Understanding the Garn-St Germain Act for Probate: Implications for Florida Estate and Mortgage Matters

When it comes to probate matters in Florida, it is crucial to have a clear understanding of the Garn-St Germain Act, a federal law that significantly impacts estate and mortgage issues. This act specifically addresses the enforcement of “due on sale” clauses in mortgages and has important implications for the administration of estates during probate. By comprehending the act’s provisions, executors and beneficiaries can navigate mortgage-related challenges more effectively.

The Basic Concepts

1. The mortgage follows the note and runs with the Property as a secured lien.
2. The beneficiaries of the Property are not personally liable to pay the note. If unpaid the bank as a secured creditor may be able to foreclose the property.
3. A due on sale or acceleration provision makes the unpaid loan balance immediately due.

Federal law prohibits the acceleration of mortgages or due on sale clauses in certain circumstances. This post will examine the federal law and apply it to Florida Probate proceedings.

Federal Law Protections- The Garn-St Germain Act

Definitions

Before delving into the details, let’s begin with key definitions related to the Garn-St Germain Act:

• Due-on-sale clause: A contractual provision that permits lenders to demand full payment of a mortgage loan when any part or the entire property securing the loan is sold or transferred without the lender’s prior written consent.
• Lender: An individual, institution, or government agency that provides real property loans, including assignees or transferees.
• Real property loan: A loan, mortgage, advance, or credit sale secured by a lien on real property, cooperative housing corporation dwelling unit stock, or residential manufactured homes (whether classified as real or personal property).
• Residential manufactured home: A manufactured home used as a residence, as defined in section 5402(6) of title 42.
• State: Encompasses all U.S. states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, American Samoa, and the Trust Territory of the Pacific Islands.

Loan Contract and Terms

The Garn-St Germain Act provides provisions that significantly impact loan contracts and the execution or enforcement of due-on-sale options. These aspects are particularly relevant in the context of probate. Key points to consider are:

• Lenders have the authority to enter into or enforce loan contracts that contain due-on-sale clauses for real property loans, subject to subsection (c).

• The terms of the loan contract exclusively govern the exercise of the lender’s option under a due-on-sale clause, fixing the rights and remedies for both lenders and borrowers.

• Lenders are encouraged to allow assumption of real property loans at the existing contract rate or a rate averaging between the contract and market rates. This provision ensures flexibility and may be beneficial for beneficiaries of an estate during probate.

State Prohibitions and Federal Regulation

Understanding state prohibitions and federal regulations is crucial for probate purposes under the Garn-St Germain Act. Here are key considerations:

• If a real property loan contract was made or assumed during the period when a state adopted a constitutional provision or statute prohibiting due-on-sale clauses, subsection (b) provisions only apply to transfers occurring after three years from October 15, 1982.

• A state can regulate such contracts through a state law enacted by the state legislature within the three-year period. This regulation applies to real property loans originated in the state by lenders other than national banks, federal savings and loan associations, federal savings banks, and federal credit unions.

• The Comptroller of the Currency or the National Credit Union Administration Board can regulate such contracts for real property loans originated by national banks or federal credit unions, respectively. These regulations must be issued within the three-year period.

Exemption of Specified Transfers or Dispositions

The Garn-St Germain Act provides exemptions for certain transfers or dispositions of real property loans secured by a lien on residential real property. These exceptions play a crucial role in probate administration. The following transfers prevent lenders from exercising their option under a due-on-sale clause:

1. The creation of a subordinate lien or encumbrance unrelated to a transfer of occupancy rights in the property.

2. The creation of a purchase money security interest for household appliances.

3. Transfers occurring due to the death of a joint tenant or tenant by the entirety.

4. The granting of a leasehold interest of three years or less without an option to purchase.

5. Transfers resulting from the death of a borrower to a relative.

6. Transfers where the borrower’s spouse or children become owners of the property.

7. Transfers resulting from a dissolution of marriage decree, legal separation agreement, or property settlement agreement where the spouse becomes an owner.

8. Transfers to an inter vivos trust where the borrower remains a beneficiary and the transfer doesn’t relate to occupancy rights.

9. Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

That means that this Federal law will prevent acceleration or due on sale provisions from kicking in if an Estate proceeding transfers the subject property from a decedent to a relative. That is the case for most but not all Estate proceedings. So what happens if you’re a beneficiary and not related to the decedent but inheriting a house with a secured mortgage? The simple answer is that this federal law may not protect you from acceleration. Nonetheless in our experience most banks will work with beneficiaries who stay proactive. If your property has a mortgage its always advisable to reach out to the mortgage company to seek a temporary pause on the loan. Finally remember that beneficiaries who acquire title take the ownership subject to the existing lien, thus even if due on sale or acceleration clauses can apply there is typically enough time for a refinance or new loan.

Navigating Gain-St Germain Transfers in Probate

When dealing with probate matters, particularly transfers of real estate subject to a mortgage, the Garn-St Germain Act provides crucial guidance. This act allows for smoother transfers of property and protects beneficiaries during the probate process. However, it is important to proceed with caution to avoid unexpected mortgage complications. Seeking the advice of an attorney experienced in probate and mortgage matters is highly recommended. By doing so, you can ensure that your estate plan adheres to the relevant provisions of the Garn-St Germain Act and successfully accomplishes your probate goals related to real property.

We probate cases throughout the state of Florida. If you have any Estate related issues concerning a mortgage or any other probate related issue we would love to help you. Give us a call for a free consultation.

Brice Zoecklein, Esq.

813-501-5071

Disclaimer:   The information contained in this blog/website is for informational purposes only and provides general information about the law but not specific advice.  This information should not be used as a substitute for advice from competent legal counsel as laws change and the facts in your specific case need to be analyzed. 

OTHER RESOURCES:

Here is the full text from the Federal regulation below. Also some case law in Florida highlighting this exemption:

Freedom Savings v. LaMonte, 448 So.2d 51, (Fla. 2^nd DCA 1984).

12 U.S.C.A. § 1701j-3

§ 1701j-3. Preemption of due-on-sale prohibitions

Currentness

(a) Definitions

For the purpose of this section–

(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;

(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;

(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; and

(4) the term “residential manufactured home” means a manufactured home as defined in section 5402(6) of Title 42 which is used as a residence; and

(5) the term “State” means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, American Samoa, and the Trust Territory of the Pacific Islands.

(b) Loan contract and terms governing execution or enforcement of due-on-sale options and rights and remedies of lenders and borrowers; assumptions of loan rates

(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), 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), 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.

(c) State prohibitions applicable for prescribed period; subsection (b) provisions applicable upon expiration of such period; loans subject to State and Federal regulation or subsection (b) provisions when authorized by State laws or Federal regulations

(1) In the case of a contract involving a real property loan which was made or assumed, including a transfer of the liened property subject to the real property loan, during the period beginning on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such State has rendered a decision (or if the highest court has not so decided, the date on which the next highest appellate court has rendered a decision resulting in a final judgment if such decision applies State-wide) prohibiting such exercise, and ending on October 15, 1982, the provisions of subsection (b) shall apply only in the case of a transfer which occurs on or after the expiration of 3 years after October 15, 1982, except that–

(A) a State, by a State law enacted by the State legislature prior to the close of such 3-year period, with respect to real property loans originated in the State by lenders other than national banks, Federal savings and loan associations, Federal savings banks, and Federal credit unions, may otherwise regulate such contracts, in which case subsection (b) shall apply only if such State law so provides; and

(B) the Comptroller of the Currency with respect to real property loans originated by national banks or the National Credit Union Administration Board with respect to real property loans originated by Federal credit unions may, by regulation prescribed prior to the close of such period, otherwise regulate such contracts, in which case subsection (b) shall apply only if such regulation so provides.

(2)(A) For any contract to which subsection (b) does not apply pursuant to this subsection, a lender may require any successor or transferee of the borrower to meet customary credit standards applied to loans secured by similar property, and the lender may declare the loan due and payable pursuant to the terms of the contract upon transfer to any successor or transferee of the borrower who fails to meet such customary credit standards.

(B) A lender may not exercise its option pursuant to a due-on-sale clause in the case of a transfer of a real property loan which is subject to this subsection where the transfer occurred prior to October 15, 1982.

(C) This subsection does not apply to a loan which was originated by a Federal savings and loan association or Federal savings bank.

(d) Exemption of specified transfers or dispositions

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 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 which does not relate to a transfer of rights of occupancy in the property;

(2) the creation of a purchase money security interest for household appliances;

(3) a transfer by devise, 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 three years or less not containing an option to purchase;

(5) a transfer to a relative resulting from the death of a borrower;

(6) a transfer where the spouse or children of the borrower become an owner of the property;

(7) a transfer resulting from a decree of a 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 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; or

(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

(e) Rules, regulations, and interpretations; future income bearing loans subject to due-on-sale options

(1) The Federal Home Loan Bank Board, in consultation with the Comptroller of the Currency and the National Credit Union Administration Board, is authorized to issue rules and regulations and to publish interpretations governing the implementation of this section.

(2) Notwithstanding the provisions of subsection (d), the rules and regulations prescribed under this section may permit a lender to exercise its option pursuant to a due-on-sale clause with respect to a real property loan and any related agreement pursuant to which a borrower obtains the right to receive future income.

(f) Effective date for enforcement of Corporation-owned loans with due-on-sale options

The Federal Home Loan Mortgage Corporation (hereinafter referred to as the “Corporation”) shall not, prior to July 1, 1983, implement the change in its policy announced on July 2, 1982, with respect to enforcement of due-on-sale clauses in real property loans which are owned in whole or in part by the Corporation.

(g) Balloon payments

Federal Home Loan Bank Board regulations restricting the use of a balloon payment shall not apply to a loan, mortgage, advance, or credit sale to which this section applies.