Due-on-sale Law as Preempted by the Garn-st. Germain Act
| Publication year | 1983 |
| Pages | 591 |
1983, April, Pg. 591. Due-On-Sale Law as Preempted By the Garn-St. Germain Act
On October 15, 1982, the Garn-St. Germain Depository Institutions Act of 1982 ("Act") was signed into law by President Reagan. This lengthy piece of federal legislation concerns itself primarily with the powers of banks and thrift institutions; but one short part of the Act is of special interest to real estate practitioners, since it has the effect of preempting state law on the enforcement of due-on-sale clauses. Its purpose and implications are discussed in this article.
The term "due-on-sale" is commonly used as a contract provision authorizing a lender of a loan secured by real property, at its option, to declare due and payable sums described in the lender's security instrument if all or any part of the property, or an interest therein, is sold or transferred without the lender's prior written consent. During the past six years, the prevalence and effect of due-on-sale clauses have become extremely controversial and have been the subject of numerous state and federal judicial determinations, as well as legislative restrictions.
The effect of court decisions and restrictive legislation led to a trend viewed by the lending industry as a threat to the security interests of lenders. In 1976, the Federal Home Loan Bank Board ("FHLBB") felt that restrictions on a savings and loan association's ability to accelerate a loan upon transfer of the security would have adverse effects upon the financial security of the savings and loan due to loss of cash flow, loss of net income and access to secondary mortgage markets.(fn1) The FHLBB therefore issued a regulation effective July 31, 1976, governing due-on-sale clauses,(fn2) which expressly affirmed the continued right of federal associations to exercise due-on-sale clauses, notwithstanding restrictive state laws.(fn3)
In mid-1982, in Fidelity Savings & Loan Association v. De La Cuesta,(fn4) the United States Supreme Court upheld the right of a federally chartered savings and loan association in California to include and enforce a due-on-sale clause pursuant to the FHLBB 1976 regulation. In so holding, the Court found that Congress intended to preempt state due-on-sale law, at least with respect to federally chartered thrift institutions. Additionally, the National Credit Union Administration ("NCUA") Board promulgated a preemptive regulation for federally chartered credit unions in 1982 and the Comptroller of the Currency ("COC") issued proposed preemptive regulations for national banks in 1981.(fn5) However, the COC has never taken final action on the proposed preemptive regulations.
In Colorado, the validity of due-on-sale clauses was upheld by the Colorado Supreme Court in 1973 in Malouff v. Midland Federal Savings & Loan Association.(fn6) Subsequently, the Colorado Court of Appeals has upheld enforcement of the due-on-sale clause upon the conveyance of real property by use of an installment land contract.(fn7)
It has also held that federal regulation preempts the area of due-on-sale restriction in Colorado and precludes the ceiling on interest rate increases on assumptions of mortgages to federally chartered savings and loan associations.(fn8)
Effective July 1, 1975, the Colorado Legislature enacted C.R.S. 1973, § 38-30-165. This statute provides that a lender invoking a due-on-sale clause may not accelerate or mature the indebtedness secured by real estate on account of the sale or transfer of such real estate or on account of the assumption of such indebtedness. This is true unless it is reasonably determined by the owner of the security interest that the transferee is financially incapable of retiring the indebtedness according to its terms, based upon standards normally used by persons in the business of making loans on real estate in the same or similar circumstances.(fn9) The statute also prohibits a lender from increasing the interest rate more than one percent per annum above the existing interest rate of the indebtedness upon assumption or from modifying the indebtedness for the benefit of the holder of the security interest on account of the sale or transfer of real estate or on account of the assumption of the indebtedness.(fn10)
Congress found that due-on-sale clauses result in inflated prices for homes encumbered by assumable loans and encourages lenders to charge premiums for new loans in states which restrict due-on-sale clauses, because earnings from the new loans must offset older loans which cannot be turned over when due-on-sale clauses are unenforceable. Thus, restrictions on due-on-sale clauses were determined generally to help existing home buyers to the disadvantage of new home buyers.(fn11) Congress also found that due-on-sale restrictions encouraged risky lending practices, outside the realm of traditional mortgage credit delivery systems, which intensifies default risks.(fn12)
Section 341(b)(1) of the Act(fn13) clearly preempts "any provision of the constitution or laws (including the judicial decisions) of any State to the countrary. . . ." This preemption applies to all real property loans(fn14) made by all lenders (whether institutional or individual), except for loans originated or assumed during the "Window Period," discussed below, and except for certain "Permitted Transfers."
Although Congress intended to preempt state efforts to regulate the enforcement of due-on-sale provisions in real estate loans, a total federal preemption would "have an unfair...
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