If you inherit a home after a loved one dies, an interpretive rule issued in 2014 by the Consumer Financial Protection Bureau (CFPB) clears the way for you to more easily take over an existing mortgage on the property. The CFPB rule also helps heirs by requiring mortgage servicers to provide certain information about the home loan.
Also, a 2018 CFPB rule requires servicers to have policies and procedures in place to promptly identify and communicate with family members, heirs, or other parties—known as “successors in interest”—who have a legal interest in the home.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress established the CFPB and gave it the authority to adopt new rules to protect consumers in mortgage transactions. The CFPB subsequently issued an interpretive rule that helps an heir take over a deceased borrower’s mortgage after inheriting a home. Specifically, after the original borrower dies, the person who inherits the home may be added to the mortgage as an obligor (a borrower) without triggering the Ability-to-Repay rule.
What is the Ability-to-Repay rule? The Ability-to-Repay (ATR) rule, which went into effect January 10, 2014, requires mortgage lenders to make sure a borrower can afford a mortgage before issuing the loan. (Learn more about the ATR rule in Nolo’s article New Mortgage Rules on Ability to Repay.)
This rule is significant because if the lender did have to follow the ATR rule and determine an heir's ability to repay the mortgage, it would prevent some heirs from being added to the mortgage. The CFPB rule ultimately makes it easier to add the heir to the mortgage since the creditor does not have to consider whether or not the heir can repay the mortgage debt.
When a home transfers from a deceased person to an heir and there is still an outstanding loan on the property, there can be significant consequences if the heir is not able to add his or her name to the mortgage. For example, the heir may find it difficult, if not impossible, to deal with the mortgage servicer. (A mortgage servicer collects payments from borrowers, handles workout negotiations if the homeowner defaults, and manages the foreclosure process if one is started.)
Below are a few of the problems heirs have faced in the past when dealing with mortgage servicers after inheriting a home. These difficulties in working with a servicer can lead to unnecessary mortgage defaults and foreclosures.
Servicers sometimes won't speak to heirs. Servicers sometimes refuse to give out information (such as how much is due on the mortgage) to anyone but the borrower named in the mortgage—even when an heir has a legal right to such information.
Servicers often refuse to help heirs modify the mortgage. In some cases, servicers have refused to consider a mortgage modification on the basis that the heir was not a party to the existing mortgage and therefore cannot enter into a modification agreement.
Once the heir is listed as a named borrower on the mortgage, he or she can more easily obtain account information and/or seek a mortgage modification or other loan workout.
The CFPB interpretive rule and corresponding guidance on how to implement the rule imposes certain duties on mortgage servicers in situations where the original borrower dies. Mortgage servicers must, among other things:
The servicer must also promptly evaluate whether to postpone or stop a pending foreclosure to provide the heir with a reasonable amount of time to add his or her name to the mortgage and, if needed, apply for a mortgage modification.
The issue of adding a new person to a mortgage often arises upon the death of the original borrower, but it can come up in other circumstances as well. As of April 19, 2018, a federal rule requires servicers to promptly identify and communicate with “successors in interest.” A successor in interest is someone who receives property:
Under the rule, successors in interest get the same protections under federal mortgage servicing rules as the original borrower. Basically, the servicer must treat the successor in interest as a borrower, even if the successor is not listed as a borrower on the mortgage loan account. This means that a successor in interest is entitled to information about the account and may apply for a loss mitigation option—like a loan modification—just like an original borrower could. Though, the servicer might require the successor in interest to assume the loan as a condition of a loss mitigation offer.
A successor in interest, like an original borrower, is also entitled to enforce certain provisions of the servicing rules, including loss mitigation procedural protections. (To learn about federal loss mitigation procedural protections, see Federal Laws Protecting Homeowners: Foreclosure Protections.)
Many, if not most, loan contracts contain a “due-on-sale” provision. This clause states that if the property is transferred to a new owner, then the full loan balance will be accelerated and the entire balance of the loan must be repaid. But the federal Garn-St. Germain Depository Institutions Act of 1982, prohibits enforcement of a due-on-sale clause in certain transactions, like a transfer to a relative upon the borrower’s death. (To learn more about the Garn-St. Germain Act, see Avoiding Foreclosure: Can Someone Else Assume (Take Over) the Mortgage?)
If you have received property through an inheritance or in one of the other ways mentioned in this article, but your loan servicer is refusing to give you information about the loan or otherwise help you with the loan, consider talking to an attorney who can advise you about what to do in your situation.