Print 🖨

Below is the HillCo client report from the May 27 House Business & Industry Committee hearing.

The committee met to consider interim charges.  The following report focuses only on discussion of lien laws.
 
Automobile Mechanic’s Liens
 
Chairman Rene Oliveira gave opening comments.

  • As currently written, the law allows a mechanic to keep a car until he gets paid, at some point the mechanic can sell the car to recoup losses; if a rejected credit card payment or bounced check occurs, a lien can be imposed
  • Some contend the current law allows the lien to be transferred
  • Rep. Jim Pitts filed a bill last session that would increase the number of ways payment can be made to a mechanic while a lien is in effect

 
Clint Thompson, Texas Department of Motor Vehicles

  • The last three years’ average is about 3,600 mechanic’s liens per year in Texas
  • Two processes
    • One for workers who are franchise dealers
    • One for regular mechanics
  • Thompson discussed the procedures for imposing and clearing a lien
  • Oliveira asked if there is data in the system that can be analyzed to determine if third parties are being involved in mechanic’s liens
    • No, it is just a snapshot of documents being filed
  • Oliveira asked if a mechanic can impose a lien if a payment plan is set up and not honored
    • They have the right to repossess the vehicle if it is stated as a possibility in the contract
  • Oliveira asked about mechanic’s liens from a third party; what does a county official do
    • The guidelines are in the state manual; components for a mechanic’s lien are established; they may contact the department to determine if a policy has been followed
  • Oliveira asked if the court has to determine the authenticity of liens
    • A court decision is only necessary if the time period for notice is not followed
  • Rep. Eddie Rodriguez asked about legislation passed in the 81st session
    • It made an additional notice a requirement under the franchise dealer lien; the number of liens went from 17,000 in 2009 and 10,000 in 2010 to the 3,600 average for the last three years
  • Rodriguez asked if it is clear in statute that mechanic’s liens are not transferrable
    • Yes it is clear

 
Mike Dunagan, Texas Independent Automobile Dealers Association

  • In 1973 the legislature adopted amendments to the commercial code which was a major overhaul with revisions to secured transactions and provisions regarding lien priority
  • In 1975 the Texas Supreme Court found that a change adopted provided that a possessory lien would take priority over a recorded mortgage lien
  • Have found a steady increase in the number of abuses and fraudulent applications of the mechanic’s lien laws since the priority was changed
  • After the 2009 amendments went into effect, the number of questionable liens was significantly reduced
  • Have seen prosecution of some title services that were using mechanic’s liens to get clear titles and erase liens on vehicles for a fee
  • By tightening things up in 2009 it brought more of a balance to protect the interest of the legitimate mechanic
  • In 2011, started seeing new cases involving vehicles being repossessed by a third party; when a lienholder made inquiries they found mechanic’s liens claims being made by purchasing the liens; they were charging up to 257% APR on money advanced for repairs
  • Have filed lawsuits in some of these cases
  • Mortgage lienholders on vehicles have an incentive to keep cars running so they can keep getting paid
  • In June 2012, Texas DMV issued a bulletin to tax offices to not accept mechanic’s liens from third party assignees
    • Still getting calls regarding this issue despite the DMV directive
  • Would propose legislation that makes clear that release of a vehicle being held on a mechanic’s possessory lien would extinguish the power of that lien
  • Would like a prohibition on the assignment of possessory liens or stripping the first lien position of a lien if it is assigned
  • Not opposed to mechanics taking advantage of a law that protects them through a possessory lien
  • Counties deserve guidance related to what they should accept or not accept
  • Oliveira asked why mechanic’s liens should not be transferrable
    • It throws the system out of balance; there would be an increase in the number of liens filed
  • Rep. Paul Workman asked if he bought a used car and financed it, then took it to a repair shop and refused to pay the amount the shop charged what would happen
    • The repair man has possession of the car and can keep possession if payment is not made; if payment is made and the credit card company refunds the charge because of a dispute he can repossess the vehicle; the first lienholder will get a notice that a second lien has been placed
  • Rep. Rob Orr asked if the main issue is the priority of the liens
    • Yes

 
Adam Sarabi, Banatex, LLC

  • Would like clarity on the law regarding the mechanic’s ability to repossess a vehicle
  • Would like to give the customer the ability to pay over time while still maintaining the ability to impose a lien or repossess
  • Many mechanics do not have the ability to float the note for the customer; would like someone to come in and pay for the repairs and receive transference of the lien from the mechanic
  • Rep. Armando Walle asked what the company does
    • Is a third party debt purchaser
  • Walle asked if an interest rate is charged to the consumer and the mechanic
    • Just to the consumer; around 250-260% interest
  • The business is going out of business because it was being sued too often and there was no clarity in the law

 
Jesse Hoffman, Banatex, LLC

  • Wants it to be clear that liens are transferrable
  • Mechanics are increasing the value of an automobile and should have access to a lien to minimize their risk
  • Oliveira noted he agrees with the witness; there is a reason why mechanics are protected
  • The two main concerns are the ability for a mechanic to structure their payments and to transfer the lien
  • Orr noted in construction liens, if a person installs a pool or an addition onto a house they cannot get advantage over a priority lien

 
Wayne Ray, Repair Shop Owner

  • Cannot work on cars unless all the money is brought up front
  • Looking for clarification that the mechanic can repossess the car if a payment is not made so that structured payment plans can be offered
  • The current method of transaction is causing transmission shops to go out of business

 
Michelle French, Denton County Tax A/C

  • Discussed a situation with a mechanic’s lien involving Banatex
  • There needs to be clear and concise direction on what is a possessory lien and what can be transferred

 
Phillip Lathrop, VP Auto Sales

  • Third party groups attempt to create usurious loans in order to be able to create a possessory lien and repossess an automobile then hold the collateral hostage until it is paid by the primary lienholder
  • Rodriguez asked why the primary lienholder shouldn’t pay for the mechanic’s work when it improves the value of a car
    • Not arguing that point; the problem is the third party group the primary lienholder has to pay ridiculous interest rates to

 
Oliveira noted the issue is not that complicated. The parties who were operating questionably are going out of business but it does not fix the problem. Need to determine if these loans are assignable and if the law already states that, it needs to be made more clear.
 
Property Tax Liens
 
Leslie Pettijohn, Consumer Credit Commissioner

  • SB 247 (83R) has been fully implemented; all rulemaking has been completed
  • SB 762 (82R) required the Finance Commission to study the property tax lending industry; published a report
  • When a person gets a property tax loan, a lender must give written disclosures to the consumer; the commission has promulgated a form that must be filled out; the borrower must also be given a full breakdown of all the costs
  • The volume of loans has grown at about 5% per year; because of recent changes to statute it should slow down and possibly decline
  • 87 property tax lenders were licensed between January and February of 2014; the industry is beginning to consolidate
  • Violations are generally regarding unauthorized interest rates or fees
  • Oliveira noted property tax loans have increased significantly in the last 6 years; the amount being loaned went from $120 million to around $200 million per year
    • Likely due to a greater involvement in commercial property tax loans
  • Oliveira asked if some property tax lenders are still challenging the fact that they are subject to the Truth in Lending Act
    • Some provisions are established that industry members feel they are not subject to and are challenging that fact in court
  • Oliveira asked if the litigation is prevailing
    • Not sure there has been any resolution in those cases

 
John Fleming, Texas Mortgage Bankers Association

  • The current notice requirement does not have to be given until the property tax loan transfer has been made; once the lender gets it he cannot do anything about it until the mortgage loan goes delinquent or the property tax loan goes into default
  • With respect to allowing mortgage lenders to better protect their collateral position, it would be helpful to have that notice be given before the property tax loan is made; then the mortgage lender could review the terms and make a determination if it would be better to make an advance to the delinquent taxing authority in order to cure the default
  • There ought the be clarity in whether or not property tax lenders should be required to comply with the same federal requirements a mortgage lender must comply with when making a mortgage loan
  • Some property tax lenders take the position that they are not extending credit; many people have determined that these loans should be classified as high-cost mortgage loans
  • The legislature should end the confusion by adopting statutes that make it clear that a property tax lender be required to make the same determinations a mortgage lender must make with regard to ability to pay
  • Prior notification to the lender and reasonable opportunity for the lender to make the advance to protect their collateral position would help to clarify the current situation
  • Rodriguez asked if property tax lenders use asset based lending
    • They make no assessment of the actual borrower’s ability to pay
  • Under traditional deeds of trust, if a borrower does not pay their taxes before they become delinquent, the lender can cure that default by paying the tax obligation; that secures the priority of the mortgage lend; the lender is basically shut out from enforcing their preexisting priority in the current system
  • Orr asked how many mortgage loans do not have escrow accounts
    • Not sure; as a percentage of total loans outstanding there is a higher number of non-escrowed accounts
  • Workman asked if property tax lenders cannot approach a consumer until the taxes are delinquent
    • They cannot make a loan until the account goes into delinquency
  • Workman noted if a lender can determine that an account is delinquent, a mortgage lender should be able to find the same information and approach the borrower before the property tax lender
    • Many times the tax lien lender advertises the speed of their service which makes them hard to compete with

 
Steve Scurlock, Texas Independent Bankers Association

  • This issue continues to cause problems for small banks around the state
  • These loans should be categorized as subprime
  • Making a tax lien loan on a property could stack up year after year and get to 50% of appraised value and the lender is still protected in a foreclosure
  • Oliveira asked why the amount of loans might be increasing so significantly
    • Could be because property taxes are increasing, property values are increasing, advertising practices are getting better
  • Workman asked what happens to a property owner whose taxes go delinquent
    • A taxing authority must offer an installment plan; the tax lien lender should be a last resort
  • Workman noted it seems hard to believe that a mortgage lender could step in and prevent taxing authorities from going to collection agencies when collection agencies seem to be doing very robust business
  • Oliveira noted if the mortgage lenders were half as aggressive as the tax lien lenders they wouldn’t have as much of a problem; they need to do more outreach
  • Orr asked what dollar losses are happening to community banks in this regard
    • Not sure that is quantifiable

 
Charlie Brown, Texas Property Tax Lienholders Association

  • A tax lien is a priority lien when the county holds the lien; it does not just jump ahead in priority when it transfers to a lender
  • Over 30% of customers are facing foreclosure and almost all of them end up keeping their property and paying off the tax loan when they use the tax lien service
  • Oliveira asked why the witness resists the Truth in Lending Act provisions
    • Not necessarily resistant; the laws that apply to the industry are generally followed and complied with

 
Jack Nelson, Texas Property Tax Lienholders Association

  • Interest rates are dropping in the industry due to competition
  • Texas law prohibits the industry from profiting on foreclosures
  • In Florida there is one billion in tax lien lending every year and Texas has only around $180 million
  • The property owner should not have to wait until delinquency before taking out a tax lien loan
  • Workman asked when solicitation can begin
    • Not sure what the rules say; the industry does not generally blanket market because it is far more expensive that targeted marketing
  • Walle asked about the interest rate
    • The regulation caps the rate at 18% and rates have come down about 1% per year because of competition
  • Walle asked about the demographic of the customer
    • All types of people and buildings; from million dollar commercial buildings all the way down to $30,000 residential properties
  • Walle asked if the industry would cease to exist if more authority was given to taxing authorities to work with delinquent property owners
    • Generally the county requires higher interest rates for shorter periods of time and the industry members can compete very well with the counties

 
Trey Gulledge, Tax Ease LP

  • Discussed the industry in other states and noted that comparatively, Texas is much more highly regulated and allows for consumer choice

 
Sally Sauers, Protect My Texas Property

  • Protect… is a consumer group in support of tax lien lending
  • Discussed her story about how tax lien lending helped her in her situation

 
Bill Peacock, Texas Public Policy Foundation

  • Consumers want this service
  • Recommend policies be pursued that protect and enhance the consumer’s ability to use tax lien transfers
  • Do not want the government to take over what is a successful private industry
  • State could eliminate the prohibition on use of tax liens before taxes become delinquent; consumers could save 7% of their tax obligation
  • Oppose any additional regulations that add cost to the consumers

 
Don Baylor, Center for Public Policy Priorities

  • Determining ability to repay is an important part of truth in lending; loans should not be made based solely on value of collateral
  • There is a substantial lack of data with regard to the annual report submitted by the Consumer Credit Commissioner
  • There is hardly any information on the amount of fees paid by consumers for these services

 
Robert Doggett, Attorney

  • The tax lien industry has come about because the state is not addressing the problem the way it should be addressed
  • A person making a loan should determine ability to pay, not just collateral amount and amount owed
  • Would like the legislature to look at what is causing the problem of people not being able to pay their taxes and solve the issue holistically

 
Contractors Liens
 
Oliveira noted the statutes that surround these liens are archaic and do not address the way business is done in the economy today.
 
Steven Kennedy, Author, Lien Law Handbook

  • Gave a brief overview of the statutory lien scheme
  • A mechanic’s lien is basically any lien imposed by a subcontractor, supplier, etc. for work done that is not paid for
  • A general contractor or prime contractor does not have to do much to perfect their lien, only file it with the county; the constitutional lien is only available for prime contractors and can be used if they statutory lien deadline is missed
  • Texas has a separate statutory scheme for perfecting a claim against public property
  • Architects, engineers, landscapers and such have a different set of rules than contractors and subcontractors
  • Oliveira was confused about use of the term mechanic’s lien
    • It is technically called a mechanic’s, contractor’s or materialman’s lien
  • Oliveira asked where the problem areas are in the system
    • There is a bit too much complexity in the system

 
Fred Wilsherson, Author, Lien Law Handbook

  • For a general contractor, a lien must be filed after the 15th day of the 4th month after delivery of a product and payment has not been maid; then a notice must be sent to the owner
  • For a first tier subcontractor there is another step added called a trapping notice
  • Anyone below that will have another step added, must send a notice to the original contractor and a trapping notice on top of the 4th month notice and the notice to the owner
  • For some contractors, retainage is taken out and they must send notice to the owner and copy the general contractor warning them that there is retainage being held back; also must file a lien affidavit
  • There is an equality for most mechanic’s liens in a construction project; they are all considered the same no matter when they are submitted
  • A lien can be removed by filing surety bonds; these bonds cost a fee that can be 1-2% of the entire cost of a project
  • Oliveira asked for recommendations to make the system better
    • The statute is very complicated so something more user friendly would be helpful; there also seem to be traps for the unwary on both sides of a lien written into the complexities of the law

 
Raymond Risk, Texas Construction Association

  • It is extremely hard for a laborer to establish a lien on a property for unpaid work; it should not be as hard as it is
  • Sometimes the complicated nature of a construction project can translate into complications for the lien process; starting date, commercial versus residential or both, public works or private project
  • Fund trapping notices must be done every month and that is a burden on small companies
  • Oliveira noted it seems like the statute could benefit by creating one place to send all the notices to
    • Some type of internet based system could benefit the process quite a bit

 
John Fisher, Associated Builders and Contractors of Texas

  • Have begun talking with other trade associations to reach an agreement on a way to simplify the lien laws
  • Trying to get other stakeholders involved
  • Want to be able to share the work as soon as possible so other stakeholders can collaborate

 
Bill Beardall, Equal Justice Center

  • For low wage construction workers, the mechanic’s lien statute is their single greatest protection against wage theft
  • Any revisions made to the statute must maintain the protections for low wage workers; at the same time the statute is too complicated and difficult to understand and does need to be more concise