On Tuesday, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule to clarify that when a mortgage borrower dies, the name of the heir may be added to the mortgage without triggering the new Ability to Repay rule. This rule is designed to help surviving family members who acquire the title to a home to take over their family member’s mortgage and to be considered for loan modification or refinance.
“Losing a loved one should not mean losing your home. Today’s interpretive rule makes it clear that when family members inherit property, they can take over the mortgage without jumping through unnecessary loops,” CFPB Director Richard Cordray said. “This gives heirs an opportunity to work with the lender to pay off the loan or seek a loan modification.”
This new rule does not make a lender obligated to allow an heir’s name to be added to a loan, only that the lender is not required to consider the heir’s ability to repay. This means that just because a family member has inherited a home does not mean the heir is automatically qualified to be added to the home loan.
The bureau also added that multiple eligible heirs may be added to the mortgage in the case of multiple named heirs. Even if an heir added to the loan would not normally qualify, the loan would still be considered a Qualified Mortgage.
Under the Ability to Repay rule, which went into effect in January, lenders are required to make a good-faith determination that the borrower has the ability to repay the loans. The CFPB found that, while this rule is common sense, it has created serious consequences, including heirs losing their home when they cannot have their names added to an outstanding loan on the home that has been legally transferred to them due to the Ability to Repay rule being triggered by the lender.
This interpretive rule can also be applied to other legal transfers, such as transfers to living trusts, transfers during life from parents to a child, transfers due to a legal separation or divorce and other family transfers of real estate.
In October, the CFPB offered additional clarification on the role of loan servicers when a borrower dies. Servicers are responsible for collecting payment from borrowers on behalf of creditors and loan owners. The CFPB said that servicers must have policies in place that ensure they quickly identify and communicate with surviving family members and anyone with a legal interest in the property. Examples of such policies include allowing heirs to continue paying the loan.
The CFPB has attempted to create a smooth transition to compliance with its new mortgage rules that went into effect this year. The bureau has coordinated with other agencies, published plain-language guides and maintained regular contact with consumer advocates, housing counselors, lenders and legal aid attorneys to answer questions on the rules, as well as providing educational material to the public.