The Consumer Financial Protection Bureau (CFPB) is issuing an interpretive rule to clarify that when a borrower dies, the name of the borrower’s heir generally may be added to the mortgage without triggering the Bureau’s Ability-to-Repay (ATR) rule. This clarification will help surviving family members who acquire title to a property to take over their loved one’s mortgage, and to be considered for a loan workout, if necessary, to keep their home.
“Losing a loved one should not mean also losing your home. This interpretive rule makes it clear that when family members inherit property, they can take over the mortgage without jumping through unnecessary hoops,” said CFPB Director Richard Cordray. “This gives heirs an opportunity to work with the lender to pay off the loan or seek a loan modification.”
The interpretive rule is available here.
In January 2013, the CFPB finalized several mortgage rules, most of which took effect in January 2014. Among these rules, the Ability-to-Repay rule protects consumers from irresponsible mortgage lending by requiring that lenders generally make a reasonable, good-faith determination that prospective borrowers have the ability to repay their loans.
When property legally transfers from family members to their heirs and there is still an outstanding loan on the property, there can be significant consequences if an heir is not able to add their name to the mortgage. For example, if the heir seeks a modification to ensure they can retain the home, the creditor may refuse to modify the debt on the grounds that the heir is not officially named on the mortgage.
“The CFPB’s announcement is a crucial step toward assisting widows, other heirs, and divorced spouses seeking to keep their family home after a tragic loss or change in family situation,” said Alys Cohen, staff attorney at the National Consumer Law Center’s Washington, D.C. office. “The rule clarifies that the requirements for new loans do not apply to these homeowners, and that these homeowners also have the right to receive routine notices about the loan. We hope the CFPB will go further and build on its October 2013 guidance to make clear that mortgage companies should accept loan modification requests from successors’-in-interest before requiring that person to assume the debt.”
The interpretive rule explains that because an heir has already acquired the title to the home, adding the heir as a borrower on the mortgage does not trigger the ATR requirements. The rule does not require the creditor to determine the heir’s ability to repay the mortgage before formally recognizing the heir as the borrower. As the named borrower, the heir may more easily be able to obtain account information, pay off the loan, or seek a loan modification. The interpretive rule can also apply to other transfers, including transfers to living trusts, transfers during life from parents to children, transfers resulting from divorce or legal separation, and other family-related transfers.
In October 2013, the CFPB provided clarifications on the role of mortgage servicers when a borrower dies. Mortgage servicers are responsible for collecting payments from mortgage borrowers on behalf of loan owners or creditors. The bulletin said servicers must have policies and procedures in place to ensure that they promptly identify and communicate with surviving family members and others who have a legal interest in the home. The bulletin provided examples of such policies and procedures, including allowing heirs to continue to pay the mortgage.
The CFPB has been working to ensure a smooth transition to compliance with the new mortgage rules. The Bureau has coordinated with other agencies, published plain-language guides and other compliance aids, and had regular contact with industry participants, consumer advocates, legal aid attorneys, housing counselors, and others to answer questions. The CFPB also has provided educational materials to the public about their new protections under the rules.