Due-on-Sale Clauses

Simple clause: “If borrower sells the Property without Lender’s consent, Lender may, at its option require immediate payment in full of all sums secured by this mortgage.” (Why is this optional with the lender?)

Fannie Mae-Freddie Mac Clause 18, page 1214 “If all or any part of the Property or any interest in it is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent....”

Objectives of the clause: To allow lender to underwrite the credit of the new owner. To allow lender to increase its yield on the funds if market rates have risen. How can the lender do this?... Call the loan due and relend the $; or Increase the interest rate; or Charge an “assumption fee.”

At the other extreme of the interest cycle: The 11 th District cost of funds index dropped below 2% in 2004!

Sec. 341, Garn-St. Germain Dep- ository Institutions Act of 1982: Notwithstanding any provision of the constitution or laws of any state to the contrary, a lender may enter into or enforce a contract containing a due-on- sale clause. (All conflicting state statutes and case law are preempted!)

Is the clause triggered by… Creation of junior mortgage? Foreclosure of junior mortgage? Sale by installment contract? Option to purchase?

Exceptions to enforceability (also preemptive, but apply only on 1-4-family dwellings) Junior lien Household appliance lien Lease < 3 years without option to purchase Transfer at death Transfer to spouse or kids Transfer at divorce Inter vivos trust if borrower is a beneficiary

Additional questions: Is a lender who waits too long (after getting notice of the transfer) estopped to accelerate? May the lender accelerate and also charge a prepayment fee? Must the lender release the original borrower when the lender approves a transfer of the property?

12 CFR §591.5(b)(3): A lender waives its option to exercise a due-on-sale clause if the lender and grantee agree in writing that the grantee will be obligated under the terms of the loan.... Upon such agreement, a lender shall release the existing borrower.

Concealment of Transfers: Does the borrower have a duty to notify the lender of a transfer? How might the lender discover the transfer? What remedies might the lender assert? Is concealment unethical if an attorney assists? Is concealment smart?

From a land development viewpoint, what’s the most important aspect of the clause to negotiate? Transfers of ownership shares in the entity (usually an LLC): Among family members Among related entities Minority ownership Try to think through likely transfers before signing the loan documents.