18 USC Sec. 1010 makes it a crime to make any false statement in regard to a loan insured by HUD. This law has been used to prosecute borrowers who lie on their loan applications for FHA loans. It has never been used to prosecute due-on-sale violators. Remember that the due-on-sale is triggered by "transfers" other than a deed. A lease of three years or more, a lease/option of any term, a contract for deed (except on VA-guaranteed loans), moving out of the property within the first year and other transactions also give the lender the option to call the loan due. Thus hundreds of thousands of borrowers across the country could be subject to prosecution. Furthermore, their real estate agents, attorneys, insurance agents, title companies and others would have to be indicted as conspirators. Not likely!

Of course, all of this discussion of "fraud" requires a material misstatement of fact in the first place. According to the United State Supreme Court, if a borrower simply transferred title to you without making any statements to the lender, then there can be no fraud. See Field v. Mans, 1995, S.Ct. 207 (1995).

Thus, beyond the legalities, "ethics" becomes a matter of opinion. In other words, is it dishonest? Attorney Robert Bruss, a well-respected nationally syndicated real estate columnist, also suggests the practice of silent "subject-to" transfers. I doubt that hundreds of newspapers across the country would carry his column if readers thought his advice was "unethical". If you think that concealing a due-on-sale transfer from a lender is dishonest, consider the following lender practices.

Yield spread premium "kick-backs" recently declared RESPA violations by at least three federal courts. (See, e.g., Cu/pepperv./n/and Mortgage, 132F.3d692 (1998).

$100 "processing" fees for loan payoff declared unenforceable by a Florida Federal District Court in Sand/in v. Shapiro 95-213. CivFtM.17D (M.D. F/a 1996).

"Stalling" for loan payoff statements to obtain additional interest (a common practice by several lenders in my personal experience in closing scores of loan transactions).

My point here is not to convince you that banks are evil. Like the Godfather says, "It's just business." Taking a property in violation of a due-on-sale. it's also "just business". It makes more financial sense in many cases than plunking down a 20 percent down payment, paying loan costs and signing personally on a note. It also makes more financial sense for a lender to ignore a due-on-sale violation than to incur costs in foreclosing a property. This is especially true if the loan is already in default and there is little equity in the property. In many cases, lenders today are not concerned with violations of due-on-sale clauses on performing loans. There is no financial incentive for a lender to enforce a due-on-sale provision on a performing loan if market interest rates aren't any higher. A lender does not want non-performing loans in its portfolio-it simply looks bad. This trend will probably continue so long as interest rates remain within a few percentage points of existing loans.

Posted: 11/6/2000 6:56:15 PM