Please respond to the survey questions detailed below with respect to the laws, regulations and local practices in the state of Texas relating to residential construction. For purposes of this survey, "creditor", "lender" and "bank" shall mean a national bank. The loan product contemplated is a "one-time close" construction/permanent loan program (the "Program") under which borrowers may finance the construction of new homes and convert to permanent financing upon completion of construction. Each borrower under the Program must be a natural person and the home must be the borrower's primary residence or second home. Each loan under the Program is made by the Bank directly, and is secured by a first priority mortgage/deed of trust lien in favor of the Bank.

Response:

The answers to the survey questions are different depending upon whether the improvement is intended to be the primary residence or second home of the borrower. Thus, within each answer, you will find denoted "primary residence" only which indicates that the law, precedence, or other requirement only applies if the transaction is a loan secured by a borrower's intended primary residence (homestead).

Additionally, the survey responses do not take into consideration "one-time close" transactions for loans involving repairs and/or renovations to existing structures as the responses are limited to new construction only.

Prior to answering the survey questions, a few definitions should provide helpful. Unless noted otherwise, the following terms shall have the meanings defined below:

"Residential Construction Project" shall mean the initial construction of a dwelling intended to be the borrowers' residence.

"Completion of Improvements" title exception shall mean an exception in the policy which expressly removes any coverage for claims arising out of construction.

"Illegal lot" means a lot which is configured differently than as contained on a recorded plat. If the legal description is that of a partial lot or is that of a lot plus additional property, you may have an illegal lot and the owner will be prohibited from building upon the illegal lot.

"Pending disbursements" title exception means that the coverage of the policy is limited to the actual amount advanced rather than the face amount of the policy.

1. General
   
   
   1. In general, what statutes/regulations in the state of Texas govern construction of improvements on residential real property?
      
      
      1. The following Texas laws, statutes, codes and regulations govern construction of improvements on residential real property:
         
         
         1. Property Code:
            

            Title 4, Chapter 27.001, et seq., Residential Construction Liability; relating to the liability of contractors to homeowners.
            
            Title 5, Chapter 53, Subtitle B, ' 53.106 regarding affidavit of completion
            
            Title 5, Chapter 53, Subtitle B, ' 53.124 regarding inception of mechanic's lien
            
            Title 5, Chapter 53, Subchapter G, governing mechanic's and materialman's lien claims.
            
            Title 5, Subtitle B, Subchapter K, Chapter 53, relating specifically to Residential Construction Projects
            
            Title 5, Subtitle A, Exempt Property, Chapter 41, Subchapter A, Exemptions in Land Defined, and Subchapter B, Designation of a Homestead
            
            Title 10, Chapter 162, Construction Payments, Loan Receipts and Misapplication of Trust Funds
            
            Title 16, Chapter 401 et seq. relating to licensing of contractors and projects, warranties, building and performance standards, dispute resolutions and penalties, effective September 1, 2003
            
            Title 4, '' 28.002, 28003, 28.008, 28.009 and 28.000, Prompt Pay for Contractors 1999 Legislative Amendments to Property Code, effective September 1, 1999, affecting mechanic's lien statutes
            

         2. Local Government Code, Title 7, Regulation of Land Use, Structures, Businesses, and Related Activities, Chapter 214, Municipal Regulation of Structures
            

            Subchapter A, Dangerous Structures
            
            Subchapter C, Swimming Pool Enclosures
            

         3. Government Code ' 83.001
            
            
         4. Finance Code, Chapter 346
            
            
         5. Constitution of the State of Texas:
            

            Protection from forced sale, Tex. Const. Art. 16, '50
            
            Amount of homestead, uses, Tex. Const. Art. 16, '51
            
            Constitutional mechanic's lien, Tex. Const. Art. 16, '37
            

         6. Business & Commerce Code
            

            ' 2A.309 Lessor's and Lessee's Rights when Goods Become Fixtures
            
            ' 9.313 Priority of Security Interest in Fixtures
            
            ' 26.02 Loan Agreement Must Be in Writing
            
            ' 39.003 Cancellation of Certain Consumer Transactions

         7. Title Insurance Regulations, Rule P-8(b)
            
            
         8. Insurance Code, Chapter 21, Subchapter E, Art. 21.49, regarding Catastrophe Property Insurance
            
            
   2. Are there local (county, city) ordinances/regulations in the state of Texas governing construction of improvements on residential real property that will impact the origination, servicing, or administration of a construction/permanent loan under the Program?
      
      In general, the Local Government Code authorizes municipalities and counties to regulate land use and structures within their jurisdictions. Thus, a city or county, depending on the location of the real property, has the right to approve plats, implement zoning laws, enforce private deed restrictions, inspect structures and enforce compliance with local building codes. Each county or city has local ordinances and rules governing building permits for construction of the structure, septic systems, sewer systems, wells or other water supply resources. A lender should require a building permit, insure that the real property if platted is a "legal lot" and provide in the loan documents that the contractor will comply with all building requirements of the appropriate governmental entity. At the time of roll-over, the lender should require a copy of the septic and/or well approval issued by the appropriate governmental authority, and a final certificate of occupancy, if available. In some areas, certificates of occupancy are not available, such as properties located outside a city's limit or extra-territorial jurisdiction. Many municipalities require that they inspect various stages of the construction before a contractor can continue with the construction, i.e., foundation, framing, plumbing and electrical work. These vary by city and cannot be addressed specifically. The Bank should require representations and warranties in the loan agreement regarding these matters and rely upon the Bank's inspector to keep it informed as to these issues.
      
      In addition, properties subjected to deed restrictions are sometimes subject to inspection and approval of the plans and specifications by an architectural control committee created by the deed restrictions. Deed restrictions should be reviewed and the construction department of the Bank should assure compliance with the committee's requirements, if any.
      
      Also, properties located in counties designated by the Texas Windstorm Insurance Association as being in a catastrophe area or in an inadequate fire insurance area are subject to special building codes and inspections. In order for the improvements to be eligible for insurance coverage. Insurance Code, Art. 21.49B.
      
      
2. Requirements at Loan Origination
   
   
   1. What are the requirements at loan closing for ensuring that the lien of a construction lender's mortgage is and remains superior to liens of contractors, subcontractors, mechanics, materialmen, suppliers and other construction professionals?
      

      In Texas, one may not "ensure" that its construction lien is and remains superior to liens of contractors, subcontractors, etc. However, there are certain steps which may be taken which reduce a construction lender's risk. These steps include

      1. The execution and filing of an Affidavit of Commencement after loan closing and after the work has commenced, but in no event should recording occur later than 30 days from the date included in the affidavit as the date of commencement of construction. Once recorded, the date included in the affidavit is prima facie evidence of the date that construction commenced (Property Code '53.124). The commencement date is important, in that (a) if the improvements are homestead, the mechanic's lien contract must be executed and recorded prior to commencement of work, or the lender's lien is invalid, and (b) a subcontractor's, materialmen's or mechanic's lien will "relate back" to the date that work under the original contract commenced. If any work is commenced prior to the recording of the construction deed of trust, then all lien claimants under the contract will have lien priority in front of the deed of trust.
         
         
      2. Lender inspection. At or near closing, the lender or its agent should conduct an inspection to insure that no work has commenced. A picture of the unaltered site, with no dirt work, clearing or other evidence of any commencement of work should be included in the lender's file.
         
         
      3. The construction deed of trust should recite that it is a construction mortgage pursuant to the Business and Commerce Code ' 9.313. An encumbrance which in fact is a construction mortgage will take priority over any purchase money liens for fixtures or leasehold interests so long as it recites that it is a construction mortgage and is recorded prior to the perfection of either personal property lien (Bus. & Com. Code, '' 9.313 and 2A.309).
         
         
      4. Retainage. If a lender retains 10% of the contract price for a period of 30 days from the date of completion, no lien claim filed by a subcontractor, materialman, or laborer can attach to the property. The subcontractor, materialman, or laborer must look solely to the retainage fund for payment of any claim. Property Code, ' 53.105.
         
         
      5. Removables. See discussion under 2(b) below.
         
         
   2. Are any documents required to be recorded (for example, a notice of commencement) to establish and continue a construction lender's lien priority? If so, please provide a form.
      
      
      1. Affidavit of Commencement (see discussion above).
         
         
      2. Mechanic's lien contract (primary residence only). You must have executed and recorded prior to commencement of work, a mechanic's lien contract creating a lien on the property for the contract sum. This lien is assigned to the lender and is refinanced in the lender's deed of trust. If the lender's construction loan will finance all construction costs, then a full assignment of the lien is effected. If the lender is financing a portion of the construction costs, a partial assignment is effected, leaving the remainder with the contractor as a subordinated second lien. The mechanic's lien contract must contain the amount or contract sum agreed to be paid for the improvements, not including the land costs, if any, and must contain a state disclosure (see discussion in B(3)e below). We do not recommend use of a mechanic's lien note, as the mechanic's lien is sufficient evidence of the debt to the contractor. Adding a mechanic's lien note increases the likelihood that the transactions may be considered a retail installment contract and hence made subject to Chapter 346, Texas Finance Code, the Federal Trade Commission Holder-in-Due Course Rule, and Truth in Lending requirements, all of which create additional liability and risk to a lender.
         
         The recording of the mechanic's lien contract and deed of trust prior to commencement of construction insures lien validity on homestead, but does not insure lien priority in all instances. For instance, a lien claim for removables always has priority over a lender's construction deed of trust. If the property can be removed without damage to the remaining structure or without damage to the removable property, then it may be considered a removable and can be removed in the event the subcontractor, materialman, supplier or laborer is not paid. The removable item cannot be removed by a breach of the peace and requires a court proceeding. No title insurance is available to protect a construction lender against a claim for removables.
         
         
      3. Deed of Trust.
         
         
      4. Financing Statements.
         
         Financing statements are generally not used in residential construction. The deed of trust is drafted so that it is a security agreement and constitutes the filing of a financing statement when filed with the county recorder. Financing statements are generally not filed with the Secretary of State, in that most construction lenders do not advance for materials not incorporated into the improvements, for materials stored off site, or for specially fabricated items. If a Lender intends to advance for such items not incorporated into the improvements, then a financing statement should be filed with the Secretary of State's office.
         
         
      5. Non-Homestead and Designation of Homestead Affidavit. Loans to borrowers to construct "second homes" should include this affidavit in the loan documentation. The affidavit should be recorded at loan closing.
         
         
   3. Are any disclosures specifically relating to the construction required or recommended to be provided to borrowers by lenders or others in connection with the closing of the construction loan or commencement of construction?
      
      
      1. Texas Construction Disclosure Statement. This disclosure must be provided by the contractor at execution of the construction contract and must be provided by the lender on or at closing. The lender generally provides the disclosures at loan closing. (Property Code '53.255)
         
         
      2. Non-Holder-in-Due-Course Affidavit. It is recommended that this affidavit be utilized. The Federal Trade Commissioner has issued an opinion letter that if the facts set forth in the affidavit are true, then the Federal Holder-in-Due-Course Rule is not applicable even though in Texas, the lender is an assignee of the mechanic's lien contract. Hopefully, the use of the affidavit will prevent a borrower from attempting to assert against the lender any claim that they may have against the contractor as a defense against repayment of the note. If there is an affiliation or referral relationship between the lender and the contractor, then the FTC Rule applies and the mechanic's lien contract must contain the following notice:
         

         "ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER."

         So long as the facts as outlined in the non-holder-in-due-course affidavit are true, the notice requirements of the Federal Anti-Holder in Due Course regulation (16 C.F.R. 433) (see FTC opinion letter) and the right of cancellation notice required by Tex. Bus. & Com Code '39.003 are not required. However, see discussion below under "Comments on Documents Listed on Schedule A and enclosed with Survey Request" regarding notice of cancellation as relates to the law set out in the Texas Constitution.
         
         
      3. Waiver of retainage disclosure if applicable.
         
         
      4. Notice of right to receive loan documents at least 24 hours prior to closing. This may be waived by the borrower and does not affect lien validity (Property Code, ' 53.257)
         
         
      5. The mechanic's lien contract must contain the following:
         

         "IMPORTANT NOTICE: You and your contractor are responsible for meeting the terms and conditions of this contract. If you sign this contract and you fail to meet the terms and conditions of this contract, you may lose your legal ownership rights in your home. KNOW YOUR RIGHTS AND DUTIES UNDER THE LAW." (Property Code ' 41.007) (Primary Residence only)

         The notice must be conspicuous, be in at least 10-point bold type or computer equivalent and be located next to the owner's signature line on the contract.
         
         
      6. No Oral Agreements Notice. We include this notice in the Loan Agreement and do not use a separate form. The notice should also be placed in any commitment letter issued by the Bank (Bus. & Com. Code, '26.02).
         
         
3. Requirements During the Construction Loan Term
   
   
1. What are the requirements for ensuring that the lien of a construction lender mortgage retains its priority at the time of each advance? At the time of the final advance? Upon completion of construction? At the time of rollover to the permanent phase of the loan?
   
   As stated above, one cannot "ensure" that the lien of a construction lender retains its priority. At the time of each advance, in order to reduce the risk, one may retain 10% of the amount requested to be advanced under the contract, obtain lien waivers for prior advances, or for each present advance, and obtain a down-date endorsement from the title company in order to ascertain if any lien claims have been filed. However, these three suggested practices are not popular with builders and may affect the marketability of the program. The down-date procedure is used frequently. However, the down-date is only as good as the plant date (the date through which the title company has recorded information, which generally runs three to four weeks behind the current date). Keep in mind that the title company, even with a down date, is not insuring against lien claims arising out of the construction, in that it has a specific exception in its construction binder or title policy excepting any coverage for liens claims during construction. Therefore, the down-date at a cost of $50.00 per down-date, is nothing more than "informational only" and will not be current. Additionally, at the time of each advance, you may obtain an affidavit of bills paid to date from the contractor with lien waivers as a condition to payment (Property Code, '53.085).
   
   As a condition to the final advance for residential construction projects, you should obtain an Affidavit of All Bills Paid from the contractor (Property Code, '53.259). You may obtain final lien waivers, and you should require upon final advance that the title company delete its exceptions for "completion of improvements", "pending disbursements" and survey exception. Once the "completion of improvements" exception is removed from the mortgagee's title policy, then the lender has coverage for lien claims. I would assume that the final advance would not be made until completion of construction and therefore the final advance should not be made until the Bank or its agent has confirmed that construction is complete, has received an Affidavit of Completion in recordable form, has received an Affidavit of All Bills Paid, and has obtained a certificate of occupancy from the appropriate governmental entity prior to release of the final loan funds. In the event that retainage has been held, it should be held for 30 days from the date of completion of the improvements. If this is done, then the claimants have no right to file a lien against the property and they lose their rights to the retainage fund. However, it is not common practice to hold retainage for 30 days past the date of completion, in that homeowners want to move in and close on their permanent loan or they want to effect a roll-over into a permanent phase, and cease interim interest on the construction phase. Whether retainage is held for the 30 days after completion is dependent upon whether the title company is willing to issue its endorsement deleting the "completion of improvements" exception to the policy. If it is willing to do so, then the lender has title insurance against lien claimants, with the possible exception of lien claims for removables. See discussion regarding removables in Paragraph B(2)b above.
   
   
2. Are lien waivers and/or affidavits required or recommended at the time of each advance? At the time of the final advance? Upon completion of construction?
   
   Lien waivers and Affidavit of All Bills Paid to date are not required. They are recommended, but are not commonly used. At the time of final advance, an Affidavit of All Bills Paid is required by statute and the title company (Property Code '53.259, and in general, the final advance is not made until there is completion. An Affidavit of Completion should be required and must be recorded within 10 days of completion (Property Code '53.106). Failure to record the Affidavit within this time frame causes the date of completion to be deemed the recordation date. If this procedure is followed, along with sending a copy of the Affidavit of Completion to all subcontractors, then the Affidavit is prima facie evidence of the completion date. Property Code, '53.106. This, coupled with the Affidavit of All Bills Paid, should be executed at final advance and completion of the work.
   
   
3. Typically the lender disburses advances of construction loan proceeds directly to the contractor at the direction of the borrower. The final advance of construction loan proceeds is made payable jointly to the borrower and the contractor, unless the lender receives a letter from the borrower specifically directing the lender to disburse the final advance to the contractor. Does this disbursement procedure pose risks to the lender or does this procedure differ from recommended or required disbursement procedures in the state of Texas? Are lien waivers and/or affidavits required or recommended at the time of each advance? At the time of the final advance? Upon completion of construction?
   
   So long as the procedures outlined in C(4) below are followed, whether the lender disburses directly to the contractor or jointly to the borrower and the contractor, does not pose any additional risk to the lender, except for tax reporting requirements which are outside the scope of this survey. See discussion in Paragraph 2 above regarding lien waiver and affidavits.
   
   
4. Are any disclosures specifically relating to the construction required or recommended to be provided to borrowers by lenders or others during the construction loan term? At the time of the final advance? Upon completion of construction? At the time of rollover to the permanent phase of the loan?
   
   During the construction loan term, a contractor must submit a draw request to the borrower for signature and approval prior to submitting the same to the construction lender. Property Code '53.258. The construction lender must then prepare a disbursement schedule reflecting the original amount of the loan available for construction, the amount drawn to date, the amount requested with the specific draw request, and the balance remaining in the construction account. Id. This disbursement schedule, along with the draw request, must be submitted to the borrower prior to approval and funding of any draw request. Id. A borrower has the right to receive a list including name, address and phone number, of all subcontractors that the contractor intends to use, and the contractor is required to update the list anytime a change in such subcontractors is made. Property Code '53.256. The original list of subcontractors and the update may be waived by the borrower at the time it enters into a construction agreement with the contractor. The lender should not make any advances to the contractor either during construction or the final advance without following such procedure, whether the advances are made payable to the contractor or jointly to the borrower and the contractor.
   
   
5. Does a construction lender have any notification or other responsibilities if it decides to cease funding or reallocate construction funds?
   
   Generally a tri-party loan agreement is executed by and between the lender, the borrower and the contractor. Whether the construction lender has any notification or other responsibilities in the event it decides to cease funding or to reallocate construction funds depends upon the contractual obligations of the parties contained in the loan agreement. There is no statute or law imposing duties on the lender because of cessation or reallocation of funding. Texas does require contractors to deposit loan funds into a construction trust account for the benefit of the subcontractors. (Property Code '162). However, lenders have no duty under this statute. We advise lenders who fund construction loans to a builder who maintains an account with the lender to require the account to be styled "construction trust account." The lender should fund all draw proceeds into such account, but has no obligation to monitor the contractor's compliance with this statute. An owner is required to pay a contractor promptly for properly performed work.
   
   An owner is required to pay no later than 35 days after receipt of an invoice. If an owner fails to pay the contractor an undisputed amount within 35 days of receipt of an invoice, a contractor or subcontractor may suspend performance 10 days after giving the owner and lender written notice pursuant to the statute. If a lender is involved, the contractor's right to suspend performance does not arise unless the owner fails to pay contractor within 5 days of receipt of loan proceeds. The lender has no statutory liability under this statute. However, if a lender posts a notice at the project, gives its name, address and person to contact, the lender is entitled to notices under the statute. Property Code '' 28.002, 28.003, 28.008, 28.009 and 28.010.
   
   
6. Does a construction lender have any other responsibilities required or recommended in the state of Texas during the term of the loan?
   
   The following are recommendations only. The construction loan agreement should provide (1) that inspections are for the benefit of the lender only, (2) that the lender is not responsible for the quality of the work, (3) that the borrower has the right to receive a copy of the lender's inspection report, (4) that the lender has the right to approve any substitute contractor, (5) that cessation of work or failure to commence the work is a default under the loan documents. Basically, the loan agreement should expressly remove all obligations and responsibilities of the lender except to fund the loan and to comply with specific state law requirements. Otherwise, any other responsibility should be totally disclaimed by the lender in the loan agreement.
   
   
4. Title Insurance Requirements
   
   
   1. What title insurance endorsements are available or recommended at the time of closing? At the time of each advance?
      
      No construction endorsements are available in Texas at the time of closing. You can obtain a down-date endorsement at the time of each advance to reflect the total amount advanced and therefore insured under a policy, and to obtain information regarding the recordation of any lien claims. However, in Texas you cannot obtain insurance against lien claims arising out of construction.
      
      
   2. Is a "pending disbursements" clause recommended or required in the lender's title insurance policy?
      
      The "pending disbursements" clause is required to be inserted in lender title insurance policies along with a "completion of improvements" exception which excepts from coverage any and all lien claims arising out of construction. (Rule P-8, Title Insurance Regulations)
      
      
   3. Is affirmative mechanics' lien coverage available/typical/recommended for the lender's title insurance policy?
      
      Affirmative mechanic's lien coverage is not available in Texas.
      
      
   4. In some states title insurance companies offer construction packages, including a temporary title insurance policy during construction, a foundation endorsement, allotments for "lien-free" endorsements for each disbursement of loan proceeds, a final survey endorsement, and a standard ALTA loan policy upon completion of construction. California title insurance companies refer to this as an "LP-10" package. Do title insurance companies in Texas offer a comparable product?
      
      No.
      
      
   5. In addition to the items discussed above, is there any other aspect of title insurance policies in Texas relating to construction of which a lender should be aware when making construction loans secured by residential property in Texas?
      
      As previously addressed, in Texas you cannot obtain any title insurance coverage for mechanic's lien claims arising out of construction. In Texas, it is common practice to obtain a construction binder in lieu of a mortgagee's title policy on residential construction loans. The construction binder is basically a commitment to issue a policy when construction is complete. The cost of the binder is minimal. It is the normal practice that a policy is not obtained until permanent financing is in place. In connection with all one-time loans, a mortgagee policy of title insurance is obtained at the closing of the one-time transaction. Also, any endorsements required by the permanent phase of the one-time loan need to be obtained upfront at the one-time closing. In the event the permanent phase is an ARM note, then an ARM endorsement to the title policy should be obtained when the transaction is closed and not at the time of roll-over. In the event a modification of the loan is required, the modification should be forwarded to the title company for review and recording and there should be a request for an endorsement to the policy reflecting the modification, thus insuring that the modification does not adversely affect the title insurance policy.
      
      
5. Construction Requirements for Loan Documents
   
   
   1. What language, if any, needs to be included in the security instrument or other loan documents to insure the lien priority of future construction loan advances in the state of Texas?
      
      As previously stated, you cannot "ensure" the lien priority of construction loan advances because of our mechanic's lien laws, which allow lien claimants to "relate back" the timing of their liens to the date of initial construction on a project and because liens for removables have priority. The security instrument should recite that it is a construction mortgage and that it is in renewal and extension of a mechanic's lien contract which has been assigned to the lender. So long as future advances are clearly contemplated by the loan documents, then lien priority as to the future advances is insured except for mechanic's lien claims.
      
      
   2. Is there a maximum lien amount that is required or recommended to be specified in the security instrument to secure future construction loan advances (no amount necessary, the loan amount, two times the loan amount, or another amount)?
      
      As to primary residences, the mechanic's lien contract must contain the contract price, but should also contain a provision allowing for increases based upon alterations and extras. Failure to include a pre-determined price on homestead loans may cause the lien to be invalid, in that the Texas Constitution (Art. 16 '50(a)(5)) and Property Code '' 41.00 and 53.254 require a pre-commencement contract that includes the price. On primary residence property, one may not increase the loan amount unless there is a change order and work on such change order has not commenced, and the original contract contemplated increases. On second homes, the deed of trust should recite a specific loan amount which may be increased by a modification should the need arise, and future advances should be contemplated pursuant to the loan agreement.
      
      
6. Miscellaneous
   
   
   1. Are there specific actions that are required or advisable to be taken by a construction lender in the state of Texas if the general contractor is fired or walks off the job? If construction ceases, then recommences? If the general contractor is replaced during construction?
      
      We generally advise that the loan agreement include provisions giving the lender the right to approve a substitution of contractor in the event the contractor defaults. Generally, the lender will approve the substitute contractor so long as (1) a budget is submitted reflecting the cost to complete, (2) the substitute contractor assumes all the responsibilities of the original contractor pursuant to the loan documents, (3) the owner and the substitute contractor indemnify the lender against any claims by the original contractor, (4) the original contractor consents to the substitution and indemnifies the lender against any lien claims arising out of work done by the original contractor, and (5) the lender is satisfied with the substitute contractor after reviewing the contractor's financial and business experience. Our loan documentation generally makes cessation of construction or failure to continuously proceed with construction events of default. In order to substitute an original contractor, the bank requires the owner to provide evidence of the original contractor's default and requires the owner to actually terminate the contractor. During the process of substitution, the loan documents should give lender the right to protect its collateral whether it be changing locks or other action necessary or advisable to prevent unpaid subcontractors from damaging the collateral. Additionally, it is advisable to obtain a down-date to see if any of the subcontractors have filed claims. It is also advisable to perform a telephone inquiry with some of the known subcontractors and suppliers to ascertain whether they are being paid timely, or if amounts are owned under the contract.
      
      
   2. Are there any Texas licensing requirements for the general contractor?
      
      Yes. The Texas Residential Construction Act, Title 16, Chapter 401, et seq., Property Code, became effective September 1, 2003. Any person who, for a fixed price, commission, fee, wage or other compensation, who constructs, supervises or manages the (i) new construction of a home, or (ii) material improvements to a home, other than repair or replacement of a roof on an existing home, or (iii) an improvement to the interior of an existing home when the costs exceed $20,000.00 must be licensed with the Texas Residential Construction Commission. Additionally, a construction project must be registered with the Commission. A builder of a new home must register the new home with the Commission on or before the 15th day of the month following the month the home is sold to a homeowner. A builder must register any improvement project with the Commission not later than the 15th day after the earlier of: (i) the date a contract with the homeowner is signed; or (ii) the date work is commenced on the repairs.
      
      
   3. Are there any critical elements required prior to recordation of the appropriate construction loan documents, such as obtaining permit(s) for septic or well?
      
      Yes, a construction lender should require permits from the appropriate government authorities as to septic, well and construction prior to advancing loan funds for such items. Additionally, if deed restrictions affect the property and/or an architectural control committee has authority over construction pursuant to the deed restrictions, a lender should have written approval by the ACC of the plans and specifications.
      
      
   4. Are there any other Texas laws or local practices, or required or recommended procedures relating to construction not covered by this survey that would be pertinent to a lender's solicitation, origination, documenting, servicing or enforcement of a construction/permanent loan contemplated under the Program?
      
      Emphasis is placed on inspections. It is very important for a construction lender in Texas to inspect the site prior to closing to assure no commencement of work and to inspect the site after receipt of a draw request to insure that the work and materials pursuant to the draw request have in fact been performed and delivered. Pre-slab or slab surveys are highly recommended to insure that the funds advanced for construction are not being advanced for a project that encroaches upon easements, building lines, or proposes construction of improvements on the wrong lot.
      
      A contractor cannot require an owner to convey the real property to the contractor as a condition to the performance of construction of improvements under a residential construction contract. Property Code, '53.260.
      
      Texas is a community property state. Both spouses must execute the mechanic's lien contract and security instruments. Failure to obtain the signatures of both spouses will cause the lien for construction to be invalid as to homestead, and will not encumber the spouse's interest if not homestead.
      
      The loan agreement should address with specificity the insurance requirements of the Bank, including builder's risk, workmen's compensation (unless the builder has all of his subcontractors execute an independent contractor formBsee form included), and general liability insurance.
      
      A landscaper's lien is now available. To establish the lien, there must be a written contract between the contractor and the owner. Priority is determined by the date of the recording of the lien affidavit. Property Code '' 53.021(d), 53.124(e).
      
      Chapter 83.001 of the Texas Government Code prohibits anyone other than a Texas licensed attorney from preparing documents that affect title to real estate for a fee. Thus, the Bank should be very careful not to enter into the unauthorized practice of law.