Impact of Successor-in-Interest Rules on Financial Institution Operations
On April 19, 2018, the Consumer Financial Protection Bureau’s (“CFPB’s”) amendments to The Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) regarding “successors-in-interest” to original borrowers will take effect and have an impact on various facets of a financial institution’s operations. A “successor-in-interest” is a recipient of a property interest based on various types of transfers, including without limitation, a transfer by devise, descent, or operation of law after the death of a borrower, or a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement.
Nearly all of Regulation X’s mortgage servicing rules and certain important disclosures under Regulation Z applicable to borrowers will be made applicable to confirmed “successors-in-interest” after April 19, 2018. Financial institutions are required to have reasonable policies and procedures to confirm the identity and legal status of a “successor-in-interest” through document requests and other sources of information. Secondly, financial institutions are required to treat confirmed “successors-in-interest” the same as borrowers for purposes of loss-mitigation, early intervention, periodic statements, mortgage transfer disclosures, escrow account disclosures, et cetera.
An important feature of the new rules is that a person does not have to assume or otherwise be liable on the mortgage loan to be a confirmed successor in interest under the new rules and take advantage of the rights confirmed thereby. This presents several operational challenges for financial institutions in several contexts, including the pursuit of a loan modification with someone who may not want to ultimately be obligated on the debt, reporting IRS Form 1098 for mortgage interest, debt collection, usage of terms in disclosures such as periodic statements that connote personal liability (i.e., “your loan balance”), filing proofs of claim in the successor-in-interest’s bankruptcy case, and so on.