Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Greetings to all of you out there in regulatory compliance land. On August 4, 2016, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a final rule amending certain mortgage servicing rules issued by the Bureau in 2013 and codified in various sections of Regulations X and Z. The rulemaking addresses issues such as force-placed insurance notices, early intervention, loss mitigation, prompt payment crediting, and the issuance of periodic statements. This blog highlights a topic that received more comments than any other aspect of the Bureau’s mortgage servicing proposal, the provisions addressing the rights of successors in interest.
Under the current 2013 RESPA Servicing Rules, credit unions are required to maintain policies and procedures designed to “promptly identify and facilitate communication with the successor in interest of [a] deceased borrower with respect to the property secured by the deceased borrower’s mortgage loan.” 12 C.F.R. § 1024.38(b)(1)(vi). In the October 2013 Servicing Bulletin, the Bureau provides examples of servicer practices that it believes should be part of the policies and procedures required by Regulation X, including promptly providing any party claiming to be a successor in interest with a list of all the documents that the servicer requires to establish the death of the borrower and the identity and legal interest of the successor and evaluating whether the successor is eligible for any loss mitigation options if the mortgage loan is delinquent. See, Servicing Bulletin at 2-3.
The 2016 Mortgage Servicing Rules amend commentary to Section 1024.38(b)(1)(vi) to provide further guidance on the types of documents that a servicer can reasonably require to confirm a potential successor in interest’s identity and ownership interest in the property. While these documents may vary depending on the law in the relevant jurisdiction, the Bureau provides several illustrative examples depending on the nature in which the successor in interest acquires an ownership interest in the property. In addition, the amended commentary notes that “a servicer’s policies and procedures must be reasonably designed to ensure that the servicer can promptly notify the potential successor in interest that the servicer has confirmed the potential successor in interest’s status.” See, Preamble to 2016 Mortgage Servicing Rules, pp. 821-4.
Most importantly, however, the Rules significantly expand the protections afforded to successors in interest by redefining “borrower” in Subpart C of Regulation X and “consumer” in Regulation Z to include “confirmed successors in interest.” See, Preamble to 2016 Mortgage Servicing Rules, pp. 782, 854. This means that the mortgage servicing provisions contained in Subpart C of Regulation X, including error resolution, early intervention, and loss mitigation, will apply to successors in interest that have been verified by the servicer. Credit unions will also be required to provide confirmed successors in interest with rate adjustment notices for adjustable rate mortgages, periodic statements, and to promptly credit payments according to the requirements in Section 1026.36 of Regulation Z. Furthermore, the Mortgage Servicing Rules extend the coverage of Section 1024.17 of Regulation X, which sets forth certain requirements for escrow accounts, to confirmed successors in interest.
In addition, while the limited protections in the 2013 RESPA Servicing Rules were naturally limited to the “spouse, child, or heir of a deceased borrower or other party with an interest in the property,” the 2016 Mortgage Servicing Rules expand the number of individuals who qualify as successors in interest under Regulations X and Z. As amended, mortgage servicing protections, such as loss mitigation, will now be available to transferees of property securing a mortgage loan transferred from a borrower under the following circumstances:
- A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
- A transfer to a relative following the death of a borrower;
- A transfer where the spouse or children of the borrower become an owner of the property;
- A transfer resulting from a divorce decree, legal separation agreement, or incidental property settlement agreement, by which the spouse of the borrower becomes the owner of the property; or
- A transfer into an inter vivos ("between the living") trust in which the borrower is and remains a beneficiary and which does not relate to transfer of rights of occupancy in the property.
See, Preamble to 2016 Mortgage Servicing Rules, pp. 783-4. One point of clarification here is that individuals who may otherwise qualify as successors in interest but who are already joint obligors on the mortgage loan are already protected as borrowers under Regulations X and Z and those protections are not limited to those available to successors in interest under the 2016 Mortgage Servicing Rules. For example, as a joint obligor, this individual would typically have standing to bring a Regulation Z claim not related to any mortgage servicing acts or practices committed by the servicer.
The amended commentary also clarifies that confirmed successors in interest are not required to assume a mortgage loan prior to receiving the protections of the Rules. If the confirmed successor in interest does decide to assume the mortgage loan or otherwise becomes liable on the obligation, the successor in interest is entitled to the full protections of Regulations X and Z rather than just the mortgage servicing provisions. Furthermore, even after the servicer has confirmed a successor in interest, the servicer must still comply with all applicable requirements of Regulations X and Z with respect to the transferor borrower. See, Preamble to 2016 Mortgage Servicing Rules, pp. 114-5; 813-4.
To address privacy concerns raised by NAFCU, the 2016 Mortgage Servicing Rules also amend the error resolution and request for information provisions in Sections 1024.35 and 36 of Regulation X to permit credit unions to omit certain information such as location, contact information, and personal financial information other than the terms, status, and payment history of the mortgage loan from information provided to a potential or confirmed successor in interest. See, Preamble to 2016 Mortgage Servicing Rules, pp. 787-9. When responding to a request for information from a potential successor in interest, credit unions are required to treat the potential successor as a “borrower” for purposes of Section 1024.36. This means, for example, that the credit union would be subject to the timing requirements in paragraph (d) and the prohibition on charging a fee for an information request in paragraph (g)(1) of that Section.
While the bulk of the 2016 Mortgage Servicing Rules are effective 12 months after publication in the Federal Register, the successor in interest provisions are not effective until 18 months after publication. These effective dates happen to roughly coincide with the first and second implementation phases of the CFPB’s revised HMDA Rules, which NAFCU expects will be a significant compliance challenge for credit unions. In order to help assist our members, the Regulatory Compliance Team will provide additional resources on both the Mortgage Servicing Rules and revised HMDA in the coming months through blog posts, guides, and other publications. Currently available resources can be found here and here.
A Seaside Vacation. While not typically NAFCU policy, I happened to write this blog post on a rainy day while on vacation in Rhode Island. I found the calm ocean vistas an interesting contrast to the sturm und drang of the CFPB’s Mortgage Servicing Rules. Here are some photos of Block Island, just an hour ferry ride away from the mainland.