MY ANALYSIS OF THE GARN ACT AND THE FEDERAL REGULATIONS
Over the last few years there has been much debate about whether or not a transfer into a trust violates a lender’s due on sale clause. However as most of us already know, according to The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)(8),
“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 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”.
But some may ask, what about Title 12 of the Code of Federal Regulations, specifically §591.5(b)(1) (vi) which reads;
“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”.
Doesn’t it interpret the real or true meaning the legislators wanted to achieve when they enacted the “Garn Act”?
My answer is no.
You see §591.5 of Title 12 of the Code of Federal Regulations, is NOT an interpretation of the law (“Garn Act”), yet it is as effective as the law itself.
What exactly do I mean?
Well, according to § 1701j-3(d)(9) of the Act; any OTHER transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board (now known as The Office Of Thrift Supervision), are also exempt transfers within the meaning of the Garn Act.
Therefore §591.5 of Title 12 of the Code of “FEDERAL REGULATIONS”, in nothing more than an addition to and re-emphasis of some, but not all of the laws enacted by the “Garn Act”.
Now let’s compare U.S.C. 1701j-3(d)(8) with C.F.R.§591.5(b)(1) (vi).
First, the “Act” says 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 does not violate the due on sale clause.
But the “CFR” says 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, does not violate the due on sale clause.
Do they contradict each other? Again my answer is no.
You see, according to §591.5(b) of the CFR, it has “specific limitations”. And just what are those specific limitations?
Well, with respect to ANY loan on the security of a home OCCUPIED or TO BE OCCUPIED by the borrower, a lender shall not (except with regard to a reverse mortgage) exercise its option pursuant to a due-on-sale clause upon etc. etc. etc. happening.
Have you noticed that it specifically says “ANY LOAN” and “OCCUPIED”.
What about a personal loan secured by real property occupied by the borrower? Would such a loan fall within the meaning of the CFR?
Of course it would. As it is ANY loan.
Secondly, what about a REAL PROPERTY LOAN secured by a multi-family home (5+ residential dwelling units), which are owner occupied? Would such a loan fall within the meaning of the CFR?
Again it would, as it is ANY loan.
Now would a personal loan secured by real property occupied by the borrower fall within the scope of 1701j-(3)(d)(8) of the Garn Act?
No it would not, because the Act refers to REAL PROPERTY LOANS on residential dwellings of 4 units or less, exclusively.
Therefore I contend that §591.5 of Title 12 of the Code of “FEDERAL REGULATIONS”, is effective as LAW and does not “interpret” The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3.
It is none other than an addition to and re-emphasis of some, but not all of the laws enacted by the Act itself.
Darryl Evans
[ Edited by Darryle-CA on Date 05/07/2006 ]
Darryl,
Not disputing your analysis, but just clarifying definitions.
US Code - laws made by the U.S. Congress.
Code of Federal Regulations (CFR) - rules made by federal agencies and executive departments. The Code of Federal Regulations (CFR) is the codification of the general and permanent rules published by the executive departments and agencies of the Federal Government. It is divided into 50 titles that represent broad areas subject to Federal regulation.
Thanks Newkid, good point.
Wiz,
It is my opinion that the Garn St. Germain Act was NEVER interpretated. I believe that some federal agency used 1701j-3(d)(9) of the Act as a way of exempting any OTHER transfer or disposition which would later be described in regulations prescribed by the Federal Home Loan Bank Board (now known as The Office Of Thrift Supervision), via the CFR.
Ask yourself, is 1701j-3(d)(9) law and does it give federal agencies the “GREEN LIGHT” to create subsequent regulations which would be effective as law?
Darryl
[ Edited by Darryle-CA on Date 05/04/2006 ][ Edited by Darryle-CA on Date 05/07/2006 ]
Darryl-
I think you may have a basic misunderstanding of the legal process in this country. Laws are made through legislation, period. By elected representatives.
If a later rule making process goes beyond or contradicts the underlying legislation, this does not create a new law. It merely creates rules that you will have to follow unless you want to challenge them in court. If you can show in court (or in a quasi -judicial body, in my case the State Commission on Water Resource Management) that the rules go beyond or conflict with the underlying legislation, the rules will be overturned. Just be prepared to spend ten years and a lot of money.
Again, non-elected bodies such as the Office Of Thrift Supervision NEVER make laws. Laws are only made by elected officials. If there is a conflict between the two, the law will ALWAYS have precedence over the rules.
Chris
I have been following this thread and a question comes to mind.
The LAWS vs RULES argument.
Are these LAWS that we as investors need to follow, or are they RULES that the lenders need to follow?
If they are LAWS, then we as investors must be concerned about them.
If they are RULES, then the individuals/companies/agencies who are governed by these rules, must be concerned about them.
We all live by laws that affect everyone, but do we have to follow these rules or are they meant only for those who are governed by them.
If they were written for those that are governed by them, then we only have to worry about them as they affect our business when dealing with those who are governed by those rules.
What I mean, for example, and of course I am only applying simple logic, since I am not an attorney, is that if a lender is only allowed to lend $10.00 on a Tuesday, then can we only borrow $10.00 on Tuesday?
Do these rules affect the way we do business, of course they may and this is why we all need to be informed.
In that example is it against the law/rules for us to obtain $10.00 on a Friday? I don’t think so, because the rule only applies to the lender in lending that $10.00 only on a Tuesday; and not us borrowing on a Friday.
Could the lender get in trouble for lending on any day but Tuesday…possibly.
Could we as the investor get in trouble for borrowing on any day but Tuesday, I don’t think so because that lending rule only applies to the lender and not to the borrower.
Of course in any situation, IF it ever got to court, a Judge could decide either way depending upon which way the wind blew.
John (LV)
Ypochris,
I do understand the legal process. I guess what I was trying to say is that, 1701j-(3)(d)(9) makes regulations prescribed via the CFR, effective as law.
jfmlv1950,
I think you answered your own question.
It was meant to do that.
As long as you can show a deed, you can.
sweet
Why is it so important that you sell to an investor? No investor I know would buy at 90% LTV nor would they buy a 180k house that they can nonly get 1k monthly rent. I believe you are going to have to sell to someone who is going to owner occupy the house.
Before you buy any houses from this group you should have your own independent appraisal and your own independent inspection and repair estimate. Then you should do the math with your purchase costs, your three closing costs, your holding costs, your repair costs, etc. My experience with these groups are that you will be lucky to come out breaking even. Not a bad way to break into the business and get an education, but I would not count on making any money from this deal.
Hundredfold,
Beware of TCI rule #7.
Panic Films,
Thanks so much for all of that informaion. It really helps. I appreciate it.
Still awaiting replies of viewers
Hi Wiz,
One more thing...Who would the trustee be in the case I put it in a Land Trust?
When creating a simple single beneficiary land trust for just the purpose of shielding ownership from public view, one can legally name just about any one or any entity he/she would choose to function as a trustee. However, when more than one beneficiary (i.e., a trust involving other parties with disparate interests and objectives) is involved, there are severe drawbacks to using any entity other than a third-party, non-profit, corporate trustee.
Da Wiz
mtnwizard,
how do you protect seller? Include both you and seller as the beneficiary of the land trust? Thx.
Thanks so much
mtnwizard,
When you sell the property, do you have to give 10% profit to seller? If you have no intention to do, what if the seller sues you? Thx.
The contract specifies that upon termination, his mtg is paid off and he receives his equity in full. Once that happens, he simply assigns his 10% to you by prior written agreement.
Da Wiz
The seller sold the home, even though the loan is still in place. Some lenders will credit them 100%, they just have to look, some will go 75%, some will give none since the loan is still in their name. The sellers can find one ff they look.
What is a triple net lease?
tripple net lease is a term used in commercial leasing where the tenant pays all expenses.
Quote:
On 2006-05-24 21:04, tom7w wrote:
What is a triple net lease?
I am interested in this as well. [ Edited by futureRX on Date 05/23/2006 ]
I get title insurance both from my RE attorney and my normal title company on Subject-2 with out a problem.
What about a case where I took a property Sub To - and got a Warranty Deed and no title ins. Am I going to have a problem selling. ie, the buyer obtaining title ins?
Thanks for your answers.
The current mortgage would show up on the exception page. No big deal, you are buying the insurance for yourself and you know that there is an existing mortgage. What if someone wanted to lend you money for a 2nd mortgage and he wanted to get a lenders policy? It would certainly meantion the first mortgage on the exception page and the title company would certainly sell the morgagee a title policy. I do not see the difference.
Da Wiz - how much does your trustee charge - what is his pay schedule? When you have a closing do you have to FedEx the papers to him? Is the proceeds check from the closing written to your trustee or to the benficial interest?
KCorsini,
Hello. Because the IRS considers your tenant an owner for tax purposes (re: IRC 163(h)4(D, most lenders will allow the buyer to refi rather than have to obtain a purchase loan. Lenders will vary as to the length of seasoning required. Good luck.
Da Wiz
Thanks for the responses .... very helpful!
One more thought - Is there a minimum amount of time a Land Trust can/should be in place before selling? Ideally, I would just like the Land Trust to be in existance for 6 months before title passes completely to the buyer.
Thanks again for the input![ Edited by kcorsini on Date 05/09/2006 ]
KCorsini,
There is no minimum time a property can be held in Trust. I use Simple Land Trusts to facilitate "Joint Venture / Partnership" arrangements. We have a Seller place the property in the Trust one day and sell it to one of the Beneficiaries or other party the next.
Da Wiz