BILL ANALYSIS C.S.S.B. 336 By: Rosson (Oliveira) 5-10-95 Committee Report (Substituted) BACKGROUND Colonias are substandard, generally impoverished, rural subdivisions that typically lack one or more of the basic amenities of water, wastewater service, paved streets, drainage or electric service. The lack of these services has been implicated in a variety of social and health problems, including an incidence of tuberculosis and hepatitis not usually found outside third world countries. Although it is generally assumed that colonias exist only along the U.S.-Mexico border, there are, in fact, similarly substandard subdivisions in virtually every area of Texas. Nevertheless, the greatest concentration of colonias is along the Texas-Mexico border, particularly in the lower Rio Grande Valley and El Paso County. Colonias residents almost always acquire their lots by means of an executory contract, generally known as a "contract for deed" or "contract for sale." This type of conveyance is unlike a typical deed of trust transaction in several notable respects: first, the property being conveyed generally is only land, with no house, structure or improvements; second, under a contract for deed, legal title does not transfer until all payments are made, and the purchaser may not accrue any equity in a tract even though substantial payments may have been; third, contracts for deed are not required to be recorded; and fourth, virtually none of the state and federal protections afforded conventional home buyers are provided to a purchaser under a contract for deed. The fact that a purchaser has very few rights or remedies under a contract for deed has led to a number of abusive practices by sellers of colonia lots. Sellers have sold individual lots to two or more buyers, sold lots without a written contract, and placed liens on lots subsequent to the sale without informing the purchaser. Colonias residents also suggest that sellers frequently misrepresent the availability of water, sewer service and other utilities, and that they are often not informed that the property being sold lies in a flood plain or is otherwise unsuitable for habitation. The magnitude of problems resulting from colonias development and the role that contracts for deed play in allowing these problems to develop have led some parties to call for an outright prohibition on this type of conveyance. However, low income families needing housing currently have no other alternatives, as few, if any, banks or other conventional financial institutions are willing to lend, and few insurers will provide coverage for this type of property. PURPOSE As proposed, C.S.S.B. 336 requires, in certain counties, recording of contracts for deed and specific notice as to the availability of water, wastewater, electric service, and flood plain status. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Sets forth the findings of the legislature. SECTION 2. Amends Subchapter D, Chapter 5, Property Code, as follows: SUBCHAPTER D. EXECUTORY CONTRACT FOR CONVEYANCE Sec. 5.061. New title: AVOIDANCE OF FORFEITURE, ACCELERATION, OR OF RESCISSION. Authorizes a seller to enforce the remedy of rescission or forfeiture and acceleration against a purchaser in default under an executory contract (contract) for conveyance of real property used or to be used as the purchaser's residence if the seller notifies the purchaser of certain conditions. Sec. 5.062. NOTICE. Sets forth the requirements, language, and conditions of a notice under Section 5.061 of this code. Sec. 5.063. RIGHT TO CURE DEFAULT. Authorizes a purchaser in default of a contract to avoid the enforcement of a remedy described by Section 5.061 by complying with the terms of the contract up to the date of compliance. Sec. 5.064. PLACEMENT OF LIEN FOR UTILITY SERVICE. Makes no change. Sec. 5.065. DEFAULT. Defines "default." SECTION 3. Amends Chapter 5, Property Code, by adding Subchapter E, as follows: SUBCHAPTER E. REQUIREMENTS FOR EXECUTORY CONTRACT FOR CONVEYANCE APPLICABLE TO CERTAIN COUNTIES Sec. 5.091. APPLICABILITY. Establishes the required demographics a county must meet in order for this subsection to be applicable to that county, and limits the application of this subchapter to purchases of residential property. Sec. 5.092. DETERMINATION AND NOTICE OF APPLICABILITY. (a) Requires the Texas Department of Housing and Community Affairs (department) to determine annually in which counties this subchapter applies. (b) Requires the department to publish a list of the counties in which this subchapter applies in the Texas Register, and to notify the county clerk of each county. (c) Sets forth the required contents of the notice. (d) Requires the department to make its determination not later than May 1 of each year. Provides that the determination becomes effective June 1. (e) Requires the county clerk to publish a copy of the notice on three separate days in a newspaper of general circulation immediately following receipt of the notice. Requires the clerk to post a copy of the notice on three separate days on a bulletin board at a place convenient to the public in the county courthouse. Sec. 5.093. SPANISH LANGUAGE REQUIREMENT. Requires the seller to provide a copy of all written documents in Spanish if the negotiations that precede the execution of a contract are conducted primarily in Spanish. Sec. 5.094. SELLER'S DISCLOSURE OF PROPERTY CONDITION. (a) Requires the seller to provide the purchaser with a survey or plat of the real property, copies of all restrictive covenants, easements, and other documents which encumber or affect title to the real property, and a specific written notice. (b) Requires the seller in unrecorded subdivisions to provide the purchaser with a separate disclosure form stating that utilities may not be available to the property until the subdivision is recorded by law. (c) Requires an advertisement by the seller to disclose information regarding the availability of water, sewer, and electric service. (d) Sets forth the options for a seller's failure to disclose information required by this section. (e) Provides that Subsection (d) does not limit the purchaser's remedy against the seller for other false, misleading, or deceptive acts or practices actionable in a suit brought under Chapter 17E, Business & Commerce Code. Sec. 5.095. SELLER'S DISCLOSURE OF FINANCING TERMS. Sets forth the information the seller is required to provide the purchaser before a contract is signed. Sec. 5.096. CONTRACT TERMS PROHIBITED. Prohibits a seller from including certain provisions as terms of the contract. Sec. 5.097. PURCHASER'S RIGHT TO CANCEL CONTRACT WITHOUT CAUSE. (a) Authorizes the purchaser to cancel and rescind a contract for any reason within 14 days of the contract. (b) Sets forth a statement the seller is required to include in the contract. (c) Sets forth the language of a notice of cancellation the seller is required to provide a purchaser at the time the purchaser signs the contract. (d) Prohibits the seller to request the purchaser to sign a waiver of receipt of the notice of required cancellation form. Sec. 5.098. PURCHASER'S RIGHT TO PLEDGE INTEREST IN PROPERTY ON CONTRACTS ENTERED INTO BEFORE SEPTEMBER 1, 1995. (a) Allows the purchaser to pledge the interest which accrues on the property in an executory contract entered into before September 1, 1995, to obtain a loan only for improving the safety of the property or any improvements on the property. (b) Provides that loans improving the safety of the property and improvements on the property include loans for water service; wastewater system; septic system; structural improvements to the residence; fire protection. Sec. 5.099. RECORDING REQUIREMENTS. (a) Requires the seller to record the contract as prescribed by Title 3. (b) Provides that Section 12.002(c) does not apply to a contract filed for record under this section. (c) Requires the seller to record the instrument that terminates the contract if the contract is terminated for any reason. (d) Requires the county clerk to collect a filing fee prescribed by Section 118.011, Local Government Code. Sec. 5.100. ANNUAL ACCOUNTING STATEMENT. (a) Requires the seller to provide the purchaser with an annual statement in January of each year for the term of the contract. (b) Sets forth the required contents of the statement. Sec. 5.101. EQUITY PROTECTION; SALE OF PROPERTY. (a) Grants the seller the power to sell the purchaser's interest in the property if the purchaser defaults after paying 40 percent or more of the amount due or the equivalent of 48 monthly payments under the contract. Prohibits the seller from enforcing the remedy of rescission or forfeiture and acceleration. (b) Requires the seller to notify a purchaser of a default under the contract and allow the purchaser at least 60 days after the date notice is given to cure the default. Sets forth the language of the notice. (c) Requires the seller to post, file, and serve a notice of sale and the county clerk to record and maintain the notice of sale. Provides that a notice of sale is not valid unless it is given after the period to cure has expired. (d) Requires the trustee or a substitute trustee of the seller to conduct the sale as prescribed by Section 51.002. Requires the seller to tell a purchaser of a sale conducted under this section fee simple title to the real property. (e) States that the remaining balance of the amount due is the debt for purposes of a sale under this section. Requires the seller to disburse the excess funds to the purchaser if the proceeds of the sale exceed the debt amount. Set that the seller's right to recover the resulting deficiency is subject to Sections 51.003, 51.004, and 51.005 unless a provision of the executory contract releases the purchaser under the contract from liability. (f) Sets forth that a affidavit that states that the notice was given and the sale was conducted as provided by this section is evidence of those facts. A bona fide purchaser for value who relies on an affidavit under this subsection acquires title to the property free and clear of the executory contract. (g) Sets forth that a seller may enforce the remedy of rescission or of forfeiture and acceleration of the indebtedness if the seller complies with the notice requirements of Sections 5.061 and 5.062. Sec. 5.102. TITLE TRANSFER. (a) Requires the seller to transfer title of the property covered by the contract to the purchaser not later than the 30th day after the date the seller receives the purchaser's final payment. (b) Provides specific penalties imposed on a seller that violates Subsection (a). (c) Explains "seller" under this section to include a successor, assignee, personal representative, executor, or administrator of the seller. Sec. 5.103. LIABILITY FOR DISCLOSURES. Provides that a disclosure required by this subchapter that is made by a seller's agent is a disclosure. SECTION 4. Amends Section 2306.092, (12), Government Code, to add developing a consumer education program to educate consumers on contract transactions for conveyance of real property used or to be used as the consumer's residence to the duties the community affairs division is required to perform. SECTION 5. Makes application of Section 2 of this Act prospective. SECTION 6. Effective date: September 1, 1995. Provides that Chapter 5E, Property Code, applies in a county on a date designated by the department, but not later than November 1, 1995; and requires the department to act as soon as a practicable to make the initial determination under Chapter 5E, Property Code, as added by this Act, and to publish and give notice of those determinations by October 1, 1995. SECTION 7. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The original bill under Sec. 5.061 changed the title to Avoidance of Forfeiture, Acceleration, or Rescission. The substitute changes it further to Avoidance of Forfeiture and Acceleration or of Rescission. The original bill required the seller to provide the purchaser with copies of all restrictive covenants, easements, and other documents which encumber or affect title to the real property; and a written notice informing the purchaser of the condition of the property that must, at a minimum, be executed by the seller and purchaser and sets guidelines for the way it should read. The substitute changes the requirements so that a seller has to provide a legible copy of any document that describes an encumbrance or other claim, including a restrictive covenant or easement, that affects title to the real property; and a written notice, which must be attached to the contract, informing the purchaser of the condition of the property that must, at a minimum, be executed by the seller and purchaser and changes the guidelines for the way it should read. The substitute adds to the disclosure of financing terms that the seller must provide to the purchaser a written statement that specifies the late charge, if any, that may be assessed under the contract and the fact that the seller may not charge a prepayment penalty if the purchaser elects to pay the entire amount due under the contract before the scheduled payment date under the contract. The original bill prohibits the purchaser from pledging the purchaser's interest in the property as security to obtain a loan to place residential improvements, including without limitation utility improvements and fire protection improvements, on the property. The substitute prohibits the purchaser from pledging the purchaser's interest in the property as security to obtain a loan to place improvements, including utility improvements or fire protection improvements, on the property; or imposes a prepayment penalty if the purchaser elects to pay the entire amount due under the contract before the scheduled payment date under the contract. The substitute adds to the notice of cancellation an acknowledge of receipt statement. The substitute also adds that the seller may not request the purchaser to sign a waiver of receipt of the notice of cancellation form. The substitute adds a new Sec. 5.098 to set out specification for purchaser's right to pledge interest in property on contracts entered into before September 1, 1995. The substitute adds that a seller shall record the executory contract, including the attached disclosure statement required by Section 5.094. Under Section 5.100, the substitute adds that if the seller mails the annual accounting statement to the purchaser, the statement must be postmarked not later than January 31. The substitute adds further that if the seller fails to comply with this requirement, the purchaser may notify the seller that the purchaser has not received the statement and will deduct 15 percent of each monthly payment due until the statement is received, and not earlier than the 25th day after the date the purchaser provides the seller notice, deduct 15 percent of each monthly payment due until the statement is received by the purchaser. Additionally, a purchaser who makes the 15 percent deduction is not required to reimburse the seller for the amount deducted. The substitute also grants the seller the power to sell through a trustee designated by the seller. The substitute changes from the original bill the notice of default to the purchaser. The substitute also adds specifications to the recording requirements that the seller must record. The original bill provided that a seller who fails to transfer the recorded legal property title covered under the executory contract 30 days after the seller received the purchasers final payment due is subject for each day of the violation to a penalty that is equivalent to a daily payment under the executory contract. The substitute further provides under Section 5.102 (formerly 5.101 of the original), that a seller who fails to transfer the recorded property title to the purchaser 30 days after the final payment was made by purchaser is subject to a penalty of $250 a day for each day the seller fails to transfer the title to the purchaser during the period that begins the 31st day and ends on the 90th day after the date the seller receives the purchaser's final payment due under the contract and a $500 a day for each day the seller fails to transfer title to the purchaser after the 90th day after the date the seller receives the purchaser's final payment due under the contract. Additionally under this section (Section 5.102), "seller" includes a successor, assignee, personal representative, executor or administrator or the seller. SUMMARY OF COMMITTEE ACTION The Business and Industry Committee considered S.B. 336 in a public hearing on May 2, 1995. The committee considered a complete committee substitute to the bill. The substitute was withdrawn without objection. Testifying in support of the bill was John Henneberger, representing Texas Low Income Housing Information Service. Testifying against the bill were Pablo Munoz, representing himself; J. Gary Frisby, representing himself; Robert J. Goodwin, representing himself; Daniel Acevedo, representing himself. No one testified on the bill. S.B. 336 was left pending before the committee. S.B. 336 was reconsidered by the committee in a formal meeting on May 10, 1995. The committee considered a complete committee substitute to the bill. Without objection, the committee substitute was adopted. S.B. 336 was reported favorably, as substituted, with the recommendation that it do pass and be printed, by a record vote of 7 (seven) ayes, 0 (zero) nays, 0 (zero) present-not-voting, 2 (two) absent.