The CFPB recently provided guidance on the application of the Regulation Z ability-to-repay rule (Section 1026.43) to assumptions of residential mortgage loans for purposes of clarifying the application of the rule in cases in which a relative acquires title to a security property upon the death of the borrower and wants to assume the loan, and also in similar situations. Creditors may rely on the CFPB interpretation under TILA Section 130(f), which provides a safe harbor from TILA liability for actions taken or omitted in good faith in conformity with a CFPB rule, regulation or interpretation.
Prior CFPB guidance indicated that the ability-to-repay rule applied to refinancings and assumptions under Regulation Z sections 1026.20(a) and 1026.20(b), respectively. The CFPB notes that both industry and consumer advocates have expressed uncertainty regarding the application of the rule in cases in which a successor seeks to be added as an obligor or substituted for the current obligor on an existing mortgage. The CFPB describes a successor as 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. Although the successor acquires title to the property, by virtue of the acquisition the successor does not become legally obligated on any existing mortgage loan. Last October, the CFPB addressed the obligations of servicers with regard to successors in Bulletin 2013-02, and while the CFPB provided guidance regarding assumptions, it did not address the ability-to-repay rule. We previously reported on the Bulletin.
The CFPB notes that there can be significant consequences for a successor who is not able to become an obligor on an existing mortgage loan, and provides an example of a successor not being able to obtain a modification because he or she is not a party to the existing loan and cannot enter into a modification agreement. As the CFPB observes, if the ability-to-repay rule applies to a successor’s assumption of an existing mortgage loan, such an assumption is less likely to occur.
The CFPB interprets the ability-to-repay rule as incorporating the existing Regulation Z standard for transactions involving a change in obligors as set forth in section 1026.20(b) and, therefore, unless a change in obligors satisfies the definition of “assumption” under that section the change does not trigger the ability-to-repay rule requirements. The CFPB then notes that an “assumption” for purposes of section 1026.20(b) occurs when a creditor agrees in writing to accept a new consumer as a primary obligor on an existing mortgage loan, and the loan would constitute a residential mortgage transaction for that new consumer. Under Regulation Z, a residential mortgage transaction is a transaction in which a consumer finances the acquisition or initial construction of the consumer’s principal dwelling.
The CFPB interprets the ability-to-repay rule as not applying when a creditor agrees in writing to allow a successor to become the obligor on an existing mortgage loan because there is no assumption for Regulation Z Section 1026.20(b) purposes. Because the successor had previously acquired title to the property, the transaction is not a residential mortgage transaction for the successor and, therefore, is not an assumption subject to the ability-to-repay rule.
The CFPB notes that the transaction still is a consumer credit transaction and is subject to other Regulation Z requirements, including the requirement to provide monthly statements under Section 1026.41 and the requirements to provide notices of interest rate adjustments under Sections 1026.20(c) and (d).