 (HB 2061) was signed by Governor Perry and went into immediate effect during the 2007 legislative session. This bill amends the Notice of Confidentiality Rights contained in Texas Property Code, §11.008, and now requires that this notice be included on any instrument transferring an interest in real property, whether or not any social security numbers or driver's license numbers are contained in the instrument. The commission last adopted amendments concerning these confidentiality notices at the February 23, 2007, commission meeting. As part of that adoption, the commission removed the notices from the model contracts. At that time, §11.008 required that the notice be given only if social security numbers or driver's license numbers were actually present in the transferring instrument. The February change was intended to reflect the current industry practice of not including such information on security documents, triggering inclusion of the notice only if the lender disclosed the borrower's personal information.
With the recent passage of HB 2061, however, the confidentiality notice is now mandatory on all instruments transferring an interest in real property. Thus, with this adoption, the commission is returning the Notice of Confidentiality Rights clauses included throughout the plain language rules to the model contracts and reinstating the language regarding the required nature of the notices to the rule text in compliance with HB 2061. Consequently, with respect to the confidentiality notices, these adopted amendments will result in the rules and model contracts more closely resembling their state prior to the February 23, 2007, adoption. Adopted amendments concerning the Notice of Confidentiality Rights clause are contained in §90.403(c)(37). This adoption will return the notice to the model contract contained in Figure: 7 TAC §90.404(a)(8).
The commission received one written comment regarding the proposal, from Black, Mann & Graham, L.L.P. The comment concerns §90.403 and §90.404, and relates to issues pertaining to the Notice of Confidentiality Rights.
In reference to §90.403(c)(37), the commenter believes that the proposed language regarding the location of the confidentiality notice is in conflict with provisions of the Texas Local Government Code and the Texas Property Code. While §191.007(c) of the Texas Local Government Code requires that "a clearly identifying heading . . . be placed at the top of the first page," it prefaces that statement with an exception deferring to Texas Property Code, §11.008. Section 11.008(c) requires that the Notice of Confidentiality Rights appear "on the top of the first page of the instrument." The commenter recommends that the phrase "either above or directly below the document heading" be deleted from §90.403(c)(37)(A). The commission agrees with the suggested change and has deleted this phrase from §90.403(c)(37)(A). Consequently, the removal of this phrase will result in the preceding provision having no change from the current text. Furthermore, in the Figure: 7 TAC §90.404(a)(8), the Notice of Confidentiality Rights has been relocated to the very top of the document above the heading, as to best reflect "the top of the first page" language contained in HB 2061.
Also concerning subsection (c)(37) of §90.403, the commenter recommends that the date reference of "January 1, 2004," be changed to March 28, 2007, which is the effective date of HB 2061. Although the commission agrees that the January 1, 2004, date should be removed from §90.403(c)(37), the commission does not believe that any other date reference is necessary. At the time of this rule's initial proposal, the date was needed in order to establish the future effective date of the authorizing legislation. With HB 2061, the effective date is in the past, and thus, all future contracts subject to HB 2061 will be required to contain the confidentiality notices. Therefore, the commission agrees to delete "On or after January 1, 2004," from §90.403(c)(37), but declines to add "March 28, 2007."
Regarding Figure: 7 TAC §90.404(a)(8), the commenter believes that the proposed notice "does not substantially comply with the promulgated text in new §11.008(c), Property Code, added by House Bill 2061, because the notice in proposed Figure: 7 TAC §90.404(a)(8) refers only to the document on which it is located and not, as required by Section 11.008(c), to 'any instrument that transfers an interest in real property'." The commenter recommends that the text of the Notice of Confidentiality Rights contained in Figure: 7 TAC §90.404(a)(8) be revised by replacing "THIS DOCUMENT" with "ANY DOCUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY." Although the commission would prefer this revision, the commission is unable to adopt the suggested language at this meeting, as the corresponding rule text of the notice has been proposed with no changes. In order to maintain consistency between the model clause contained in the rule text and the notice included in the figure, the commission declines to adopt the suggested language at this time. The commission believes that the current notice language substantially complies with HB 2061, and is returning the same text to the figure. At a future meeting, however, the commission plans on proposing the commenter's recommended Notice of Confidentiality Rights so that it may be uniformly revised within the model clauses and the model contracts.
Two revisions to enhance consistency and clarity are being adopted for the figures in 7 TAC §90.403(b)(11) and §90.404(a)(7). In §90.403(b)(11), which contains the property insurance model provision, the plural personal pronoun "We" is being replaced with "You" for consistency purposes. As amended, §90.403(b)(11) will include language parallel to the other property insurance sections contained throughout the plain language rules.
Regarding Figure: 7 TAC §90.404(a)(7), a comment offered prior to the last adoption has been reconsidered concerning the home equity disclosure statement. For the best clarity, the commission now agrees that the disclosure should be amended as follows: "THIS IS [SECURITY DOCUMENT SECURES] AN EXTENSION OF CREDIT AS DEFINED BY SECTION 50(a)(6), ARTICLE XVI OF THE TEXAS CONSTITUTION." The deleted language inappropriately refers to a security document, whereas Figure: 7 TAC §90.404(a)(7) is a model home equity note.
These amendments as well as all of the rules contained in Chapter 90 provide model clauses and model contracts. Licensees are not required to adopt the model language contained in the rules. However, regarding Chapter 90, Subchapter A - F, for those licensees utilizing the model provisions, the prior model language (as contained in former 7 TAC, Part 1, Chapter 1, Subchapter Q) is acceptable and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §§90.105, 90.403, 90.404, 90.503, 90.504, 90.603, and 90.604 in the Texas Register on March 9, 2007 (32 TexReg 1232), listed the agency's implementation date as October 1, 2007. Given these additional amendments, some required by recent legislation, the agency intends to provide licensees until January 1, 2008, for compliance.
The amendments are adopted under Texas Finance Code §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 grants the commission the authority to adopt rules to enforce the consumer loans chapter.
The statutory provisions (as currently in effect) affected by the adopted amendments are contained in Texas Finance Code, Chapter 342.
§90.403.Model Clauses.
(a) Generally. These model clauses are the plain language rendition of contract clauses that have typically been stated in technical legal terms. Nothing in this regulation prohibits a contract from including provisions that provide more favorable results for the borrower than those that would result from the use of a model clause.
(b) For a Chapter 342, Subchapter G second lien home equity loan contract:
(1) Identification. The model identification clause lists the account or contract number, the name and address of the creditor or lender, the date of the note, and the name and address of the borrower. The model clause identifying the pronouns used for the borrower and the lender reads: "A word like "I" or "me" means each person who signs as a Borrower. A word like "you" or "your" means the Lender or "Note Holder." The Lender is _________. The Lender may sell or transfer this Note. The Lender or anyone who is entitled to receive payments under this Note is called the "Note Holder." You will tell me in writing who is to receive my payments."
(2) Truth in Lending Act (TILA) disclosure box. The model Truth in Lending Act (TILA) disclosure box reads:
Figure: 7 TAC §90.403(b)(2) (No change.)
(3) Itemization of amount financed box. The itemization of amount financed box is not required if the licensee provides the borrower with a good faith estimate or a settlement statement as permitted by the Truth in Lending Act. An itemization of amount financed box which complies with Regulation Z is considered to be in compliance with this paragraph and will not require a non-standard submission.
(4) Promise to pay. One permissible change to the model language for the scheduled installment earnings method would be to allow partial prepayments of the principal during the term of the loan. This variation on the Texas scheduled installment earnings method would allow periodic reductions of the principal balance by partial prepayments. This variation would allow reductions of the principal balance that were not originally scheduled. The model clause for the borrower's promise to pay reads: "This loan is an Extension of Credit defined by Section 50(a)(6), Article XVI of the Texas Constitution."
(A) For contracts using the scheduled installment earnings method: "I promise to pay the Total of Payments to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(B) For contracts using the true daily earnings method: "I promise to pay the cash advance plus the accrued interest to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(5) Late charge. The model late charge provision for contracts using the scheduled installments earnings method or the true daily earnings method reads: "If I don't pay all of a payment within 10 days after it is due, you can charge me a late charge. The late charge will be 5% of the scheduled payment."
(6) After maturity interest. The model provision for after maturity interest reads: "If I don't pay all I owe when the final payment becomes due, I will pay interest on the amount that is still unpaid. That interest will be the higher of the rate of 18% per year or the maximum rate allowed by law. That interest will begin the day after the final payment becomes due."
(7) Prepayment clause. The model prepayment clause options read:
(A) For contracts using the scheduled installment earnings method: "I can make a whole payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(B) For contracts using the true daily earnings method: "I can make any payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(8) Finance charge earnings and refund method. The model provision options specifying the finance charge earnings and refund method read:
(A) For contracts using the scheduled installment earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.403(b)(8)(A) (No change.)
(B) For contracts using the scheduled installment earnings method with prepayments option - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.403(b)(8)(B) (No change.)
(C) For contracts using the true daily earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.403(b)(8)(C) (No change.)
(9) Fee for dishonored check clause. The model clause specifies the maximum allowable dishonored check fee. A licensed lender may always choose a lesser amount. The fee for dishonored check model clause reads: "I agree to pay you a fee of up to $30 for a returned check. You may add the fee to the amount I owe or collect it separately."
(10) Default clause. The model provision specifying the conditions causing default reads:
Figure: 7 TAC §90.403(b)(10) (No change.)
(11) Property insurance. The model provision regarding property insurance reads:
Figure: 7 TAC §90.403(b)(11) (.pdf)
(12) Credit insurance. If single premium credit insurance is allowable, a permissible change to the disclosure can be to offer a single charge for the entire term of the loan. The term for the single premium charge should be shown for the original term of the loan, unless otherwise specified. The licensee has the option of including language that reads: "The insurance will cancel on the date when the total past due premiums equal or exceed (insert number) times the first month's premium. "The industry standard regarding the relationship between total past due premiums and the first month's premium in this equation appears to be four (4) times. However, if a different time frame is more appropriate, that time frame may be used. The model credit insurance disclosure box reads:
Figure: 7 TAC §90.403(b)(12) (No change.)
(13) Mailing of notices to borrower. The model provision regarding the mailing of notices to the borrower reads: "You or I may mail or deliver any notice to the address above. You or I may change the notice address by giving written notice. Your duty to give me notice will be satisfied when you mail it by first class mail."
(14) Due on sale clause, notice of intent to accelerate, and notice of acceleration. The model provision regarding the due on sale clause, notice of intent to accelerate, and notice of acceleration reads: "If all or any interest in the homestead is sold or transferred without your prior written consent, you may require immediate payment in full of all that I owe under this Loan Agreement. You will not exercise this option if prohibited by law. If you exercise this option, you will give me notice of acceleration (i.e., payment of all I owe at once). This notice will give me a period of not less than 21 days from the date of the notice within which I must pay all that I owe under this Loan Agreement. If I fail to pay all that I owe before the end of this period, you may use any remedy allowed by the Loan Agreement."
(15) No waiver of lender's rights. The model provision expressing no waiver of the lender's rights reads: "If you don't enforce your rights every time, you can still enforce them later."
(16) Collection expenses clause. The model collection expenses clause reads: "If you require me to pay all that I owe at once, you will have the right to be paid back by me for all of your costs and expenses in enforcing this Loan Agreement to the extent not prohibited by law, including Section 50(a)(6), Article XVI of the Texas Constitution. These expenses include, for example, reasonable attorneys' fees. I understand that these fees are not for maintaining or servicing this Loan Agreement."
(17) Joint liability. The model provision providing for joint liability reads: "I understand that you may seek payment from only me without first looking to any other Borrower. You can enforce your rights under this Loan Agreement solely against the homestead. This Loan Agreement is made without personal liability against each owner of the homestead and the spouse of each owner unless the owner or spouse obtained this loan by actual fraud. If this loan is obtained by actual fraud, I will be personally liable for the debt, including a judgment for any deficiency that results from your sale of the homestead for an amount less than is owed under this Loan Agreement."
(18) Usury savings clause. The model usury savings clause reads: "I do not have to pay interest or other amounts that are more than the law allows."
(19) Savings clause. The model savings clause stating that if any part of the contract is invalid, the rest remains valid reads: "If any part of this Loan Agreement is declared invalid, the rest of the Loan Agreement remains valid. If any part of this Loan Agreement conflicts with any law, that law will control. The part of the Loan Agreement that conflicts with any law will be modified to comply with the law. The rest of the Loan Agreement remains valid."
(20) Contract supersedes prior agreements. For loan agreements exceeding $50,000.00, this notice must be boldfaced, capitalized, underlined, or otherwise set out from the surrounding written material to be conspicuous. The model integration clause providing that the contract supersedes prior agreements reads: "This written Loan Agreement is the final agreement between you and me and may not be changed by prior, current, or future oral agreements between you and me. There are no oral agreements between you and me relating to this Loan Agreement. Any change to this Loan Agreement must be in writing. Both you and I have to sign written agreements."
(21) Security document. The model provision stating that the homestead described in the loan agreement is subject to the lien of the security document reads: "The homestead described above by the property address is subject to the lien of the Security Document. I will see the separate Security Document for more information about my rights and responsibilities."
(22) Application of law. The model clause specifying that federal law and Texas law apply to the contract reads: "Federal law and Texas law apply to this Loan Agreement. The Texas Constitution will be applied to resolve any conflict between the Texas Constitution and any other law."
(23) Complaints and inquiries notice. The model complaints and inquiries notice reads: "This lender is licensed and examined by the State of Texas - Office of Consumer Credit Commissioner. Call the Consumer Credit Hotline or write for credit information or assistance with credit problems. Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207, www.occc.state.tx.us, (800) 538-1579."
(24) Clause describing collateral. The model provision describing the collateral reads: "The homestead described above by the property address is subject to the lien of the Security Document."
(25) Signature blocks. The licensee may also provide additional signature lines for witness signatures. The model provision regarding signature blocks reads:
Figure: 7 TAC §90.403(b)(25) (No change.)
(c) For the security document for a Chapter 342, Subchapter G second lien home equity loan contract:
(1) The model definitions section reads:
(A) ""Loan Agreement" means the Note, Security Document, deed of trust, any other related document, or any combination of those documents, under which you have extended credit to me.
(B) "Security Document" means this document, which is dated ________, together with all Riders to this document.
(C) "I" or "me" means _________________________________________, the grantor under this Security Document and the person who signed the Note ("Borrower").
(D) "You" means __________________________________________, the Lender and any holder entitled to receive payments under the Note. Your address is _________________________________________. You are the beneficiary under this Security Document.
(E) "Trustee" is ______________________________. Trustee's address is ___________________________________.
(F) "Note" means the promissory Note signed by me and dated ______________. The Note states that the amount I owe you is _________________ dollars (U.S. $_______) plus interest. I have promised to pay this debt in regular Periodic Payments and to pay the debt in full not later than ______________________________ (maturity date).
(G) "My Homestead" means the property that is described below under the heading "Transfer of Rights in the Property."
(H) "Extension of Credit" means the debt evidenced by the Note, as defined by Section 50(a)(6), Article XVI of the Texas Constitution and all the documents executed in connection with the debt.
(I) "Riders" means all Riders to this Security Document that I execute.
Figure: 7 TAC §90.403(c)(1)(I) (No change.)
(J) "Applicable Law" means all controlling applicable federal, Texas and local constitutions, statutes, regulations, administrative rules, local ordinances, judicial and administrative orders (that have the effect of law) as well as all applicable final, non-appealable judicial opinions.
(K) "Community Association Dues, Fees, and Assessments" means all dues, fees, assessments and other charges that are imposed on me or My Homestead by a condominium association, homeowners association, or similar organization.
(L) "Electronic Funds Transfer" means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, computer, or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account. The term includes point-of-sale transfers, automated teller machine transactions, transfers initiated by telephone, wire transfers, and automated clearinghouse transfers.
(M) "Escrow Items" means those items that are described in Section ___ of this Security Document.
(N) "Miscellaneous Proceeds" means any compensation, settlement, award of damages, or proceeds paid by any third party (other than proceeds paid under my insurance) for: damage or destruction of My Homestead; condemnation or other taking of all or any part of My Homestead; conveyance instead of condemnation; or misrepresentations or omissions related to the value or condition of My Homestead.
(O) "Periodic Payment" means the regularly scheduled amount due for principal and interest under the Note plus any amounts under this Security Document.
(P) "RESPA" means the Real Estate Settlement Procedures Act (12 U.S.C. §2601 et seq.) and Regulation X (24 C.F.R. Part 3500), as they might be amended from time to time, or any additional or successor legislation or regulation that governs the same subject matter. As used in this Security Document, "RESPA" refers to all requirements and restrictions that are imposed in regard to a "federally related mortgage loan" even if the Loan Agreement does not qualify as a "federally related mortgage loan" under RESPA.
(Q) "Successor in Interest of me" means any party that has taken title to My Homestead, whether or not that party has assumed my obligations under the Loan Agreement.
(R) "Ground Rents" means amounts I owe if I rented the real property under the buildings covered by this Security Document. Such an arrangement usually takes the form of a long-term "ground lease"."
(2) Secured agreement. The model provision regarding the secured nature of the agreement reads: "To secure this loan, I give you a security interest in My Homestead including existing and future improvements, easements, fixtures, attachments, replacements and additions to the property, insurance refunds, and proceeds. This security interest is intended to be limited to the homestead property and not other collateral, as required under the Texas Constitution."
(3) Transfer of rights in the property. The model provision regarding a transfer of rights in the property reads:
Figure: 7 TAC §90.403(c)(3) (No change.)
(4) Borrower and Lender's promise. The model provision regarding the borrower and lender's promise to comply with the terms of the security document reads: "YOU AND I PROMISE:".
(5) Late charges and prepayment. The model provision regarding late charges and prepayment of principal and interest reads:
Figure: 7 TAC §90.403(c)(5) (No change.)
(6) Funds for escrow items. The model provision regarding the funds for escrow items reads:
Figure: 7 TAC §90.403(c)(6) (No change.)
(7) Charges and liens. The model provision regarding charges and liens reads:
Figure: 7 TAC §90.403(c)(7) (No change.)
(8) Property insurance. The model provision regarding property insurance reads:
Figure: 7 TAC §90.403(c)(8) (No change.)
(9) Homestead. The model provision stating that the borrower occupies the property as his homestead reads: "I now occupy and use the property secured by this Security Document as my Texas homestead."
(10) Preservation, maintenance, protection, and inspection of the property. The model provision regarding preservation, maintenance, protection, and inspection of the property reads: "I will not destroy, damage or impair My Homestead, allow it to deteriorate, or commit waste. Whether or not I live in My Homestead, I will maintain it in order to prevent it from deteriorating or decreasing in value due to its condition. I will promptly repair the damage to My Homestead to avoid further deterioration or damage unless you and I agree in writing that it is economically unreasonable. I will be responsible for repairing or restoring My Homestead only if you release the insurance or condemnation proceeds for the damage to or the taking of My Homestead. You may release proceeds for the repairs and restoration in a single payment or in a series of payments as the work is completed. I still am obligated to complete repairs or restoration of My Homestead even if there are not enough proceeds to complete the work. You or your agent may inspect My Homestead. You may inspect the interior of My Homestead with reasonable cause. You will give me notice stating reasonable cause when or before the interior inspection occurs."
(11) Conditions causing actual fraud. The model provision specifying the conditions causing actual fraud reads:
Figure: 7 TAC §90.403(c)(11) (No change.)
(12) Protection of lender's interest in the property and rights under the security document. The model provision regarding the protection of the lender's interest in the property and rights under the security document reads:
Figure: 7 TAC §90.403(c)(12) (No change.)
(13) Assignment of miscellaneous proceeds and forfeiture. The model provision regarding the assignment of miscellaneous proceeds and forfeiture reads:
Figure: 7 TAC §90.403(c)(13) (No change.)
(14) Forbearance not a waiver. The model provision specifying that the borrower is not released from liability if the lender modifies the payment schedule reads: "My successors and I will not be released from liability if you extend the time for payment or modify the payment schedule. If I pay late, you will not have to sue me or my successor to require timely future payments. You may refuse to extend time for payment or modify this Loan Agreement even if I request it. If you do not enforce your rights every time, you may enforce them later."
(15) Joint and several liability, security document execution, successors obligated. The model provision regarding joint and several liability and specifying that the person who signs the contract grants his ownership in the homestead and binds his successors and assigns reads:
Figure: 7 TAC §90.403(c)(15) (No change.)
(16) Extension of credit charges. The model provision regarding the extension of credit charges reads:
Figure: 7 TAC §90.403(c)(16) (No change.)
(17) Delivery of notices. The model provision regarding the delivery of notices reads: "Under the Loan Agreement, you and I will give notices to each other in writing. Any notice under the Loan Agreement will be considered given to me when it is mailed by first class mail or when actually delivered to me at my address if given by another means. You will give notice to My Homestead address unless I provide you a different address. I will notify you promptly of any change of address. I will comply with any reasonable procedure for giving a change of address that you provide. There will only be one address for notice under the Loan Agreement. Notice to me will be considered notice to all persons who are obligated under the Loan Agreement unless Applicable Law requires a separate notice. I may give you notice by delivering or mailing it by first class mail to the address provided by you, unless you require a different procedure. You, however, will not receive notice under the Loan Agreement until you actually receive it. Legal requirements governing notices subject to the Loan Agreement will prevail over conditions in the Loan Agreement."
(18) Governing law and severability. The model provision regarding the law governing the contract, stating that if any part of the contract is declared invalid, the rest of the contract remains valid reads: "The Loan Agreement will be governed by Texas law and federal law. If any provision in the Loan Agreement conflicts with any legal requirement, all non-conflicting provisions will remain effective."
(19) Rules of construction. The model provision regarding rules of clause construction reads:
Figure: 7 TAC §90.403(c)(19) (No change.)
(20) Loan agreement copies. The model provision specifying that the lender will give the borrower a copy of all signed documents at the time the loan agreement is made reads: "At the time the Loan Agreement is made, you will give me copies of all documents I sign."
(21) Transfer of interest in property. The model provision regarding a transfer of interest in the property reads: ""Interest in My Homestead" means any legal or beneficial interest. This term includes those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement (the intent of which is the transfer of title by me at a future date to a purchaser). If any part of My Homestead is sold or transferred without your prior written permission, you may require immediate payment of all I owe. You will not exercise this option if disallowed by Applicable Law. If you accelerate, you will give me notice. The notice of acceleration will allow me at least 21 days from the date the notice is given to pay all I owe. If I fail to timely pay all I owe, you may pursue any remedy allowed by the Loan Agreement without further notice or demand."
(22) Borrower's right to reinstate after acceleration. The model provision regarding the borrower's right to reinstate after acceleration reads:
Figure: 7 TAC §90.403(c)(22) (No change.)
(23) Sale of note, change of loan servicer, notice of grievance, and lender's right to comply. The model provision regarding the sale of the loan, change of loan servicer, notice of grievance, and the lender's right to comply reads:
Figure: 7 TAC §90.403(c)(23) (No change.)
(24) Hazardous substances. The model provision regarding hazardous substances reads:
Figure: 7 TAC §90.403(c)(24) (No change.)
(25) Acceleration and remedies. The model provision regarding acceleration and remedies reads:
Figure: 7 TAC §90.403(c)(25) (No change.)
(26) Power of sale. The model provision regarding the power of sale reads:
Figure: 7 TAC §90.403(c)(26) (No change.)
(27) Release. The model provision regarding the release of the lien securing the loan agreement reads: "You will cancel and return the Note to me and give me, in recordable form, a release of lien securing the Loan Agreement or a copy of any endorsement of the Note and assignment of the lien to a lender that is refinancing the Loan Agreement. I will pay only the cost of recording the release of lien. My acceptance of the release or endorsement and assignment will end all of your duties under Section 50(a)(6), Article XVI of the Texas Constitution."
(28) Non-recourse liability. The model provision specifying that the loan agreement is given without personal liability against each owner of the homestead and the spouse of each owner reads:
Figure: 7 TAC §90.403(c)(28) (No change.)
(29) Proceeds. The model provision specifying that the borrower has not been required to repay another debt with the proceeds of the loan reads: "I am not required to apply the proceeds of the Loan Agreement to repay another debt except a debt secured by My Homestead or a debt to another lender."
(30) No assignment of wages. The model provision specifying that the borrower has not assigned wages as security for the loan agreement reads: "I have not assigned wages as security for the Loan Agreement."
(31) Acknowledgment of fair market value. The model provision specifying that the lender and the borrower have agreed in writing to the fair market value of the homestead reads: "You and I agreed in writing to the fair market value of My Homestead on the date of the Loan Agreement."
(32) Trustees and trustee liability. The model provision regarding trustees and trustee liability reads:
Figure: 7 TAC §90.403(c)(32) (No change.)
(33) Waiver of additional collateral. The model provision regarding the lender's waiving additional collateral reads:
Figure: 7 TAC §90.403(c)(33) (No change.)
(34) Default. The model default provision reads: "Any default of my agreements with you will be a default of this Security Document."
(35) Signature blocks. The model provision regarding signature blocks reads:
Figure: 7 TAC §90.403(c)(35) (No change.)
(36) Non-purchase disclosure. The model provision indicating that the security document does not finance a purchase transaction should appear at the beginning of the document, below the heading and prior to the definitions section. The model non-purchase disclosure provision reads: "This Security Document is not intended to finance Borrower's acquisition of the Property."
(37) Notice of confidentiality rights disclosure. The security document must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:
(A) appear on the top of the first page of the security document;
(B) be in at least 12-point boldfaced type or 12-point uppercase lettering; and
(C) be substantially similar to the required notice or disclosure under Texas Property Code, §11.008(b). The model notice of confidentiality rights reads: "NOTICE OF CONFIDENTIALITY RIGHTS: I MAY REMOVE OR STRIKE MY SOCIAL SECURITY NUMBER OR MY DRIVER'S LICENSE NUMBER FROM THIS DOCUMENT BEFORE IT IS FILED IN THE PUBLIC RECORDS."
§90.404.Permissible Changes.
(a) A licensed lender may consider making the following types of changes to the second lien home equity loans plain language model clauses:
(1) Adding information related to information set forth in the model clauses that is not otherwise prohibited by law;
(2) Substituting another term for "Lender" or "Borrower" that has the same meaning, or using pronouns such as "you," "we," and "us";
(3) Presenting the model clauses in any order, and combining or further segregating the model clauses;
(4) Inserting descriptive headings or number provisions;
(5) Changing the case of a word if otherwise permitted by the Texas Finance Code; or
(6) Making other changes which do not affect the substance of the disclosures.
(7) A sample model note is presented in the following example.
Figure: 7 TAC §90.404(a)(7) (.pdf)
(8) A sample model security document is presented in the following example.
Figure: 7 TAC §90.404(a)(8) (.pdf)
(b) An authorized licensee has considerable flexibility to arrange the format of the model form if the revised format does not significantly adversely affect the substance, clarity, or meaningful sequence of the disclosures.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703682
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640
The Finance Commission of Texas (commission) adopts amendments to 7 TAC §90.503, concerning Model Clauses and §90.504, concerning Permissible Changes for second lien purchase money loans. The amendments are adopted with changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3934).
The purpose of the amendments to these rules governing plain language contract provisions for Chapter 342 transactions is to implement changes required by recently passed legislation.
House Bill 2061 (HB 2061) was signed by Governor Perry and went into immediate effect during the 2007 legislative session. This bill amends the Notice of Confidentiality Rights contained in Texas Property Code, §11.008, and now requires that this notice be included on any instrument transferring an interest in real property, whether or not any social security numbers or driver's license numbers are contained in the instrument. The commission last adopted amendments concerning these confidentiality notices at the February 23, 2007, commission meeting. As part of that adoption, the commission removed the notices from the model contracts. At that time, §11.008 required that the notice be given only if social security numbers or driver's license numbers were actually present in the transferring instrument. The February change was intended to reflect the current industry practice of not including such information on security documents, triggering inclusion of the notice only if the lender disclosed the borrower's personal information.
With the recent passage of HB 2061, however, the confidentiality notice is now mandatory on all instruments transferring an interest in real property. Thus, with this adoption, the commission is returning the Notice of Confidentiality Rights clauses included throughout the plain language rules to the model contracts and reinstating the language regarding the required nature of the notices to the rule text in compliance with HB 2061. Consequently, with respect to the confidentiality notices, these adopted amendments will result in the rules and model contracts more closely resembling their state prior to the February 23, 2007, adoption. Adopted amendments concerning the Notice of Confidentiality Rights clause are contained in §90.503(c)(35). This adoption will return the notice to the model contract contained in Figure: 7 TAC §90.504(a)(8).
The commission received one written comment regarding the proposal, from Black, Mann & Graham, L.L.P. The comment concerns §90.503 and §90.504, and relates to issues pertaining to the Notice of Confidentiality Rights.
In reference to §90.503(c)(35), the commenter believes that the proposed language regarding the location of the confidentiality notice is in conflict with provisions of the Texas Local Government Code and the Texas Property Code. While §191.007(c) of the Texas Local Government Code requires that "a clearly identifying heading . . . be placed at the top of the first page," it prefaces that statement with an exception deferring to Texas Property Code, §11.008. Section 11.008(c) requires that the Notice of Confidentiality Rights appear "on the top of the first page of the instrument." The commenter recommends that the phrase "either above or directly below the document heading" be deleted from §90.503(c)(35)(A). The commission agrees with the suggested change and has deleted this phrase from §90.503(c)(35)(A). Consequently, the removal of this phrase will result in the preceding provision having no change from the current text. Furthermore, in Figure: 7 TAC §90.504(a)(8) the Notice of Confidentiality Rights has been relocated to the very top of the document above the heading, as to best reflect "the top of the first page" language contained in HB 2061.
Also concerning subsection (c)(35) of §90.503, the commenter recommends that the date reference of "January 1, 2004," be changed to March 28, 2007, which is the effective date of HB 2061. Although the commission agrees that the January 1, 2004, date should be removed from §90.503(c)(35), the commission does not believe that any other date reference is necessary. At the time of this rule's initial proposal, the date was needed in order to establish the future effective date of the authorizing legislation. With HB 2061, the effective date is in the past, and thus, all future contracts subject to HB 2061 will be required to contain the confidentiality notices. Therefore, the commission agrees to delete "On or after January 1, 2004," from §90.503(c)(35), but declines to add "March 28, 2007."
Regarding Figure: 7 TAC §90.504(a)(8), the commenter believes that the proposed notice "does not substantially comply with the promulgated text in new Section 11.008(c), Property Code, added by House Bill 2061, because the notice in proposed Figure: 7 TAC §90.404(a)(8) refers only to the document on which it is located and not, as required by Section 11.008(c), to 'any instrument that transfers an interest in real property'." The commenter recommends that the text of the Notice of Confidentiality Rights contained in Figure: 7 TAC §90.504(a)(8) be revised by replacing "THIS DOCUMENT" with "ANY DOCUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY." Although the commission would prefer this revision, the commission is unable to adopt the suggested language at this meeting, as the corresponding rule text of the notice had been proposed with no changes. In order to maintain consistency between the model clause contained in the rule text and the notice included in the figure, the commission declines to adopt the suggested language at this time. The commission believes that the current notice language substantially complies with HB 2061, and is returning the same text to the figure. At a future meeting, however, the commission plans on proposing the commenter's recommended Notice of Confidentiality Rights so that it may be uniformly revised within the model clauses and the model contracts.
These amendments as well as all of the rules contained in Chapter 90 provide model clauses and model contracts. Licensees are not required to adopt the model language contained in the rules. However, regarding Chapter 90, Subchapter A - F, for those licensees utilizing the model provisions, the prior model language (as contained in former 7 TAC, Part 1, Chapter 1, Subchapter Q) is acceptable and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §§90.105, 90.403, 90.404, 90.503, 90.504, 90.603, and 90.604 in the Texas Register on March 9, 2007 (32 TexReg 1232), listed the agency's implementation date as October 1, 2007. Given these additional amendments, some required by recent legislation, the agency intends to provide licensees until January 1, 2008, for compliance.
The amendments are adopted under Texas Finance Code §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 grants the commission the authority to adopt rules to enforce the consumer loans chapter.
The statutory provisions (as currently in effect) affected by the adopted amendments are contained in Texas Finance Code, Chapter 342.
§90.503.Model Clauses.
(a) Generally. These model clauses are the plain language rendition of contract clauses that have typically been stated in technical legal terms. Nothing in this regulation prohibits a contract from including provisions that provide more favorable results for the borrower than those that would result from the use of a model clause.
(b) For a Chapter 342, Subchapter G second lien purchase money loan contract:
(1) Identification. The model identification clause lists the account or contract number, the name and address of the creditor or lender, the date of the note, the name and address of the borrower, and the property address. The model clause identifying the pronouns used for the borrower and the lender reads: A word like "I" or "me" means each person who signs as a Borrower. A word like "you" or "your" means the Lender or "Note Holder". The Lender is _________. The Lender may sell or transfer this Note. The Lender or anyone who is entitled to receive payments under this Note is called the "Note Holder." You will tell me in writing who is to receive my payments."
(2) Truth in Lending Act (TILA) disclosure box. The model Truth in Lending Act (TILA) disclosure box reads:
Figure: 7 TAC §90.503(b)(2) (No change.)
(3) Itemization of amount financed box. The itemization of amount financed box is not required if the licensee provides the borrower with a good faith estimate or a settlement statement as permitted by the Truth in Lending Act. An itemization of amount financed box which complies with Regulation Z is considered to be in compliance with this paragraph and will not require a non-standard submission.
(4) Promise to pay. One permissible change to the model language for the scheduled installment earnings method would be to allow partial prepayments of the principal during the term of the loan. This variation on the scheduled installment earnings method would allow periodic reductions of the principal balance by partial prepayments. This variation would allow reductions of the principal balance that were not originally scheduled. The model clause options for the borrower's promise to pay read:
(A) For contracts using the scheduled installment earnings method: "I promise to pay the Total of Payments to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(B) For contracts using the true daily earnings method: "I promise to pay the cash advance plus the accrued interest to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(5) Late charge. The model late charge provision for contracts using the scheduled installment earnings method or the true daily earnings method reads: "If I don't pay all of a payment within 10 days after it is due, you can charge me a late charge. The late charge will be 5% of the scheduled payment."
(6) After maturity interest. The model clause specifies the maximum interest rate allowed by law for after maturity interest. A creditor may always choose a lower rate. The model provision for after maturity interest reads: "If I don't pay all I owe when the final payment becomes due, I will pay interest on the amount that is still unpaid. That interest will be the higher of the rate of 18% per year or the maximum rate allowed by law. That interest will begin the day after the final payment becomes due."
(7) Prepayment clause. The model prepayment clause options read:
(A) For contracts using the scheduled installment earnings method: "I can make a whole payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(B) For contracts using the true daily earnings method: "I can make any payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(8) Finance charge earnings and refund method. The model provision options specifying the finance charge earnings and refund method read:
(A) For contracts using the scheduled installment earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.503(b)(8)(A) (No change.)
(B) For contracts using the scheduled installment earnings method with prepayments option - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.503(b)(8)(B) (No change.)
(C) For contracts using the true daily earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.503(b)(8)(C) (No change.)
(9) Fee for dishonored check clause. The model clause specifies the maximum allowable dishonored check fee. A creditor may always choose a lesser amount. The model fee for dishonored check provision reads: "I agree to pay you a fee of up to $30 for a returned check. You may add the fee to the amount I owe or collect it separately."
(10) Default clause. The model provision specifying the conditions causing default reads:
Figure: 7 TAC §90.503(b)(10) (No change.)
(11) Property insurance. The model provision regarding property insurance reads:
Figure: 7 TAC §90.503(b)(11) (No change.)
(12) Credit insurance. If single premium credit insurance is offered, a permissible change to the disclosure can be to offer a single charge for the entire term of the loan. The term for the single premium charge should be shown for the original term of the loan, unless otherwise specified. The licensee has the option of including language that reads: "The insurance will cancel on the date when the total past due premiums equal or exceed (insert number) times the first month's premium." The industry standard regarding the relationship between total past due premiums and the first month's premium in this equation appears to be four (4) times. However, if a different time frame is more appropriate, that time frame may be used. The model credit insurance disclosure box reads:
Figure: 7 TAC §90.503(b)(12) (No change.)
(13) Mailing of notices to borrower. The duty to give notice is satisfied when it is mailed by first class mail. The model provision regarding the mailing of notices to the borrower reads: "You or I may mail or deliver any notice to the address above. You or I may change the notice address by giving written notice. Your duty to give me notice will be satisfied when you mail it."
(14) Due on sale clause, notice of intent to accelerate, and notice of acceleration. The model provision regarding the due on sale clause, notice of intent to accelerate, and notice of acceleration reads: "If all or any interest in the Property is sold or transferred without your prior written consent, you may require immediate payment in full of all that I owe under this Loan Agreement. You will not exercise this option if prohibited by law. If you exercise this option, you will give me notice that you are demanding immediate payment of all that I owe. This notice will give me a period of not less than 21 days from the date of the notice within which I must pay all that I owe under this Loan Agreement. If I fail to pay all that I owe before the end of this period, you may use any remedy allowed by the Loan Agreement."
(15) No waiver of lender's rights. The model provision expressing no waiver of the lender's rights reads: "If you don't enforce your rights every time, you can still enforce them later."
(16) Collection expenses clause. The model collection expenses clause reads: "If you require me to pay all that I owe at once, you will have the right to be paid back by me for all of your costs and expenses in enforcing this Loan Agreement to the extent not prohibited by Applicable Law. These expenses include, for example, reasonable attorneys' fees."
(17) Joint liability. The model provision providing for joint liability reads: "I understand that you may seek payment from only me without first looking to any other Borrower."
(18) Usury savings clause. The model usury savings clause reads: "I do not have to pay interest or other amounts that are more than Applicable Law allows."
(19) Savings clause. The model savings clause stating that if any part of the contract is invalid, the rest remains valid reads: "If any part of this Loan Agreement is declared invalid, the rest of the Loan Agreement remains valid. If any part of this Loan Agreement conflicts with any law, that law will control. The part of the Loan Agreement that conflicts with any law will be modified to comply with the law. The rest of the Loan Agreement remains valid."
(20) Contract supersedes prior agreements. For loan agreements exceeding $50,000.00, this notice must be boldfaced, capitalized, underlined, or otherwise set out from the surrounding written material to be conspicuous. The model integration clause providing that the contract supersedes prior agreements reads: "This written Loan Agreement is the final agreement between you and me and may not be changed by prior, current, or future oral agreements between you and me. There are no oral agreements between you and me relating to this Loan Agreement. Any change to this Loan Agreement must be in writing. Both you and I have to sign written agreements."
(21) Security document. The model provision stating that the property described in the loan agreement is subject to the lien of the security document reads: "In addition to the protections given to the Note Holder under this Note, a Security Document, dated ______________, protects the Note Holder from possible losses that might result if I do not keep the promises that I make in this Note. The Security Document describes how and under what conditions I may be required to make immediate payment in full of any amounts that I owe under this Note."
(22) Application of law. The model clause specifying that federal law and Texas law apply to the contract reads: "Federal law and Texas law apply to this Loan Agreement."
(23) Complaints and inquiries notice. The model complaints and inquiries notice reads: "The (name of Lender or Note Holder) is licensed and examined under the laws of the State of Texas and by state law is subject to regulatory oversight by the Office of Consumer Credit Commissioner. Any consumer wishing to file a complaint against the (name of Lender or Note Holder) should contact the Office of Consumer Credit Commissioner through one of the means indicated below: In Person or U.S. Mail: 2601 North Lamar Boulevard, Austin, Texas 78705-4207; Telephone No.: (800) 538-1579; Fax No.: (512) 936-7610; E-mail: consumer.complaints@occc.state.tx.us; Website: www.occc.state.tx.us."
(24) Clause describing collateral. The model provision describing the collateral reads: "The collateral described above by the property address is subject to the lien of the Security Document."
(25) Signature blocks. The licensee may also provide additional signature lines for witness signatures. The model provision regarding signature blocks reads.
Figure: 7 TAC §90.503(b)(25) (No change.)
(c) For the security document for a Chapter 342, Subchapter G second lien purchase money loan contract:
(1) The model definitions section reads:
(A) "Loan Agreement" means the Note, Security Document, deed of trust, any other related document, or any combination of those documents, under which you have made a loan to me.
(B) "Security Document" means this document, which is dated ________, together with all Riders to this document.
(C) "I" or "me" means _________________________________________, the grantor under this Security Document and the person who signed the Note ("Borrower").
(D) "You" means __________________________________________, the Lender and any holder entitled to receive payments under the Note. Your address is _________________________________________. You are the beneficiary under this Security Document.
(E) "Trustee" is ______________________________. Trustee's address is _________________________________.
(F) "Note" means the Purchase Money Note signed by me and dated ______________. The Note states that the amount I owe you is _________________ dollars (U.S. $______) plus interest. I have promised to pay this debt in regular Periodic Payments and to pay the debt in full not later than ____________________________________ (maturity date).
(G) "Property" means the real estate that is described below under the heading "Transfer of Rights in the Property."
(H) "Riders" means all Riders to this Security Document that I execute.
Figure: 7 TAC §90.503(c)(1)(H) (No change.)
(I) "Applicable Law" means all controlling applicable federal, Texas and state constitutions, statutes, regulations, administrative rules, local ordinances, judicial and administrative orders (that have the effect of law) as well as all applicable final, non-appealable judicial opinions.
(J) "Community Association Dues, Fees, and Assessments" means all dues, fees, assessments and other charges that are imposed on me or the Property by a condominium association, homeowners association, or similar organization.
(K) "Electronic Funds Transfer" means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, computer, or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account. The term includes point-of-sale transfers, automated teller machine transactions, transfers initiated by telephone, wire transfers, and automated clearinghouse transfers.
(L) "Escrow Items" means those items that are described in Section ___ of this Security Document.
(M) "Miscellaneous Proceeds" means any compensation, settlement, award of damages, or proceeds paid by any third party (other than proceeds paid under my insurance) for: damage or destruction of the Property; condemnation or other taking of all or any part of the Property; conveyance instead of condemnation; or misrepresentations or omissions related to the value or condition of the Property.
(N) "Periodic Payment" means the regularly scheduled amount due for principal and interest under the Note plus any amounts under this Security Document.
(O) "RESPA" means the Real Estate Settlement Procedures Act (12 U.S.C. §2601 et seq.) and Regulation X (24 C.F.R. Part 3500), as they might be amended from time to time, or any additional or successor legislation or regulation that governs the same subject matter. As used in this Security Document, "RESPA" refers to all requirements and restrictions that are imposed in regard to a "federally related mortgage loan" even if the Loan Agreement does not qualify as a "federally related mortgage loan" under RESPA.
(P) "Successor in Interest of me" means any party that has taken title to the Property, whether or not that party has assumed my obligations under the Loan Agreement.
(Q) "Ground Rents" means amounts I owe if I rented the real property under the buildings covered by this Security Document. Such an arrangement usually takes the form of a long-term "ground lease".
(2) Secured agreement. The model provision regarding the secured nature of the agreement reads: "To secure this Loan Agreement, I give you a security interest in the Property including existing and future improvements, easements, fixtures, attachments, replacements and additions to the Property, insurance refunds, and proceeds."
(3) Transfer of rights in the property. The model provision regarding a transfer of rights in the property reads:
Figure: 7 TAC §90.503(c)(3) (No change.)
(4) Borrower and Lender's promise. The model provision regarding the borrower and lender's promise to comply with the terms of the security document reads: "YOU AND I PROMISE:".
(5) Late charges and prepayment. The model provision regarding late charges and prepayment of principal and interest reads:
Figure: 7 TAC §90.503(c)(5) (No change.)
(6) Funds for escrow items. The model provision regarding the funds for escrow items reads:
Figure: 7 TAC §90.503(c)(6) (No change.)
(7) Charges and liens. The model provision regarding charges and liens reads:
Figure: 7 TAC §90.503(c)(7) (No change.)
(8) Property insurance. The model provision regarding property insurance reads:
Figure: 7 TAC §90.503(c)(8) (No change.)
(9) Preservation, maintenance, protection, and inspection of the property. The model provision regarding preservation, maintenance, protection, and inspection of the property reads: "I will not destroy, damage or impair the Property, allow it to deteriorate, or commit waste. Whether or not I live in the Property, I will maintain it in order to prevent it from deteriorating or decreasing in value due to its condition. I will promptly repair the damage to the Property to avoid further deterioration or damage unless you and I agree in writing that it is economically unreasonable. I will be responsible for repairing or restoring the Property only if you release the insurance or condemnation proceeds for the damage to or the taking of the Property. You may release proceeds for the repairs and restoration in a single payment or in a series of payments as the work is completed. I still am obligated to complete repairs or restoration of the Property even if there are not enough proceeds to complete the work. If this Security Document secures a unit in a condominium or planned unit development, I will perform all of my obligations under the declaration or covenants creating or governing the condominium or planned unit development, and any other relevant document. You or your agent may inspect the Property. You may inspect the interior of the Property with reasonable cause. You will give me notice stating reasonable cause when or before the interior inspection occurs."
(10) Protection of lender's interest in the property and rights under the security document. The model provision regarding protection of the lender's interest in the property and rights under the security document reads:
Figure: 7 TAC §90.503(c)(10) (No change.)
(11) Assignment of miscellaneous proceeds and forfeiture. The model provision regarding the assignment of miscellaneous proceeds and forfeiture reads:
Figure: 7 TAC §90.503(c)(11) (No change.)
(12) Forbearance not a waiver. The model provision specifying that the borrower is not released from liability if the lender modifies the payment schedule reads: "My successors and I will not be released from liability if you extend the time for payment or modify the payment schedule. If I pay late, you will not have to sue me or my successor to require timely future payments. You may refuse to extend time for payment or modify this Loan Agreement even if I request it. If you do not enforce your rights every time, you may enforce them later."
(13) Joint and several liability, security document execution, successors obligated. The model provision regarding joint and several liability and specifying that the person who signs the contract grants his ownership in the property and binds his successors and assigns reads:
Figure: 7 TAC §90.503(c)(13) (No change.)
(14) Extension of credit charges. The model provision for the extension of credit charges reads:
Figure: 7 TAC §90.503(c)(14) (No change.)
(15) Delivery of notices. The model provision regarding the delivery of notices reads: "Under the Loan Agreement, you and I will give notices to each other in writing. Any notice under the Loan Agreement will be considered given to me when it is mailed by first class mail or when actually delivered to me at my address if given by another means. You will give notice to the Property address unless I provide you a different address. I will notify you promptly of any change of address. I will comply with any reasonable procedure for giving a change of address that you provide. There will only be one address for notice under the Loan Agreement. Notice to me will be considered notice to all persons who are obligated under the Loan Agreement unless Applicable Law requires a separate notice. I may give you notice by delivering or mailing it by first class mail to the address provided by you, unless you require a different procedure. You, however, will not receive notice under the Loan Agreement until you actually receive it. Legal requirements governing notices subject to the Loan Agreement will prevail over conditions in the Loan Agreement."
(16) Governing law and severability. The model provision regarding the law governing the contract, stating that if any part of the contract is declared invalid, the rest of the contract remains valid reads: "The Loan Agreement will be governed by Texas law and federal law. If any provision in the Loan Agreement conflicts with any legal requirement, all non-conflicting provisions will remain effective."
(17) Rules of construction. The model provision regarding rules of clause construction reads:
Figure: 7 TAC §90.503(c)(17) (No change.)
(18) Loan agreement copies. The model provision specifying that the lender will give the borrower a copy of all signed documents at the time the loan agreement is made reads: "At the time the Loan Agreement is made, you will give me copies of all documents I sign."
(19) Transfer of interest in property. The model provision regarding a transfer of interest in the property reads: "Interest in the Property" means any legal or beneficial interest. This term includes those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement (the intent of which is the transfer of title by me at a future date to a purchaser). If any part of the Property is sold or transferred without your prior written permission, you may require immediate payment of all I owe. You will not exercise this option if disallowed by Applicable Law. If you accelerate, you will give me notice. The notice of acceleration will allow me at least 21 days from the date the notice is given to pay all I owe. If I fail to timely pay all I owe, you may pursue any remedy allowed by the Loan Agreement without further notice or demand."
(20) Borrower's right to reinstate after acceleration. The model provision regarding the borrower's right to reinstate after acceleration reads:
Figure: 7 TAC §90.503(c)(20) (No change.)
(21) Sale of note, change of loan servicer, notice of grievance, and lender's right to comply. The model provision regarding the sale of the loan, change of loan servicer, notice of grievance, and the lender's right to comply reads: "A full or partial interest in the Loan Agreement can be sold one or more times without prior notice to me. The sale may result in a change of the company servicing or handling the Loan Agreement. The company servicing or handling the Loan Agreement will collect my monthly payment and will comply with other servicing conditions required by the Loan Agreement or Applicable Law. In some cases, the company servicing or handling the Loan Agreement may change even if the Loan Agreement is not sold. If the company servicing or handling the Loan Agreement is changed, I will be given written notice of the change. The notice will state the name and address of the new company, the address to which my payments should be made, and any other information required by RESPA. Any notice of acceleration and opportunity to cure under the Loan Agreement will satisfy the notice and opportunity to address the alleged violation provisions of this Section. No agreement between you and me or any third party will limit your ability to comply with your duties under the Loan Agreement and the Applicable Law. You and I are limiting all agreements so that all current or future interest or fees in connection with this Loan Agreement will not be greater than the highest amount allowed by Applicable Law. You and I intend to conform the Loan Agreement to the provisions of Applicable Law. If any part of the Loan Agreement is in conflict with the Applicable Law, then that part will be corrected or removed. This correction will be automatic and will not require any amendment or new document. Your right to correct any violation will survive my paying off the Loan Agreement. My right to correct will override any conflicting provision of the Loan Agreement. Your right to comply as provided in this Section will survive the payoff of the Loan Agreement. The provisions of this Section will supersede any inconsistent provision of the Loan Agreement."
(22) Hazardous substances. The model provision regarding hazardous substances reads:
Figure: 7 TAC §90.503(c)(22) (No change.)
(23) Acceleration and remedies. The model provision regarding acceleration and remedies reads:
Figure: 7 TAC §90.503(c)(23) (No change.)
(24) Assignment of rents, appointment of receiver, and lender in possession. The model provision regarding assignment of rents, appointment of receiver, and the lender in possession reads: "As additional security, I assign to you the rents of the Property, provided that I have the right, prior to acceleration or abandonment of the Property, to collect and retain the rents as they become due. Upon acceleration or abandonment, you, by agent or by court-appointed receiver, will be entitled to enter, take possession, manage the Property, and collect due and past due rents. All rents you or the court-appointed receiver collect will be applied first to payment of the costs of management of the Property and collection of rents, including receiver's fees, premiums on receiver's bonds, and reasonable attorneys' fees, and then to the sums secured by this Security Document. You and the receiver will be liable to account only for rents received."
(25) Power of sale. The lender has the option to choose wording to indicate that a Trustee's deed will convey good title to the Property that cannot be defeated. The model provision regarding the power of sale reads:
Figure: 7 TAC §90.503(c)(25) (No change.)
(26) Release. If the lender cannot return the note to the borrower, the lender may provide the borrower with a discharge and release of all obligations under the loan. The discharge must meet the requirements of Texas Finance Code, §342.454. The model provision regarding the release of the lien securing the loan agreement reads: "Upon payment of all that I owe under this Loan Agreement, you will cancel and return the Note to me and give me, in recordable form, a release of lien securing the Loan Agreement or a copy of any endorsement of the Note and assignment of the lien to a lender that is refinancing the Loan Agreement. If you cannot, you will provide me with a discharge and release of all obligations under the loan. I will pay only the cost of recording the release of lien."
(27) Lender's rights and borrower's responsibilities. The model provision specifying that each person who signs the document is responsible for each promise and duty in the security document reads:
Figure: 7 TAC §90.503(c)(27) (No change.)
(28) Trustees and trustee liability. The model provision regarding trustees and trustee liability reads:
Figure: 7 TAC §90.503(c)(28) (No change.)
(29) Default. The model default provision reads: "Any default of my agreements with you will be a default of this Security Document."
(30) Subrogation. The model provision regarding subrogation reads: "If I ask, you will use proceeds from the Loan Agreement to pay off all valid outstanding liens against the Property. You will then own all rights, superior titles, liens, and interests owned or claimed by any owner or holder of an outstanding lien or debt. You own these things whether the lien or debt is transferred to you or whether it is released by the holder upon payment."
(31) Partial invalidity. The model provision regarding what happens if the sums secured and other charges violate applicable law reads: "If any portion of the sums secured by this Security Document cannot be lawfully secured, payments minus those sums will be applied first to the portions not secured. If any charge provided for in this Loan Agreement, separately or together with other charges that are considered part of this Loan Agreement, violates Applicable Law, the charge is reduced to the extent necessary to eliminate the violation. Lender will refund the amount of interest or other charges paid to Lender in excess of the amount permitted by Applicable Law. At Lender's option, the amount in excess will either be refunded directly to me or will be applied to reduce the principal of the debt."
(32) Request for notice of default and foreclosure under superior mortgages or security documents. The model provision regarding the lender and borrower's request for notice of default and foreclosure under superior mortgages or security documents reads:
Figure: 7 TAC §90.503(c)(32) (No change.)
(33) Signature blocks. The model provision regarding signature blocks reads:
Figure: 7 TAC §90.503(c)(33) (No change.)
(34) Acknowledgment. The model provision regarding the acknowledgment reads:
Figure: 7 TAC §90.503(c)(34) (No change.)
(35) Notice of confidentiality rights disclosure. The security document must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:
(A) appear on the top of the first page of the security document;
(B) be in at least 12-point boldfaced type or 12-point uppercase lettering; and
(C) be substantially similar to the required notice or disclosure under Texas Property Code, §11.008(b). The model notice of confidentiality rights reads: "NOTICE OF CONFIDENTIALITY RIGHTS: I MAY REMOVE OR STRIKE MY SOCIAL SECURITY NUMBER OR MY DRIVER'S LICENSE NUMBER FROM THIS DOCUMENT BEFORE IT IS FILED IN THE PUBLIC RECORDS."
§90.504.Permissible Changes.
(a) A licensee may consider making the following types of changes to the second lien purchase money loans plain language model clauses:
(1) Adding information related to information set forth in the model clauses that is not otherwise prohibited by law;
(2) Substituting another term for "Lender" or "Borrower" that has the same meaning, or using pronouns such as "you," "we," and "us";
(3) Presenting the model clauses in any order, and combining or further segregating the model clauses;
(4) Inserting descriptive headings or number provisions;
(5) Changing the case of a word if otherwise permitted by the Texas Finance Code; or
(6) Making other changes which do not affect the substance of the disclosures.
(7) A sample model note is presented in the following example.
Figure: 7 TAC §90.504(a)(7) (.pdf)
(8) A sample model security document is presented in the following example.
Figure: 7 TAC §90.504(a)(8) (.pdf)
(b) A licensee has considerable flexibility to arrange the format of the model form if the revised format does not significantly adversely affect the substance, clarity, or meaningful sequence of the disclosures
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703683
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640
The Finance Commission of Texas (commission) adopts amendments to 7 TAC §90.603, concerning Model Clauses and §90.604, concerning Permissible Changes for second lien home improvement contracts. The amendments are adopted with changes to the proposal published in the June 29, 2007, issue of the Texas Register (32 TexReg 3935).
The purpose of the amendments to these rules governing plain language contract provisions for Chapter 342 transactions is to implement changes required by recently passed legislation.
House Bill 2061 (HB 2061) was signed by Governor Perry and went into immediate effect during the 2007 legislative session. This bill amends the Notice of Confidentiality Rights contained in Texas Property Code, §11.008, and now requires that this notice be included on any instrument transferring an interest in real property, whether or not any social security numbers or driver's license numbers are contained in the instrument. The commission last adopted amendments concerning these confidentiality notices at the February 23, 2007, commission meeting. As part of that adoption, the commission removed the notices from the model contracts. At that time, §11.008 required that the notice be given only if social security numbers or driver's license numbers were actually present in the transferring instrument. The February change was intended to reflect the current industry practice of not including such information on security documents, triggering inclusion of the notice only if the lender disclosed the borrower's personal information.
With the recent passage of HB 2061, however, the confidentiality notice is now mandatory on all instruments transferring an interest in real property. Thus, with this adoption, the commission is returning the Notice of Confidentiality Rights clauses included throughout the plain language rules to the model contracts and reinstating the language regarding the required nature of the notices to the rule text in compliance with HB 2061. Consequently, with respect to the confidentiality notices, these adopted amendments will result in the rules and model contracts more closely resembling their state prior to the February 23, 2007, adoption. Adopted amendments concerning the Notice of Confidentiality Rights clauses are contained in §90.603(b)(15), and §90.603(f)(35). This adoption will return the notices to the model contracts contained in the figures for 7 TAC §90.604(a)(12), and §90.604(a)(16).
Although the commission did not receive any comments directly addressing the provisions of this proposal, the commission did receive two written comments regarding the companion proposals concerning §90.403 and §90.404, and §90.503 and §90.504. Both of the comments are from Black, Mann & Graham, L.L.P. and relate to issues pertaining to the Notice of Confidentiality Rights. The two comments outline identical concerns with respect to the sections contained in those two subchapters. For the reader's convenience, the commission's responses to the comments regarding §90.403 and §90.404 are listed with this adoption. The commission is making corresponding revisions to §90.603 and §90.604 for consistency purposes, with the affected subsections and figures listed after the responses concerning the parallel provisions contained in §90.403 and §90.404.
In reference to §90.403(c)(37), the commenter believes that the proposed language regarding the location of the confidentiality notice is in conflict with provisions of the Texas Local Government Code and the Texas Property Code. While §191.007(c) of the Texas Local Government Code requires that "a clearly identifying heading . . . be placed at the top of the first page," it prefaces that statement with an exception deferring to Texas Property Code, §11.008. Section 11.008(c) requires that the Notice of Confidentiality Rights appear "on the top of the first page of the instrument." The commenter recommends that the phrase "either above or directly below the document heading" be deleted from §90.403(c)(37)(A). The commission agrees with the suggested change and has deleted this phrase from §90.403(c)(37)(A), as well as the corresponding language in §90.603(b)(15)(A) and (f)(35)(A). Consequently, the removal of this phrase will result in the preceding provisions having no change from the current text. Furthermore, in the figures for 7 TAC §§90.404(a)(8), 90.604(a)(12), and 90.604(a)(16), the Notice of Confidentiality Rights has been relocated to the very top of the document above the heading, as to best reflect "the top of the first page" language contained in HB 2061.
Also concerning subsection (c)(37) of §90.403, the commenter recommends that the date reference of "January 1, 2004," be changed to March 28, 2007, which is the effective date of HB 2061. Although the commission agrees that the January 1, 2004, date should be removed from §90.403(c)(37), the commission does not believe that any other date reference is necessary. At the time of this rule's initial proposal, the date was needed in order to establish the future effective date of the authorizing legislation. With HB 2061, the effective date is in the past, and thus, all future contracts subject to HB 2061 will be required to contain the confidentiality notices. Therefore, the commission agrees to delete "On or after January 1, 2004," from §90.403(c)(37), and §90.603(b)(15) and (f)(35), but declines to add "March 28, 2007."
Regarding Figure: 7 TAC §90.404(a)(8), the commenter believes that the proposed notice "does not substantially comply with the promulgated text in new Section 11.008(c), Property Code, added by House Bill 2061, because the notice in proposed Figure: 7 TAC §90.404(a)(8) refers only to the document on which it is located and not, as required by Section 11.008(c), to 'any instrument that transfers an interest in real property'." The commenter recommends that the text of the Notice of Confidentiality Rights contained in Figure: 7 TAC §90.404(a)(8) be revised by replacing "THIS DOCUMENT" with "ANY DOCUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY." Although the commission would prefer this revision, the commission is unable to adopt the suggested language at this meeting, as the corresponding rule text of the notices had been proposed with no changes. In order to maintain consistency between the model clauses contained in the rule text and the notices included in the figures, the commission declines to adopt the suggested language at this time. The commission believes that the current notice language substantially complies with HB 2061, and is returning the same text to the figures. At a future meeting, however, the commission plans on proposing the commenter's recommended Notice of Confidentiality Rights so that it may be uniformly revised within the model clauses and the model contracts.
These amendments as well as all of the rules contained in Chapter 90 provide model clauses and model contracts. Licensees are not required to adopt the model language contained in the rules. However, regarding Chapter 90, Subchapter A - F, for those licensees utilizing the model provisions, the prior model language (as contained in former 7 TAC, Part 1, Chapter 1, Subchapter Q) is acceptable and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §§90.105, 90.403, 90.404, 90.503, 90.504, 90.603, and 90.604 in the Texas Register on March 9, 2007 (32 TexReg 1232), listed the agency's implementation date as October 1, 2007. Given these additional amendments, some required by recent legislation, the agency intends to provide licensees until January 1, 2008, for compliance.
The amendments are adopted under Texas Finance Code §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 grants the commission the authority to adopt rules to enforce the consumer loans chapter.
The statutory provisions (as currently in effect) affected by the adopted amendments are contained in Texas Finance Code, Chapter 342.
§90.603.Model Clauses.
(a) Generally. These model clauses are the plain language rendition of contract clauses that have typically been stated in technical legal terms. Nothing in this regulation prohibits a contract from including provisions that provide more favorable results for the borrower than those that would result from the use of a model clause.
(b) For a Chapter 342, Subchapter G second lien home improvement loan contract for use in a transaction that does not allow for withdrawals or multiple advances:
(1) Identification. The model identification clause reads:
Figure: 7 TAC §90.603(b)(1) (No change.)
(2) Definitions. The model definitions section reads:
(A) ""Owner" means (name of Owner), whose address is (address of Owner, including county). If Owner and Maker are not the same person, the word "Owner" includes Maker. "I" or "me" means the Owner.
(B) "Contractor" means (name of Contractor), whose address is (address of Contractor, including county) and includes those to whom the Contractor has assigned or transferred Contractor's rights and remedies. "You" or "your" means the Contractor.
(C) "Lender" means (name of Lender), whose address is (address of Lender, including county) and includes those to whom the Lender has assigned or transferred Lender's rights and remedies.
(D) "Trustee" means (name of Trustee), whose address is (address of Trustee, including county).
(E) "Property" means the Property at (list address of the Property), whose legal description is (list legal description of the Property).
(F) "Work" means the construction project as agreed to in writing between the Owner and Contractor.
(G) "Completion Date" means (date on which the Work will be completed).
(H) "Contract" means this Texas Home Improvement Mechanic's Lien Contract for Improvement and Power of Sale."
(3) Construction of improvements. The model clause regarding construction of improvements reads: "You agree to furnish and pay for all labor and material needed to complete the Work within _____ days from the date of this Contract. The Work will be performed on the Property in a good and workmanlike manner."
(4) Contract price. The model clause establishing the contract price reads: "I agree to pay, or cause to be paid, to you, or to your order, the sum of ___________________ dollars (U.S. $_____________________) when the Work is completed."
(5) Transfer of lien. The model clause regarding the transfer of lien reads: "You transfer to Lender all of your rights and interests in this Contract."
(6) Completion by contractor, but not lender. The model clause specifying that the lender is not responsible for completing the construction reads: "You will complete the Work by the Completion Date. Lender is not responsible for completing the Work. Lender is not a guarantor of your performance. You will indemnify and hold Lender harmless against all claims related to the Work."
(7) Partial lien. The model clause regarding a partial lien reads: "If you do not complete the Work by the Completion Date in a good and workmanlike manner, then Lender will have a valid lien for the contract price, less the amount reasonably necessary to complete the Work. As an alternative, Lender may choose to complete the Work and the lien will be valid for the contract price."
(8) Charges and extras. The model clause regarding charges and extras reads: "All labor or material furnished outside of this Contract must be agreed upon in writing or it will be considered as performed under the original Contract and you will receive no extra money."
(9) Receipts and releases. The model clause regarding receipts and releases reads: "If I ask, you will give me valid receipts and releases for the Work from any subcontractor, worker, and supplier."
(10) No work commenced. The model clause specifying that no work has commenced prior to execution of the contract reads: "This Contract is executed, acknowledged, and delivered before any labor has been performed and any material has been furnished for the Work."
(11) Trustee's duties. The model clause regarding the trustee's duties reads:
Figure: 7 TAC §90.603(b)(11) (No change.)
(12) Preservation of claims and defenses. In accordance with the Federal Trade Commission's Holder in Due Course Rule (16 C.F.R. §433), it is an unfair or deceptive act or practice to take or receive a consumer credit contract in connection with the sale or lease of goods or services to consumers that does not include the following notice. The notice regarding the preservation of claims and defenses reads: "NOTICE. ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER."
(13) Owner and contractor responsible. Texas Property Code, §41.007 specifies that a home improvement contract must contain a notice specifying that the owner and the contractor are responsible for meeting the terms of the contract. This notice must appear either in this contract or in the residential construction contract. The Property Code requires that the notice must be conspicuously printed, stamped, or typed in a font size equal to at least 10-point boldfaced type or computer equivalent and appear next to the owner's signature line on the contract. The wording of the notice is specified by the Property Code, which uses the pronouns "you" and "your" to refer to the owner. Licensees are encouraged to explain in the contract, prior to the notice, that "you" and "your" refer to the owner in this notice. The parties' signatures must be notarized. The licensee may use a different notary acknowledgment without having to submit the contract to the agency as a non-standard contract. The notice specifying that the owner and the contractor are responsible for meeting the terms of the contract, the model explanatory clause regarding the use of "you" and "your" in the notice, and the signature blanks read:
Figure: 7 TAC §90.603(b)(13) (No change.)
(14) Assignment. The parties may use a different assignment or a separate document for the assignment without having to submit the contract to the agency as a non-standard contract. The model assignment in which the contractor transfers and assigns the lien to the lender reads:
Figure: 7 TAC §90.603(b)(14) (No change.)
(15) Notice of confidentiality rights disclosure. The security document must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:
(A) appear on the top of the first page of the security document;
(B) be in at least 12-point boldfaced type or 12-point uppercase lettering; and
(C) be substantially similar to the required notice or disclosure under Texas Property Code, §11.008(b). The model notice of confidentiality rights reads: "NOTICE OF CONFIDENTIALITY RIGHTS: I MAY REMOVE OR STRIKE MY SOCIAL SECURITY NUMBER OR MY DRIVER'S LICENSE NUMBER FROM THIS DOCUMENT BEFORE IT IS FILED IN THE PUBLIC RECORDS."
(c) For a Chapter 342, Subchapter G second lien home improvement loan promissory note for use in a transaction that does not allow for withdrawals or multiple advances:
(1) Identification. The model identification clause lists the account or contract number, the name and address of the creditor or lender, the date of the note, the name and address of the borrower, the property address, the principal amount, and the terms of payment. The model clause identifying the pronouns used for the borrower and the lender reads:
Figure: 7 TAC §90.603(c)(1) (No change.)
(2) Truth in Lending Act (TILA) disclosure box. The model Truth in Lending Act (TILA) disclosure box reads:
Figure: 7 TAC §90.603(c)(2) (No change.)
(3) Itemization of amount financed box. The itemization of amount financed box is not required if the licensee provides the borrower with a good faith estimate or a settlement statement as permitted by the Truth in Lending Act. An itemization of amount financed box which complies with Regulation Z is considered to be in compliance with this paragraph and will not require a non-standard submission.
(4) Security for payment. The model clause relating to the security for payment reads: "Liens created in the Contract secure this Note."
(5) Definitions. The model definitions section reads:
(A) ""Owner" means (name of Owner), whose address is (address of Owner, including county). If Owner and Maker are not the same person, the word "Owner" includes Maker.
(B) "Contractor" means (name of Contractor), whose address is (address of Contractor, including county) and includes those to whom the Contractor has assigned or transferred Contractor's rights and remedies.
(C) "Contract" means this Texas Home Improvement Mechanic's Lien Contract for Improvement and Power of Sale dated _________________________ between Contractor and Owner.
(D) "Property" means the Property at (list address of the Property), whose legal description is (list legal description of the Property).
(E) "Note" means the Texas Home Improvement Mechanic's Lien Note signed by me and dated ___________________________ and includes all amounts secured by this Contract. The Note states that the amount I owe you is ______________ dollars (U.S. $___________________) plus interest. I have promised to pay this debt in regular periodic payments and to pay the debt in full not later than _________________."
(6) Promise to pay. One permissible change to the model language for the scheduled installment earnings method would be to allow partial prepayments of the principal during the term of the loan. This variation on the scheduled installment earnings method would allow periodic reductions of the principal balance by partial prepayments. This variation would allow reductions of the principal balance that were not originally scheduled. The model clause options for the borrower's promise to pay read:
(A) For contracts using the scheduled installment earnings method: "I promise to pay the Total of Payments to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(B) For contracts using the true daily earnings method: "I promise to pay the cash advance plus the accrued interest to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(7) Late charge. The model late charge provision for contracts using the scheduled installment earnings method or the true daily earnings method reads: "If I don't pay all of a payment within 10 days after it is due, you can charge me a late charge. The late charge will be 5% of the scheduled payment."
(8) After maturity interest. The model clause specifies the maximum interest rate allowed by law for after maturity interest. A creditor may always choose a lower rate. The model provision for after maturity interest reads: "If I don't pay all I owe when the final payment becomes due, I will pay interest on the amount that is still unpaid. That interest will be the higher of the rate of 18% per year or the maximum rate allowed by law. That interest will begin the day after the final payment becomes due."
(9) Prepayment clause. The model prepayment clause options read:
(A) For contracts using the scheduled installment earnings method: "I can make a whole payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(B) For contracts using the true daily earnings method: "I can make any payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(10) Finance charge earnings and refund method. The model provision options specifying the finance charge earnings and refund method read:
(A) For contracts using the scheduled installment earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.603(c)(10)(A) (No change.)
(B) For contracts using the scheduled installment earnings method with prepayments option - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.603(c)(10)(B) (No change.)
(C) For contracts using the true daily earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.603(c)(10)(C) (No change.)
(11) Deferment. The model provision regarding deferment reads: "If I ask for more time to make any payment and you agree, I will pay more interest to extend the payment. The extra interest will be figured under the Finance Commission rules."
(12) Fee for dishonored check clause. The model clause specifies the maximum allowable dishonored check fee. A creditor may always choose a lesser amount. The model fee for dishonored check provision reads: "I agree to pay you a fee of up to $30 for a returned check. You may add the fee to the amount I owe or collect it separately."
(13) Default. The model provision specifying the conditions causing default reads:
Figure: 7 TAC §90.603(c)(13) (No change.)
(14) Property insurance. The model provision regarding property insurance reads:
Figure: 7 TAC §90.603(c)(14) (No change.)
(15) Credit insurance. If single premium credit insurance is offered, a permissible change to the disclosure can be to offer a single charge for the entire term of the loan. The term for the single premium charge should be shown for the original term of the loan, unless otherwise specified. The licensee has the option of including language that reads: "The insurance will cancel on the date when the total past due premiums equal or exceed (insert number) times the first month's premium." The industry standard regarding the relationship between total past due premiums and the first month's premium in this equation appears to be four times. However, if a different time frame is more appropriate, that time frame may be used. The model credit insurance disclosure box reads:
Figure: 7 TAC §90.603(c)(15) (No change.)
(16) Mailing of notices to borrower. The duty to give notice is satisfied when it is mailed by first class mail. The model provision regarding the mailing of notices to the borrower reads: "You or I may mail or deliver any notice to the address above. You or I may change the notice address by giving written notice. Your duty to give me notice will be satisfied when you mail it."
(17) Statement of truthful information. The model provision specifying that the borrower gave truthful information reads: "I promise that all information I gave you is true."
(18) Due on sale clause, notice of intent to accelerate, and notice of acceleration. The model provision regarding the due on sale clause, notice of intent to accelerate, and notice of acceleration reads: "If all or any interest in the Property is sold or transferred without your prior written consent, you may require immediate payment in full of all that I owe under this loan agreement. You will not exercise this option if prohibited by law. If you exercise this option, you will give me notice that you are demanding payment of all that I owe. This notice will give me a period of not less than 21 days from the date of the notice within which I must pay all that I owe under this loan agreement. If I fail to pay all that I owe before the end of this period, you may use any remedy allowed by the loan agreement."
(19) No waiver of lender's rights. The model provision expressing no waiver of the lender's rights reads: "If you don't enforce your rights every time, you can still enforce them later."
(20) Collection expenses. The model collection expenses clause reads: "If you require me to pay all that I owe at once, you will have the right to be paid back by me for all of your costs and expenses in enforcing this loan agreement to the extent not prohibited by applicable law. These expenses include, for example, reasonable attorneys' fees."
(21) Joint liability. The model provision providing for joint liability reads: "I understand that you may seek payment from only me without first looking to any other Borrower."
(22) Usury savings clause. The model usury savings clause reads: "I do not have to pay interest or other amounts that are more than applicable law allows."
(23) Savings clause. The savings model clause stating that if any part of the contract is invalid, the rest remains valid reads: "If any part of this loan agreement is declared invalid, the rest of the loan agreement remains valid. If any part of this loan agreement conflicts with any law, that law will control. The part of the loan agreement that conflicts with any law will be modified to comply with the law. The rest of the loan agreement remains valid."
(24) Prior agreements. For loan agreements exceeding $50,000.00, this notice must be boldfaced, capitalized, underlined, or otherwise set out from the surrounding written material to be conspicuous. The model clause stating that there are no prior agreements between the parties regarding the loan agreement reads: "This written loan agreement is the final agreement between you and me. It may not be changed by prior, current, or future oral agreements between you and me. There are no oral agreements between you and me relating to this loan agreement. Any change to this loan agreement must be in writing. Both you and I have to sign written agreements."
(25) Application of law. The model clause specifying that federal law and Texas law apply to the contract reads: "Federal law and Texas law apply to this loan agreement."
(26) Complaints and inquiries notice. The model complaints and inquiries notice reads: "The (name of lender or note holder) is licensed and examined under the laws of the State of Texas and by state law is subject to regulatory oversight by the Office of Consumer Credit Commissioner. Any consumer wishing to file a complaint against the (name of lender or note holder) should contact the Office of Consumer Credit Commissioner through one of the means indicated below: Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207; www.occc.state.tx.us; (800) 538-1579."
(27) Collateral. The model clause regarding the collateral reads: "The Property is subject to the Contract lien. I am responsible for all obligations in this Note."
(28) Preservation of claims and defenses. In accordance with the Federal Trade Commission's Holder in Due Course Rule (16 C.F.R. §433), it is an unfair or deceptive act or practice to take or receive a consumer credit contract in connection with the sale or lease of goods or services to consumers that does not include the following notice. The notice regarding the preservation of claims and defenses reads: "NOTICE. ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER."
(29) Signature blocks. Documents for a home improvement loan on a homestead must be signed at the office of the lender, an attorney at law, or a title company. If this provision applies, the model clause, "This document must be signed at the office of the Lender, an attorney at law, or a title company" should appear above the signature of the borrower. The licensee may also provide additional signature lines for witness signatures. The model signature block reads:
Figure: 7 TAC §90.603(c)(29) (No change.)
(d) For a Chapter 342, Subchapter G second lien home improvement loan contract for use in a transaction that allows for withdrawals or multiple advances:
(1) Identification. The model identification clause listing the date and the account or contract number reads:
Figure: 7 TAC §90.603(d)(1) (No change.)
(2) Definitions. The model definitions section reads:
(A) ""Owner" means (name of Owner), whose address is (address of Owner, including county). If Owner and Maker are not the same person, the word "Owner" includes Maker. "I" or "me" means the Owner.
(B) "Contractor" means (name of Contractor), whose address is (address of Contractor, including county) and includes those to whom the Contractor has assigned or transferred Contractor's rights and remedies. "You" or "your" means the Contractor.
(C) "Lender" means (name of Lender), whose address is (address of Lender, including county) and includes those to whom the Lender has assigned or transferred Lender's rights and remedies.
(D) "Trustee" means (name of Trustee), whose address is (address of Trustee, including county).
(E) "Property" means the Property at (list address of the Property), whose legal description is (list legal description of the Property).
(F) "Work" means the construction project as agreed to in writing between the Owner and Contractor.
(G) "Completion Date" means (date on which the Work will be completed).
(H) "Contract" means this Texas Home Improvement Mechanic's Lien Contract for Improvement, Power of Sale, and Deed of Trust.
(I) "Note" means the Texas Home Improvement Mechanic's Lien Note signed by me and dated _________________________________ and includes all amounts secured by this Contract. The Note states that the amount I owe you is _____________________________ dollars (U.S. $___________________) plus interest.
(J) "Loan Agreement" means the Note, Contract, and any other related document under which Lender has made a loan to me.
(K) "Applicable Law" means all controlling applicable federal, state, and local law.
(L) "Tenant at Sufferance" means a person who continues to possess the Property with no current right to possess it.
(M) "Forcible Detainer" means a lawsuit to remove a person from the Property.
(N) "Periodic Payment" means the regularly scheduled amount due for principal and interest under the Note plus any amount under this Contract.
(O) "Successor in Interest" means any party that has taken title to the Property.
(P) "Lien" means the Mechanic's and Materialman's Lien on the Property that results from the Contract and the Work performed. The Lien includes all existing and future improvements, easements, and rights in the Property."
(3) Construction of improvements. The model clause regarding construction of improvements reads: "You agree to furnish and pay for all labor and material needed to complete the Work within _____ days from the date of this Contract. The Work will be performed on the Property in a good and workmanlike manner."
(4) Contract price. The model clause establishing the contract price reads: "I agree to pay, or cause to be paid, to you, or to your order, the sum of _______________ dollars (U.S. $_______________) when the Work is completed."
(5) Note payable to lender. The model clause specifying that the note is payable to the lender reads: "In exchange for money from the Lender to you, I have signed a Note to the Lender in the amount of __________________ dollars (U.S. $__________________)."
(6) Lien to secure note. The model clause regarding security for the note reads: "To secure the amounts Lender provides to you, and the interest payable to Lender, I give you, and you transfer to Lender, the Lien. The Note is secured by a deed of trust, which I will sign. The deed of trust will renew and extend the Lien created by this Contract."
(7) Transfer of lien. The model clause regarding the transfer of lien reads: "You transfer to Lender all of your rights and interests in this Contract."
(8) Exceptions to conveyance and warranty. Any exceptions to conveyance and warranty should be specified in the contract. The model clause regarding the exceptions to conveyance and warranty reads: "The exceptions to conveyance and warranty are: (List any exceptions to conveyance and warranty.)"
(9) Completion by contractor, but not lender. The model clause specifying that the lender is not responsible for completing the construction reads: "You will complete the Work by the Completion Date. Lender is not responsible for completing the Work. Lender is not a guarantor of your performance. You will indemnify and hold Lender harmless against all claims related to the Work."
(10) Partial lien. The model clause regarding a partial lien reads: "If you do not complete the Work by the Completion Date in a good and workmanlike manner, then Lender will have a valid lien for the contract price, less the amount reasonably necessary to complete the Work. As an alternative, Lender may choose to complete the Work and the lien will be valid for the contract price."
(11) Charges and extras. The model clause regarding charges and extras reads: "All labor or material furnished outside of this Contract must be agreed upon in writing or it will be considered as performed under the original Contract and you will receive no extra money."
(12) Receipts and releases. The model clause regarding receipts and releases reads: "If I ask, you will give me valid receipts and releases for the Work from any subcontractor, worker, and supplier."
(13) No work commenced. The model clause specifying that no work has commenced prior to execution of the contract reads: "This Contract is executed, acknowledged, and delivered before any labor has been performed and any material has been furnished for the Work."
(14) Owner's promises and rights. The model clause regarding the owner's promises and rights reads:
Figure: 7 TAC §90.603(d)(14) (No change.)
(15) Owner's duties. The model clause regarding the owner's duties reads:
Figure: 7 TAC §90.603(d)(15) (No change.)
(16) Contractor's duties. The model clause regarding the contractor's duties reads:
Figure: 7 TAC §90.603(d)(16) (No change.)
(17) Contractor's rights. The model clause regarding the contractor's rights reads:
Figure: 7 TAC §90.603(d)(17) (No change.)
(18) Trustee's duties. The model clause regarding the trustee's duties reads:
Figure: 7 TAC §90.603(d)(18) (No change.)
(19) General provisions. The model clause regarding general contract provisions reads:
Figure: 7 TAC §90.603(d)(19) (No change.)
(20) Preservation of claims and defenses. In accordance with the Federal Trade Commission's Holder in Due Course Rule (16 C.F.R. §433), it is an unfair or deceptive act or practice to take or receive a consumer credit contract in connection with the sale or lease of goods or services to consumers that does not include the following notice. The notice regarding the preservation of claims and defenses reads: "NOTICE. ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER."
(21) Owner and contractor responsible. Texas Property Code, §41.007 specifies that a home improvement contract must contain a notice specifying that the owner and the contractor are responsible for meeting the terms of the contract. The notice must appear in either this contract or the residential construction contract. The Property Code requires that the notice must be conspicuously printed, stamped, or typed in a font size equal to at least 10-point boldfaced type or computer equivalent and appear next to the owner's signature line on the contract. The wording of the notice is specified by the Property Code, which uses the pronouns "you" and "your" to refer to the owner. Licensees are encouraged to explain in the contract, prior to the notice, that "you" and "your" refer to the owner in this notice. The parties' signatures must be notarized. The licensee may use a different notary acknowledgment without having to submit the contract to the agency as a non-standard contract. The notice specifying that the owner and the contractor are responsible for meeting the terms of the contract, the model explanatory clause regarding the use of "you" and "your" in the notice, and the signature blanks read:
Figure: 7 TAC §90.603(d)(21) (No change.)
(22) Assignment. The parties may use a different assignment or a separate document for the assignment without having to submit the contract to the agency as a non-standard contract. The model assignment in which the contractor transfers and assigns the lien to the lender reads:
Figure: 7 TAC §90.603(d)(22) (No change.)
(e) For a Chapter 342, Subchapter G second lien home improvement loan promissory note for use in a transaction that allows for withdrawals or multiple advances:
(1) Identification. The model identification clause lists the account or contract number, the name and address of the creditor or lender, the date of the note, the name and address of the borrower, the property address, the principal amount, and the terms of payment. The model clause identifying the pronouns used for the borrower and the lender reads:
Figure: 7 TAC §90.603(e)(1) (No change.)
(2) Truth in Lending Act (TILA) disclosure box. The model Truth in Lending Act (TILA) disclosure box reads:
Figure: 7 TAC §90.603(e)(2) (No change.)
(3) Itemization of amount financed box. The itemization of amount financed box is not required if the licensee provides the borrower with a good faith estimate or a settlement statement as permitted by the Truth in Lending Act. An itemization of amount financed box which complies with Regulation Z is considered to be in compliance with this paragraph and will not require a non-standard submission.
(4) Security for payment. The model clause relating to the security for payment reads: "The Deed of Trust and the Lien created in the Contract secure this Note."
(5) Definitions. The model definitions section reads:
(A) ""Owner" means (name of Owner), whose address is (address of Owner, including county). If Owner and Maker are not the same person, the word "Owner" includes Maker.
(B) "Contractor" means (name of Contractor), whose address is (address of Contractor, including county) and includes those to whom the Contractor has assigned or transferred Contractor's rights and remedies.
(C) "Lender" means (name of Lender), whose address is (address of Lender, including county) and includes those to whom the Lender has assigned or transferred Lender's rights and remedies.
(D) "Trustee" means (name of Trustee), whose address is (address of Trustee, including county).
(E) "Property" means the Property at (list address of the Property), whose legal description is (list legal description of the Property).
(F) "Work" means the construction project as agreed to in writing between the Owner and Contractor.
(G) "Completion Date" means (date on which the Work will be completed).
(H) "Contract" means this Texas Home Improvement Mechanic's Lien Contract for Improvement, Power of Sale, and Deed of Trust.
(I) "Note" means the Texas Home Improvement Mechanic's Lien Note signed by me and dated ____________________ and includes all amounts secured by this Contract. The Note states that the amount I owe you is _____________________ dollars (U.S. $________________) plus interest.
(J) "Loan Agreement" means the Note, Contract, and any other related document under which Lender has made a loan to me.
(K) "Applicable Law" means all controlling applicable federal, state, and local law.
(L) "Tenant at Sufferance" means a person who continues to possess the Property with no current right to possess it.
(M) "Forcible Detainer" means a lawsuit to remove a person from the Property.
(N) "Periodic Payment" means the regularly scheduled amount due for principal and interest under the Note plus any amount under this Contract.
(O) "Successor in Interest" means any party that has taken title to the Property.
(P) "Lien" means the Mechanic's and Materialman's Lien on the Property that results from the Contract and the Work performed. The Lien includes all existing and future improvements, easements, and rights in the Property."
(6) Promise to pay. One permissible change to the model language for the scheduled installment earnings method would be to allow partial prepayments of the principal during the term of the loan. This variation on the scheduled installment earnings method would allow periodic reductions of the principal balance by partial prepayments. This variation would allow reductions of the principal balance that were not originally scheduled. The model clause options for the borrower's promise to pay read:
(A) For contracts using the scheduled installment earnings method: "I promise to pay the Total of Payments to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(B) For contracts using the true daily earnings method: "I promise to pay the cash advance plus the accrued interest to the order of you. (The "principal" or "cash advance" is $________. This amount plus interest must be paid by _________ (maturity date).) I will make payments to you at the address above or as you direct. I will make the payments on the dates and in the amounts shown in the Payment Schedule."
(7) Late charge. The model late charge provision for contracts using the scheduled installment earnings method or the true daily earnings method reads: "If I don't pay all of a payment within 10 days after it is due, you can charge me a late charge. The late charge will be 5% of the scheduled payment."
(8) After maturity interest. The model clause specifies the maximum interest rate allowed by law for after maturity interest. A creditor may always choose a lower rate. The model provision for after maturity interest reads: "If I don't pay all I owe when the final payment becomes due, I will pay interest on the amount that is still unpaid. That interest will be the higher of the rate of 18% per year or the maximum rate allowed by law. That interest will begin the day after the final payment becomes due."
(9) Prepayment clause. The model prepayment clause options read:
(A) For contracts using the scheduled installment earnings method: "I can make a whole payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(B) For contracts using the true daily earnings method: "I can make any payment early. Unless you agree otherwise in writing, I may not skip payments. If I make a payment early, my next payment will still be due as scheduled."
(10) Finance charge earnings and refund method. The model provision options specifying the finance charge earnings and refund method read:
(A) For contracts using the scheduled installment earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.603(e)(10)(A) (No change.)
(B) For contracts using the scheduled installment earnings method with prepayments option - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.603(e)(10)(B) (No change.)
(C) For contracts using the true daily earnings method - Section 342.301 rate loans, the model language reads:
Figure: 7 TAC §90.603(e)(10)(C) (No change.)
(11) Deferment. The model provision regarding deferment reads: "If I ask for more time to make any payment and you agree, I will pay more interest to extend the payment. The extra interest will be figured under the Finance Commission rules."
(12) Fee for dishonored check clause. The model clause specifies the maximum allowable dishonored check fee. A creditor may always choose a lesser amount. The model fee for dishonored check provision reads: "I agree to pay you a fee of up to $30 for a returned check. You may add the fee to the amount I owe or collect it separately."
(13) Default. The model provision specifying the conditions causing default reads:
Figure: 7 TAC §90.603(e)(13) (No change.)
(14) Property insurance. The model provision regarding property insurance reads:
Figure: 7 TAC §90.603(e)(14) (No change.)
(15) Credit insurance. If single premium credit insurance is offered, a permissible change to the disclosure can be to offer a single charge for the entire term of the loan. The term for the single premium charge should be shown for the original term of the loan, unless otherwise specified. The licensee has the option of including language that reads: "The insurance will cancel on the date when the total past due premiums equal or exceed (insert number) times the first month's premium." The industry standard regarding the relationship between total past due premiums and the first month's premium in this equation appears to be four times. However, if a different time frame is more appropriate, that time frame may be used. The model credit insurance disclosure box reads:
Figure: 7 TAC §90.603(e)(15) (No change.)
(16) Mailing of notices to borrower. The duty to give notice is satisfied when it is mailed by first class mail. The model provision regarding the mailing of notices to the borrower reads: "You or I may mail or deliver any notice to the address above. You or I may change the notice address by giving written notice. Your duty to give me notice will be satisfied when you mail it."
(17) Statement of truthful information. The model provision specifying that the borrower gave truthful information reads: "I promise that all information I gave you is true."
(18) Due on sale clause, notice of intent to accelerate, and notice of acceleration. The model provision regarding the due on sale clause, notice of intent to accelerate, and notice of acceleration reads: "If all or any interest in the Property is sold or transferred without your prior written consent, you may require immediate payment in full of all that I owe under this Loan Agreement. You will not exercise this option if prohibited by law. If you exercise this option, you will give me notice that you are demanding payment of all that I owe. This notice will give me a period of not less than 21 days from the date of the notice within which I must pay all that I owe under this Loan Agreement. If I fail to pay all that I owe before the end of this period, you may use any remedy allowed by the Loan Agreement."
(19) No waiver of lender's rights. The model provision expressing no waiver of the lender's rights reads: "If you don't enforce your rights every time, you can still enforce them later."
(20) Collection expenses. The model collection expenses clause reads: "If you require me to pay all that I owe at once, you will have the right to be paid back by me for all of your costs and expenses in enforcing this Loan Agreement to the extent not prohibited by Applicable Law. These expenses include, for example, reasonable attorneys' fees."
(21) Joint liability. The model provision providing for joint liability reads: "I understand that you may seek payment from only me without first looking to any other Borrower."
(22) Usury savings. The model usury savings clause reads: "I do not have to pay interest or other amounts that are more than Applicable Law allows."
(23) Savings clause. The model savings clause stating that if any part of the contract is invalid, the rest remains valid reads: "If any part of this Loan Agreement is declared invalid, the rest of the Loan Agreement remains valid. If any part of this Loan Agreement conflicts with any law, that law will control. The part of the Loan Agreement that conflicts with any law will be modified to comply with the law. The rest of the Loan Agreement remains valid."
(24) Prior agreements. For loan agreements exceeding $50,000.00, this notice must be boldfaced, capitalized, underlined, or otherwise set out from the surrounding written material to be conspicuous. The model clause stating that there are no prior agreements between the parties regarding the loan agreement reads: "This written Loan Agreement is the final agreement between you and me. It may not be changed by prior, current, or future oral agreements between you and me. There are no oral agreements between you and me relating to this Loan Agreement. Any change to this Loan Agreement must be in writing. Both you and I have to sign written agreements."
(25) Note secured by deed of trust. The model clause stating that the note is secured by a deed of trust reads: "In addition to this Note, the Deed of Trust protects the Note holder from losses that might result if I do not keep the promises that I make in this Note. The Deed of Trust describes how and under what conditions I may have to make immediate payment of all that I owe under this Note."
(26) Application of law. The model clause specifying that federal law and Texas law apply to the contract reads: "Federal law and Texas law apply to this Loan Agreement."
(27) Complaints and inquiries notice. The model complaints and inquiries notice reads: "The (name of lender or note holder) is licensed and examined under the laws of the State of Texas and by state law is subject to regulatory oversight by the Office of Consumer Credit Commissioner. Any consumer wishing to file a complaint against the (name of lender or note holder) should contact the Office of Consumer Credit Commissioner through one of the means indicated below: Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207; www.occc.state.tx.us; (800) 538-1579."
(28) Collateral. The model clause regarding the collateral reads: "The Property is subject to the Contract lien. I am responsible for all obligations in this Note."
(29) Preservation of claims and defenses. The notice regarding the preservation of claims and defenses reads: "NOTICE. ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER."
(30) Signature blocks. Documents for a home improvement loan on a homestead must be signed at the office of the lender, an attorney at law, or a title company. If this provision applies, the model clause, "This document must be signed at the office of the Lender, an attorney at law, or a title company" should appear above the signature of the borrower. The licensee may also provide additional signature lines for witness signatures. The model signature block reads:
Figure: 7 TAC §90.603(e)(30) (No change.)
(f) For a Chapter 342, Subchapter G second lien home improvement loan deed of trust for use in a transaction that allows for withdrawals or multiple advances:
(1) Definitions. The model definitions section reads:
(A) ""Borrower" is _________________. Borrower's address is _____________________.
(B) "Contractor" is __________________. Contractor's address is _______________________.
(C) "Lender" is ____________________. Lender's address is ___________________________.
(D) "Trustee" is ____________________. Trustee's address is _______________________.
(E) "I" or "me" means ________________________________, the grantor under this Deed of Trust and the person who signed the Note ("Borrower").
(F) "Loan Agreement" means the Contract, Note, Security Document, Deed of Trust, any other related document, or any combination of those documents, under which Lender has made a loan to me.
(G) "Deed of Trust" means this document, which is dated ________, together with all riders to this document.
(H) "Note" means the Texas Home Improvement Mechanic's Lien Note signed by me and dated ______________ and includes all amounts secured by this Contract. The Note states that the amount I owe Lender is _________________ dollars (U.S. $_________) plus interest.
(I) "Property" means the property at (list address of the Property), whose legal description is (list legal description of the Property).
(J) "Applicable Law" means all controlling applicable federal, state, and local law.
(K) "Community Association Dues, Fees, and Assessments" means all dues, fees, assessments and other charges that are imposed on me or the Property by a condominium association, homeowners association, or similar organization.
(L) "Electronic Funds Transfer" means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, computer, or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account. The term includes point-of-sale transfers, automated teller machine transactions, transfers initiated by telephone, wire transfers, and automated clearinghouse transfers.
(M) "Escrow Items" means those items that are described in Section ___ of this Deed of Trust.
(N) "Miscellaneous Proceeds" means any compensation, settlement, award of damages, or proceeds paid by any third party (other than proceeds paid under my insurance) for: damage or destruction of the Property; condemnation or other taking of all or any part of the Property; conveyance instead of condemnation; or misrepresentations or omissions related to the value or condition of the Property.
(O) "Periodic Payment" means the regularly scheduled amount due for principal and interest under the Note plus any amounts under this Deed of Trust.
(P) "RESPA" means the Real Estate Settlement Procedures Act (12 U.S.C. §2601 et seq.) and Regulation X (24 C.F.R. Part 3500), as they might be amended from time to time, or any additional or successor legislation or regulation that governs the same subject matter. As used in this Deed of Trust, "RESPA" refers to all requirements and restrictions that are imposed in regard to a "federally related mortgage loan" even if the Loan Agreement does not qualify as a "federally related mortgage loan" under RESPA.
(Q) "Successor in Interest" means any party that has taken title to the Property.
(R) "Ground Rents" means amounts I owe if I rented the real property under the buildings covered by this Deed of Trust. Such an arrangement usually takes the form of a long-term "ground lease."
(S) "Contract" means the Texas Home Improvement Mechanic's Lien Contract for Improvement, Power of Sale, and Deed of Trust.
(T) "Lien" means the Mechanic's and Materialman's Lien on the Property that results from the Contract and the Work performed. The Lien includes all existing and future improvements, easements, and rights in the Property."
(2) Transfer of rights in the property. The model provision regarding a transfer of rights in the property reads:
Figure: 7 TAC §90.603(f)(2) (No change.)
(3) Payment of late charges and prepayment. The model provision regarding the payment of late charges and prepayment of principal and interest reads:
Figure: 7 TAC §90.603(f)(3) (No change.)
(4) Funds for escrow items. The model provision regarding the funds for escrow items reads:
Figure: 7 TAC §90.603(f)(4) (No change.)
(5) Charges and liens. The model provision regarding charges and liens reads:
Figure: 7 TAC §90.603(f)(5) (No change.)
(6) Property insurance. The model provision regarding property insurance reads:
Figure: 7 TAC §90.603(f)(6) (No change.)
(7) Preservation, maintenance, protection, and inspection of the property. The model provision regarding preservation, maintenance, protection, and inspection of the property reads: "I will not destroy, damage, or impair the Property, allow it to deteriorate, or commit waste. Whether or not I live in the Property, I will maintain it in order to prevent it from deteriorating or decreasing in value due to its condition. I will promptly repair the damage to the Property to avoid further deterioration or damage unless Lender and I agree in writing that it is economically unreasonable. I will be responsible for repairing or restoring the Property only if Lender releases the insurance or condemnation proceeds for the damage to or the taking of the Property. Lender may release proceeds for the repairs and restoration in a single payment or in a series of payments as the Work is completed. I still am obligated to complete repairs or restoration of the Property even if there are not enough proceeds to complete the Work. If this Deed of Trust secures a unit in a condominium or planned unit development, I will perform all of my obligations under the declaration or covenants creating or governing the condominium or planned unit development, and any other relevant document. Lender or Lender's agent may inspect the Property. Lender may inspect the interior of the Property with reasonable cause. Lender will give me notice stating reasonable cause when or before the interior inspection occurs."
(8) Protection of lender's interest in the property and rights under the deed of trust. The model provision regarding protection of the lender's interest in the property and rights under the deed of trust reads:
Figure: 7 TAC §90.603(f)(8) (No change.)
(9) Assignment of miscellaneous proceeds and forfeiture. The model provision regarding the assignment of miscellaneous proceeds and forfeiture reads:
Figure: 7 TAC §90.603(f)(9) (No change.)
(10) Forbearance not a waiver. The model provision specifying that the borrower is not released from liability if the lender modifies the payment schedule reads: "If Lender doesn't enforce Lender's rights every time, Lender can still enforce them later."
(11) Joint and several liability, deed of trust execution, successors obligated. The model provision regarding joint and several liability and specifying that the person who signs the contract grants his ownership in the property and binds his successors and assigns reads:
Figure: 7 TAC §90.603(f)(11) (No change.)
(12) Usury savings clause. The model usury savings clause reads: "I do not have to pay interest or other amounts that are more than Applicable Law allows."
(13) Mailing of notices to borrower. The duty to give notice is satisfied when it is mailed by first class mail. The model provision regarding the mailing of notices to the borrower reads: "Lender or I may mail or deliver any notice to the address above. Lender or I may change the notice address by giving written notice. Lender's duty to give me notice will be satisfied when Lender mails it."
(14) Application of law. The model clause specifying that federal law and Texas law apply to the contract reads: "Federal law and Texas law apply to this Loan Agreement."
(15) Rules of construction. The model provision regarding rules of clause construction reads:
Figure: 7 TAC §90.603(f)(15) (No change.)
(16) Loan agreement copies. The model provision specifying that the lender will give the borrower a copy of all signed documents at the time the loan agreement is made reads: "At the time the Loan Agreement is made, Lender will give me copies of all documents I sign."
(17) Due on sale clause, notice of intent to accelerate, and notice of acceleration. The model provision regarding the due on sale clause, notice of intent to accelerate and notice of acceleration reads: "If all or any interest in the Property is sold or transferred without Lender's prior written consent, Lender may require immediate payment in full of all that I owe under this Loan Agreement. Lender will not exercise this option if Applicable Law prohibits. If Lender exercises this option, Lender will give me notice that Lender is demanding payment of all that I owe. This notice will give me a period of not less than 21 days from the date of the notice within which I must pay all that I owe under this Loan Agreement. If I fail to pay all that I owe before the end of this period, Lender may use any remedy allowed by the Loan Agreement."
(18) Lender, contractor, and borrower's promises and agreements. The model provision regarding the lender, contractor, and borrower's promises and agreements reads: "LENDER, CONTRACTOR, AND I PROMISE AND AGREE:".
(19) Acceleration and remedies. The model provision regarding acceleration and remedies reads:
Figure: 7 TAC §90.603(f)(19) (No change.)
(20) Power of sale. The model provision regarding the power of sale reads:
Figure: 7 TAC §90.603(f)(20) (No change.)
(21) Borrower's right to reinstate after acceleration. The model provision regarding the borrower's right to reinstate after acceleration reads:
Figure: 7 TAC §90.603(f)(21) (No change.)
(22) Assignment of rents, appointment of receiver, and lender in possession. The model provision regarding the assignment of rents, appointment of receiver, and the lender in possession reads: "As additional security, I assign to you the rents of the Property, provided that you have the right, prior to acceleration or abandonment of the Property, to collect and retain the rents as they become due. Upon acceleration or abandonment, you, by agent or by court-appointed receiver, will be entitled to enter, take possession, manage the Property, and collect due and past due rents. All rents you or the court-appointed receiver collect will be applied first to payment of the cost of management of the Property and collection of rents, including receiver's fees, premiums on receiver's bonds, and reasonable attorneys' fees, and then to the sums secured by this Deed of Trust. You and the receiver will be liable to account only for rents received."
(23) Release. The model provision regarding the release of the lien securing the loan agreement reads: "Lender will cancel and return the Note to me and give me, in recordable form, a release of lien securing the Loan Agreement or a copy of any endorsement of the Note and assignment of the Lien to a Lender that is refinancing the Loan Agreement. I will pay only the cost of recording the release of lien."
(24) Trustees and trustee liability. The model provision regarding trustees and trustee liability reads:
Figure: 7 TAC §90.603(f)(24) (No change.)
(25) Assignment of contractor's lien, and commencement of work. The model provision regarding the assignment of the contractor's lien and specifying that no work was commenced before the contract was executed reads: "Contractor and I have entered into the Contract for improvements to be made to the Property. I will perform my duties under the Contract. Under the Contract, I gave Contractor a Lien on the Property. Contractor permanently transfers the Lien and any other interest Contractor has in the Property to Lender. As additional security, Contractor also agrees that the lien created by this Deed of Trust has priority over the Lien. The purpose of the Note is to pay in whole or in part the improvements to be made to the Property by the Contractor. Contractor and I agree that the Lien is for Lender's sole benefit. Any other interest Contractor has in the Property will be merged with the Lien, and may be enforced by Lender according to the terms of this Deed of Trust. Contractor and I further agree that no Work was performed or material delivered before the Contract was executed."
(26) Subrogation. The model provision regarding subrogation reads: "If I ask, Lender will use proceeds from the Loan Agreement to pay off all valid outstanding liens against the Property. Lender will then own all rights, superior titles, liens, and interests owned or claimed by any owner or holder of an outstanding lien or debt. Lender owns these things whether the lien or debt is transferred to Lender or whether it is released by the holder upon payment."
(27) Partial invalidity. The model provision regarding what happens if the sums secured and other charges violate applicable law reads: "If any portion of the sums secured by this Deed of Trust cannot be lawfully secured, payments minus those sums will be applied first to the portions not secured. If any charge provided for in this Loan Agreement, separately or together with other charges that are considered part of this Loan Agreement, violates Applicable Law, the charge is reduced to the extent necessary to eliminate the violation. Lender will refund the amount of interest or other charges paid to Lender in excess of the amount permitted by Applicable Law. At Lender's option, the amount in excess will either be refunded directly to me or will be applied to reduce the principal of the debt."
(28) Renewal and extension. The model provision regarding the renewal and extension of the note secured by the deed of trust reads: "The Note secured by this Deed of Trust is renewed and extended, but not in extinguishment of the debt under the Contract identified in the paragraph entitled "Assignment of Contractor's Lien, Commencement of Work" and the Note."
(29) Sale of loan, change of loan servicer, notice of grievance, and lender's right to comply. The model provision regarding the sale of the loan, change of loan servicer, notice of grievance, and the lender's right to comply reads: "A full or partial interest in the Loan Agreement can be sold one or more times without prior notice to me. The sale may result in a change of the company servicing or handling the Loan Agreement. The company servicing or handling the Loan Agreement will collect my monthly payment and will comply with other servicing conditions required by the Loan Agreement or Applicable Law. In some cases, the company servicing or handling the Loan Agreement may change even if the Loan Agreement is not sold. If the company servicing or handling the Loan Agreement is changed, I will be given written notice of the change. The notice will state the name and address of the new company, the address to which my payments should be made, and any other information required by RESPA. Any notice of acceleration and opportunity to cure under the Loan Agreement will satisfy the notice and opportunity to address the alleged violation provisions of this Section. No agreement between Lender and me or any third party will limit Lender's ability to comply with Lender's duties under the Loan Agreement and Applicable Law. Lender and I are limiting all agreements so that all current or future interest or fees in connection with this Loan Agreement will not be greater than the highest amount allowed by Applicable Law. Lender and I intend to conform the Loan Agreement to the provisions of Applicable Law. If any part of the Loan Agreement is in conflict with the Applicable Law, then that part will be corrected or removed. This correction will be automatic and will not require any amendment or new document. Lender's right to cure any violation will survive my paying off the Loan Agreement. My right to cure will override any conflicting provision of the Loan Agreement. Lender's right to comply as provided in this Section will survive the payoff of the Loan Agreement. The provisions of this Section will supersede any inconsistent provision of the Loan Agreement."
(30) Hazardous substances. The model provision regarding hazardous substances reads:
Figure: 7 TAC §90.603(f)(30) (No change.)
(31) Lender's rights and Borrower's responsibilities. The model provision regarding the lender's rights and the borrower's responsibilities reads:
Figure: 7 TAC §90.603(f)(31) (No change.)
(32) Default. The model provision regarding the borrower's default reads: "Any default of my agreements with Lender will be a default of this Deed of Trust."
(33) Request for notice of default and foreclosure under superior mortgages or deeds of trust. The model provision regarding the lender and borrower's request for notice of default and foreclosure under superior mortgages or deeds of trust reads:
Figure: 7 TAC §90.603(f)(33) (No change.)
(34) Signature blocks. The parties' signatures must be notarized. The licensee may use a different notary acknowledgment without having to submit the deed of trust to the agency as non-standard. Documents for a home improvement loan on a homestead must be signed at the office of the lender, an attorney at law, or a title company. If this provision applies, the model clause, "This document must be signed at the office of the Lender, an attorney at law, or a title company" should appear above the signature of the borrower. The model provision regarding signature blocks reads:
Figure: 7 TAC §90.603(f)(34) (No change.)
(35) Notice of confidentiality rights disclosure. The security document must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:
(A) appear on the top of the first page of the security document;
(B) be in at least 12-point boldfaced type or 12-point uppercase lettering; and
(C) be substantially similar to the required notice or disclosure under Texas Property Code, §11.008(b). The model notice of confidentiality rights reads: "NOTICE OF CONFIDENTIALITY RIGHTS: I MAY REMOVE OR STRIKE MY SOCIAL SECURITY NUMBER OR MY DRIVER'S LICENSE NUMBER FROM THIS DOCUMENT BEFORE IT IS FILED IN THE PUBLIC RECORDS."
§90.604.Permissible Changes.
(a) A licensee may consider making the following types of changes to the second lien home improvement contracts plain language model clauses:
(1) Regulation Z of the Truth in Lending Act provides a right of rescission form that must be provided to consumers in a transaction involving the consumer's principal dwelling. The TILA right of rescission form for use in a transaction involving the consumer's principal dwelling reads:
Figure: 7 TAC §90.604(a)(1) (No change.)
(2) If the Texas constitutional homestead requirements apply to the transaction, the licensee must add a clause regarding notice of cancellation, place of singing the contract, and the five-day waiting period. The model clause regarding the notice of cancellation, place of signing the contract, and the five-day waiting period reads:
Figure: 7 TAC §90.604(a)(2) (No change.)
(3) Article 16, Section 50(a)(5) of the Texas Constitution provides that a contract for improvements on a homestead must expressly provide the owner with notice of the owner's right to cancel the contract. The model notice regarding the owner's right to cancel the contract reads: "NOTICE OF RIGHT TO CANCEL. THE OWNER MAY CANCEL THE CONTRACT WITHOUT PENALTY OR CHARGE WITHIN THREE DAYS AFTER THE EXECUTION OF THE CONTRACT BY ALL PARTIES, UNLESS THE WORK AND MATERIAL ARE NECESSARY TO COMPLETE IMMEDIATE REPAIRS TO CONDITIONS ON THE HOMESTEAD PROPERTY THAT MATERIALLY AFFECT THE HEALTH OR SAFETY OF THE OWNER OR PERSON RESIDING IN THE HOMESTEAD AND THE OWNER OF THE HOMESTEAD ACKNOWLEDGES SUCH IN WRITING."
(4) Texas Business and Commerce Code, Chapter 39 requires that notice must be given to the consumer regarding the consumer's right to cancel certain types of transactions. If this chapter is applicable, the notice that must be given by the licensee must appear in immediate proximity to the consumer's signature, or on the front page of the receipt if a contract is not used. The notice must be in boldfaced type and must be the equivalent of at least 10 points in the Times typeface. The statement to which the notice must be substantially similar reads: "YOU, THE BUYER, MAY CANCEL THIS TRANSACTION AT ANY TIME PRIOR TO MIDNIGHT OF THE THIRD BUSINESS DAY AFTER THE DATE OF THIS TRANSACTION. SEE THE ATTACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT."
(5) Texas Business and Commerce Code, Chapter 39 also requires, if applicable, that a completed notice of cancellation form in duplicate be attached to the loan documents or receipt of the consumer transaction. This notice must be easily detachable from the contract or receipt, be in the same language as the contract or receipt, be in boldfaced type, and be the equivalent of at least 10 points in the Times typeface. The required notice of cancellation reads:
Figure: 7 TAC §90.604(a)(5) (No change.)
(6) The licensee may add information related to information set forth in the model clauses that is not otherwise prohibited by law.
(7) The licensee may substitute another term for "Lender" or "Borrower" that has the same meaning, or use pronouns such as "you," "we," and "us."
(8) The model clauses may be presented in any order, and may be combined or further segregated at the licensee's option.
(9) The licensee may insert descriptive headings or number provisions.
(10) The licensee may change the case of a word if otherwise permitted by the Texas Finance Code.
(11) The licensee may make other changes that do not affect the substance of the disclosures.
(12) A sample model contract that does not allow for withdrawals or multiple advances is presented in the following example.
Figure: 7 TAC §90.604(a)(12) (.pdf)
(13) A sample model promissory note that does not allow for withdrawals or multiple advances is presented in the following example.
Figure: 7 TAC §90.604(a)(13) (No change.)
(14) A sample model contract that allows for withdrawals or multiple advances is presented in the following example.
Figure: 7 TAC §90.604(a)(14) (No change.)
(15) A sample model promissory note that allows for withdrawals or multiple advances is presented in the following example.
Figure: 7 TAC §90.604(a)(15) (.pdf)
(16) A sample model deed of trust that allows for withdrawals or multiple advances is presented in the following example.
Figure: 7 TAC §90.604(a)(16) (.pdf)
(b) A licensee has considerable flexibility to arrange the format of the model form if the revised format does not significantly adversely affect the substance, clarity, or meaningful sequence of the disclosures.
This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on August 17, 2007.
TRD-200703684
Leslie L. Pettijohn
Commissioner
Office of Consumer Credit Commissioner
Effective date: September 6, 2007
Proposal publication date: June 29, 2007
For further information, please call: (512) 936-7640