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Justin Fitzhugh

CFPB: Ability to Repay Rules Dont Apply to an Existing Mortgages Successor

Wednesday, July 16, 2014 - Article by: Justin Fitzhugh - Nations Lending Corporation - Message

The CFPB issued an interpretive rule that establishes a lenders acknowledgement of a successor-in-interest of an existing mortgage is not subject to the Ability to Repay Rule (ATR Rule). Last year, in Bulletin 2013-12, the CFPB communicated servicers were required to have policies and procedures that would allow the continued payment of a mortgage, evaluation of an heir, or implementation of loss mitigation measures in cases where the legal interest of a property passed to another after the death of a borrower. The Bureaus intention was to help heirs retain the property; however, the potential repercussions of extending credit to non-qualifying borrowers stemming from the ATR Rule deterred lenders from assisting heirs. But the CFPBs interpretation that transfers resulting from operation of law are not residential mortgage transactions as per Regulation Z 1026.20(a) and 1026.20(b), these are not subject to the rules requirements.

Under Regulation Z, a residential mortgage transaction is defined as the financing of the purchase or building of a borrowers principal dwelling. Transactions involving the transfer of a legal interest in a dwelling by operation of law dont fall under this definition, and therefore this type of transfers/assumptions wont trigger ATR Rule requirements. Situations where a successor may seek to become the substitute or/and obligor of an existing mortgage may occur after the death of the original borrower, surviving spouses and/or children, divorce, transfers from living parents to children, and/or transfers through an inter vivos trust. In these situation, the successor is not liable for the debt, but he/she may choose to assume responsibility, and lenders may agree to name him/her the debts obligor without triggering the ATR Rules requirements. The keyword here is existing.

Transaction involving consumers who want to finance the acquisition of a borrowers principal residence who have NO EXISTING interest ARE subject to the ATR Rule.

The Ability to Repay Rule (ATR Rule) applies to any consumer credit transaction that is secured by a dwelling. Under this rule, lenders must determine the borrower has the ability to repay at or before the settlement of the transaction and provide certain disclosures. Changes that constitute refinancing or an assumption require the lender provides new disclosures.

Although mortgage assumptions by operation of law as described earlier provide automatic safe harbor from the ATR Rule, these are still subject to monthly statement and interest rate adjustment notice disclosures.

I am glad the CFPB issued this interpretation. In most cases, beneficiaries want to work with us, but when they didnt meet overlay requirements, our hands were tied. If we approved the assumption of responsibility, we faced potential legal action by investors, borrowers, and/or government enterprises and agencies. It is much cheaper to process a foreclosure than to lose our ability to sell loans to Fannie, Freddie, or endorse FHA loans. Now, we can confidently work with beneficiaries, and devise ways to help them a dwelling.

1) http://www.cfpbmonitor.com/2014/07/08/cfpb-provides-guidance-on-ability-to-repay-rule-application-to-assumptions-of-residential-mortgage-loans/

2) http://www.consumerfinance.gov/eregulations/1026-43/2013-30108_20140118#1026-43

3) http://www.consumerfinance.gov/eregulations/1026-20/2013-30108_20140118#1026-20

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