Getting Started—Information Required
This chapter addresses in summary form the information the attorney should collect in connection with the client’s request that the attorney enforce collection of a debt in default.
Once the attorney has established the attorney-client relationship, the attorney must obtain copies of all the pertinent documents pertaining to the debt in default so that the attorney may fully understand the agreements between the borrower, the mortgagor, and the lender concerning the debt and the collateral. Without this understanding, it is not possible for the attorney to confirm (1) that the borrower or mortgagor is actually in breach of the loan agreement; (2) what procedures and remedies the borrower, the mortgagor, and the lender contractually agreed to in the event of a breach of the loan agreement; or (3) where and how the attorney is to communicate with the borrower or the mortgagor concerning the alleged breach. It is also essential that the attorney establish the procedures for ready contact with the client, as the attorney must anticipate that throughout the legal representation communications from the borrower (such as a request for forbearance), challenges to the collection process (such as a usury accusation or a request for a temporary restraining order), or other unforeseen events may arise that require prompt consultation with the client.
At the beginning of the representation, the attorney should define the scope of the legal services to be performed for the client so that there are no misunderstandings or disagreements about the scope and nature of the legal services that the attorney has agreed to perform for the client. At a minimum, the attorney should document the work the attorney has agreed to perform for the client and the fee or how the attorney will charge for the work. In many situations, the attorney may also want to document specific types of services that the attorney will not provide as part of the legal representation of the client, such as obtaining appraisals of the mortgaged property, obtaining environmental studies of the mortgaged property, bringing postforeclosure eviction actions, or bringing deficiency suits. Many institutional lenders and servicers (especially in the residential loan area) have software programs that manage and control foreclosure referrals and case progress. Accordingly, to prevent surprises when representing such clients, the attorney should verify early in the representation that the scope of the attorney’s legal services and the means of communication between the attorney and the client conform to the client’s mortgage servicing platform and computer protocols.
See chapter 1 in this manual for a discussion of establishing and documenting the attorney-
client relationship, especially section 1.5:2 if the attorney has represented both the borrower and the lender.
§ 2.3Verifying Client’s Authority
A significant attorney-client issue that has come to the fore in recent years is the question of verifying that the client has the authority to enforce the loan documents, execute the necessary appointments, and generally make the key business decisions that arise during the legal representation. This issue is particularly troublesome in the area of securitized loans sold into the secondary market, where the servicing rights and the authority to enforce the loan documents are routinely separated from the actual ownership interests in the debt (see the discussion of Texas law concerning the authority of mortgage servicers in sections 2.5:6 and 6.3:7 in this manual), but the issue will also arise in connection with any loan owned (or participated in) by multiple lenders. The attorney should always make appropriate inquiries of the client to determine if any other persons “lie behind” the client and, if so, what agreements exist between the client and these third parties. As a related matter, the attorney may wish to clarify in writing with the client whether the attorney is expected to verify that all necessary assignments or transfers of liens in the chain of documents leading to the client are in proper order. Verification of the chain of transfers for loans in the Mortgage Electronic Registration Systems, Inc. (MERS) recording system can be done through the Internet, but this verification can be quite difficult for loans not in the MERS system. While Texas case law seems to hold that assignments of interest in promissory notes and liens are valid between the parties to the assignment without regard to whether the assignment instruments are recorded in the real property records, the failure to record such assignments may make it very difficult to reconstruct the chain of title, particularly if one or more of the persons in the chain is deceased or has ceased to do business. See sections 3.3:6, 10.3:5, and 10.27 and chapter 4 generally for further discussion of these title issues.
§ 2.4Collecting Necessary Information
Although all major mortgage servicers and many other lenders have their own standard legal services referral forms, the attorney should have a form instrument setting out the information the attorney desires from the client, as the attorney can use such a form as both a checklist for the information provided by the client under the client’s legal services referral form and as the operative document in the event the client does not have its own referral form. See the Loan Referral Questionnaire provided as form 2-1 in this manual for a detailed example of such a form. See also the Loan Referral Acknowledgment form provided as form 2-2, which can be used in conjunction with form 2-1.
The attorney’s goal is to obtain from the client all the documents and information necessary for the attorney to plan and implement the steps necessary to enforce the loan documents. Documents and information that the attorney should review include, but are not limited to—
•executed copies of all documents evidencing the loan transaction (such as the promissory note, the deed of trust, guarantees, participation agreements, and any notices or disclosures delivered at closing) and all subsequent amendments or modifications to such documents;
•lease agreements and subordination, nondisturbance, and attornment agreements;
•full names and the most current contact and address information for all parties who are either currently obligated on the loan (whether as maker or as a guarantor or assumptor of the loan) or who granted a lien or security interest against the mortgaged property securing the loan;
•entity information, including formation documents, governance documents, certificates of existence, good standing, and tax ID numbers;
•the information necessary to perform a Department of Defense search on each individual who is an obligor on the loan and/or a mortgagor, including either the Social Security number or birth date of each such individual (see chapter 33 in this manual concerning the Servicemembers Civil Relief Act);
•the loan payment history;
•statements of the loan amounts in default (Note: Even if the client agrees that the attorney may rely on the statements and calculations performed by the client, it is recommended that the attorney attempt to verify the calculations, as demands for improper amounts may jeopardize the validity of the entire collection effort and expose the client to significant counterclaims. See, for example, the fair debt collection practices statutes discussed in chapter 7.);
•the loan file comments or communication record;
•the mortgagee’s title insurance policy;
•lender/servicer title, lien, and bankruptcy searches (if any) performed after the issuance of the mortgagee’s title insurance policy;
•appraisals of the mortgaged property;
•all correspondence sent to the loan obligors and mortgagors before engagement of the attorney (especially correspondence regarding alleged defaults, demands to cure, notices of intent to accelerate, notices of acceleration, prenegotiation agreements, letters of intent, standstill agreements, and forbearance agreements);
•all correspondence sent to the client/lender/servicer by the obligors or the mortgagors (Note: In addition to alerting the attorney to potential issues not evident on the face of the client’s file, such correspondence may reveal that the obligors or the mortgagors have sent a change of address notice, and the failure to send notices to the correct addresses under the loan documents and any applicable statutes may invalidate the entire collection effort by the attorney and potentially expose the client to significant counterclaims);
•verification of who has custody of the original loan documents and physical possession of the promissory note; and
•any other information that the attorney deems helpful in light of the particular circumstances of the loan.
§ 2.5Key Areas for Attorney Review
In reviewing the loan information, the attorney should pay particular attention to certain key areas.
The attorney should review all the original loan documents and all amendments and modifications thereto to understand the specific agreements of the parties concerning what acts constitute a breach of the agreements, what remedies are available for breach, and what conditions, if any, must be met before exercise of the remedies for the breach (e.g., written notice of default and opportunity to cure). Additionally, loan documents almost invariably set out not only the respective addresses of the parties for all notices under the loan documents, but also the proper means of sending notices to a party (such as U.S. certified mail, overnight delivery by a national carrier, etc.).
While loan documents usually clearly define events of default, problems may arise when the contractual agreement of the parties in the loan documents exceeds or falls short of minimum standards established by statute. For example, the standard forms of promissory note and deed of trust used in residential loans intended for resale into the secondary market afford the borrower not less than thirty days to cure a default as a condition to the creditor’s acceleration of the loan maturity. This contractual agreement for a thirty-day cure period will supersede the minimum twenty-day cure period for residential loans set out in Texas Property Code section 51.002. Moreover, the same forms of residential promissory note and deed of trust also provide that not only may the borrower cure the default after acceleration of maturity and thereby reinstate the loan, but that the borrower must also be given written notice of such right:
Acceleration; Remedies. Lender shall give notice to Borrower before acceleration following Borrower’s breach of any covenant or agreement in this Security Instrument. . . . The notice shall specify: (a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice will result in acceleration of the sums secured by this Security Instrument and sale of the Property. The notice shall further inform Borrower of the right to reinstate after acceleration [under a different section of the loan document] and the right to bring a court action to assert the nonexistence of a default or any other defense of Borrower to acceleration and sale.
Commercial loans will vary much more widely than standard residential loan documents as to default, notice, and cure requirements because (unlike residential loans) essentially every loan provision pertaining to default, notice, and cure is (at least in theory) open to negotiation by the parties to the particular transaction. Guaranty agreements may contain consent, notice, and other provisions that are inconsistent with or more restrictive than the loan documents.
In short, the attorney must review every loan document to determine the specific requirements of the loan in question.
See chapter 5 in this manual for a discussion of promissory notes, chapter 6 for a discussion of deeds of trust, and chapter 7 for a discussion of consumer debt collection.
The attorney must review both the documents in the chain of title leading up to the loan documents and any documents pertaining to the collateral that were filed after the loan closing. If the attorney merely reviews a summary or “run sheet” of instruments in the chain of title, the attorney may overlook key problems affecting the loan transaction. Common title problems affecting collection efforts include (1) discrepancies between the legal description in the deed by which the mortgagor took title to the mortgaged property and the legal description in the deed of trust executed by the mortgagor; (2) that the deed of trust omits persons owning an interest in the mortgaged property; (3) that priority liens (such as ad valorem tax liens) were filed after the loan closing; (4) that junior encumbrances requiring special notice to third parties (such as federal tax liens) were filed after the loan closing; and (5) that previously unknown prior liens are discovered through a preforeclosure title review.
Another potential title issue under Texas law is that, absent a contractual agreement to the contrary by the senior lienholder, a senior lienholder has no obligation to notify junior lienholders of a pending foreclosure sale; consequently, a junior lienholder client must constantly monitor the status of the senior lien to make sure that the client’s junior lien is not extinguished by foreclosure of the prior lien. The attorney representing a junior lienholder should clarify early on whether this responsibility to monitor for senior lien postings is to be performed by the attorney or the client.
See chapter 4 in this manual for a general discussion of title matters.
§ 2.5:3Verification of Addresses
If the debt is secured by the debtor’s residence, the “debtor’s last known address” is defined by Texas Property Code section 51.001(2)(A) as “the debtor’s residence address unless the debtor provided the mortgage servicer a written change of address before the date the mortgage servicer mailed a notice required by Section 51.002.” Tex. Prop. Code § 51.0001(2)(A). For any other debt, the debtor’s last known address is the address contained in the mortgage servicer’s file unless there was a written change of address given under the requirements of the loan documents. See Tex. Prop. Code § 51.0001(2)(B). Because failure to send foreclosure notices to the correct addresses is generally a fatal foreclosure defect, obtaining the correct addresses from the lender or servicer is critical. Many attorneys simply mail notices to all currently valid addresses that the lender has for the borrower.
Many attorneys also deem it useful to confirm the physical address of the collateral property, even if the loan documents provide that notices must be given to a different address. In addition to being necessary to conduct any inspection of the mortgaged property before foreclosure, the physical address is useful if the client desires an eviction action, as the eviction notice to vacate and the eviction petition should list the actual physical address of the property. If the eviction petition only contains a mailing address and not the property street address, the constable will not serve the eviction petition, and the attorney will not be able to obtain a writ of possession if the eviction pleading or the judgment lists a mailing address rather than the street address.
See generally chapter 8 in this manual concerning notices to the obligors and mortgagors.
The attorney should review the loan payment history to verify that the demand being made to cure the loan default is correct. If the attorney makes a demand for an amount of money that is in excess of the actual debt owed, both the attorney and client may be liable for statutory damages and subject to counterclaims by the borrower. See chapter 7 in this manual for considerations of both the Texas Debt Collection Act and the federal Fair Debt Collection Practices Act.
The attorney should review the client’s loan file comments/communication record to ensure that the client has not made representations or agreements with the borrowers or mortgagors that may hinder or prevent the foreclosure, such as an enforceable promise to modify a loan or forbear from certain actions. Typically, residential mortgage servicers will not provide loan comments for review without a special request from the attorney.
§ 2.5:6Prior Correspondence with Parties
To control legal fees, large residential mortgage servicers will typically prepare and mail notices of default, demands for cure, and notices of intent to accelerate before engaging an attorney to assist with the collection effort. The attorney should verify that such prior correspondence was done properly, and if necessary the attorney should resend notices that comply with the requirements of the loan documents and applicable law.
Beginning in 2014 and escalating dramatically thereafter, borrowers have been challenging foreclosure by claiming that the statute of limitations under Texas Civil Practice and Remedies Code section 16.035 bars the mortgagee from foreclosing because a notice of acceleration sent four or more years earlier matured the debt. See Tex. Civ. Prac. & Rem. Code § 16.035. Consequently, before proceeding with foreclosure, counsel must determine whether a notice of acceleration was previously sent and, if sent, ensure the notice was abandoned or rescinded. See Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562 (Tex. 2001); Tex. Civ. Prac. & Rem. Code § 16.038. See section 10.26 in this manual for a discussion of this issue.
The attorney should review the loan policy of title insurance (T-2) (“Mortgagee Policy”). It is important to verify that the identity of the insured, the legal description of the mortgaged property, the description of the insured amount, the loan document recording information, and the Schedule B encumbrances are accurately set out in the title policy and comport with the loan documents. Mistakes in transcribing information onto the Mortgagee Policy are not uncommon. If a truly significant problem is discovered that cannot be corrected, the attorney should consult with the client concerning both the viability of proceeding with the collection effort and the appropriateness of filing a claim under the title Mortgagee Policy. See Texas Department of Insurance, Title Insurance Basic Manual at www.tdi.texas.gov/title/titleman.html.
See chapter 4 in this manual for further discussion of title issues.
§ 2.6Foreclosure Calendar and Checklist
It is highly recommended that the attorney prepare both a foreclosure calendar and a foreclosure checklist for each loan being handled by the attorney, as these instruments are a useful means of organizing and tracking the key steps in the foreclosure process for each particular loan. See form 2-3 in this chapter for a foreclosure calendar that lists key dates and deadlines during the foreclosure process. See form 2-4 for an attorney’s foreclosure checklist.