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From Banking and Finance Law Daily, July 8, 2014

Taking over family home does not trigger ability-to-repay inquiry

By Richard A. Roth, J.D.

If a consumer who has inherited a home wishes to be added as an obligor on an existing loan secured by the property, the Ability-to-Repay rules do not apply, according to an interpretive rule issued by the Consumer Financial Protection Bureau. The same will be true if a consumer acquires ownership as a result of a divorce, a transfer from a parent, or in another comparable way. The reason, according to the CFPB, is that adding the consumer as an obligor does not constitute a residential mortgage transaction.

The CFPB’s interpretive rule was prompted by concerns over the situation of surviving family members after the death of a borrower. While such a situation might not trigger a due-on-sale clause in a mortgage, it can create a situation in which the survivors need some assistance, such as a loan workout, if they are to stay in their family home.

According to the CFPB, some creditors have refused to consider mortgage loan modifications because the surviving family members are not named as obligors on the mortgage loan. Also, there have been concerns that adding their names would require the creditor to engage in an ability-to-repay analysis that would lead to a refusal to consider a modification. The interpretive rule seeks to avoid that difficulty, and also should make it easier for surviving family members to obtain information they need from the loan servicer.

Application of Reg. Z. The CFPB’s interpretive rule is based on an examination of when a creditor is required to make new disclosures after an existing loan is modified in some fashion. New disclosures are required in the case of a refinancing or assumption of an existing loan, but not under other situations, the bureau says (12 CFR §1026.20).

The Ability-to-Repay rule generally requires a lender to make a reasonable, good faith determination that a consumer will be able to repay a mortgage loan at or before the loan is made (12 CFR §1026.43). However, the staff comments to 1026.43 make clear that the ability-to-repay analysis is not required if new disclosures are not required. In other words, if the addition of a successor in interest is not an assumption requiring new disclosures under 12 CFR §1026.20, it is not a transaction requiring an ability-to-pay analysis.

Loan assumption. According to the CFPB, an assumption occurs when a creditor agrees to accept a successor as the primary obligor on an existing residential mortgage transaction. A residential mortgage transaction is a loan a consumer uses to finance the purchase or construction of a principal dwelling.

When a person seeks to become liable for a mortgage loan after gaining ownership of the home through inheritance, as part of a marital property settlement, or in a comparable manner, he is not financing the acquisition or construction of the home, the bureau points out. In fact, he acquired the interest in the home before becoming liable to repay the loan.

As a result, adding a successor in interest as an obligor on an existing loan is not a residential mortgage transaction, and thus it also is not an assumption. Neither new disclosures nor an ability-to-repay analysis are needed, the CFPB says.

Servicer duties. On the other hand, the transaction is a consumer credit transaction, the bureau says. This means creditors and servicers remain subject to duties such as providing monthly statements and giving notices of interest rate adjustments.

MainStory: TopStory ConsumerCredit CFPB Loans Mortgages TruthInLending

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