Last week, we discussed how most all mortgage loans nowadays, including home equity loans and lines of credit, have due-on-transfer clauses, which are also call due-on-sale clauses. If ownership of the property transfers from the borrower to someone else by sale or otherwise, the lender can call the entire principal balance of the loan due and payable immediately. However oftentimes, federal law prohibits the lender from enforcing these due-on-transfer clauses.
Lenders were getting a bit heavy handed in the enforcement of due-on-transfer clauses, so in 1982, our legislators in Washington D.C. passed the Garn-St. Germain Depository Institutions Regulation Act. The Act carved out nine situations in which a lender on a loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, could not enforce the due-on-transfer clause.
Michigan legislators jumped on the same band wagon and passed a state statute that provides that a lender in Michigan cannot enforce a due-on-transfer clause if it is prohibited by the Garn-St. Germain Depository Institutions Regulation Act of 1982. Today we will discuss these nine situations in which lenders are prevented from enforcing due-on-transfer clauses.
- Second and third mortgages.
When you take out a home equity loan or line of credit, the loan is secured by a mortgage on your home, which means that you have transferred a security interest in the home to the new lender. So long as the creation of the second lien or other encumbrance is subordinate to the first mortgage and there is no transfer of rights of occupancy in the property, the first mortgage lender cannot call the first mortgage loan.
- Purchase money security interest for household appliances;
You may buy new household appliances on credit and those appliances are installed in the home. The lender can take a security interest in the appliances installed in the home. Although technically this security interest is a transfer of an interest in the property, your first mortgage lender, cannot enforce the due-on- transfer clause in their loan,
- Transfer on account of death of a joint tenant or spouse co-owner.
After the death of a joint tenant or co-owner spouse, there is a transfer to the survivor. The survivor does not have to pay off the mortgage loan immediately, even if the survivor was not on the loan in the first place. The survivor can just continue to make the payments on the mortgage loan.
- Leasehold interest of three years or less not containing an option to purchase.
If you are leasing the property for three years or less, and the lease does not have an option to purchase, your mortgage lender cannot call the loan. These short term leases cannot trigger the due-on-transfer clause.. However, if the lease term exceeds three years and/or the lease includes an option to purchase, this is enough of a change to allow the lender to call the mortgage loan.
- Transfer to a relative resulting from the death of a borrower.
If the original borrower dies and the property ends up with a relative of the deceased borrower, the relative can just step in the shoes of the deceased and continue to make the monthly payments on the mortgage loan and the lender cannot do anything about it. The due-on-transfer clause in the note or mortgage is not enforceable. Relative is not specifically defined in the statute or in the regulations. However, since spouses and children of the borrower have a specific exemption, relative would most likely include ancestors, lineal descendants and siblings of the borrower.
- Transfer to the spouse or children of the borrower.
If you are the original borrower and you transfer the property to your spouse or children, they do not have to pay off your mortgage, but can continue to make just the monthly payments over the life of the original loan. They just step into your shoes, except that they are not personally obligated on the loan.
- Divorce or separation.
Similarly in the event of a transfer to a spouse or ex-spouse as part of a divorce or legal separation. If the transfer to the spouse or ex-spouse came about from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, then the new spouse owner can continue to make the payments on the mortgage and step into the shoes of the former spouse owner/borrower, except that they also are not personally obligated on the loan.
- Transfer to a trust.
You can transfer your property which is subject to a mortgage to your living trust without triggering the due-on-transfer clause. So long as you as borrower is and remains a beneficiary of the trust and the transfer does not relate to a transfer of rights of occupancy in the property, then the mortgage lender cannot call the loan immediately due and payable and you may continue to make the monthly payments.
- Any other transfer described in regulations.
The statute allows the regulatory agency to designate other transfers which do not trigger the enforcement of the due-on-transfer clause in the mortgage loan. The regulations list the same eight situations above that would prevent the triggering of the enforcement of a due-on-transfer clause in a mortgage loan. However the regulations expand those prohibitions to “any such loan made on the security of a home occupied or to be occupied by the borrower.” So long as it is the borrower’s homestead, it can have more than four units and still be protected from the due-on-transfer clause enforcement in these situations.
Even with these prohibitions in place, some lenders will still try to enforce the due-on-transfer clause in these situations. To stop this from happening, inform the lender that they are prohibited from calling the loan by both Federal and Michigan laws.
Other lenders will attempt to charge the new owners an assumption fee to continue the loan in these situations. What they are attempting to do is get the new owners to obligate themselves on the debt. If you as new owner do not sign an assumption agreement or pay an assumption fee, there is nothing the lender can do. They are prohibited from enforcing the due-on-transfer clause.
If you have concerns about what will happen with your home loans after your death, the best thing you can do is to consult with a knowledgeable estate planning and elder law attorney. The attorney should be able to review your situation, loan agreements and mortgages in order to make a determination of what options there are and what needs to be done with your home.
By Matthew M. Wallace, CPA, JD
Published edited January 21, 2018 in The Times Herald newspaper Port Huron, Michigan as: Lenders can’t always call your mortgage