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CFPB Issues Ruling to keep Heirs from Falling into Foreclosure

When a borrower dies, the passing of property to the remaining family members can be a complicated process. Even if there are no issue with the borrower’s estate there can be issues transferring the mortgage to a party that had no previous relationship with the servicer.

The Consumer Financial Protection Bureau (CFPB) issued guidance Tuesday aimed at making it easier for surviving family members who have inherited a property due the death of a loved one to be added to the mortgage, allowing them to seek modification or refinance and avoid foreclosure.

Specifically, the Bureau ruled that the heir may be added to the mortgage without triggering the CFPB’s Ability to Pay Rule.

“Losing a loved one should not mean also 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 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 Ability to Pay Rule took effect in January of 2014 and requires lenders to make a good faith effort to ensure that the borrower is actually has the ability to make payments on the loan that they are applying for. The rule purports to ward off predatory lending practices.

The change allows the lender to recognize the heir as the borrower without considering their creditworthiness. The rationale the CFPB cites is that the change will allow more heirs to stay in their new homes because it gives them the legitimacy of being a borrower and gives them the same rights that the now deceased mortgagor previously held. The more legitimate status makes it more likely that the mortgage holder will grant a modification, preventing unnecessary foreclosures.

The rule does not obligate the lender to add the surviving family member to the mortgage but allows them the previously not possessed leeway to do so when it would prevent the loan from going into default.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.
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