Effective as of April 19, 2018, successors in interest to property secured by mortgage loans that are covered by the Real Estate Settlement Procedures Act (“RESPA”) and Truth In Lending Act (“TILA”) now have certain rights under those acts.
These amendments are part of the Consumer Financial Protection Bureau’s 2016 Mortgage Servicing Rule amendments to RESPA and TILA. The CFPB issued the new rules because “it had received reports of servicers either refusing to speak to a successor in interest or demanding documents to prove the successor in interest’s claim to the property that either did not exist or were not reasonably available.” 81 Fed. Reg. 72,160 at 72,165. The rules are therefore designed to make it easier for potential successors in interest to communicate with servicers and establish that they are successors in interest.
At the outset, the new rules define a “successor in interest” as anyone who obtains an ownership interest in a property secured by a mortgage loan, provided that the transfer occurs under one of the scenarios listed in the new rule. The scenarios range from a transfer resulting from the death of the borrower to a transfer from the borrower to a spouse or child. The person does not have to assume the loan in order to be a successor in interest.
The amendments create several potential pitfalls for servicers because certain obligations are triggered when a servicer receives actual or inquiry notice that someone might be a successor in interest. As discussed below, the amendments require servicers to “promptly” communicate with anyone who may be a successor in interest. Servicers must also only request documents “reasonably” required to confirm whether that person is in fact a successor in interest. And a “confirmed” successor in interest now has the same rights as the original borrower under RESPA and TILA mortgage servicing rules.
Litigation is also inevitable because the amendments contain broad and imprecise language – such as “reasonably” and “promptly” – that opens the door for lawsuits and cries for judicial interpretation. The information below is intended to be a primer on the amendments, but in-house and outside litigation counsel must understand the intricacies of the amendments to defend against future lawsuits.
Who is a “successor in interest”?
A “successor in interest” is defined as “a person to whom an ownership interest in a property securing a mortgage loan subject to this subpart is transferred from a borrower, provided that the transfer is:
(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 become 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.” 12 C.F.R. § 1024.31.
What should a servicer do when it receives correspondence from a potential successor in interest?
1. Promptly respond and request documents.
An aspect of the amendments that is bound to create headaches (and litigation) for servicers is that they have an obligation to respond when they receive correspondence providing actual notice that someone might be a successor in interest and when they receive a written request that puts them on inquiry notice that someone might be a successor in interest.
Actual notice. Servicers must have policies and procedures to ensure that they “promptly facilitate communication with any potential or confirmed successors in interest” upon receiving “notice of the death of a borrower or of any transfer of the property.” 12 C.F.R. § 1204.38(b)(1)(vi)(A) (emphasis added).
Upon receiving the foregoing notice, servicers must then “promptly” request documents, determine the status of the person, and notify the person “that the servicer has confirmed the person’s status, has determined that additional documents are required (and what those documents are), or has determined that the person is not a successor in interest.” 12 C.F.R. § 1204.38(b)(1)(vi)(B) and (C).
While it is unclear what constitutes a “prompt” determination, a determination is not prompt “if it unreasonably interferes with a successor in interest’s ability to apply for loss mitigation options according to the procedures provided in § 1024.41.” 81 Fed. Reg. 72,160 at 72,380.
Inquiry notice. If a servicer receives any written request “that indicates that the person may be a successor in interest” and “includes the name of the transferor borrower” and “information that enables the servicer to identify the mortgage loan account,” a servicer shall respond by requesting, in writing, the documents the servicer reasonably requires to confirm whether the person is a successor in interest. 12 C.F.R. § 1024.36(i)(1)(emphasis added).
The types of request that “indicate” the person may be a successor in interest are broad. See 81 Fed. Reg. 72,160 at 72,379. For example, a written loss mitigation application from a person other than a borrower is a written request that indicates the person may be a successor in interest. Id.
If the written request from the potential successor in interest does not have the required information, the servicer “may” respond by requesting more information. 12 C.F.R. § 1024.36(i)(2).
Servicers should also be mindful of the deadlines for responding to written requests for information under 12 C.F.R. § 1024.36(c) and 1024.36(d), which require acknowledging receipt within five business days and a substantive response within thirty business days.
2. Request documents “reasonably” required to confirm the person is a successor in interest.
A “potential” successor in interest becomes a “confirmed” successor in interest if the servicer confirms “the successor in interest’s identity and ownership interest in a property.” 12 C.F.R. § 1024.31.
But a servicer may only request “documents the servicer reasonably requires to confirm that person’s identity and ownership interest in the property.” 12 C.F.R. § 1024.38(b)(1)(vi)(B) (emphasis added). The requested documents “must be reasonable in light of the laws of the relevant jurisdiction, the specific situation of the potential successor in interest, and the documents already in the servicer’s possession.” 81 Fed. Reg. 72,160 at 72,379. The servicer can also require documents it believes are necessary to prevent fraud or other criminal activity, e.g. if the servicer believes that the documents are forged. See id. at 72,380.
Subject to the foregoing, requesting a death certificate, executed will or court order might be reasonable. But it would be unreasonable to request certain probate documents when “the applicable law of the relevant jurisdiction does not require a probate proceeding to establish that the potential successor in interest has sole interest in the property.” 81 Fed. Reg. 72,160, at 72,379-380. Because the reasonableness requirement depends heavily on the relevant jurisdiction, servicers must take into account local laws when requesting documents.
How do these changes impact RESPA and TILA?
A “confirmed successor in interest” is now a “borrower” for purposes of RESPA’s mortgage servicing rules and 12 C.F.R. § 1024.17 and a “consumer” for TILA’s mortgage servicing rules. 12 C.F.R §§ 1024.30(d) and 1026.2(11). Thus, a confirmed successor in interest is entitled to the same rights as the original borrower or consumer.
For reverse mortgages, the changes only impact the rules that apply to reverse mortgages. See 12 C.F.R. § 1024.30(b). For example, a confirmed successor in interest is still not subject to the loss mitigation procedures in 12 C.F.R. § 1024.41, but a confirmed successor in interest is now entitled to a payoff statement under 12 C.F.R. 1026.36(c). See 81 Fed. Reg. 72,160 at 72,170.
There is no private right of action for claims by potential successors.
While confirmed successors in interest have the same private right of action to enforce the rules as borrowers and consumers, the rules do not “provide potential successors in interest a private right of action or a notice of error procedure for claims that a servicer made an inaccurate determination about successorship status or failed to comply with § 1024.36(i) or § 1024.38(b)(1)(vi).” 81 Fed. Reg. 72,160 at 72,175, see also id. at 72,184 and 72,211. This, however, will likely not deter potential successors in interest from trying to assert such claims. Moreover, a confirmed successor in interest who has allegedly been damaged by a servicer’s failure to request documents “reasonably” required for the determination or a determination that was not “promptly” made might be able to assert claims under the new rules.