Member Divorced or Deceased? Now What?

November 24, 2014 at 8:40 am Leave a comment

Statistics indicate that approximately half of all marriages end in divorce. What’s more, according to the Center for Disease Control in Atlanta, one hundred percent of your members are going to die someday. In spite of these facts, the procedures used by financial institution when dealing with a “successor in interest,” someone who obtains property by operation of law, varies widely. Some credit unions know that Mrs. Jones has been dead for years without trying to figure out who is making her mortgage payments, while others stop accepting payments once they hear of a member’s death.

The CFPB has heard these stories too and wants to waive its magic consumer wand to establish national standards that mortgage servicers must adhere to when dealing with successors in interest to real property. This proposal is just one of several substantive amendments the CFPB proposed last week with regard to the Servicing regulations that took effect last January. The successor in interest proposal is what I am most interested in because I think the general approach taken by the CFPB is a good one with or without additional regulations. You don’t have to wait until these amendments have been finalized to make sure you have policies in place that are consistent with existing law.

First of all, do you think the death of a borrower constitutes a default of the mortgage? If you said the answer is yes, think again. Since 1982, federal law has preempted mortgage contracts that apply “due on sale” provisions to property transfers that result from a bequest in a will, the death of a joint tenant, transfer to a relative upon death, or a transfer resulting from a divorce or legal separation agreement, among other things. A key component of the CFPB’s servicer regulations is to require lenders to provide delinquent borrowers with prompt information about loss mitigation possibilities. Even before its mortgage servicing rules took effect in 2014, the CFPB has been concerned about how its loss mitigation requirements would be applied to successors in interest. As a result, in October of 2013 it released a guidance to its final RESPA and mortgage servicing rules imposing procedures that servicers must maintain regarding the identification and communication with any successor in interest of a deceased borrower with respect to mortgage loans he or she held. The CFPB’s proposal released last week would extend this guidance to all types of successors in interest.

Most importantly, a new section, 1024.36(i), stipulates that when a financial institution receives a written request from a person that indicates that the person “may be a successor in interest,” a servicer is mandated to respond to this written notification “by providing the potential successor in interest with information regarding the documents the servicer requires to confirm the person’s identity and ownership interest in the property.”

As the English commentators on the Soccer matches I like to watch on Saturday mornings like to say, I think the CFPB is “spot on” on this one. By extending a servicer’s obligation to communicate with potential successors in interest, the regulations would empower financial institutions to communicate with ex-spouses and children, for example, without running afoul of privacy concerns. In addition, by making it clear to everyone what papers a person claiming to have an ownership interest in property must provide, the regulation will ideally facilitate the resolution of potentially complicated estate issues in a more expedient manner.

One thing to keep in mind: whether or not a person is a valid successor in interest, the mortgage lien that your credit union has on the property remains valid and enforceable. As a result, just because a deceased mother legally transferred ownership of her home to her son doesn’t mean that any delinquencies owing on the mortgage are wiped out. All this regulation does is help ensure that there are procedures in place to help clarify what parties ultimately remain responsible for a mortgage.

Entry filed under: Compliance, Legal Watch, Mortgage Lending, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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