| The Garn St. Germain Act carves several exceptions | | | | not violated the due-on-sale (so long as there is no |
| in which the lender may not enforce the due-on-sale: | | | | change in occupancy). |
| With respect to a real property loan secured by a lien | | | | Let's say that you come across a seller who is willing |
| on residential real property containing less than five | | | | to give you title to his property. The only "glitch" is that |
| dwelling units, including a lien on the stock allocated to a | | | | the loan is not assumable because the mortgage has |
| dwelling unit in a cooperative housing corporation, or on | | | | a due-on-sale clause. Here's the process for getting |
| a residential manufactured home, a lender may not | | | | around it: |
| exercise its option pursuant to a due-on-sale clause | | | | STEP 1: Sammy Seller signs a trust agreement with |
| upon - | | | | you as trustee of his trust. Sammy is named as the |
| (1) the creation of a lien or other encumbrance | | | | "beneficiary" of the trust. |
| subordinate to the lender's security instrument which | | | | STEP 2: Sammy Seller transfers title to the trustee (no |
| does not relate to a transfer of rights of occupancy in | | | | violation of the due-on-sale clause). |
| the property; | | | | STEP 3: Sammy Seller quietly assigns his interest |
| (2) the creation of a purchase money security interest | | | | under the trust to you (similar to a transfer of stock in |
| for household appliances; | | | | a corporation). This assignment is not recorded in any |
| (3) a transfer by devise, descent, or operation of law | | | | public record. Sammy moves out and you move in. |
| on the death of a joint tenant or tenant by the entirety; | | | | STEP 4: You are now the beneficiary of the trust. |
| 4) the granting of a leasehold interest of three years | | | | Your trustee makes payments to the lender. |
| or less not containing an option to purchase; | | | | Keep in mind that the assignment of Sammy Seller's |
| 5) a transfer to a relative resulting from the death of a | | | | interest under the trust to you does trigger the |
| borrower; | | | | due-on-sale, but who is going to tell the lender? In |
| 6) a transfer where the spouse or children of the | | | | reality, the lender will discover the transfer of an |
| borrower become an owner of the property; | | | | interest in real estate in one of three ways: |
| (7) a transfer resulting from a decree of a dissolution | | | | 1) Change of name on the deed. Not likely, since |
| of marriage, legal separation agreement, or from an | | | | lenders don't readily have "spies" at the clerk's and |
| incidental property settlement agreement, by which the | | | | recorder's office; |
| spouse of the borrower becomes an owner of the | | | | 2) Different name on the check received for payment. |
| property; | | | | Not likely, since the bank officers are far removed |
| (8) a transfer into an inter-vivos trust in which the | | | | from the clerical workers who process payments; or |
| borrower is and remains a beneficiary and which does | | | | 3) Change of hazard insurance beneficiary. This is the |
| not relate to a transfer of rights of occupancy in the | | | | most common way a lender discovers a transfer of |
| property; or | | | | interest in the borrower's property. |
| (9) any other transfer or disposition described in | | | | If you notify your insurance carrier of a change in |
| regulations prescribed by the Federal Home Loan | | | | insurance beneficiary, the lender, who is also a named |
| Bank Board. | | | | beneficiary, receives a copy of the change. However, |
| (The Federal Home Loan Bank Board, which was | | | | if you transferred title into a land trust, the new |
| disbanded in 1989 and replaced by the Office of Thrift | | | | beneficiary under the insurance policy will be the |
| Supervision, takes the absurd position that the Act only | | | | trustee of the land trust. The lender will probably not |
| applies to owner-occupied homes. See 12 C.F.R. 591. | | | | object, since it will assume the seller has implemented |
| However, the clear language of Garn Act specifically | | | | an estate planning device. If the beneficiary of the trust |
| states that it applies to residential one-to-four family | | | | is assigned, the lender will not be notified since the |
| homes. There is no mention that it must be | | | | insurance beneficiary (the trustee) has not changed. |
| "owner-occupied." Although never enforced or | | | | This strategy is not much different than simply |
| challenged, such a direct conflict with the | | | | transferring title directly from seller to buyer (called |
| Congressional statute would probably be struck down | | | | taking a deed "subject to"). However, the chances of |
| in court as being "ultra vires"). | | | | the lender discovering the change of ownership are |
| A land trust is form of a revocable, living trust which is | | | | greatly reduced. This is especially true where the |
| exempted under the Garn Act. A land trust, like a living | | | | lender has contracted to use a "servicing" company to |
| trust, is create by two legal documents: | | | | deal with most facets of the loan. |
| 1) A trust agreement between the creator (called | | | | If you have had any experience with servicing |
| "grantor" in legal terms) of the trust and the trustee | | | | companies, you may know that most are so poorly |
| which defines the trust arrangement; and | | | | managed that they don't know which way is up (I |
| 2) A deed from the creator of the trust to the trustee. | | | | would wager that a survey of 100 servicing company |
| The trustee holds title for the benefit of the grantor (in | | | | employees would reveal that 98 of them wouldn't |
| this case, the grantor is also the "beneficiary"). If you | | | | know the meaning of a due-on-sale clause). |
| place title to your property into a land trust, you have | | | | |