§ 8.1Use and Effect of Deed of Trust
A deed of trust is a mortgage with a power of sale. Although a deed of trust by its literal terms conveys the described property in trust to the trustee, its actual effect under Texas law is to create a lien against the property to secure a debt of the grantor of the lien to the beneficiary of the lien. The deed of trust is often used to establish a lien on property for which a lender has advanced purchase money, but it may also secure a loan or other obligation unrelated to the property. The primary advantage of the deed of trust over the type of mortgage used in many other states is that it provides the default remedy of nonjudicial foreclosure by a trustee’s sale without the necessity of a lawsuit.
This chapter provides three basic forms: the deed of trust (form 8-1), the deed of trust to secure assumption (form 8-2), and the leasehold deed of trust (form 8-10). As discussed in this chapter, the forms may be adapted to a variety of situations.
The deed of trust often includes a security agreement and financing statement to cover personal property and fixtures associated with the real estate. For drafting instructions for using a deed of trust with a security agreement, see section 8.11:2 below.
The Texas Trust Code does not apply to a deed of trust. Tex. Prop. Code § 111.003(4).
The deed-of-trust form provided in this manual may be adapted to cover indebtedness other than the note specifically described, such as future advances or overdrafts, and to serve as a security agreement for personal property. Due-on-sale clauses, prohibitions against further encumbrances, and tax and insurance reserve clauses may be added. Clauses for these purposes are suggested in form 8-9 in this chapter.
§ 8.1:2Precautions for Deed of Trust
The lender’s attorney should determine whether the property is the borrower’s homestead and, if so, whether a valid lien can be created against it. The Texas Constitution and Property Code allow liens against homesteads only under certain conditions. See Tex. Const. art. XVI, § 50; Tex. Prop. Code ch. 41.
Article XVI, section 50, of the Texas Constitution was amended in 1997 to permit home equity lending under certain circumstances. Home equity lending is discussed in chapter 11 in this manual. The attorney is cautioned against using the forms in this chapter for that purpose. In particular, the attorney should be aware that nonjudicial foreclosure is not available in home equity loans.
Trustees foreclosing under a deed of trust must comply exactly with all requirements of Property Code section 51.002, which specifies in detail the procedures for a trustee’s sale. See Tex. Prop. Code § 51.002. Trustees must also comply with any additional requirements imposed by the deed of trust. Under certain circumstances, a lender, trustee, or substitute trustee may rescind a nonjudicial foreclosure sale involving residential real property. See Tex. Prop. Code § 51.016. See section 14.6:8 in this manual. Foreclosures are discussed in chapter 14.
A deed of trust is generally a component of a “loan agreement” as defined in the Texas Business and Commerce Code statute of frauds for loan documents and requires the notice prescribed therein. See Tex. Bus. & Com. Code § 26.02. The notice of final agreement, form 10-14 in this manual, may be used to satisfy the statutory requirements.
Texas Finance Code chapter 343 regulates certain types of home loans. For example, “[a] lender may not replace or consolidate a low-rate home loan directly made by a government or nonprofit lender before the seventh anniversary of the date of the loan” unless the transaction meets the requirements of chapter 343 of the Texas Finance Code. Tex. Fin. Code § 343.101(b). See section 10.14 for further discussion.
§ 8.2Considerations in Drafting Deed of Trust
For general information about designation of parties, see the remarks at section 3.9 in this manual.
The party granting the deed-of-trust lien and the borrower in the note secured are not necessarily the same party. The attorney drafting the deed of trust must make certain that all parties are properly designated. Paragraph E.14. in the deed-of-trust form (form 8-1 in this chapter) recognizes that the party granting the lien and the party obligated to pay the note may not be the same. This provision is included to add versatility to the form. The attorney dealing with such a situation, however, should consider specifying in greater detail the obligations of the respective parties—for example, that while the borrower in the note is obligated to pay the note, the grantor in the deed of trust is responsible for performance of the other covenants contained in the deed of trust, such as payment of ad valorem taxes. If the attorney elects to add such detail, the deed of trust should make clear that any default by either party is also a default by the other, entitling the lender to exercise the remedies contained in both the note and the deed of trust.
The lender should be identified by full name and, if the lender is a legal entity rather than a natural person, the type of entity. The lender’s name should appear exactly as it does in the note.
Individuals, not corporations, are usually named as trustees. Institutional lenders frequently prefer to designate one of their own officers or attorneys to serve in this capacity.
One or more persons may be authorized to exercise the power of sale under a security instrument. See Tex. Prop. Code § 51.0074(a).
The deed of trust should provide at least basic information about the note so that the note may be clearly identified. Attorneys have different ideas about how much information the deed of trust should reveal about the note being secured, and some prefer not to disclose the payment terms. Usually, though, the note’s date, amount, borrower, lender, and, if desired, final maturity date are shown. If parties prefer not to disclose the payment terms, they may insert in the relevant space on the form a short phrase such as “As provided in the note” or “Monthly installments according to terms provided in the note.”
If the final maturity date of the note is stated, it should be possible to avoid any assertion that limitations began to run on execution of the note. Stating the final maturity date should also make limitations available in clearing title of old time-barred deeds of trust. On the other hand, if this information is included in the deed of trust, it is critical that it be accurate and that any extensions granted by the lender be documented in a duly recorded extension agreement to preclude limitations barring a valid deed-of-trust lien against purchasers for value without notice.
For remarks and cautions in general about property descriptions, see section 3.7 in this manual. Also, note that the description of the property in the leasehold deed of trust (form 8-10 in this chapter) should be of the leasehold interest of the tenant granting the deed-of-trust lien.
If the deed of trust creates a first lien on the property, the word none is adequate for the space for listing prior liens on the form. If the lien is a second or other subordinate lien, all prior liens should be fully described.
In listing the prior liens, the attorney should not overlook previously recorded deeds of trust to secure assumption that affect the priority of subsequent liens.
§ 8.2:5Other Exceptions to Conveyance and Warranty
For remarks about reservations from conveyance and exceptions to conveyance and warranty, see sections 5.2:6 and 5.2:7 in this manual.
If a vendor’s lien clause is used it should be added to paragraph 19. of “General Provisions” in the deed of trust. See form 8-3 in this chapter. Clause 8-3-3 may be used if no vendor’s lien is expressly retained in the deed and the note evidences money used to purchase the property.
§ 8.2:7Mechanic’s Lien Clauses
If a mechanic’s lien contract with power of sale is used (such as that in chapter 20 in this manual), a deed of trust is not necessary but should be used if there is a third-party lender. If a mechanic’s lien contract without a power of sale is used and a contractor wants to reserve the right to a nonjudicial foreclosure in a separate deed of trust, a clause like clause 8-9-1 should be added to paragraph 19. of “General Provisions.”
§ 8.2:8Clauses Extending Existing Liens
If an existing lien is extended, the clauses in form 8-4 in this chapter should be added to paragraph 19. of “General Provisions.”
Extension of Existing Deed-of-Trust Lien: The bracketed sentences of clauses 8-4-1 through 8-4-4 are appropriate if the renewed and extended note has been assigned to the lender secured by the deed of trust but should not be used if the lender secured by the deed of trust is the original lender in the note.
In the transaction described in clause 8-4-2, the sum of the unpaid balance of the prior note and the amount of cash advanced should equal the amount of the note secured by this deed of trust.
Alternative Renewal and Extension Language: Some attorneys prefer to use more comprehensive language renewing and extending the lien than that in extension clauses 8-4-1 through 8-4-4. The language suggested in clause 8-4-5 extends a deed-of-trust lien, but it can be modified to address other types of liens. If clause 8-4-5 is used, it replaces the sentence in clauses 8-4-1 through 8-4-4 beginning “Grantor acknowledges that the lien(s) . . .”
Extension of Prior Lien to Be Released, Not Assigned: Clause 8-4-6 is drafted for use if a note and a deed of trust are being used to extend a deed-of-trust lien, but it can be modified to extend other types of liens.
Extension of Lien to Only Part of Property: Clause 8-4-7 extends a vendor’s lien and a deed-of-trust lien as to only part of the property.
§ 8.2:9Acknowledging Cash Advanced
Clause 8-3-3 in this chapter acknowledges the receipt of cash and is appropriate if all or part of the cash advanced is applied to the purchase price and no vendor’s lien is retained in the deed. If cash is advanced and used for other purposes, one of the clauses in form 8-5 may be suitable or may be adapted, and it should be added to paragraph 19 of “General Provisions.”
To Pay Ad Valorem Taxes: If the borrower files a sworn affidavit with the tax office authorizing the lender to pay taxes on the property, the tax office transfers the tax lien to the lender when the lender pays the taxes. The lien must be recorded in the real property records of the county in which the property is located, with a sworn statement and affidavit attesting to the transfer of the tax lien, and foreclosure on the lien may not be initiated for one year after its recording, unless the deed of trust or other agreement between the borrower and the lender provides otherwise. Tex. Tax Code §§ 32.06, 32.065. See clause 8-5-3. See also section 2.5 in this manual.
The deed-of-trust form in this manual includes a due-on-sale clause, that is, a clause accelerating the underlying debt on the transfer of property. The attorney should remove this clause if it is not applicable to the transaction in question. Events triggering acceleration of the debt under the due-on-sale clause include transfer of the property by the owner, granting of subordinate liens on the property, and transfers of equity interest in the owner, with exceptions for transfers to other family members or entities when no change of control results. Because many lenders evaluate the creditworthiness, track record, and management ability of the grantor, as well as the predicted cash flow of the property, during the underwriting process, they require that a deed of trust contain a due-on-sale clause to prevent a change of management or ownership (including current ownership of voting interests in business entities not publicly held) without an opportunity for the lender to reevaluate the security for the loan. Many lenders also require a due-on-sale clause that applies when subordinate liens are granted because historically many bankruptcy proceedings have been funded by subordinate lenders attempting to delay foreclosure proceedings. The Texas Real Estate Commission’s Seller Financing Addendum contains an election that includes a due-on-sale clause. Federal law prohibits the enforcement of a due-on-sale clause for owner-occupied residential property under certain circumstances. See 12 U.S.C. § 1701j–3(d); 12 C.F.R. § 591.5(b). The exceptions to the due-on-sale clause in the residential deed of trust are derived from these federal restrictions.
Alternative due-on-transfer clauses are found at clauses 8-9-21 through 8-9-23 in this chapter.
§ 8.2:11Confidentiality Notice
If any party to a deed of trust, including the trustee, is an individual, the deed of trust must contain the confidentiality notice required by Tex. Prop. Code § 11.008. See section 3.16 in this manual.
§ 8.3Use and Effect of Subordinate Deed of Trust
A subordinate deed of trust is one that is either recorded after a previously recorded deed of trust or, less often, expressly made subordinate to it by agreement of the lender. A deed of trust can also become subordinate by another lien’s having a superpriority—for example, ad valorem tax liens. The most common uses of a subordinate deed of trust are in cases involving a borrower whose property is subject to an existing lien and who desires additional financing to be secured by the same property, and in cases involving seller financing.
A wraparound mortgage is a subordinate mortgage secured by real property on which a prior lien remains outstanding and unsatisfied and on which the original obligor remains obligated. The wraparound debt includes within it the balance of the underlying lien debt. In some wraparound mortgages the prior lien may be “wrapped” more than once.
In a wraparound financing transaction, the borrower (usually the buyer) agrees to make payments on the wraparound mortgage to the lender (usually the seller) who, as required by the wraparound mortgage agreement, must in turn make payments on the prior, underlying, or wrapped lien to the prior lienholder. If the lender fails to pay off the first lien, the wraparound agreement normally gives the borrower the right to make the first-lien payments and receive credit on the wraparound note. The two primary reasons for a wraparound transaction are to take advantage of the spread in interest rates between the underlying and wrap notes and to provide the wrap-note lender with the assurances that the underlying note payments are made. Use of the forms provided in this manual for a wraparound transaction requires the use of specific clauses in both the note and the deed of trust. For examples of these, see clauses 6-6-4 and 8-9-11 in this manual.
§ 8.4Precautions for Subordinate Deed of Trust
Subordinate lien financing involves a number of considerations for all the parties involved: the borrower, the prior lender, and the subordinate lender. The borrower should ascertain that the creation of a subordinate lien will not be a default under the prior deed of trust, because subordinate encumbrances are expressly prohibited in many deeds of trust. The prior lender may have concerns about the ability of the borrower to service both the superior and subordinate lien debts. If the borrower should default on the subordinate lien debt and the subordinate lender should foreclose, the borrower, although still liable on the debt, will no longer be the owner of the property, and the incentive to repay the senior loan will obviously be diminished.
The party at greatest risk in subordinate lien financing transactions is the subordinate lender. Foreclosure of a superior lien extinguishes all subordinate liens. See Exchange Savings & Loan Ass’n v. Monocrete Proprietary, Ltd., 629 S.W.2d 34 (Tex. 1982). In Texas, unlike many other jurisdictions, a subordinate lienholder is not entitled by law to notice of default on the prior lien debt or notice of foreclosure proceedings. The subordinate lienholder is likewise not entitled to share in the foreclosure proceeds, unless there is an excess after payment of costs and expenses in connection with the foreclosure and satisfaction of the prior lien debt. The subordinate lienholder may therefore want to obtain the prior lienholder’s agreement to provide notice of any default by the borrower under the first-lien note and deed of trust and the opportunity to cure such default or require the borrower to provide continuing proof that payments on the prior lien debt have been made.
Another concern for the subordinate lender is the potential application of a “dragnet” or “other indebtedness” clause in the prior deed of trust. If the prior deed of trust secures debt of the borrower other than the prior lien note itself, there is a likelihood that the total debt secured by the prior lien will exceed the value of the property, and the subordinate lender’s lien may be for all practical purposes worthless. These are issues that the subordinate lender may want to address by an agreement with the prior lender, generally called a lender’s “estoppel certificate” or an intercreditor agreement. See form 10-10 in this manual.
A subordinate lien transaction may be subject to chapter 342 of the Texas Finance Code if the property is a dwelling designed for occupancy by four or fewer families and the interest rate exceeds 10 percent per year. See Tex. Fin. Code §§ 342.001(4), 342.005. Chapter 342 applies to a secondary mortgage loan made by a person in the business of making, arranging, or negotiating those types of loans. Tex. Fin. Code § 342.005(3). The chapter does not apply to a secondary mortgage loan made by a seller of property to secure all or part of the unpaid purchase price. Tex. Fin. Code § 342.006. If a lender is in the business of making, arranging, or negotiating secondary mortgage loans, the lender must obtain a license from the Office of Consumer Credit Commissioner (the OCCC) unless the lender is a bank, savings bank, savings and loan association, credit union, or a residential mortgage loan originator licensed under chapter 156. See Tex. Fin. Code §§ 124.005, 339.004, 341.103–.104, 342.051. Unless exempt under section 180.003, an individual who acts as a residential mortgage loan originator in the making, transacting, or negotiating of a secondary mortgage loan subject to chapter 342 must individually be licensed under chapter 342, be enrolled with the Nationwide Mortgage Licensing System and Registry as required by section 180.52, and comply with other applicable requirements of the Texas Secure and Fair Enforcement of Mortgage Licensing Act of 2009. Tex. Fin. Code ch. 180.
Chapter 342 loans are highly specialized and regulated, and thus if a subordinate lien transaction is subject to chapter 342, the attorney must carefully review the chapter to make sure all requirements have been met. Texas Finance Code section 341.502 provides that “[a] contract for a loan under Chapter 342, a retail installment transaction under Chapter 348, or a home equity loan regulated by the Office of Consumer Credit Commissioner must be . . . written in plain language designed to be easily understood by the average consumer.” Tex. Fin. Code § 341.502(a). The Finance Commission of Texas is authorized to adopt model contracts for loans subject to that section. A lender may not use a contract other than a model contract unless the lender has submitted the contract to the OCCC for its approval. If the OCCC issues an order disapproving a submitted contract, the lender may not use the contract after the order takes effect. Tex. Fin. Code § 341.502(b)–(d). Plain-language model contracts and related rules for chapter 342, subchapter G, second-lien home improvement contracts are codified at 7 Tex. Admin. Code §§ 90.601–.604.
The attorney general of Texas determined that section 341.502(a) is applicable only to those loan transactions for which the consumer credit commissioner is the appointed regulating official and has no application to loan transactions subject to the regulatory authority of the banking commissioner, the savings and mortgage lending commissioner, the credit union commissioner, and federal regulatory officials. See Tex. Att’y Gen. Op. No. JC-0513 (2002).
Banks, savings and loan associations, and credit unions accordingly are not required to comply with the section 341.502 “plain language” contract requirements or to obtain a license to engage in the business of making subordinate lien loans subject to chapter 342. Tex. Fin. Code § 342.051(c)(1). These institutional lenders nevertheless are thought to be subject to other substantive law provisions of chapter 342, including, for example, the limitations of that chapter on the collection of authorized fees and charges, as enforced by the policies of their respective regulatory agencies. See Tex. Fin. Code §§ 342.308, 342.502.
Before using the deed-of-trust forms contained in this chapter of the manual for a loan subject to chapter 342 of the Texas Finance Code, the attorney should determine whether the lender is subject to the plain-language model contract provisions of Texas Finance Code section 341.502. The forms contained in this chapter have not been submitted to or approved by the OCCC.
If the attorney decides that the forms contained in this chapter may nevertheless be used for a loan regulated by chapter 342 of the Texas Finance Code, the forms still must be modified to comply with the requirements of that chapter. For example, the secondary mortgage loan documents for a loan made by a licensed lender must contain the name, mailing address, and telephone number of the OCCC. Tex. Fin. Code § 14.104. See clause 8-9-24 in this chapter. Neither the deed-of-trust forms nor the note forms in this manual contain that information. The attorney should include that information in both the deed-of-trust form and the note form when documenting a secondary mortgage loan if the lender has a license from the OCCC. Additionally, if a subordinate lien transaction is subject to chapter 342, the printed language in the deed of trust must be modified slightly. In paragraph 4. of “Grantor’s Obligations,” the phrase “issued by insurers and written on policy forms acceptable to Lender” must be struck. This change is necessary because Finance Code sections 342.404 through 342.405 and 342.413 prohibit a lender from approving the selection of insurance. See Tex. Fin. Code §§ 342.404–.405, 342.413. Also, Finance Code section 342.404 provides that when insurance is required in connection with a loan made under that chapter, the lender must furnish the borrower a statement like the one in clause 8-9-9, which may be added to the deed of trust as a numbered paragraph under “General Provisions.” See Tex. Fin. Code § 342.404.
The same chapter imposes other requirements if the lender sells or procures insurance related to the loan at a rate not fixed or approved by the State Board of Insurance. See Tex. Fin. Code § 342.405.
Finance Code section 342.307 limits the enforcement fees that may be included in secondary mortgage loan documents. To comply with this section, the attorney’s fee provisions in the note, form 6-1, and the deed of trust should be modified if used in transactions subject to chapter 342 of the Finance Code. See Tex. Fin. Code § 342.307. In the note, the third paragraph, concerning attorney’s fees, should be replaced with clause 6-6-15. See section 6.2:7. To modify the deed of trust, in paragraph E.16., after the words “an attorney” add “who is not an employee of Lender.”
An institutional third-party lender may be required to provide the borrower a truth-in-lending disclosure (loan) form. An example of this form is included in chapter 12 in this manual. The clauses in form 8-8 are examples of second-lien clauses.
If the prior deed of trust contains a due-on-sale clause, the wraparound deed-of-trust conveyance, like other subordinate liens, may violate the due-on-sale clause.
The wraparound mortgage has usury implications that are not yet fully settled, centering primarily around the issue of whether the entire principal amount of the wraparound note or merely the difference between the principal amount of the wraparound note and the balance of the underlying note should be used for interest calculations. The attorney is referred to the December 31, 1981, letter from the OCCC, which may be obtained from that office, and to Summers v. Consolidated Capital Special Trust, 783 S.W.2d 580 (Tex. 1989), for two analyses of these issues.
The wraparound mortgage, like other subordinate lien mortgages, may be subject to chapter 342 of the Texas Finance Code.
§ 8.5Considerations in Drafting Subordinate Deed of Trust
It is essential that a subordinate deed of trust contain terms and provisions identifying the prior lien and obligating the borrower to keep the prior note and deed of trust current and not in default. The clauses in form 8-8 in this chapter may be used for this purpose. The parties may wish to attempt to obtain an estoppel letter or intercreditor agreement from the prior lienholder. An example of such an instrument may be found at form 10-10 in this manual.
There are additional considerations in drafting instruments for a wraparound transaction: modification of the warranty deed with vendor’s lien (see chapter 5), promissory note (see chapter 6), and deed of trust (see sections 8.2:1 through 8.2:9 above). These forms should be completed according to the instructions in their respective sections of this manual, and then all three documents should be modified further according to the instructions in sections 8.5:1 through 8.5:4 below.
§ 8.5:1Additional Clauses for Wraparound Deed of Trust
A deed of trust should be drafted according to the comments in sections 8.2:1 through 8.2:9 above and then modified to accommodate a wraparound transaction.
If the transaction is subject to chapter 342 of the Texas Finance Code, see section 8.4 above for a suggested modification of the form.
In the space following “General Provisions,” a vendor’s lien clause like clause 8-3-1 in this chapter should appear. Also, a wraparound clause similar to clause 8-9-11 should be included in the same part of the deed of trust.
If the deed of trust securing the prior note requires monthly deposits to a reserve account for payment of taxes and insurance premiums, a similar requirement should be inserted in the wraparound deed of trust securing the wraparound note. A clause serving this purpose appears at 8-9-4. Also, language similar to that suggested in the second part of clause 8-9-11 should be added to the wraparound lien clause.
§ 8.5:2Additional Documents for Use with Wraparound Mortgage
An additional document often used in wraparound transactions is a collection agreement specifying the terms by which the borrower makes payments on the subordinate lien note to an escrow agent, usually a bank, rather than to the lender. This procedure protects the borrower from the possibility that the lender will fail to forward part of the payment to the holder of the prior lien. The lender’s failure to make payments on the prior lien would, of course, cause a default that the borrower would have to cure to avoid a foreclosure on the property. A collection agreement usually provides that the agent will use the borrower’s subordinate lien payment to pay the prior lienholder and then remit the excess to the lender. A sample of such an agreement is found at form 10-7 in this manual.
§ 8.5:3Statute Applicable to Wraparound Mortgages for Certain Residential Real Estate Transactions
Subtitle E, title 3, Finance Code, amended effective January 1, 2022, adds chapter 159, “Wrap Mortgage Loan Financing,” for residential real estate transactions. Unless exempt, any owner of Texas residential real estate who makes more than three wrap mortgage loans for all or part of the purchase price to purchasers of that property in any twelve-consecutive-month period must comply with certain licensing, transactional, and disclosure requirements. See Tex. Fin. Code §§ 159.001–.108. See section 8.5 above. A chapter 159 wrap mortgage is defined as a loan that is made to finance the purchase of residential real estate that will continue to be subject to an unreleased lien that (a) attached to the residential real estate before the loan was made, (b) secures a debt incurred by a person other than the wrap borrower that was not paid off at the time the loan was made, and (c) obligates the wrap borrower to the wrap lender for payment of the outstanding principal balance of the debt and any remaining amount of the purchase price financed by the wrap lender. See Tex. Fin. Code § 159.001(7). A person may not originate or make a wrap mortgage loan unless the person is licensed or registered to originate or make residential mortgage loans under chapter 156 (“Residential Mortgage Loan Companies”), 157 (“Mortgage Bankers and Residential Mortgage Loan Originators”), or 342 (“Consumer Loans”) or is exempt from licensing or registration as provided under an applicable provision of those chapters. Tex. Fin. Code § 159.051.
Wrap mortgages on unimproved property or for the sale of residential real estate that is the wrap lender’s homestead are exempt from the requirements of chapter 159. See Tex. Fin. Code § 159.002. For a list of exemptions, see Tex. Fin. Code § 156.202, 157.0121, 159.003.
In addition to the notice requirements of Tex. Prop. Code § 5.016, Tex. Fin. Code § 159.101 provides that wrap mortgage lenders subject to Tex. Fin. Code ch. 159 must, on or before the seventh day before the wrap mortgage loan agreement is entered into, provide to the wrap borrower a separate written disclosure statement in at least twelve-point type in substantially the following form:
NOTICE REGARDING PROPERTY INSURANCE: ANY INSURANCE MAINTAINED BY A SELLER, LENDER, OR OTHER PERSON WHO IS NOT THE BUYER OF THIS PROPERTY MAY NOT PROVIDE COVERAGE TO THE BUYER IF THE BUYER SUFFERS A LOSS OR INCURS LIABILITY IN CONNECTION WITH THE PROPERTY. TO ENSURE THE BUYER’S INTERESTS ARE PROTECTED, THE BUYER SHOULD PURCHASE THE BUYER’S OWN PROPERTY INSURANCE. BEFORE PURCHASING THIS PROPERTY, YOU MAY WISH TO CONSULT AN INSURANCE AGENT REGARDING THE INSURANCE COVERAGE AVAILABLE TO YOU AS A BUYER OF THE PROPERTY.
This disclosure statement must be dated and signed by the wrap borrower upon receipt. If the negotiations with the borrower were conducted primarily in a language other than English, the wrap lender must provide the disclosure in that other language. Tex. Fin. Code § 159.102.
Failure to timely provide the wrap mortgage loan disclosure can result in dire consequences for a wrap lender, specifically due to the tolling of limitations and rescission of the wrap mortgage loan agreement and related purchase agreement. If a wrap lender fails to provide the disclosure statement, the statute of limitations period applicable to any cause of action the wrap borrower has against the wrap lender in connection with the wrap mortgage loan is tolled until the 120th day after the date the disclosure is provided. See Tex. Fin. Code § 159.103(d). As it relates to rescission, if the disclosure statement and any required foreign language disclosure statement are received by the wrap borrower on or before the closing date of the wrap mortgage loan, the wrap borrower may rescind the loan for up to the seventh day after the date of receipt of the statement, regardless of whether disclosure is timely made. See Tex. Fin. Code § 159.101(d). If the wrap borrower receives the required disclosure after closing but before rescinding the loan, the wrap borrower may rescind the loan up to twenty-one days after receipt of the disclosure. See Tex. Fin. Code § 159.104(b). If the wrap lender fails to provide the disclosure altogether, the wrap borrower may rescind the loan at any time. See Tex. Fin. Code § 159.104(a). No later than thirty days after rescission, the wrap lender must return all principal and interest payments made by the wrap borrower on the wrap mortgage loan; any money or property given as earnest money, down payment, or otherwise in connection with the wrap mortgage loan or related purchase transaction; and any escrow amounts for the wrap mortgage loan or related purchase transaction. Tex. Fin. Code § 159.104(c). The wrap lender may avoid rescission if, no later than thirty days after receiving a notice of rescission, the wrap lender pays the outstanding principal balance on the original obligation as defined in Tex. Fin. Code § 159.001(7), pays due and unpaid taxes or government assessments, pays the wrap borrower noncompliance damages of $1,000 and reasonable attorney’s fees, and provides to the wrap borrower evidence of the loan, tax, and assessment payoffs. Tex. Fin. Code § 159.104(e).
Chapter 159 continues with enforcement rights and remedies. Section 159.105 states that a lien securing a wrap mortgage loan is void unless the transaction is closed by an attorney or a title company. Sections 159.151 and 159.152 provide that a person who receives a payment from a wrap borrower holds the payment in trust for the benefit of the wrap borrower and owes a fiduciary duty to the wrap borrower to use the payment to satisfy the obligations of the prior lien and any taxes and insurance for which the wrap lender has received such payments from the wrap borrower. The Texas Finance Commission has the authority to investigate and inspect certain lenders, issue cease and desist orders, and impose administrative penalties of up to $1,000 per day for violation of such orders. See Tex. Fin. Code § 159.252, 159.253, 159.301. Lenders considering making wrap mortgages on residential property should carefully review Tex. Fin. Code ch. 159.
The Texas Finance Commission has adopted a model form that satisfies these requirements, which is accessible at https://texreg.sos.state.tx.us/fids/202105163-1.pdf.
The prior note may be secured by liens other than those discussed in sections 8.2:6 through 8.2:9 above. If so, those liens should be described.
The lender sometimes adds to the clauses a provision that, as between the borrower and the lender, the lender is not required to make payments under the prior note or liens if the borrower fails to make payments on the wraparound note.
The borrower often insists on another modification of the clauses to provide compensation beyond the amount tendered to cure a default by the lender in payment of the prior note. A common provision credits the borrower with 110 percent of the payment made to cure the default and characterizes the added 10 percent as liquidated damages to compensate for expenses incurred.
The borrower also will often include in the wraparound note a requirement that the lender must give notice regularly that the prior note payment has been made.
The wraparound note should be structured so that payments are due before payments are due on the prior note.
If any party to a deed of trust, including the trustee, is an individual, the deed of trust must contain the confidentiality notice required by Tex. Prop. Code § 11.008. See section 3.16 in this manual.
§ 8.6Use and Effect of Deed of Trust to Secure Assumption
The deed of trust to secure assumption may be used if the buyer assumes payment of a debt for which the seller is liable at the time of sale. If this instrument is used under these circumstances, the seller usually conveys title by deed with a vendor’s lien reserved. The assumed debt and lien are evidenced by a note and deed of trust. The deed of trust to secure assumption provides that the lien it creates is released with the release of the prior deed of trust, unless before the release the seller files a notice with the proper county clerk setting forth any amount the seller has advanced to cure a default in payment of the assumed lien.
The primary function of the deed of trust to secure assumption is to give the seller recourse against the property if the buyer defaults in payment of the debt secured by the first lien.
In a transaction involving the deed of trust to secure assumption the buyer is the grantor in the deed of trust to secure assumption and the grantee in the warranty deed. The seller is the grantor in the warranty deed, the lender in the deed of trust to secure assumption, and usually the borrower in the note and grantor in the deed of trust assumed.
Caution: The deed of trust to secure assumption is not appropriate for use in a wraparound mortgage transaction. Also, its use may violate a due-on-sale clause in the prior deed of trust.
§ 8.7Considerations in Drafting Deed of Trust to Secure Assumption
Chapter 3 in this manual offers useful suggestions for completing the basic information required for this form, such as designation of parties and recording information. The property description should either repeat exactly the description in the deed of trust assumed or incorporate that description by reference. References to the deed of trust should include its recording information.
§ 8.7:1Additional Clauses for Use with Deed of Trust to Secure Assumption
The assumption provision in the deed includes an indemnity against all damages caused by the assuming party’s breach of its obligations. It is likely, considering the election-of-remedies provision of paragraph 3. under section D, “General Provisions,” in the deed of trust to secure assumption, that a cause of action for damages would survive action taken under the deed of trust to secure assumption.
§ 8.7:2Warranty Deed Provisions for Use with Deed of Trust to Secure Assumption
The grantor in the warranty deed accompanying the deed of trust to secure assumption is the beneficiary (lender) of the deed of trust to secure assumption, and the buyer of the property is the grantee in the deed and the borrower (grantor) in the deed of trust to secure assumption.
The deed should contain an assumption clause like clause 5-6-1 in this manual and a clause for vendor’s lien and deed of trust to secure assumption like clause 5-9-10 or 5-9-11.
§ 8.8Use of Leasehold Deed of Trust
The leasehold deed of trust should be used if the grantor is encumbering a leasehold interest instead of a fee interest in real property. The grantor of the leasehold deed of trust must be the tenant under the lease encumbered by the leasehold deed of trust.
The attorney drafting the leasehold deed of trust must first determine if the tenant’s interest in the lease may be encumbered. The encumbrance of a tenant’s interest in a lease is considered a sublease under Texas law. See Amco Trust, Inc. v. Naylor, 317 S.W.2d 47 (Tex. 1958); American National Bank & Trust Co. v. First Wisconsin Mortgage Trust, 577 S.W.2d 312 (Tex. App.—Beaumont 1979, writ ref’d n.r.e.), disapproved on other grounds by Stewart Title Guaranty Co. v. Sterling, 822 S.W.2d 1, 11 (Tex. 1991). Section 91.005 of the Property Code prohibits subleases without the prior consent of the landlord. Also, many leases in Texas expressly prohibit the subleasing or encumbering of the tenant’s interest without the landlord’s consent. However, a tenant whose lease gives authorization to sublease any part of the leased premises also has the right to encumber the leasehold estate. See Menger v. Ward, 30 S.W. 853 (Tex. 1895).
Therefore, the attorney must find that the lease allows encumbrance of the tenant’s interest without the landlord’s consent or that any required landlord consent has been obtained before execution of the leasehold deed of trust. See form 8-11 in this chapter for a form of consent by landlord to a leasehold deed of trust that also includes additional representations and agreements by the landlord that a lender will require as a condition to making a loan secured by the leasehold deed of trust, including the opportunity to cure defaults by the tenant under the lease.
In addition to a description of the lease, the leasehold deed of trust contains affirmative and negative covenants and representations by the grantor that relate specifically to the lease that is being encumbered. These covenants are intended generally to cause the grantor to keep the lease in effect during the term of the loan in substantially the same status as the grantor represented it to be when the loan was made.
Certain covenants in the deed of trust (form 8-1) that may be inconsistent with the tenant’s obligations under the lease (for example, payment of taxes, maintenance and repair, and insurance) have been deleted from the leasehold deed of trust in favor of the covenants by the grantor to observe and perform all of its obligations and to enforce the landlord’s obligations under the lease.
If any party to a deed of trust, including the trustee, is an individual, the deed of trust must contain the confidentiality notice required by Tex. Prop. Code § 11.008. See section 3.16 in this manual.
§ 8.8:2Title Insurance for Leasehold Deeds of Trust
A leasehold loan policy endorsement (T-5) is available, at no extra charge, for leasehold deeds of trust.
§ 8.9Use of Consent to Leasehold Deed of Trust
If the lease does not allow encumbrance of the tenant’s interest without the landlord’s consent, the lease will also not contain the additional representations and agreements by the landlord that a lender will typically require as a condition to making a loan secured by the leasehold deed of trust. In this case, the lender not only must obtain the written consent of the landlord to the leasehold deed of trust but should also seek from the landlord certain representations about the status of the lease and certain affirmative and negative covenants designed to preserve the lease as viable collateral for the loan. The consent to leasehold deed of trust (form 8-11 in this chapter) may be used for this purpose.
Form 8-11 covers common issues of importance to the lender, including rights to give to the tenant notice and cure of tenant defaults, access to the leased premises to enforce a security interest in the tenant’s personalty, free assignability of the lease at foreclosure and to a purchaser from the lender of the tenant’s assets after foreclosure, and to demand a new lease on the same terms if the lease is terminated or rejected by a trustee in bankruptcy. The lender that is considering demanding a new lease should also be aware of the effect of the termination of the lease on any subleases in effect as of the termination and may wish to consider adding to form 8-11 a provision that allows the new tenant to reinstate desirable subleases without the landlord’s consent.
If used, clauses such as those in form 8-9 in this chapter should appear as numbered paragraphs following paragraph E.12. in the deed of trust (form 8-1), paragraph E.9. in the deed of trust to secure assumption (form 8-2), and paragraph G.11. in the leasehold deed of trust (form 8-10).
Both the deed of trust and the deed of trust to secure assumption may be modified to secure other obligations of the borrower such as guaranties and “subject to” transactions in which the borrower does not assume the underlying debt.
Future advance clauses may be enforceable to the extent that they secure a debt that is within the reasonable contemplation of the parties when the deed of trust is executed. The lien securing a future advance may have priority over an intervening lien if the intervening lienholder has notice that the earlier lien secures future advances. Form 8-6 in this chapter contains several examples of future advance clauses. If the future indebtedness to be secured is that of someone other than the borrower granting the lien, these clauses should be modified accordingly.
Clause 8-6-4, in addition to future advances, also covers present or future debts of other borrowing entities in which the borrower has an interest.
If the parties anticipate circumstances requiring partial release of the lien, such as subdivision of the property, they often include partial release provisions in the deed of trust or, if the terms are complex and lengthy, in a separate agreement referred to in the deed of trust. The partial release clause should specify exactly which part of the property will be released from the lien and what amount of debt must be paid. The terms of release, especially an accurate description of the affected property, must be precise. The clauses in form 8-7 in this chapter are examples of partial release clauses. The first is for use if releases are by acre, the second if the property is subdivided at the time of the granting of the deed of trust, and the third if a separate agreement is used in connection with a seller-financed sale contemplating the buyer’s subdivision of the property. Because each situation requiring a partial release is unique, these clauses must be adapted to the particular situation at hand.
For an example of a partial release of lien, see form 10-3 in this manual.
If the property covered by the deed of trust is income-producing, the lender will frequently require the grantor to maintain records of operation on the property and make them available for the lender’s review. Clause 8-9-14 in this chapter contains such a requirement.
If the loan is commercial, the lender will frequently require the grantor to prepare and submit to the lender periodic financial statements, either on request or on an annual basis. Such a requirement is also sometimes imposed in connection with residential construction loans, but rarely in connection with residential mortgage loans. Clause 8-9-15 in this chapter requires financial statements from the grantor.
In the aftermath of the banking and thrift crisis of the 1980s, the requirements for appraisals of real property securing loans made by federally insured lenders were greatly strengthened and banking regulatory agencies were required to develop standards for appraisals. See 12 U.S.C. §§ 3331, 3335. These standards were codified at 12 C.F.R. §§ 34.41–.47, 225.61–.67, 323.1–.7, 564.1–.8. Appraisals may be required not only in connection with the underwriting of the loan but also during its term. Clause 8-9-16 in this chapter allows the lender to obtain such appraisals at the grantor’s expense.
Institutional lenders commonly require grantors to agree to reexecute documents, modify executed documents, or execute additional documents if the lender determines that it is necessary to secure or perfect the lender’s liens or security interests or to correct errors in the loan documents. Such agreements, commonly called agreements for further assurances, may take the form of separate documents, or they may be included as clauses in the loan documents. Clause 8-9-17 in this chapter is a further assurance clause for use in the deed of trust.
The attorney may wish to substitute the more detailed insurance provisions found at clause 8-9-18 in this chapter for the existing provisions in the deed-of-trust form, particularly if the deed of trust covers income-producing property or secures a construction loan. If clause 8-9-18 is used, it replaces the clause at paragraph B.1. in the deed of trust. Form 8-12 describes specific endorsements and coverage that the lender may want to include.
If the lender requires contractual indemnity from the borrower independent of insurance, or for damages that would otherwise be the lender’s responsibility (for example, arising out of the ordinary negligence or strict liability of the lender), form 8-12 may be used, adapted, or incorporated into the deed of trust. Clauses that indemnify the lender for the lender’s negligence or other liability must be in type more conspicuous than the other indemnity language in the document.
In the context of commercial loans, the lender may wish to prohibit junior liens against the property because their foreclosure would divest the grantor of title to the collateral for the loan, even though the foreclosure would not affect the prior lien position. Clause 8-9-19 in this chapter prohibits subordinate liens against the property covered by the deed of trust.
The applicability of several Texas statutes depends on whether loan proceeds are used primarily for business, commercial, investment, or similar purposes or are made primarily for personal, family, or household use. Texas Business and Commerce Code section 26.02 provides that the statute-of-frauds provisions for written loan agreements do not apply to certain loans made primarily for personal, family, or household use. See Tex. Bus. & Com. Code § 26.02(a)(2). Texas Civil Practice and Remedies Code section 15.020 excludes from the definition of a major transaction one entered into primarily for personal, family, or household purposes. Parties to a major transaction may agree in writing that a suit arising from the transaction may be brought in a specific county of the state. See Tex. Civ. Prac. & Rem. Code § 15.020. Texas Finance Code section 303.009(c) provides that credit extended for business, commercial, investment, or similar purposes may take advantage of interest rate ceilings up to 28 percent per year rather than the otherwise applicable 24 percent per year maximum rate ceiling. See Tex. Fin. Code § 303.009(c). Finance Code section 306.001(5) defines a commercial loan as a loan made primarily for business, commercial, investment, agricultural, or similar purposes and not including a loan made primarily for personal, family, or household use. See Tex. Fin. Code § 306.001(5). The Finance Code includes special provisions for commercial loans. For example, section 342.005 subjects a loan extended primarily for personal, family, or household use to the requirements of Finance Code chapter 342. See Tex. Fin. Code § 342.005. If a party is relying on any of these statutes as a basis for terms of a transaction, a statement of the purpose of the loan establishes a basis for that reliance. See clause 8-9-20 in this chapter.
§ 8.10:10No Personal Liability
If the lender is satisfied that the collateral itself is ample security for the repayment of the loan, the lender may agree that the borrower will have no personal liability for the repayment of the loan and that the lender’s sole recourse in the event of default is to foreclose on the collateral. Such agreements generally except from the “no personal liability” conditions certain “bad acts” by the borrower, such as failure to pay taxes, misapplication of insurance proceeds, failure to pay charges for labor and material that could give rise to liens against the property, and diversion of revenues from the operation of the property. See clause 8-9-26 in this chapter.
Institutional lenders often base their willingness to make a loan on the creditworthiness of the borrower, rather than the expected cash flow of the property, and in such cases generally want the original borrower to own the property as long as the loan remains outstanding. See section 8.2:10 above for a discussion of due-on-sale clauses.
§ 8.11Deed of Trust as Security Agreement and Financing Statement
In addition to creating a lien on the real property conveyed, the deed of trust with a few modifications can serve as a security agreement for personal property collateral related to the real estate and thus give the creditor the benefit of the secured transactions provisions of revised chapter 9 of the Texas Business and Commerce Code (Tex. Bus. & Com. Code §§ 9.101–.709). With other modifications described below, it may also serve as a financing statement for several classifications of collateral, including fixtures.
The attorney should refer to revised chapter 9 of the Texas Business and Commerce Code for the requirements for creating and perfecting a security interest. See Tex. Bus. & Com. Code §§ 9.203, 9.308–.316, 9.502.
If the deed of trust, as security agreement, covers both personal and real property and the debtor defaults, the creditor may proceed under chapter 9 of the Code as to the personal property without prejudicing any rights with respect to the real property or “may proceed . . . as to both the personal property and the real property in accordance with the rights with respect to the real property,” in which case the default provisions of chapter 9 do not apply. Tex. Bus. & Com. Code § 9.604(a). The deed of trust creates a lien on fixtures even without constituting a security agreement because chapter 9 does not prevent creation of an encumbrance on fixtures under real property law. See Tex. Bus. & Com. Code § 9.334(b). If the deed of trust, as security agreement, covers goods that are or become fixtures, the creditor may proceed under chapter 9 or may proceed in accordance with the rights with respect to real property, in which case the default provisions of chapter 9 do not apply. Tex. Bus. & Com. Code § 9.604(b).
A properly created and perfected security interest affords the creditor the benefit of the priorities established by chapter 9, which can protect the creditor against other creditors claiming the same collateral. In many cases, a valid security interest may be perfected by the proper filing of a financing statement in the appropriate UCC filing offices. See section 9.5 in this manual for a discussion of the other means of perfecting an attached security interest. Chapter 9 generally requires that financing statements be filed in the office of the secretary of state. The proper place to file a financing statement covering as-extracted collateral (which includes oil, gas, or other minerals), timber to be cut, or fixtures, however, is the real estate recording office for a mortgage on the related real property. Tex. Bus. & Com. Code § 9.501(a). A deed of trust duly recorded in the proper office will be effective as a financing statement covering as-extracted collateral, timber, or fixtures if it—
1.provides the name of the debtor (grantor);
2.provides the name of the secured party (beneficiary) or the secured party’s representative;
3.indicates the goods, fixtures, or accounts that it covers;
4.indicates that it covers this type of collateral;
5.indicates that it is to be filed for record in the real property records;
6.provides a legally sufficient description of the real property to which the collateral is related; and
7.provides the name of a record owner if the debtor does not have an interest of record in the real property (for example, a leasehold estate not filed of record).
Tex. Bus. & Com. Code § 9.502(a), (b).
In addition to the foregoing minimum requirements, a real estate filing office may refuse to accept a deed of trust filed as a financing statement unless it also—
8.provides the debtor’s mailing address;
9.indicates whether the debtor is an individual or an organization;
10.if the debtor is an individual, indicates the debtor’s surname; and
11.provides the mailing address of the secured party or its representative.
Tex. Bus. & Com. Code § 9.516(b)(3)(C), (b)(4), (b)(5).
The difference in legal effect between the absence from the deed of trust of any of the minimum requirements in items 1. through 7. above and the absence from the deed of trust of any of the requirements in items 8. through 11. above is that, in the former case, the deed of trust will be ineffective as a financing statement even if it is accepted for filing by the real estate filing office, whereas in the latter case the recorded deed of trust will be effective as a financing statement (as long as the requirements in items 1. through 7. are included). See Tex. Bus. & Com. Code § 9.520(c). If the deed of trust is to serve as a financing statement, the preparer should note the first boxed instruction in forms 8-1 and 8-2 in this chapter calling for the inclusion of the information set forth in items 8. through 11. above that is not already called for in those forms.
No filing fee is required beyond the regular fee charged for recording the deed of trust with respect to a deed of trust that is effective as a financing statement filed as a fixture filing or as a financing statement covering as-extracted collateral or timber to be cut. Tex. Bus. & Com. Code § 9.525(e). Unlike a regular financing statement (which is effective, if not continued, for only five years from the date of filing), a deed of trust that satisfies the above requirements is effective as a fixture filing, and as a financing statement covering as-extracted collateral or timber to be cut, “until the mortgage is released or satisfied of record or its effectiveness otherwise terminates as to the real property.” Tex. Bus. & Com. Code § 9.515(g).
For other documents and commentary relating to security agreements and financing statements, see chapter 9 in this manual.
§ 8.11:2Modifications and Clauses
If the deed of trust is to serve as a security agreement or as a security agreement and a financing statement, a heading to that effect should be added beneath or beside the “Deed of Trust” heading.
Chapter 9, as effective July 1, 2001, retains the requirement that a security agreement reasonably identify the collateral. See Tex. Bus. & Com. Code §§ 9.108(a), 9.203(b)(3)(A). Reasonable identification of collateral may be by specific listing, category, type, quantity, computational formula, or any other method under which the identity of the collateral is objectively determinable. Tex. Bus. & Com. Code § 9.108(b). In a security agreement, an “all assets” or “all personal property” description is, however, insufficient. Tex. Bus. & Com. Code § 9.108(c). Even though an “all assets” or “all personal property” collateral description is insufficient in a security agreement, an indication in a financing statement that the collateral is “all assets or all personal property” is sufficient. Tex. Bus. & Com. Code § 9.504. Accordingly, if a deed of trust is to be used as a security agreement as well as a financing statement, the deed of trust must reasonably identify the collateral. If, however, the deed of trust is to serve only as a financing statement, an “all assets or all personal property” description is sufficient.
If the collateral is not affixed to the real estate conveyed, it may be sufficiently described, for security agreement purposes, by adding to the legal description of the realty a phrase such as “and all inventory, equipment, and consumer goods on the property.” If the collateral is affixed to the real estate, it may still be described, for security agreement purposes, by a phrase or sentence added to the legal description of the realty. A description of fixtures, for example, might be “and all goods that are or will be fixtures and that are or will be located on the property.”
To serve as a security agreement, the deed of trust must also clearly state that the borrower grants a security interest in the collateral to the lender. A clause such as 8-9-10 in this chapter should appear as a numbered paragraph under “General Provisions.”
In addition, if the deed of trust is to secure a construction loan, to take advantage of the priority afforded construction lenders by revised section 9.334, the attorney should add the personal property description and construction mortgage clauses found at clauses 8-9-12 and 8-9-13, respectively. The attorney should also give serious consideration to preparing a construction loan agreement to deal with such issues as retainage, conditions for advances, and storage of supplies and materials.
Beyer, Gerry W. Real Property. 2nd ed. West’s Texas Forms 13–15. St. Paul, MN: West, 2001. Supplement 2014.
Nolan, John M., Michael F. Alessio, and Edward A. Peterson. “Texas Annotated Deed of Trust.” In Advanced Real Estate Strategies Course, 2015. Austin: State Bar of Texas, 2015.
St. Claire, Frank A., and William V. Dorsaneo III. Texas Real Estate Guide. New York: Matthew Bender & Co., 2001.