Garn-St Germain Depository Institutions Act of 1982

This article was written by Samuel Phineas Upham

A due-on-sale clause can be tricky for home owners in special circumstances. Under a clause like that, the home owner must submit payment for the full amount of the loan whenever the title of the home changes hands. Until Garn–St Germain Depository Institutions Act of 1982, this practice was largely ruled illegal by courts, but the act changed some of those provisions and allowed for some important concessions.

What the Law Did

The law made it possible for people to transfer property into trusts without triggering a due-on-sale clause to occur. This would help shield the wealthy from risky situations and protect home owners from litigation against them. This was also good for home owners who wanted to be able to pass property onto an heir after death.

The act allowed banks to provide customers with an adjustable rate mortgage. These loans helped some consumers get lower interest rates up front, but it gave the banks the ability to adjust interest rates based on their credit obligations.

Controversy

The act was well-regarded at the time, but history views it as a potential stumbling block that helped propel the country into a financial crisis. These same critics argue that the Garn–St Germain Depository Institutions Act of 1982 forced banks to take on greater risk, even incentivizing the practice. It’s unclear if there is a direct link to the financial crisis, but the fact remains that many firms went sour because of these risky assets.

About the Author: Samuel Phineas Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Samuel Phineas Upham was working at Morgan Stanley in the Media & Technology group. You may contact Samuel Phineas Upham on his Facebook page.