A disposition clause in a mortgage contract gives the lender certain established rights when there is a transfer of ownership of the property. It can also be called a pay-per-sale clause. This is designed to limit the debtor’s right to transfer the property without the creditor’s permission. Depending on the actual wording of the clause, the disposition 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 may be construed as an obvious long-term lease, but is often also construed as covering a lease-to-purchase or land contract.
On 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 mortgage loans rarely have a disposition clause requiring an interest rate change, since the rate may already be adjusted under the original contract. However, an ARM loan may have other disposal provisions, such as an assumption fee. The lender can choose which options, if any, set forth in the contract it decides to enforce. This is true for most conventional loans. Although FHA and VA loans can’t technically have disposal clauses, they still try to restrict transfers in other ways, like reserving the right to approve a new borrower to take over an FHA or VA loan.
For conventional loans, states tried to restrict the application of maturity clauses to the sale. But in the landmark 1982 United States Supreme Court case of Fidelity Savings and Loan v. De La Cuesta, ET. At. Later that same year, the U.S. Congress passed the Share Insurance Flexibility Act expanding this preemption of state laws that limit expiration-on-sale clauses so that all lenders can now enforce expiration clauses for sale.
This law has given rise to a new problem that has not yet been adequately addressed. Lenders often have disposal clauses and prepayment clauses in the contract. Essentially, the lender could charge additional fees or penalties twice, once depending on the provisions of each clause. Several rules or regulations have been proposed that would eliminate this problem by forcing lenders to choose to enforce one or another of these clauses, but no new rules have yet been enacted. Of course, with increased competition in the mortgage market, lenders are not free to charge exorbitant fees. However, it is important for buyers and sellers (and others) to be aware that this situation may exist.
