Acceleration Clauses A Real-World Guide to Garn-St. Germain Act - - PowerPoint PPT Presentation

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Avoiding "Due on Transfer" Provisions in Trusts: Structuring Transfers to Avoid Triggering Acceleration Clauses

A Real-World Guide to Garn-St. Germain Act Exemptions

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, MARCH 23, 2016

Presenting a live 90-minute webinar with interactive Q&A Jay A. Lang, Partner, Wilk Auslander, New York Marc Selden, J.D., LL.M. (Taxation), Counsel, Wilk Auslander, New York

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Avoiding "Due on Transfer" Provisions in Trusts

Presented by:

Marc Selden, J.D., LL.M. Jay Lang, J.D.

March 23, 2016

| TODAY’S SESSION

Structuring Transfers Into Trusts to Avoid Triggering Due on Sale Clauses A Real-World Guide to the Garn-

• St. Germain Act Exemption

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| AGENDA

• What is a “Due on Sale” Clause?
• Due on Sale Clause prior to Garn-St. Germain
• Due on Sale Clause post Garn-St. Germain
• STATUTE vs. REGULATIONS
• Drafting Revocable living trust documents to

hold encumbered real estate

• Structuring the transfer to avoid the

acceleration provision

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| WHAT IS A DUE ON SALE CLAUSE?

"Due-on-sale/due-on-transfer" provisions created to protect lenders’ interests

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| DEFINITION

Due on Sale Clause

A contractual provision in a mortgage which allows a lender to demand that the borrower immediately repay the entire mortgage loan if the borrower transfers any interest in the mortgaged property without the lender’s consent.

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| EXAMPLES

Due on Sale Clause

Residential Mortgage

[NY Single Family – Fannie Mae/Freddie Mac UNIFORM INSTRUMENT Form 3033] 18. Agreements about Lender’s Rights if the Property is Sold or Transferred. Lender may require Immediate Payment in Full of all Sums Secured by this Security Instrument if all or any part

• f the Property, or if any right in the Property, is sold or transferred

without Lender’s prior written permission. If Borrower is not a natural Person and a beneficial interest in Borrower is sold or transferred without Lender’s prior written permission, Lender also may require Immediate Payment in Full. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

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| EXAMPLES

Due on Sale Clause

Residential Deed of Trust

[California Single Family – Fannie Mae/Freddie Mac UNIFORM INSTRUMENT Form 3005]

• 18. Transfer of the Property or a Beneficial Interest in Borrower. As used in this

Section 18, “Interest in the Property” means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interests transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent

• f which is the transfer of title by Borrower at a future date to a purchaser.

If all or any part of the Property or any Interest in the Property 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, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

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| EXAMPLES

Commercial Mortgage Due on Sale Clause

(a) Mortgagor shall not cause or permit, directly or indirectly: (i) any part of the Property or any interest in the Property, to be conveyed, transferred, assigned, encumbered, sold or otherwise disposed of or (ii) any change, transfer, assignment or conveyance of any interest in Mortgagor

• r in the partners, or stockholders, or members or beneficiaries of, Mortgagor or of any of

Mortgagor’s Constituents, or (iii) any merger, reorganization, dissolution or other change in the

• wnership structure of Mortgagor or its manager (whether a managing member or non-member

manager) (collectively, a “Transfer” or “Transfers”). (b) (b) The prohibitions on transfer shall not be applicable to Transfers (i) as a result of the death of a natural person; (ii) in connection with estate planning by a natural person to a spouse, son or daughter or descendant of either, or to a stepson or stepdaughter or descendant of either or to trusts created for the benefit of any of the foregoing; (iii) of up to a ___ percent (__%) ownership interest in Mortgagor to key management personnel employed by Mortgagor in the management of the Property provided that _________________ and/or his spouse and/or his children (or a trust created for their benefit) retain collectively at all times at least an aggregate fifty-one percent (51%) ownership interest in Mortgagor and a controlling interest in the management of the Property (which in all instances shall include control over day-to-day management of the Property); and/or (iv) among presently existing members of Mortgagor provided that ______________ and/or his spouse and children (or a trust created for their benefit) retain at all times at least an aggregate of fifty-one percent (51%) ownership interest in Mortgagor and a controlling interest in the management of the Property (which in all instances shall include control over day-to-day management of the Property). The Transfers described in clauses (i) through (iv) of this subsection (b) are hereinafter collectively referred to as “Permitted Transfers”. 12

| HISTORY PRIOR TO GARN-ST GERMAIN

• Pre 1930’s – typical mortgage loan had a five (5) year term with a balloon

payment due at maturity – most loans did not exceed 50% of the value of the property

• Federal legislation enacted during Depression (FHA created in 1934) to

encourage banks to make 30 year self-amortizing mortgage loan to stimulate the economy

• Due on sale clauses first appear in mortgages due to the 30 year term
• Interest rates relatively low until 1970’s when rates began to rise

dramatically resulting in lenders enforcing due on sale provisions

• Borrowers successfully challenge due on sale clause in State Courts

(Wellenkamp v. Bank of America, 21 Cal 3d 943 (1978))

• Supreme Court overturns Wellenkamp in 1972 (Fidelity Federal Sav. &

Loan Assn. v. De La Cuesta, 102 S. Ct. 3014 (1982))

• Congress codifies enforceability of due on sale clause by enacting Garn-

St Germain Depository Institutions Act of 1982

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| HISTORY

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| ENTER GARN-ST GERMAIN

"An Act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans," "... a lender may not exercise its option pursuant to a due-on-sale clause upon ... 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

• ccupancy in the property[.]” (The Garn St. Germain Depository Institutions

Act of 1982, 12 U.S.C. 1701j-3(d)(8). Edwin Jacob “Jake” Garn Fernand Joseph St. Germain

The Garn-St. Germain Depository Institutions Act of 1982

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| DUE ON SALE POST GARN-ST GERMAIN

• Codified as federal law enforceability of due on sale

clause - preempted state law (legislative and judicial) that might afford protection to Borrower from exercise

• f due on sale clause
• Federal law named after congressmen Fernand,

Joseph St. Germain and Edwin Jacob “Jake” Garn

• The Act was meant to protect Lenders (not

homeowners) by ensuring that no state law could interfere with Lender’s right to exercise its due on sale provision

• Borrowers were provided nine (9) carve outs to

triggering the due on sale clause

• We will be discussing #8 – transfer into inter-vivos

trust

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| GARN-ST GERMAIN

§ 1701j-3: Preemption of due-on-sale prohibitions 12 U.S.C. § 1701j-3(b)

1)Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c) of this section, enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan. 2)Except as otherwise provided in subsection (d) of this section, the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract. 3)In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.

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| GARN-ST GERMAIN Definition of Due on Sale Clause (12 U.S.C. § 1701j-3(a)(1)

The term “due on sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property, loan is sold or transferred without the lender’s prior written consent.”

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| GARN-ST GERMAIN

TYPES OF LENDERS COVERED BY GARN-ST GERMAIN (12 U.S.C. § 1701j-3(a)(2)) (2) the term “lender” means a person or government agency making a real property loan

• r any assignee or transferee, in whole or in

part, of such a person or agency;

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| GARN-ST GERMAIN

TYPES OF LOANS COVERED BY GARN-ST GERMAIN

(12 U.S.C. § 1701j-3(a)(3)) (3) the term “real property loan” means a loan, mortgage, advance, or credit sale secured by a lien on real property, the stock allocated to a dwelling unit in a cooperative housing corporation, or a residential manufactured home, whether real or personal property;

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| EXCEPTIONS TO GARN-ST. GERMAIN

The Statute: 12 U.S.C. § 1701j-3(d)

“With respect to a real property loan secured by a lien

• n 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, a lender may not exercise its options pursuant to a due-on-sale clause upon—”

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| EXCEPTIONS

12 U.S.C. § 1701j-3(d)

(8) 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

22

| EXCEPTIONS

REGULATIONS § 591.5. Limitation on exercise of due-on-sale clauses, 12 C.F.R. § 591.5

§ 591.5 Limitation on exercise of due-on-sale clauses.

• General. Except as provided in §§ 591.4(c) and (d)(4) of this part, due-on-sale practices of Federal

savings associations and other lenders shall be governed exclusively by the Office’s regulations, in preemption of and without regard to any limitations imposed by state law on either their inclusion or exercise including, without limitation, state law prohibitions against restraints on alienation, prohibitions against penalties and forfeitures, equitable restrictions and state law dealing with equitable transfers. Specific limitations. With respect to any loan on the security of a home occupied or to be occupied by the borrower, (1) A lender shall not (except with regard to a reverse mortgage) exercise its option pursuant to a due-on-sale clause upon: (i) – (v) (Intentionally Omitted) (vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and

• ccupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to

provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy. 23

| CONTRADICTION

Statute:

§ 1701j-3(d)(8)

With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units . . . a lender many not exercise its option pursuant to a due-on-sale clause upon-(8) 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

• ccupancy in the property”

Regulations:

12 C.F.R. § 591.5(b)(1)(vi)

With respect to any loan on the security

• f a home occupied or to be occupied by

the borrower, (1) A lender shall not . . . Exercise its option pursuant to a due-on- sale-clause upon: (vi) A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and

• ccupant of the property, unless as a

condition precedent to such transfer, the borrower refuses to provided the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy.

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| FEDERAL COURT DECISION

Baldin v. Wells Fargo Bank, NA

(2013 WL 794086)

“This implementing regulation both narrows the Congressionally authorized exception and, arguably, renders a portion of the express statutory language as having no effect.”

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| FEDERAL COURT DECISION

Baldin v. Wells Fargo Bank, NA

(2013 WL 794086)

“The court finds the Board’s implementing regulation set forth in 12 C.F.R. § 591.5(b)(1)(vi) to be contrary to Congress’s clear intent and is ultra vires to § 1701j- 3(d)(8) of the act.”

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| STRUCTURING THE TRUST

Transfer into an Inter Vivos Trust

• Grantor must be beneficiary of the trust
• There cannot be any transfer of rights of
• ccupancy

27

| RECAP

• The “Due on Sale” clause is a provision in a mortgage that gives the lender/mortgagee the right to

demand full payment of the loan balance when the property is sold or transferred;

• Banks began enforcing “Due on Sale” clauses in mortgages in the 1970’s in response to rising

interest rates;

• Homeowners were not paying off their mortgages when they sold their homes. Instead, they were

selling their homes subject to the existing mortgage. Buyers were taking over payment of the existing low interest rate loans instead of taking out a new mortgage at the higher interest rates.

• State Courts (Wellenkamp) were ruling in favor of Borrowers. Supreme Court overturned

Wellenkamp in Fidelity v De lL Cuesta.

• The Garn-St Germain Depository Institutions Act of 1982 enacted to protect Lenders, codified the

enforceability of the “due on sale” clause, despite State law to the contrary. Nine (9) “carve outs” were also included in the Act to permit certain limited “transfers” made by borrowers.

• Carve out #8 which dealt with transfers into inter vivos trusts exempts “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.”

• The language in the Regulation is in conflict with the Statute, in that it exempts a transfer to an inter

vivos trust, but adds the requirement that the borrower occupy the property, and requires prior notice to the lender.

• Baldin v. Wells Fargo, N.A. addressed this conflict and ruled that the regulation was contrary to

Congress’s clear intent and is ultra vires to §1701j-3(d)(8) of the statute. Notwithstanding this case, the regulation remains in effect. 28

| OMEN FOR THE FUTURE?

§ 591.5 Limitation on exercise of due-on-sale clauses

The Devil’s in the details!

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| THANK YOU

We Appreciate Your Time & Attention

Jay Lang, Partner Marc Selden, Counsel Real Estate Practice Group Trusts & Estates and Tax Practice Groups jlang@wilkauslander.com mselden@wilkauslander.com

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