What Is The Alienation Clause In A Mortgage Loan?
An alienation clause in a mortgage contract gives the lender certain stated rights when there is a move of ownership in the character. It may also be referred to as a due on sale clause. This is designed to limit the debtor’s right to move character without they creditor’s permission. Depending on the actual wording of the clause, alienation may be triggered by a move of title, by move of a meaningful interest in the character, or already by abandonment of the character. move of a meaningful interest can be construed as an obvious long-term lease, but often is also interpreted to cover a lease with option to buy or a land contract.
On sale or move of a meaningful interest in the character, the lender will often have the right to accelerate the debt, change the interest rate, or charge a hefty assumption fee. Adjustable rate mortgage loans seldom have an alienation clause that calls for an interest rate change since the rate can already be modificated under the original contract. An ARM loan may have other alienation provisions, however, such as an assumption fee. The lender may choose which, if any, options stated in the contract it chooses to enforce. This is true for most traditional loans. Although FHA and VA loans cannot, technically, have alienation clauses, they nevertheless attempt to restrict transfers in other ways, such as by reserving the right to approve a new debtor who will take over an FHA or VA loan.
For traditional loans, states tried to restrict enforcement of due on sale clauses. But in the 1982 landmark U.S. Supreme Court case of Fidelity Savings and Loan v. De La Cuesta, ET. Al., the Court ruled that federally chartered S & Ls could follow federal Office of Thrift Supervision rules allowing due on sale clauses, instead of following state laws that attempted to limit this right. Later that same year, the U.S. Congress passed the place Insurance Flexibility Act extending this right of pre-emption of state laws limiting due on sale clauses so all lenders can now enforce due on sale clauses.
This law has led to a new problem that has however to be addressed adequately. Lenders often have alienation clauses and prepayment clauses in contract. Essentially, the lender could collect additional fees or penalties twice, once under the provisions of each clause. Several rules or regulations have been hypothesizedv that would eliminate this problem by forcing lenders to choose to enforce one or the other of these clauses, but no new rules have however been enacted. Of course, with increased competition in the home mortgage market, lenders do not have free reign to charge expensive fees. It is important, nevertheless, for buyers and sellers (and others) to be aware that this situation may exist.