Opinion ID: 2206398
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Heading: Does subsection 535.2(4), The Code 1979, prohibit the Association from accelerating the loan balance under its mortgage due-on-sale clause?

Text: Subsection 535.2(4), The Code 1979, in its entirety reads: Notwithstanding the provisions of subsection 3, with respect to any agreement which was executed prior to August 3, 1978, and which contained a provision for the adjustment of the rate of interest specified in that agreement, the maximum lawful rate of interest which may be imposed under that agreement shall be nine cents on the hundred by the year, and any excess charge shall be a violation of section 535.4. [2] (Emphasis added.) Trial court's ruling was based on its finding that Paragraph 17 of the mortgage agreement has a provision for the adjustment of interest inasmuch as Paragraph 17 states, in part, `. . . that the interest payable on the sums secured by this mortgage shall be at such rate as Lender shall request.' The language of subsection 535.2(4) restricts its application. It only applies to agreements (1) that were executed prior to August 3, 1978, and (2) that contain a provision for the adjustment of the rate of interest specified in that agreement. It is plain that the subsection's restriction limiting interest rate changes to nine percent only applies if the interest rate is to be imposed under that agreement. Of course it follows that if the interest rate is to be imposed under another agreement, subsection 535.2(4) does not apply. Paragraph seventeen of the mortgage is part of an agreement between the Jorgensens and the Association. Because the promissory note refers to the mortgage provision controlling acceleration, the total contract is combined in the note and mortgage. However, because only the note refers to the interest Jorgensens were to pay to the Association, its provisions are the terms of the agreement for subsection 535.2(4) purposes. See Frenzel v. Frenzel, 260 Iowa 1076, 1080-81, 152 N.W.2d 157, 160 (1967) (note is the primary contract, the mortgage an incident thereto). Mortgage paragraph seventeen in no way controls the interest agreement between the Jorgensens and the Association. Neither party could invoke the paragraph to alter their agreement about interest rates. The note sets the interest rate at nine percent without any provision for changing the rate. Subsection 535.2(4) does not apply to the agreement between Jorgensens and the Association because it did not contain a provision for the adjustment of the rate of interest specified in that agreement.  It is true that mortgage paragraph seventeen contemplates an interest rate change and refers to an agreement. But the agreement that paragraph seventeen refers to is between the Lender [Association] and the person to whom the Property is to be sold or transferred, not the interest rate agreement between Jorgensens and the Association. The agreement that would change the interest rate in this case would be in neither the note nor the mortgage, but in an assumption agreement between the Association and a third party. This second agreement cannot invoke the subsection 535.2(4) interest ceiling because an interest rate in a subsequent agreement is not imposed under that agreement that contained a provision for the adjustment of the rate of interest. It is equally clear this definitional requirement must be met for application of subsection 535.2(4) according to its terms. This conclusion necessarily limits application of subsection 535.2(4), The Code 1979, to variable interest rate mortgages, as we believe the legislature intended. Such a construction finds support in other provisions of section 535.2. Subsection 535.2(3)(d), immediately preceding the subsection under scrutiny, specifically describes a variable rate agreement. Martins argue mortgage paragraph seventeen is a provision for the adjustment of the rate of interest, that being the term employed in subsection 535.2(4). Any such adjustment, however, would not trigger the subsection 535.2(4) interest ceiling due to the under that agreement language of that statute. Moreover, paragraph seventeen obviously is a mechanism for initiating negotiations with different parties, not adjusting terms in the original agreement. Adjustment as used in subsection 535.2(4) invokes the concept of modifying an existing agreement executed prior to August 3, 1978, not creating a new contract with a different party. The interest rate increase the Association requested would have been imposed after August 3, 1978, on strangers to the original contract, under a new written agreement between the Association and the Martins. Upon execution of the assumption agreement, Jorgensens, the mortgagors, would have been released. Martins further assert [s]ection 535.2(4), The Code 1979, in no way limits its protection to the original parties to the agreement. Again, they ignore the fact that the interest limitation of that statute applies only to an agreement executed before August 3, 1978, containing a provision for the adjustment of the interest rate, where the change of interest would be imposed under that agreement. Martins do not allege they are a third-party beneficiary of that agreement between Jorgensens and the Association, nor could they logically do so as paragraph seventeen contemplates a new assumption agreement for a different interest rate between different parties. Similarly without controlling force is Martins' claim that the mortgage assumption does not create a new security interest and, therefore, the agreement is unchanged. It is true, but irrelevant, that the mortgage remains the same. The Martins' argument is premised on their contention that the mortgage is the subsection 535.2(4) agreement providing for the interest rate, a contention we have already considered and rejected. Martins also argue subsection 535.2(4), The Code 1979, should be construed to prohibit due-on-sale accelerations because subsequent legislation discloses a legislative intent to limit the function of due-on-sale provisions. We reject this rationale. Present subsection 535.2(4) was enacted in 1978. 1978 Iowa Acts ch. 1190, § 11. It was not until the following year that any statutory limitation was imposed on due-on-sale accelerations. 1979 Iowa Acts ch. 132, § 16 (effective July 1, 1979); see id. ch. 130, § 22.2(c). Martins' brief notes that this provision, now subsection 535.8(2)(c), The Code 1981, makes it unlawful for Iowa lenders to invoke due-on-sale clauses on mortgages executed after July 1, 1979, unless the party that is assuming the loan and mortgage will jeopardize repayment of the loan or impair the security. They argue construing subsection 535.2(4) as they suggest would thus effect a uniform and consistent policy. However, the subsequent development of the 1979 acts discloses that in 1980 the Senate adopted an amendment to subsection 535.8(2)(c) that provided, inter alia, The provisions of this paragraph are retroactive. 1980 H.J. 1355-56. This provision was not passed into law. See 1980 Iowa Acts ch. 1156, § 8. Thus we have an indication of legislative intent that a limitation on due-on-sale acceleration clauses not be applied retrospectively. There is less reason to interpret subsection 535.2(4), which does not mention such clauses, to nullify retrospectively the acceleration clause under examination. See IPALCO Employees Credit Union v. Culver, 309 N.W.2d 484, 486-87 (Iowa 1981); § 4.5, The Code. We have examined the Martins' other arguments that subsection 535.2(4) prohibits the Association from accelerating the loan balance pursuant to the due-on-sale terms of its mortgage. We find these arguments to be without merit. Accordingly, we turn to the issue whether our common law prohibits the Association from invoking the terms of the mortgage to recover its loaned funds.