Avoiding Due on Transfer Provisions in Trusts: Structuring...
Transcript of Avoiding Due on Transfer Provisions in Trusts: Structuring...
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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
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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
of 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
of 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
or 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
ownership 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”.
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| 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
occupancy 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
of 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
or any assignee or transferee, in whole or in
part, of such a person or agency;
19
| 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;
20
| 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 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, 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
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| 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
occupant 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
occupancy in the property”
Regulations:
12 C.F.R. § 591.5(b)(1)(vi) With respect to any loan on the security
of 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
occupant 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.
24
| 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.”
25
| 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.”
26
| STRUCTURING THE TRUST
Transfer into an Inter Vivos Trust
• Grantor must be beneficiary of the trust
• There cannot be any transfer of rights of occupancy
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!
29
| THANK YOU
We Appreciate Your Time & Attention
Jay Lang, Partner Marc Selden, Counsel
Real Estate Practice Group Trusts & Estates and Tax Practice Groups
[email protected] [email protected]
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