An alienation clause in a mortgage contract gives the lender certain stated rights when there is a transfer of ownership in the property. It can also be called a sell-by clause. This is designed to limit the debtor’s right to transfer property without the creditor’s permission. Depending on the actual wording of the clause, the alienation may be triggered by a transfer of title, by the transfer of a significant interest in the property, or even by abandonment of the property. The transfer of a significant interest can be interpreted as an obvious long-term lease, but is often also interpreted as covering a lease with an option to buy or a land contract.

In the sale or transfer of a significant interest in the property, the lender will often have the right to accelerate the debt, change the interest rate, or charge a hefty assumption fee. Adjustable-rate home loans rarely have an alienation clause that requires a change in the interest rate, since the rate may already be adjusted based on the original contract. However, an ARM loan may have other disposition provisions, such as an assumption fee. The lender can choose what options, if any, set out in the contract it decides to enforce. This is true for most conventional loans. Although FHA and VA loans cannot technically have disposition clauses, they still attempt to restrict transfers in other ways, such as reserving the right to approve a new borrower who will take over an FHA or VA loan.

For conventional loans, the states tried to restrict compliance with maturity clauses on sale. But in the landmark 1982 United States Supreme Court case of Fidelity Savings and Loan v. De La Cuesta, ET. Al., The Court ruled that federally authorized S&L could follow the federal rules of the Office of Savings Supervision that allow for expiration clauses for sale, instead of following state laws that attempted to limit this right. Later that year, the U.S. Congress passed the Deposit Insurance Flexibility Act that extends this preemptive right of state laws limiting maturity clauses so that all lenders can now enforce the clauses. due date.

This law has led to a new problem that has not yet been adequately addressed. Lenders often have disposition clauses and prepayment clauses in the contract. Basically, the lender could charge additional fees or penalties twice, once according to the provisions of each clause. Various rules or regulations have been proposed that would eliminate this problem by forcing lenders to choose to enforce one or the other of these clauses, but new rules have yet to be enacted. Of course, with increased competition in the home mortgage market, lenders are not at liberty to charge exorbitant fees. However, it is important that buyers and sellers (and others) are aware that this situation may exist.