A Due-On-Sale Clause can be found in most contemporary mortgage instruments and, as the name suggests, states that the mortgage debt will become due upon sale of the property. From a lender’s perspective the logic is fairly straightforward – security for the loan is put at risk when the collateral property is owned by a party who is not bound by the terms of the Promissory Note or mortgage instrument. Sometimes known as acceleration clauses, these prohibitions are typically drafted using broad language in an attempt to protect the lender against potential loopholes, the being that borrowers can, and do, become subject to the terms of a due-on-sale clause through no action or fault of their own.
Luckily for such borrowers, the Garn-St Germain Depository Institutions Act of 1982, pecifically the portion found at 12 U.S. Code § 1701j–3(d), provides exceptions to such restrictions in the form of Federal preemption, preventing foreclosure in certain circumstances.
These exceptions are as follows:
- the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
- the creation of a purchase money security interest for household appliances;
- a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
- the granting of a leasehold interest of three years or less not containing an option to purchase;
- a transfer to a relative resulting from the death of a borrower;
- a transfer where the spouse or children of the borrower become an owner of the property;
- a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
- a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
- any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
Inevitably, there are examples of transfers of title not covered by the above exceptions which have been roundly ignored by the secured creditor. However, the lender’s failure to exercise its right to foreclose does not waive that right, and only the instances above are protected under federal law.
If you have questions about the above or wish to schedule a consultation to discuss your options, please reach out to us at kvance@patellegal.com.