I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has issued 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 CFPB’s Ability-to-Repay (ATR) rule. This clarification will help surviving family members who acquire title to a property to take over the existing mortgage, and to be considered for a loan workout, if necessary, to keep their home.
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 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 rule 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.
Since the issuance of the Title XIV Final Rules, uncertainty has been expressed about the application of the ATR rule in situations where a successor seeks to be added as an obligor or substituted for the current obligor on an existing mortgage. Often, this issue arises upon the death of the obligor, with the surviving spouse or children asserting rights under the mortgage, but it may also present itself in other settings, such as in separation or divorce, after a transfer from living parents to children, or a transfer to an inter vivos trust of which the consumer is the beneficiary.
Under the CFPB clarification, in general, where the addition or substitution of the successor as the obligor is not an “assumption,” such addition or substitution is not subject to the ATR rule’s requirements.
II. APPLICATION OF ATR RULE TO CERTAIN SITUATIONS INVOLVING SUCCESSORS-IN-INTEREST
The CFPB interpretive rule clarifies the applicability of the ATR rule where a successor acquires a home that is the collateral for an existing consumer credit transaction and seeks to become an obligor on that transaction. A successor is a person who receives legal interest in a property, typically by a transfer from a family member, by operation of law upon another’s death, or under a divorce decree or separation agreement. In all of these situations, where the successor acquires property that is subject to a mortgage, the successor is not personally liable for the associated debt, but may choose to assume the debt.
Unless the change in obligors satisfies the definition of an “assumption,” a change of obligors does not trigger the ATR rule requirements. An assumption occurs when—and only when—the creditor “expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing residential mortgage transaction.”
A “residential mortgage transaction” is a transaction in which a consumer finances the acquisition or initial construction of the consumer’s principal dwelling. For purposes of determining whether the transaction is an “assumption,” the creditor must look to whether the new obligor is seeking to finance the acquisition or construction of that subsequent consumer’s principal dwelling.
A residential mortgage transaction does not arise where a successor takes on the debt obligation that is secured by property the successor previously acquired. In these situations, Regulation Z does not apply when the successor agrees to be added as an obligor on an existing mortgage loan. Although these transactions are commonly referred to as assumptions, they are not assumptions under Regulation Z because the transaction is not a residential mortgage transaction as to the successor. Accordingly, the ATR rule does not apply to a transaction in which a successor seeks to take on the debt secured by property that the successor previously acquired.