Due-on-Sale Clause, Revocable Trust, and Garn-St Germain
In 2018, Priya borrowed $350,000 from National Bank, secured by a first mortgage on her home. The mortgage contains a standard due-on-sale clause. In 2021, Priya executed a deed transferring the home into the “Priya Family Revocable Living Trust.” Priya is the sole trustee and the sole beneficiary during her life, and the trust gives her the right to occupy the home. She did not notify the bank. In 2022, Priya amended the trust to add her adult son, Dev, as a 50% beneficiary; Priya remained trustee and retained the right to live there. In 2023, the bank discovered the 2021 transfer, demanded immediate repayment of the entire $310,000 balance, and threatened foreclosure. Priya also has a $60,000 HELOC secured by a second deed of trust. Priya argues that the transfer is exempt under the Garn-St Germain Act. The bank argues that the 2022 amendment and the HELOC violate the due-on-sale clause. The mortgage documents incorporate the federal due-on-sale regulations.
1. Is the 2021 transfer into the revocable living trust a transfer that permits the bank to accelerate the mortgage under the due-on-sale clause?
Read the worked answer
No, not on these facts. The Garn-St Germain Act preempts contrary state law and permits due-on-sale clauses, but it also lists transfers that cannot trigger acceleration. One exemption is 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. Priya transferred the home into her own revocable trust, remained sole trustee and sole beneficiary, and kept the right to occupy. That fits the exemption. The bank cannot accelerate solely because of the 2021 deed into the trust.
2. Did the 2022 amendment adding Dev as a 50% beneficiary destroy the exemption? What if Priya had given up her beneficial interest entirely?
Read the worked answer
Adding Dev probably does not destroy the exemption. The federal rule requires that the borrower “is and remains a beneficiary”; it does not require the borrower to be the sole beneficiary. Priya remained a beneficiary and retained occupancy, so the trust transfer still fits the exemption. The result would change if Priya gave up her beneficial interest entirely or transferred occupancy rights to Dev, because then the trust would no longer be one in which the borrower is and remains a beneficiary. A transfer of the home outright to Dev during Priya’s life would also be different: the Garn-St Germain exemption for transfers to relatives generally applies to transfers resulting from death or divorce, not a lifetime gift.
3. Does the $60,000 HELOC trigger the first mortgage’s due-on-sale clause? How should the bank’s threat be evaluated?
Read the worked answer
The HELOC likely does not trigger the first mortgage’s due-on-sale clause. A due-on-sale clause is aimed at transfers of title or beneficial ownership, not at granting a subordinate lien. In a lien-theory state, a second deed of trust is an encumbrance, not a conveyance of the borrower’s title. Unless the first mortgage defines “transfer” to include further encumbrances, the HELOC alone is not a sale or transfer. The bank’s threat is therefore weak as to both the trust transfer and the HELOC. The bank could enforce the HELOC’s own due-on-sale or acceleration terms if they exist, but that is a separate contract issue.