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Dealing with Deceased Borrowers Since the 2016 Mortgage Servicing Rule

2016 Mortgage Servicing Rule deceased borrower successor in interest Consumer Financial Protection Bureau mortgage servicing rules

When a borrower dies, lenders are often left wondering what to do. In 2016, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule—referred to as the 2016 Mortgage Servicing Rule—that clarified, revised, and amended several provisions in the 2013 Mortgage Servicing Rules. Provisions regarding potential or confirmed “successors in interest” were added to the 2016 Mortgage Servicing Rule to deal with transfers of property secured by a mortgage, including transfers as a result of the borrower’s death. These provisions became effective on April 19, 2018. Based on this, in the event a borrower dies, lenders need to know what actions they should consider doing upon notification of a borrower’s death, who is a “successor in interest,” and what their obligations are to a successor in interest.

Some Best Practices Upon Notification of Borrower’s Death

Upon hearing that the borrower is deceased, the lender should consider taking the following actions to preserve the value of the collateral and its claim:

Who is a “Successor in Interest”?

A person is a successor in interest if a borrower transfers an ownership interest in the collateral securing a mortgage loan to a person by means of one of the five categories of transfers:

  1. A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
  2. A transfer to a relative resulting from the death of a borrower;
  3. A transfer where the spouse or children of the borrower became an owner of the property;
  4. A transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement by which the spouse of the borrower becomes an owner of the property; or
  5. A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.

Notably, a person does not have to assume or otherwise be liable on the mortgage in order to be considered a successor in interest under the 2016 Mortgage Servicing Rule.

What are the Lender’s Obligations to a Potential Successor in Interest?

There is no affirmative obligation for lenders to determine whether a borrower is deceased. Further, lender is not required to conduct a search for potential successors in interest if they have not received actual notice of the death of the borrower. 12 C.F.R. 1024.38(b)(1)(vi). However, upon notification of the death of a borrower, lenders must “promptly identify and facilitate communication with the successor in interest of the deceased borrower with respect to the property secured by the deceased borrower’s mortgage loan.” Id. The lender should perform a diligent search to identify potential successors in interest, which may include:

(a)  A search in the public records;
(b)  A search for open probate cases in the county where the property is located and in the county where the borrower resided;
(c)  Inspecting the property to identify any people in possession; and
(d)  Inquire about possible heirs and ownership of the property with those people in possession and/or neighbors.

In addition, lenders are required to maintain policies and procedures relating to successors in interest, unless exempt. Specifically, the policies and procedures must be reasonably designed to ensure that the lender can:

Once a lender confirms the identity of a successor in interest, that person will be considered a “confirmed successor in interest.”

What are the Lender’s Obligations to a Confirmed Successor in Interest?

If there is a confirmed successor in interest, the lender must treat that person as a borrower for purposes of the Mortgage Servicing Rules in Regulation X and a consumer for purposes of the Mortgage Servicing Rules in Regulation Z. Lenders are required to send confirmed successors in interest disclosures and provide information relating to:

Although not required, the confirmed successor in interest may assume the loan upon consent. If a confirmed successor in interest submits a loss mitigation application and the property is the successor in interest’s principal residence, the lender must review and evaluate the application in accordance with Regulation Z’s loss mitigation procedures.

Conclusion

The 2016 Mortgage Servicing Rule creates certain obligations on the lender in the event a borrower dies. Lenders need to be aware of these obligations and implement standard procedures to get into compliance with the Rule, and follow best practices to preserve the value of the collateral.


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