The Consumer Financial Protection Bureau on Tuesday clarified that when a borrower dies, the name of the borrower’s heir generally may be added to the mortgage without triggering its' Ability-to-Repay rule.

The clarification is meant to help surviving family members who acquire title to a property take over their loved one’s mortgage - and to be considered for a loan workout, if necessary, to keep the home.

The CFPB in January 2013 finalized several mortgage rules, most of which took effect this January. Among the rules, Ability-to-Repay protects consumers from irresponsible mortgage lending by requiring that lenders generally make a reasonable, good-faith determination that prospective borrowers have the ability to repay their loans.

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 clarification is available here.

"Losing a loved one should not mean also losing your home. Today’s interpretive rule makes it clear that when family members inherit property, they can take over the mortgage without jumping through unnecessary hoops," said CFPB Director Richard Cordray. "This gives heirs an opportunity to work with the lender to pay off the loan or seek a loan modification."

The interpretive rule explains that because an heir already has acquired the title to the home, adding the heir as a borrower on the mortgage does not trigger the Ability-to-Repay 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.

In October 2013, the CFPB provided clarifications on the role of mortgage servicers when a borrower dies. Mortgage servicers are responsible for collecting payments from mortgage borrowers on behalf of loan owners or creditors. Servicers must have policies and procedures in place to ensure that they promptly identify and communicate with surviving family members and others who have a legal interest in the home.  

The CFPB has coordinated with other agencies on compliance with new mortgage rules and has published plain-language guides and other compliance aids, along with ongoing contact with industry participants, consumer advocates, legal aid attorneys, housing counselors and others to answer questions, officials said.

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