Insights

After a property owner becomes delinquent in paying property taxes, many states permit the taxing authority to sell the tax lien to any person who pays the outstanding taxes and collection costs. After the tax lien sale, the property owner is given the opportunity to redeem the property within a certain period of time by paying the amount paid by the tax lien purchaser, plus interest. The tax lien purchaser can opt to set up a payment plan with the property owner to facilitate redemption.

Texas permits an uncommon and innovative approach to collecting delinquent property taxes. Texas allows a third party to contract directly with the property owner to pay delinquent taxes, interest and penalties to the taxing authority in return for a superior tax lien that has priority over all other liens on the property, including the first lien mortgage. The third-party property tax lender can then collect the amount paid to the taxing authority, closing costs that may range from 10% of the amount paid for a loan in excess of $10,000 to 40% of the amount paid for a loan under $2,500, interest up to 18% a year on the amount paid and the closing costs, and servicing fees over the term of the property tax loan that are limited by Texas law. If the property owner becomes delinquent on the tax loan payments, the property tax lender can conduct an expedited foreclosure that can be completed in six months. After a foreclosure sale, the property owner or mortgage servicer can redeem the property by paying 125% of the sale price in the first year or 150% of the sale price in the second year, plus interest.

Interested parties have complained that this procedure takes advantage of property owners who may be induced into entering into property tax loans through false advertisements, are required to pay a hefty amount in interest and fees on the loans, and are subject to losing their properties in foreclosure within a short period of time. In response to these complaints, the Texas Legislature passed Senate Bill 247 that became effective on May 29, 2013 to rein in property tax lenders and prevent these alleged abuses. The new law applies to property tax loans closed on or after May 29, 2013 and to advertisements and solicitations distributed on or after May 29, 2013.

In consideration of complaints that the property tax lending process takes advantage of property owners, the new legislation requires that the property tax loans only be foreclosed on by judicial foreclosure. The new legislation also regulates advertising by prohibiting false, misleading, or deceptive advertising, requiring the disclosure of other information when a rate or charge is disclosed in an advertisement and requiring that any solicitation include a disclosure statement informing the property tax owner of installment plans that may be offered directly by the taxing authority. In addition, a property tax lender now is required to disclose the cost range of servicing costs prior to the borrower entering into a property tax loan with a standard disclosure statement about property tax loans that was previously required.

The legislation also imposes other changes on property tax lending. Any person who purchases or takes assignment of a property tax loan must be licensed as a property tax lender. Also, the Finance Commission must adopt a regulation concerning the form of payoff statements sent to a property tax lender by a mortgage holder, the form of the payoff statement, and the time period in which the payoff statement must be provided. A property owner is prohibited from waiving any requirement imposed by law in the loan contract, unless the waiver is permitted by statute. Finally, a property tax lender cannot make a loan:

• to a borrower 65 years or older who can claim a property tax exemption;
• on a property financed with a grant or below-market-rate loan from a government program or nonprofit organization that is subject to the grant or loan;
• on a property encumbered by a lien recorded under Subchapter A, Chapter 214 of the Local Government Code;
• if the taxes are not delinquent and the property is subject to another recorded lien;
• if the taxes are neither due or delinquent and the property is not subject to another recorded lien.

A property tax loan contract made under the last two prohibitions is void as expressly provided by law.

Texas property tax lenders and those taking assignment of Texas property tax loans should ensure that measures are taken to immediately implement this new legislation.

Shawnielle Predeoux is an associate of Hudson Cook, LLP, in the firm’s Hanover, Maryland office. Shawnielle can be reached at 410-865-5425 or by email at spredeoux@hudco.com.