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FAQ
Freq Asked about “subject to” transactions...
Is SUBTO LEGAL?
Obviously yes... here are suggestions feel free to research them further.
Search IRS, Fannie/Freddie docs, and HUD instructions on exactly HOW and why subto is legal in all 50 states. Enjoy some light writing on rulings
Court law ruling subto legal
The United States Supreme Court declared that it is not fraud to violate a due on sale if the borrower simply transfer title without saying anything to the lender - See Field V. Mans, 1995.S.Ct.207 (1995).
In 1995 the United States Supreme court had a bankruptcy case come before it (Field v Mans, 516 US59)
In which the creditor (lender) said it was "Fraud" for a debtor (borrower) to ask for permission to transfer a property after it was already transferred.
The court said the creditor (lender) could have easily checked public records, it could be considered misleading and fraudulent. In an opinion written by the court Justice Ginsburg quoted a conversation the court had with the creditor's lawyer in which he admitted that if the debtor had never said anything when he violated the due-on-sale clause, there would not have been a problem.
While this opinion is not a binding law, it indicates that at least one justice of the United States Supreme Court feels that violating a due-on-sale clause without informing the lender is not fraudulent.
Medovoi v American Savings & Loan, 89 Cal.App.3d 875 (1979) declared a lender could not sue the buyer for fraud for deliberately concealing a transfer, since he has no legal obligation to tell the lender of the transfer.
Many people are under the mistaken impression that transferring the title to a property secured by a "due on sale" mortgage is illegal. Most lay people confuse civil liability with criminal liability. To be "illegal" you must be in violation of a criminal law, code, or statute. There is no federal or state law which makes it a crime to violate a "due on sale" clause.
There is no "Due-On-Sale" jail.
An owner can legally deed away their interest in a property to another, but they will still be responsible for the repayment of the note and the mortgage.
The lender "due on sale" is a contractual right of the lender, it is not a law.
The Garn St. Germain Act is what allows banks to enforce the "Due on Sale" clause, but it also contains several exceptions that prevent the lender from enforcing the "Due on Sale" clause.
In respect to real property loans secured by a lien on residential real property which has 5 dwelling units or less, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation or on a residence, manufactured home, a lender may not exercise their option pursuant to a "Due on Sale" clause upon:
1. The creation of a lien or other encumbrance subordinate to the lender's security
instrument (the mortgage) which does not relate to a transfer of the rights of
occupancy in the property;
2. The creation of a purchase money security interest for household appliances;
3. A transfer by device, descent or operation of law on the death of a joint tenant or
tenant by the entirety;
4. The granting of a leasehold interest of less than three years containing an option
to purchase;
5. A transfer to a relative resulting from the death of a borrower;
6. A transfer of a spouse or children of the borrower when they become an owner
of the property;
7. A transfer resulting from decree o f dissolution of marriage, legal separation
agreement, or from an incidental property settlement agreement, by which the
spouse of the borrower becomes an owner of the property;
8. A transfer into an inter-vivos (during one's life) trust in which the borrower is and
remains a beneficiary and that does not relate to a transfer of rights of occupancy
in the property, or
9. Any other transfer or disposition described in regulations prescribed by the
Federal Home Loan Bank Board.
The Federal Home Loan Bank Board was disbanded in 1989 and was replaced by the Office of
Thrift Supervision. The Office of Thrift Supervision interprets (12 C.F.R. 591) to apply to owner
occupied homes.
The Garn St. Germain Act clearly states that it applies to residential one to four family homes.
There is no mention that the houses must be owner occupied.
