HEL/HELOC Foreclosure Process
The primary focus of this chapter will be the mechanical and logistical aspects of filing a Home Equity Loan (HEL) and Home Equity Line of Credit (HELOC) foreclosure application under rule 736 of the Texas Rules of Civil Procedure. The Texas Supreme Court has promulgated forms for use in expedited foreclosure proceedings, and the forms can be found on the Texas Supreme Court website at www.txcourts.gov/Rules-forms/forms/. The practitioner seeking to foreclose a HEL or HELOC must obtain a court order before the HEL/HELOC encumbered property can be sold by nonjudicial or judicial procedures. Tex. Const. art. XVI, § 50(a)(6)(D).
Note: In this chapter the term HEL will apply to both HEL and HELOC loans unless the context implies otherwise.
Beginning with the financial crisis in 2007, there has been substantial litigation with a corresponding number of appellate court opinions related to HEL foreclosures. See section 10.15 in this manual for a discussion of the legal issues and challenges raised by borrowers’ and lenders’ responses to those challenges in HEL litigation.
This chapter covers the mechanics of preparing a rule 736 application, as there are few appellate opinions related to the application process. The probable reasons for this lack of guidance are: (1) the Texas Supreme Court’s promulgated forms make the application process an almost fill-in-the-blank procedure—assuming the loan level information can be obtained from the mortgagee or mortgage servicer; (2) the supreme court was directed by Tex. Const. art. XVI, § 50(r) to expedite the foreclosure process; (3) the granting or denial of a rule 736 application is not subject to a motion for rehearing, new trial, bill of review, or appeal, and the order is without prejudice and has no res judicata effect under rules 736.8 and 736.9; and (4) rules 735 and 736 are written in simple instructional language.
A HEL allows a homeowner to use their homestead as collateral to obtain a loan based on the equity in the property. HELs were established by an amendment to the Texas Constitution. Tex. Const. art. XVI, § 50(a)(6). One of the principal constitutional provisions related to HELs is that a HEL loan agreement cannot be foreclosed without obtaining a court order. Tex. Const. art. XVI, § 50(a)(6)(D). To create the procedure for obtaining the foreclosure order, Tex. Const. art. XVI, § 50(r) required the Texas Supreme Court to “promulgate rules of civil procedure for expedited foreclosure proceedings related to foreclosure of liens . . . that require a court order.” The supreme court responded with rules 735 and 736 of the Texas Rules of Civil Procedure, as the means to obtain the court order before continuing with the standard nonjudicial process under the power of sale in the deed of trust and Tex. Prop. Code ch. 51 or a judicial foreclosure under Tex. R. Civ. P. 309. Both HELs and HELOCs are treated the same under the Texas Rules of Civil Procedure and the safe harbor rules adopted by the Joint Financial Regulatory Commission at 7 Tex. Admin. Code ch. 153. For additional information, see the Texas Finance Commission website at www.fc.texas.gov/. While treated the same, an HELOC differs from a standard HEL because, at closing, the borrower obtains a line of credit under Tex. Const. art. XVI, § 50(t) that can be accessed at the borrower’s discretion under the terms of the loan agreement instead of a lump sum amount for an HEL under Tex. Const. art. XVI, § 50(a)(6).
§ 28.3Type of Foreclosure Sale
Rules 735 and 736 of the Texas Rules of Civil Procedure provide an expedited procedure to proceed with a nonjudicial foreclosure under applicable law by allowing a mortgagee to file an application for a home equity foreclosure order rather than filing a traditional judicial foreclosure lawsuit. Once the court order is obtained, the petitioner can proceed with a nonjudicial sale under Texas Property Code chapter 51 and the terms and conditions of the deed of trust. The term petitioner is a term of art used to signal to the clerk that the pleading being filed is a rule 736 application. It is also used because there are multiple parties that may be legally authorized to conduct the foreclosure. A foreclosure can be initiated by the mortgagee as the holder or transferee with custody and control of the note or the mortgage servicer. See Tex. Prop. Code §§ 51.0001(3), (4), 51.0025.
There are, however, some circumstances in which a judicial foreclosure must be used to obtain the court order necessary to foreclose. Examples include (1) a petitioner who cannot comply with or supply the information required in a rule 736 application, (2) when additional causes of action are required due to a problem with the chain of title or a defect in the lien documents, (3) when the loan agreement requires a judicial sale, or (4) when the borrower is litigious. In these circumstances, the lienholder has the option of proceeding with a judicial foreclosure under rule 309 of the Texas Rules of Civil Procedure. See Tex. R. Civ. P. 735.3. See chapter 20 in this manual for a discussion and forms for initiating a judicial foreclosure.
§ 28.4Filing a Home Equity Application
Rule 736.1(a) of the Texas Rules of Civil Procedure provides that an application for a home equity foreclosure order must be filed in the county where the property is located or in a probate court with jurisdiction over proceedings involving the property. See Tex. R. Civ. P. 736.1(a). If the debtor is deceased and the property is located in a county with statutory probate courts, the application must be filed in probate court. King v. Deutsche Bank National Trust Co., 472 S.W.3d 848 (Tex. App.—Houston [1st Dist.] 2015, no pet.).
The application must be styled: “In re: Order for Foreclosure Concerning [property address] under Tex. R. Civ. P. 736.” Tex. R. Civ. P. 736.1(b).
The application should not be filed until the requisite demand to cure the default has been sent to the obligor(s) under the loan agreement, contract, or lien and the time period to cure the default has expired. See Tex. R. Civ. P. 736.1(c). Typically, both the loan agreement documentation and Texas Property Code section 51.002(d) require that the mortgagee must put the borrower on notice that a default of the loan has occurred and that the default must be cured. Before January 1, 2012, an unequivocal notice of intent to accelerate and a notice of acceleration of the maturity of the debt had to be accomplished before a rule 736 application could be filed. However, when the Texas Supreme Court amended rule 736, effective January 1, 2012, sending a notice of acceleration to the obligor of the debt was no longer required before an application could be filed. This was to prevent the inadvertent running of the four-year statute of limitations requiring nonjudicial foreclosure of the property within four years of accelerating the maturity of the debt. For more information related to the actions necessary to declare the borrower in default, see chapter 8 in this manual.
§ 28.4:3Application Requirements
One of the cardinal principles underlying rule 736 of the Texas Rules of Civil Procedure is that the application must contain all the information needed to legally affirm that the borrower was in default to the party who was legally entitled to enforce the borrower’s loan agreement. Once it was clear that the borrower was in default, based on the evidence of default, the judge could issue a rule 736 court order knowing the petitioner, as lender, mortgagee, or mortgage servicer, would have to comply with all the legal requirements of conducting a lawful foreclosure, and the borrower would have all the legal protections provided under law. In essence, a rule 736 application would be self-enforcing because all the evidence indicating the borrower’s default would be presented.
The application must include the following:
1.The name and last known address of the party legally authorized to conduct the foreclosure (the petitioner). Note that the authority for the petitioner to foreclose must be stated later in the application; therefore, ensure the named petitioner has the legal authority to foreclose.
2.The name and last known address of any obligors of the loan agreement debt and grantors of the deed of trust (the respondent(s)). The term obligor was intentionally used to indicate the person who signed the note and mortgagor for a person who signed the deed of trust but not the note.
3.The commonly known street address and legal description of the property encumbered by the loan agreement sought to be foreclosed. This provision is included to ensure that the property sought to be foreclosed was the same property encumbered by HEL loan agreement.
4.The type of lien sought to be foreclosed and its constitutional or statutory reference. Because a rule 736 application is also used to obtain a court order as condition precedent to foreclosing a reverse mortgage, a property owner association assessment lien, and a property tax loan or transfer tax lien under sections 32.06 and 32.065 of the Texas Tax Code, this section requires that the petitioner clearly disclose the type of loan made the subject of the application.
5.The authority of the petitioner to prosecute the foreclosure. This provision is to ensure the petitioner shows the legal authority under which the petitioner is conducting the foreclosure sale. The petitioner can be the current lender or beneficiary named in the deed of trust; the mortgagee, as defined in Tex. Prop. Code § 51.0001(4); the holder or transferee, as defined in Tex. Bus. & Com. Code § 3.301 and § 3.203, having custody and control of physical possession of the note; or the mortgage servicer under Tex. Prop. Code § 51.0025.
6.The type of default, either monetary or nonmonetary. If the default is monetary, the application must include the number of unpaid scheduled payments, the amount required to reinstate the debt, and the total amount required to pay off the loan agreement. Any figures included in this portion of the application must be as of a date not more than sixty days before the date the application is filed. The reason the number of unpaid scheduled payments must be disclosed is that it generally makes a difference to a judge whether the borrower is only one or two payments behind as opposed to many. Simply alleging the total dollar amount due does not tell the judge much about the severity of the default unless the judge knows the monthly loan payment due and then does a mental calculation as to the number of payments past due. If the default is nonmonetary, the application must describe the facts creating the default.
7.A statement that the requisite notice or notices to cure were mailed in accordance with the terms of the agreement and applicable law, that the opportunity to cure has expired, and that, before filing the application, all other requirements under the loan agreement and applicable law have been completed. The application requires that copies of the notice of demand to cure and notice of intent to accelerate be attached so that there is no dispute whether the notices were in fact given. In addition to copies of the notices, proof of mailing must be included. The standard proof of mailing is obtained from the United States Postal Service (U.S.P.S.) Tracking website, a U.S.P.S. mailing receipt, or a signed “green card.”
8.A conspicuous statement that the legal action is not being sought against an occupant of the property unless the occupant is a party to the underlying loan agreement (a named respondent). This provision ensures any occupant of the property who is not an obligor of the debt or a mortgagor of the deed of trust has notice of the foreclosure sale instead of being served with a notice of eviction after the property has been sold at a foreclosure sale.
9.A conspicuous statement that if the petitioner obtains a foreclosure order, the petitioner will proceed with a foreclosure of the property in accordance with applicable law and the underlying agreement. This statement in the application restates one of the fundamental principles of the rule 736 process, which is that getting a court order does not change the lender’s obligation to foreclose in compliance with all the legal statutory authority and terms and conditions of the deed of trust as required in any foreclosure proceeding.
See Tex. R. Civ. P. 736.1(d)(1)–(5). See form 28-1 in this chapter, Application for an Expedited Order Under Rule 736 on a Home Equity, Reverse Mortgage, or Home Equity Line of Credit Loan, as promulgated by the Texas Supreme Court.
§ 28.4:4Supplemental Documents
Pursuant to rule 736.1(d)(6) of the Texas Rules of Civil Procedure, the application must include an affidavit of material facts in accordance with rule 166a(f). The affidavit must be signed by the petitioner or the servicer. In support of the affidavit, rule 736 requires that the following attachments be included: (1) a copy of the note, the original recorded lien, and a current assignment of the lien or a document showing how the petitioner gained its authority to file the application (i.e., merger document, name change certificate, etc.) and (2) a copy of each notice required to be mailed to the respondent before filing the application under applicable law and the loan agreement together with proof of mailing. See Tex. R. Civ. P. 736.1(d)(6). Although the rule requires that only the last assignment be included in the application, standard practice is to include the full assignment chain. See form 28-2 in this chapter, Affidavit in Support of Petitioner’s Application for an Expedited Order Under Rule 736, as promulgated by the Texas Supreme Court; alternatively, the practitioner may use form 28-3, Declaration in Support of Petitioner’s Application for an Expedited Order Under Rule 736, as promulgated by the Texas Supreme Court.
After the petitioner files its application and pays its filing fees and costs, the clerk issues a citation together with the application, and the clerk serves the citation under the special service procedures found in Tex. R. Civ. P. 736.3 or, pursuant to Tex. Gov’t Code § 22.018, the sheriff, constable, or other authorized person under Tex. R. Civ. P. 103 serves the citation in the same manner as a regular lawsuit in accordance with Tex. R. Civ. P. 106. The citation issued by the clerk must state that a response is due the first Monday after thirty-eight days from the date the citation was placed in the U.S. mail. Tex. R. Civ. P. 736.3(a)(2). The clerk must send the citation and copy of the application to the last known address of the obligor of the debt and mortgagor of the deed of trust stated in the application. In addition, the clerk serves a citation and copy of the application addressed to the occupant of the property to be foreclosed, containing a notice that the occupant is not required to file a response to the application if the occupant is not otherwise named as a party in the application. Tex. R. Civ. P. 736.3(b)(1). Concurrently with service, the clerk prepares the return of service in accordance with rule 107 of the Texas Rules of Civil Procedure, except that the return of service need not contain a return receipt. Tex. R. Civ. P. 736.3(b)(2). The date of service and the return of service are the same date the clerk placed the citation and application in the U.S. mail. The clerk does not need to attach a copy of the return receipt to the citation because rule 736 is intended to be an expedited process, and requiring the clerk to wait on the U.S.P.S. to return the green card could take several months as well as add an extra burden on the court’s staff to match green cards with citations.
A respondent may file a response contesting the petitioner’s application. Tex. R. Civ. P. 736.5(a). As stated above, the response is due on the first Monday after the expiration of thirty-eight days from the date the citation is placed in the U.S. mail by the clerk of the court. Tex. R. Civ. P. 736.5(b). A general denial is an acceptable response, but the response must be signed by the respondent(s) in accordance with rule 57 of the Texas Rules of Civil Procedure. See Tex. R. Civ. P. 736.5(c).
If the respondent wishes to challenge the application, the response must specifically allege: (1) why the respondent believes he did not sign the underlying agreement; (2) why the respondent is not obligated to pay the lien; (3) if the default is a monetary default, why the figures included in the application are incorrect; (4) why the evidence of the loan agreement attached to the supporting affidavit is not true and correct; and (5) proof of payment in accordance with rule 95 of the Texas Rules of Civil Procedure. See Tex. R. Civ. P. 736.5(c)(1)–(5). The specificity of the elements that must be alleged in a response is to give the trial judge something in writing so that the judge can determine whether there is a true default or a defect in the application.
Because rule 736 is an expedited proceeding, as opposed to the standard lawsuit or judicial foreclosure, a counterclaim or cross claim is prohibited in a rule 736 proceeding and the borrower or respondent must file a regular lawsuit. If a counterclaim or cross claim is filed, the court must immediately strike that portion of the response without the need for a hearing. See Tex. R. Civ. P. 736.5(d). The reasoning behind this restriction relates back to the supreme court’s desire to limit the trial court’s review to the requirements that must be met by the petitioner under rule 736 without clouding the issue with related claims, much like an eviction proceeding that only considers who has the superior right of possession.
A hearing is required when a response is filed. The hearing on the application cannot be held earlier than twenty days or later than thirty days after a request for a hearing is made by any party. At the hearing, the petitioner has the burden of proof. See Tex. R. Civ. P. 736.6.
If no response is filed, the petitioner may file a motion and proposed order to obtain a default order. Tex. R. Civ. P. 736.7(a). The court must grant the motion no later than thirty days after the motion is filed if (1) the application complies with the rules set forth under Tex. R. Civ. P. 736.1; (2) the motion was properly served in accordance with rule 736.3 or rule 106; and (3) the return of service has been on file for at least ten days. Tex. R. Civ. P. 736.7(b), (c). Rule 736.7 states that if the application meets the requirements above, the court must grant the default order without a hearing. See Tex. R. Civ. P. 736.7.
Though rule 736.6 states that “the court must not conduct a hearing under this rule unless a response is filed,” many courts do require a hearing. Because there is no appeal under rule 736, only a writ of mandamus is available to make the court follow the no-hearing rule. All foreclosures, including HELs and HELOCs, must comply with all foreclosure requirements under the law. The rule 736 process is an extrajudicial proceeding that requires an order to continue with a normal foreclosure; therefore, conducting a hearing when the borrower fails to file a response adds time and expense to the regular foreclosure process. Furthermore, if the borrower has a complaint about the rule 736 process, the borrower can file a separate lawsuit.
Pursuant to rule 736.8 of the Texas Rules of Civil Procedure, if the order is granted, it must contain the following: (1) the material facts establishing the basis for foreclosure; (2) identification of the property to be foreclosed on, using its commonly known mailing address and legal description; (3) the name and last known address of the respondents; and (4) the recording or indexing information of the lien to be foreclosed. See Tex. R. Civ. P. 736.8(b). An order granting or denying the application is final and is not appealable, subject to a motion for rehearing, new trial, or bill of review. In addition, the order is without prejudice and has no res judicata effect. Tex. R. Civ. P. 736.9. This means the petitioner can refile a new application after curing the defect causing the rule 736 application to be denied, or the borrower can file a separate lawsuit to challenge the foreclosure.
If a separate lawsuit is filed contesting the order granted under rule 736 or any other element of the foreclosure process, the rule 736 order is automatically stayed. See Tex. R. Civ. P. 736.11(a). It is the duty of the respondent to give prompt notice of the suit to the petitioner. See Tex. R. Civ. P. 736.11(b). Within ten days of filing the suit, the respondent must file a motion to dismiss the application or a motion to vacate the foreclosure order with the clerk of the court where the application was filed. See Tex. R. Civ. P. 736.11(c). The court must either dismiss the application or vacate its order. See Tex. R. Civ. P. 736.11(c).
If a separate lawsuit is filed to stop a foreclosure in which a 736 order has been granted, the suit must be filed by 5:00 p.m. on the Monday before the scheduled foreclosure sale. See Tex. R. Civ. P. 736.11(a). This suit eliminates the necessity of the borrower having to file a temporary restraining order and posting a bond.
If the lawsuit is timely filed, but the property is sold at the scheduled foreclosure sale, the foreclosure sale is void and any trustee or substitute trustee’s deed must be rescinded. See Tex. R. Civ. P. 736.11(d).
After the rule 736 order is obtained, the petitioner may continue with the foreclosure process, which requires compliance with all existing foreclosure rules and regulations required under federal and state law. Rule 736 does not change any normal foreclosure requirement. It merely adds the necessity of obtaining a rule 736 order before an HEL loan agreement can be foreclosed. At the time the order is granted, all of the requisite demand letters and notices of acceleration have been sent to the relevant parties. The petitioner may now set a foreclosure date, send the appropriate notices of sale, post the property for sale, and conduct the foreclosure sale in accordance with Texas Property Code section 51.002 and the terms of the loan agreement. After the property is sold, a copy of the foreclosure order must be attached to the trustee’s or substitute trustee’s foreclosure deed. Tex. R. Civ. P. 736.12.
There is no discovery in an action filed under rule 736 of the Texas Rules of Civil Procedure. Tex. R. Civ. P. 736.4. The reason for this provision is that the constitution required the supreme court to create expeditious rules of civil procedure. Therefore, discovery is not required because the application is designed to be self-proving as to the status of the borrower’s default and the mortgagee’s compliance with all the foreclosure requirements under Texas law up to the time the application is filed. If the borrower believes the evidence presented in the application is incorrect or has other complaints about the origination or servicing of the borrower’s loan agreement, the borrower can file a separate lawsuit and obtain all the discovery the rules allow.
The Texas legislature amended the Texas Civil Practice and Remedies Code to include a provision allowing mediation following the filing of an application but only if a response is filed. The court must then schedule a hearing to determine if mediation should be ordered. See Tex. Civ. Prac. & Rem. Code § 154.028.