Content area
Full text
Lenders beware: du cruses may be legal, but clever borrowers still get around them.
A DUE-ON-SALE CLAUSE IN A MORTGAGE document allows the mortgagee to recover the full value of the loan if the mortgagor sells or otherwise transfers the property. The Gain-St Germain Depository Institutions Act of 1982, 12 U.S.C. (sec)1701j-3, et seq. (1982) (the "Act"), provides for the Federal preemption of any limitations on the exercise of due-on-sale clauses imposed by state law. Since the passage of the Act, mortgage lenders generally have assumed that they no longer need to concern themselves with potential legal challenges to the validity or enforceability of such clauses in their mortgage loan documents. However, this complacence may be misplaced: Mortgagors may still attempt to challenge-and perhaps limit or even avoid-the applicability, validity, or enforceability of due-on-sale provisions. This article discusses and analyzes those situations.
LAND CONTRACT VS. OUTRIGHT TRANSFER * Occasionally, "clever" borrowers (and their counsel) have attempted to use landcontract transfers as a purported method of avoiding due-on-sale clauses in effect in existing mortgages on the subject property This ploy again may become popular if interest rates again rise. See Mark E. Roszkowski, Drafting Around Mortgage Due-On-Sale Clauses: The Dangers of Playing Hide And Seek, 21 Real Prop. Prob. & Tr.J. 23, 29 (1986). Land Contract Sale Violates Due-on-sale Clause
Fortunately (at least for lenders) the law is settled that a land-contract transfer constitutes a violation of a due-on-sale clause. The final regulations issued in connection with the Act define a "sale or transfer" as the conveyance of real property "of any right, title or interest therein, whether legal or equitable...," which includes outright sales, deeds, installment sales, land contracts, contract for deed and any other method of conveyance of real property interests. 12 C.F.R. (sec)591.2(b)(2001). The final regulations also provide that the creation of a vendor's or vendee's interest in a contract for deed does not fall within the exceptions contained in 12 U.S.C. (sec)1701j-3(d), i.e., the limitation contained in 12 U.S.C. (sec)1701j-3(d) on the exercise of a dueon-sale clause in a residential real estate contract in the event of the creation of a secondary lien or encumbrance does not include a transfer of the property under a contract for deed. 12 U.S.C....