2.4 Wrap Mortgage Loans: Chapter 159 Disclosure, Closing, & Fiduciary Duties
Key Takeaways
- Finance Code § 159.001(7) defines a wrap mortgage loan as purchase financing for residential real estate that stays subject to an unreleased lien securing someone else's unpaid debt, with that balance folded into the new principal.
- Chapter 159 does not apply at all to a wrap on unimproved land in the two § 159.002(b)(1) situations or to a sale of the wrap lender's own homestead; § 159.003 separately exempts insured depositories and their subsidiaries, government actors, and an owner who makes or contracts for no more than three wraps in any 12-consecutive-month period.
- The wrap lender must deliver a separate written disclosure in at least 12-point type on or before the seventh day before the wrap agreement is entered into, dated and signed by the wrap borrower on receipt (§ 159.101(a)–(b); 7 TAC § 59.101).
- Rescission is a three-rung ladder: 7 days after receipt when the disclosure arrives on or before closing (§ 159.101(d)); at any time by written notice when it never arrives (§ 159.104(a)); 21 days after a post-closing delivery (§ 159.104(b)). The lender may avoid rescission within 30 days by paying off the wrapped debt and taxes and paying the borrower $1,000 plus reasonable attorney's fees (§ 159.104(e)).
- A wrap lien is void unless the loan and the conveyance are closed by an attorney or a title company (§ 159.105), and 7 TAC § 59.102(b) requires the title company to issue an owner's title policy to the wrap borrower; whoever collects the borrower's payments owes a fiduciary duty to apply them to the wrapped debt, taxes, and insurance (§ 159.152).
2.4 Wrap Mortgage Loans: Chapter 159 Disclosure, Closing, & Fiduciary Duties
Quick Answer: A wrap mortgage loan finances a home purchase while an older lien stays unreleased and unpaid (Finance Code § 159.001(7)). Making or originating one generally requires SML licensing or registration (§ 159.051) unless an exemption applies—most often the three-wrap owner exemption in § 159.003(a)(4). The wrap lender must deliver a separate written disclosure in at least 12-point type on or before the seventh day before the wrap agreement is entered into (§ 159.101), and the wrap lien is void unless the loan and the conveyance are closed by an attorney or a title company (§ 159.105). Anyone who collects the wrap borrower's payments owes a fiduciary duty to apply them to the wrapped debt, taxes, and insurance (§ 159.152).
OpenExamPrep publishes this independent Texas overlay study. It is not an NMLS, SML, or OCCC publication and does not claim official approval, partnership, or exact equivalence with those agencies' materials. Section 2.1 answered the licensing question—when a wrap triggers an RMLO or company filing. This section teaches the rest of Finance Code Chapter 159 and 7 TAC Chapter 59, because Texas regulates the wrap product, not just the person selling it. SML lists Chapter 159 and 7 TAC Chapter 59 on its mortgage-origination laws page next to the Chapter 156, 157, and 180 material.
What makes a loan a "wrap" under § 159.001(7)
Finance Code § 159.001(7) defines a wrap mortgage loan as a residential mortgage loan:
- (A) made to finance the purchase of residential real estate that will continue to be subject to an unreleased lien that (i) attached to the property before the loan was made and (ii) 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
- (B) obligating the wrap borrower to the wrap lender for a debt whose principal includes (i) the outstanding balance of that older debt and (ii) any remaining purchase price the wrap lender finances.
Two definitional consequences decide most fact patterns. First, "residential mortgage loan" carries its § 180.002 meaning, so the wrap has to be a dwelling-secured loan primarily for personal, family, or household use. A business-purpose wrap between investors is outside the chapter. Second, the wrap has to be purchase financing that leaves the seller's original note alive and unpaid. A seller-financed second lien behind a loan the buyer is assuming and paying directly is not a wrap; the old debt must be inside the new principal.
§ 159.001(5) makes the wrap borrower the person obligated to pay the wrap loan. § 159.001(6) defines the wrap lender as either the person who makes the wrap loan or an owner of residential real estate who contracts with another person to make the wrap loan on the owner's behalf. That second branch is the anti-evasion clause: hiring a mortgage shop to paper the wrap does not move the seller out of Chapter 159.
When Chapter 159 does not apply, and who is exempt
§ 159.002 turns the chapter off entirely for two situations. The first is a wrap made by or for an owner of unimproved residential real estate—land with no dwelling constructed—if either the property will not remain subject to an unreleased § 159.001(7)(A) lien securing a debt with a foreclosable due-on-sale clause, or it will remain subject to such a lien and the lienholder consented to the sale. The second is a sale of residential real estate that is the wrap lender's own homestead.
§ 159.003(a) then exempts four categories of persons: federally insured banks, savings banks, savings and loan associations, Farm Credit System institutions, and credit unions; subsidiaries of those institutions; the state and its agencies, political subdivisions, instrumentalities, and their employees acting within the scope of employment; and—subject to subsection (b)—an owner of residential real estate who does not, in any 12-consecutive-month period, make, or contract with another person to make, more than three wrap mortgage loans to purchasers of the property.
§ 159.003(b) aggregates owners the same way the Chapter 180 seller-finance rule does: two or more owners count as a single owner if any owner is an entity or an affiliate of an entity, including a general partnership, limited partnership, LLC, or corporation under Business Organizations Code § 1.002. Three wraps from an LLC and three more from its affiliate is six wraps by one owner, not two clean buckets.
| Question | Chapter 159 result | Cite |
|---|---|---|
| Buyer's purchase money wraps an unpaid seller note on a house | Chapter 159 applies | § 159.001(7) |
| Raw lot, no dwelling, and the lienholder consented to the sale | Chapter applies not at all | § 159.002(b)(1)(B) |
| Seller is wrapping the sale of the seller's own homestead | Chapter applies not at all | § 159.002(b)(2) |
| Credit union, or a credit union subsidiary, makes the wrap | Exempt person | § 159.003(a)(1)–(2) |
| Owner makes a fourth wrap in a rolling 12 months | Exemption lost; SML licensing or registration required | §§ 159.003(a)(4), 159.051 |
| Owner hires a mortgage company to originate the wrap | Counts against the owner's three-wrap cap | § 159.003(a)(4) |
The § 159.101 seven-day disclosure and the rescission ladder
§ 159.101(a) requires the wrap lender, on or before the seventh day before the wrap mortgage loan agreement is entered into, to give the wrap borrower a separate written disclosure statement in at least 12-point type that (1) contains the information required for a written disclosure statement under Property Code § 5.016 and (2) includes the statutory property-insurance warning—that insurance maintained by a seller, lender, or other non-buyer may not cover the buyer's loss or liability, and that the buyer should purchase the buyer's own property insurance. § 159.101(b) requires the statement to be dated and signed by the wrap borrower when the borrower receives it, and 7 TAC § 59.101 treats that dated signature as the delivery event and lists the readable typefaces SML will accept.
§ 159.102 adds the foreign-language rule: if negotiations were conducted primarily in a language other than English, the required disclosure must be given in that language. 7 TAC § 59.101 requires an English-language version contemporaneously with the foreign-language one. SML publishes model English and Spanish forms.
Rescission then runs on a ladder, and the rung depends on when the borrower got the disclosure:
| When the disclosure reaches the wrap borrower | Rescission right | Cite |
|---|---|---|
| On or before the closing date (even if delivered late—inside the seven days) | Rescind the wrap loan and any related purchase agreement on or before the 7th day after receipt | § 159.101(d) |
| Never delivered, and the loan closes | Rescind at any time by written notice to the wrap lender | § 159.104(a) |
| Delivered after closing but before the borrower gives notice of rescission | Rescind in writing on or before the 21st day after receipt | § 159.104(b) |
Rescission under § 159.101(d) entitles the borrower to a return of earnest money, escrow amounts, down payment, and other fees or charges paid on the wrap loan, the purchase, and related transactions. Under § 159.104(c), a post-closing rescission makes the wrap lender return, not later than the 30th day after the notice, all principal and interest the borrower paid, all earnest money, down payment, or other money or property, and all escrow amounts. § 159.104(d) then requires the borrower to convey the property back and surrender possession not later than the 30th day after receiving that money.
§ 159.104(e) is the lender's escape hatch and a favorite scenario item. The wrap lender may avoid the rescission if, not later than the 30th day after receiving the notice, it (1) pays off the outstanding balance of the wrapped debt, (2) pays any due and unpaid taxes or other governmental assessments, (3) pays the borrower $1,000 plus reasonable attorney's fees as noncompliance damages, and (4) gives the borrower evidence of compliance with (1) and (2). Curing means retiring the old lien—not mailing an apology and a copy of the notice.
§ 159.105: close with an attorney or title company, or the lien is void
§ 159.105 is one sentence with total consequences: a lien securing a wrap mortgage loan is void unless the wrap mortgage loan and the conveyance of the residential real estate securing the loan are closed by an attorney or a title company. Both the loan and the deed have to go through that closing. 7 TAC § 59.102(b), effective November 23, 2024, narrows the title-company route: for § 159.105 purposes, a wrap loan may only be closed by a title company issuing an owner's title insurance policy to the wrap borrower for the residential real estate the wrap loan secures or is designed to secure. A closing at a title office with no owner's policy to the buyer does not satisfy the rule under SML's reading.
Compare the consequence to the § 50(a)(6) cure structure in Chapter 5. A defective equity loan is curable under § 50(a)(6)(Q)(x). A wrap lien closed at a kitchen table is void, and § 159.107 forbids waiving or avoiding Chapter 159 by agreement. § 159.106 lets the wrap borrower sue for declaratory or injunctive relief, actual damages, or remedies available in a DTPA § 17.50 action, and a prevailing borrower recovers court costs and reasonable attorney's fees.
Fiduciary duty, trust accounting, and the right to deduct
§ 159.152 is the servicing duty originators must be able to explain at the kitchen table even though they do not service the loan. A person who collects or receives a payment from a wrap borrower under or in connection with a wrap mortgage loan owes the borrower a fiduciary duty to use that payment to satisfy the obligee's claims on each wrapped debt and to pay the taxes and insurance for which the wrap lender received the borrower's money. § 159.151 requires money collected for those purposes to be held in trust, and 7 TAC §§ 59.301–59.303 implement it: the fiduciary duty may not be delegated or assigned except by selling, assigning, transferring, or conveying the loan; the wrap lender must maintain separate written accountings on a current basis for each wrap loan, preserved until the limitations period runs; and the lender may use a trust account or engage a third-party servicer.
§ 159.202 gives the borrower self-help when the wrap lender pockets the money. Without taking judicial action, the wrap borrower may deduct from any amount owed to the wrap lender (1) any payment the borrower made to the obligee of the wrapped debt to cure a default caused by the wrap lender's failure to make payments it was responsible for, and (2) any other amount for which the wrap lender is liable to the borrower under the loan terms. 7 TAC § 59.201 is the notice-of-deduction procedure. A borrower who pays the underlying bank to stop a foreclosure does not have to sue first; the payment comes straight off the wrap note.
Supervision, enforcement, and SML's wrap rules
| 7 TAC Chapter 59 subchapter | Sections | What it governs |
|---|---|---|
| A — General Provisions | §§ 59.1–59.5 | Purpose, definitions, notice formatting, electronic delivery and signature, computation of time |
| B — Lender Requirements | §§ 59.100–59.102 | Required disclosure (§ 59.101) and closing requirements (§ 59.102) |
| C — Borrower's Rights | §§ 59.200–59.201 | Right to deduct and notice of deduction |
| D — Lender and Servicer Requirements | §§ 59.300–59.303 | Fiduciary duties and required accounting, trust account, use of a third-party servicer |
| E — Supervision and Enforcement | §§ 59.400–59.403 | Books and records, examination, and investigation of wrap lender registrants |
On the statute side, § 159.252 authorizes inspection and investigation, § 159.253 supplies subpoena power, and § 159.301 lets the Commissioner issue a cease and desist order. § 159.103 tolls limitations while a required disclosure is missing, so the exposure does not quietly age out. Chapter 159 was substantially rewritten by S.B. 43 in 2021 with the licensing, disclosure, closing, and enforcement provisions effective January 1, 2022; the implementing rules moved into 7 TAC Chapter 59 in SML's November 23, 2024 recodification. Study materials that describe Texas wraps as an unregulated seller-finance workaround are describing pre-2022 practice.
Official starting points
- SML laws page (lists Finance Code Chapter 159 and 7 TAC Chapter 59)
- Finance Code §§ 159.001–159.003, 159.051, 159.101–159.107, 159.151–159.152, 159.202, 159.252–159.253, 159.301
- 7 TAC Chapter 59, effective November 23, 2024
- Property Code § 5.016 (the unreleased-lien notice the § 159.101 statement incorporates)
A Texas homeowner sells a rental house and finances the purchase, leaving the owner's existing bank note unreleased and unpaid and folding that balance into the new note. This is the owner's fourth such sale in the past 11 months, and two of the earlier three were made by an LLC the owner controls. What does Finance Code Chapter 159 require?
A wrap mortgage loan closed on March 3 with no § 159.101 disclosure statement ever delivered. On June 10 the wrap lender mails the disclosure. The wrap borrower has not yet given notice of rescission. What is the borrower's rescission right?
A wrap mortgage loan and the deed were signed at the wrap lender's kitchen table before a mobile notary. The wrap borrower has made 14 monthly payments, but the wrap lender kept the money and let the underlying bank note go into default. Which pair of results is correct under Chapter 159?