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8000 - Miscellaneous Statutes and Regulations
{{6-30-05 p.9535}}
PART 591PREEMPTION OF STATE DUE-ON-SALE LAWS
Sec. 591.1
Authority, purpose, and scope.
591.2
Definitions.
591.3
Loans originated by Federal savings associations.
591.4
Loans originated by lenders other than Federal savings associations.
591.5
Limitations on exercise of due-on-sale clauses.
591.6
Interpretations.
Authority: 12 U.S.C. 1464
and 1701j--3.
SOURCE: The provisions of this part 591 appear at 54 Fed. Reg.
49718, November 30, 1989, except as otherwise
noted.
§ 591.1 Authority, purpose, and scope.
(a) Authority. This part contains regulations issued
under section 5 of the Home Owners' Loan Act of 1933, as amended, and
under section 341 of the Garn-St Germain Depository Institutions Act of
1982, Pub. L. 97--320, 96 Stat. 1469, 1505--1507.
(b) Purpose and scope. The purpose of this permanent
preemption of state prohibitions on the exercise of due-on-sale clauses
by all lenders, whether federally or state-chartered, is to reaffirm
the authority of Federal savings associations to enforce due-on-sale
clauses, and to confer on other lenders generally comparable authority
with respect to the exercise of such clauses. This part applies to all
real property loans, and all lenders making such loans, as those terms
are defined in § 591.2 of this part.
[Codified to 12 C.F.R.
§ 591.1]
§ 591.2 Definitions.
For the purposes of this part, the following definitions apply:
(a) Assumed includes transfers of real property subject
to a real property loan by assumptions, installment land sales
contracts, wraparound loans, contracts for deed, transfers subject to
the mortgage or similar lien, and other like transfers. "Completed
credit application" has the same meaning as completed application
for credit as provided in
§ 202.2(f) of this title.
(b) Due-on-sale clause means a contract provision which
authorizes the lender, at its option, to declare immediately due and
payable sums secured by the lender's security instrument upon a sale
of transfer of all or any part of the real property securing the loan
without the lender's prior written consent. For purposes of this
definition, a sale or transfer means the conveyance of real
property of any right, title or interest therein, whether legal or
equitable, whether voluntary or involuntary, by outright sale, deed,
installment sale contract, land contract, contract for deed, leasehold
interest with a term greater than three years, lease-option contract or
any other method of conveyance of real property interests.
(c) Federal savings association has the same meaning as
provided in § 541.11 of this chapter.
(d) Federal credit union means a credit union chartered
under the Federal Credit Union Act.
(e) Home has the same meaning as provided in § 541.14
of this chapter.
(f) Savings association has the same meaning as provided
in § 561.43 of this chapter.
(g) Lender means a person or government agency making a
real property loan, including without limitation, individuals, Federal
savings associations, state-chartered savings associations, national
banks, state-chartered banks and state-chartered mutual savings banks,
Federal credit unions, state-chartered credit unions, mortgage banks,
insurance companies and finance companies which make real property
loans, manufactured-home retailers who extend credit, agencies of the
Federal government, any lender approved by the Secretary of Housing and
Urban Development for participation in any mortgage insurance program
under the National Housing Act, and any assignee or transferee, in
whole or part, of any such persons or agencies.
{{6-30-05 p.9536}}
(h) Loan secured by a lien on real property means a loan
on the security of any instrument (whether a mortgage, deed of trust,
or land contract) which makes the interest in real property (whether in
fee, or in a leasehold or subleasehold) specific security for the
payment of the obligation secured by the instrument.
(i) Loan secured by a lien on stock in a residential
cooperative housing corporation means a loan on the security of:
(1) A security interest in stock or a membership certificate
issued to a tenant stockholder or resident member by a cooperative
housing organization; and
(2) An assignment of the borrower's interest in the proprietary
lease or occupancy agreement issued by such organization.
(j) Loan secured by a lien on a residential manufactured
home, whether real or personal property, means a loan made
pursuant to an agreement by which the party extending the credit
acquires a security interest in the residential manufactured home.
(k) Loan originated by a Federal savings association or
other lender means any loan for which the lender makes the first
advance of credit thereunder, Provided, That such lender
then held a beneficial interest in the loan, whether as to the whole
loan or a portion thereof, and whether or not the loan is later held by
or transferred to another lender.
(l) Real property loan means any loan, mortgage, advance
or credit sale secured by a lien on real property, the stock or
membership certificate allocated to a dwelling unit in a cooperative
housing corporation, or a residential manufactured home, whether real
or personal property.
(m) Residential manufactured home has the same meaning
as provided in § 590.2(g)
of this chapter.
(n) Reverse mortgage means an instrument that provides
for one or more payments to a homeowner based on accumulated equity.
The lender may make payment directly, through the purchase of an
annuity through an insurance company, or in any other manner. The loan
may be due either on a specific date or when a specified event occurs,
such as the sale of the property or the death of the borrower.
(o) State means the several states, Puerto Rico, the
District of Columbia, Guam, the Trust Territory of the Pacific Islands,
the Northern Mariana Islands, the Virgin Islands, and American Samoa.
(p)(1) A window-period loan means a real property loan,
not originated by a Federal savings association, which was made or
assumed during a window-period created by state law and subject to that
law, which loan was recorded, at the time of origination or assumption,
before October 15, 1982, or within 60 days thereafter (December 14,
1982).
(2) The window-period begins on: (i) The date a state adopted a
law (by means of a constitutional provision or statute) prohibiting the
unrestricted exercise of due-on-sale clauses upon outright transfers of
property securing loans subject to the state law creating the
window-period, or the effective date of a constitutional or statutory
provision so adopted, whichever is later; or
(ii) The date on which the highest court of the state rendered a
decision prohibiting such unrestricted exercise (or if the highest
court has not so decided, the date on which the next highest appellate
court rendered a decision resulting in a final judgment which applies
statewide), and ends on the earlier of the date such state law
prohibition terminated under state law or October 15, 1982.
(3) Categories of state law which create window-periods by
prohibiting the unrestricted exercise of due-on-sale clauses upon
outright transfers of property securing loans subject to such state law
restrictions include laws or judicial decisions which permit the lender
to exercise its option under a due-on-sale clause only where:
(i) The lender's security interest or the likelihood of repayment
is impaired; or
(ii) The lender is required to accept an assumption of the
existing loan without an interest-rate change or with an interest-rate
change below the market interest rate currently being offered by the
lender on similar loans secured by similar property at the time of the
transfer.
[Codified to 12 C.F.R. § 591.2]
{{6-30-05 p.9537}}
[Section 591.2 amended at 67 Fed. Reg. 60554, September 26,
2002]
§ 591.3 Loans originated by Federal savings associations.
(a) With regard to any real property loan originated or to be
originated by a Federal savings association, as a matter of contract
between it and the borrower, a Federal savings association continues to
have the power to include a due-on-sale clause in its loan instrument.
(b) Except as otherwise provided in § 591.5 of this part with
respect to any such loan made on the security of a home occupied or to
be occupied by the borrower, exercise by any lender of a due-on-sale
clause in a loan originated by a Federal savings association shall be
exclusively governed by the terms of the loan contract, and all rights
and remedies of the lender and borrower shall at all times be fixed and
governed by that contract.
[Codified to 12 C.F.R.
§ 591.3]
§ 591.4 Loans originated by lenders other than Federal savings
associations.
(a) With regard to any real property loan originated by a lender
other than a Federal savings association, as a matter of contract
between it and the borrower, the lender has the power to include a due
on sale clause in its loan instrument.
(b) Except as otherwise provided in paragraph (c) of this section
and § 591.5 of this part, the exercise of due-on-sale clauses in
loans originated by lenders other than Federal savings associations
shall be governed exclusively by the terms of the loan contract, and
all rights and remedies of the lender and the borrower shall be fixed
and governed by that contract.
(c)(1) In the case of a window-period loan, the provisions of
paragraph (b) of this section shall apply only in the case of a sale or
transfer of the property subject to the real property loan and only if
such sale or transfer occurs on or after October 15, 1985:
Provided, That:
(i) With respect to real property loans originated in a state by
lenders other than national banks, Federal savings associations, and
Federal credit unions, a state may otherwise regulate such contracts by
state law enacted prior to October 16, 1985, in which case paragraph
(b) of this section shall apply only if such state law so provides; and
(ii) With respect to real property loans originated by national
banks and Federal credit unions, the Comptroller of the Currency or the
National Credit Union Administration Board, respectively, may otherwise
regulate such contracts by regulations promulgated prior to October 16,
1985, in which case paragraph (b) of this section shall apply only if
such regulation so provides.
(2) A lender may not exercise its options pursuant to a
due-on-sale clause contained in a window-period loan in the case of a
sale or transfer of property securing such loan where the sale or
transfer occurred prior to October 15, 1982.
(d)(1) Prior to the sale or transfer of property securing a
window-period loan subject to the provisions of paragraph (c) of this
section.
(i) Any lender in the business of making real property loans may
require any successor or transferee of the borrower to supply credit
information customarily required by the lender in connection with
credit applications, to complete its customary credit application, and
to meet customary credit standards applied by such lender, at the date
of sale or transfer, to the lender's similar loans secured by similar
property.
(ii) Any lender not in the business of making loans may require
any successor or transferee of the borrower to meet credit standards
customarily applied by other similarly situated lenders or sellers in
the geographic market within which the transaction occurs, for similar
loans secured by similar property, prior to the lender's consent to the
transfer.
(2) The lender may exercise a due-on-sale clause in a
window-period loan if:
(i) The successor or transferee of the borrower fails to meet the
lender's credit standards as set forth in paragraphs (b)(1)(i) and (ii)
of this section; or
(ii) Upon transfer of the security property and not later than
fifteen days after written request by the lender, the successor or
transferee of the borrower fails to provide
{{6-30-05 p.9538}}information requested by the lender
pursuant to paragraph (d)(1)(i) or (d)(1)(ii) of this section, to
determine whether such successor or transferee of the borrower meets
the lender's customary credit standards.
(3) The lender shall, within thirty days of receipt of a
completed credit application and any other related information provided
by the successor or transferee of the borrower, determine whether such
successor or transferee meets the customary credit standards of the
lender and provide written notice to the successor or transferee of its
decision, and the reasons in the event of a disapproval. Failure of the
lender to provide such notice shall preclude the lender from exercise
of its due-on-sale clause upon the sale or transfer of the property
securing the loan.
(4) The lender's right to exercise a due-on-sale clause pursuant
to this paragraph (d)(4) is in addition to any other rights afforded
the lender by state law regulating window-period loans with regard to
the exercise of due-on-sale clauses and loan assumptions.
[Codified to 12 C.F.R.
§ 591.4]
§ 591.5 Limitation on exercise of due-on-sale clauses.
(a) 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.
(b) 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) The creation of a lien or other encumbrance subordinate to
the lender's security instrument which does not relate to a transfer of
rights of occupancy in the property: Provided, That such
lien or encumbrance is not created pursuant to a contract for deed;
(ii) The creation of a purchase-money security interest for
household appliances;
(iii) A transfer by devise, descent, or operation of law on the
death of a joint tenant or tenant by the entirety;
(iv) The granting of a leasehold interest which has a term of
three years or less and which does not contain an option to purchase
(that is, either a lease of more than three years or a lease with an
option to purchase will allow the exercise of a due-on-sale clause);
(v) A transfer, in which the transferee is a person who occupies
or will occupy the property, which is:
(A) A transfer to a relative resulting from the death of the
borrower;
(B) A transfer where the spouse or child(ren) becomes an owner of
the property; or
(C) A transfer resulting from a decree of dissolution of
marriage, legal separation agreement, or from an incidental property
settlement agreement by which the spouse becomes an owner of the
property; or
(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.
(2) A lender shall not impose a prepayment penalty or equivalent
fee when the lender or party acting on behalf of the lender
(i) Declares by written notice that the loan is due pursuant to a
due-on-sale clause or
(ii) Commences a judicial or nonjudicial foreclosure proceeding
to enforce a due-on-sale clause or to seek payment in full as a result
of invoking such clause.
{{6-30-05 p.9539}}
(3) A lender shall not impose a prepayment penalty or equivalent
fee when the lender or party acting on behalf of the lender fails to
approve within 30 days the completed credit application of a qualified
transferee of the security property to assume the loan in accordance
with the terms of the loan, and thereafter the borrower transfers the
security property to such transferee and prepays the loan in full
within 120 days after receipt by the lender of the completed credit
application. For purposes of this paragraph (b)(3), a qualified
transferee is a person who qualifies for the loan under the
lender's applicable underwriting standards and who occupies or will
occupy the security property.
(4) A lender waives its option to exercise a due-on-sale clause
as to a specific transfer if, before the transfer, the lender and the
existing borrower's prospective successor in interest agree in writing
that the successor in interest will be obligated under the terms of the
loan and that interest on sums secured by the lender's security
interest will be payable at a rate the lender shall request. Upon such
agreement and resultant waiver, a lender shall release the existing
borrower from all obligations under the loan instruments, and the
lender is deemed to have made a new loan to the existing borrower's
successor in interest. The waiver and release apply to all loans
secured by homes occupied by borrowers made by a Federal savings
association after July 31, 1976, and to all loans secured by homes
occupied by borrowers made by other lenders after the effective date of
this regulation.
(5) Nothing in paragraph (b)(1) of this section shall be
construed to restrict a lender's right to enforce a due-on-sale clause
upon the subsequent occurrence of any event which disqualifies a
transfer for a previously-applicable exception under that paragraph
(b)(1).
(c) Policy considerations. Paragraph (b) of this
section does not prohibit a lender from requiring, as a condition to an
assumption, continued maintenance of mortgage insurance by the existing
borrower's successor in interest, whether by endorsement of the
existing policy or by entrance into a new contract of insurance.
[Codified to 12 C.F.R. § 591.5]
§ 591.6 Interpretations.
The Office periodically will publish Interpretations under section
341 of the Garn-St Germain Depository Institutions Act of 1982, Pub. L.
97--320, 96 Stat. 1469, 1505--1507, in the FEDERAL REGISTER in
response to written requests sent to the Secretary, Office of Thrift
Supervision, 1700 G Street, NW., Washington, D.C. 20552.
[Codified to 12 C.F.R. § 591.6]
[The page following this is 9543.]
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