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#1938595 - 07/08/14 07:05 PM ATR Rule doesn't apply to successors-in-interest
John Burnett Offline
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John Burnett
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The sole owner of a home on which your bank holds the mortgage dies, and his son and only heir gets title to the real estate through his father's estate. The estate has been making payments to keep the loan current, but now Sam, the son, asks your bank to let him take over the loan. Is this an assumption under Regulation Z 1026.20(b)? Does Sam have to jump through the Ability to Repay hoops in section 1026.43?

No on both counts, according to an interpretive rule released today by the CFPB. The Bureau says that Sam's taking over his dad's mortgage note obligation isn't an assumption because he already owns the home regardless of who's on the hook for the loan balance, and because there's neither a refinancing nor an assumption taking place, the ATR rules don't apply.

http://www.consumerfinance.gov/f/201407_cfpb_bulletin_mortgage-lending-rules_successors.pdf
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Ability to Repay/Qualified Mortgage Rule
#1938633 - 07/08/14 07:49 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
NotDoneYet Offline
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But when Sam takes over the mortgage note, he's responsible for paying the debt, right? The creditor would effectively remove the father's name and replace it with his son's?
I found it interesting this applies to divorce situations as well.

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#1938635 - 07/08/14 07:50 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
NotDoneYet Offline
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Page 5 implies he doesn't have to assume the debt, but may choose to. So where does that leave the creditor?

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#1938688 - 07/08/14 08:50 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
John Burnett Offline
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There is nothing in this ruling that will require a creditor/servicer to accept the successor-in-interest, and a bank could refuse to release a spouse in a divorce if it doesn't have confidence that the remaining spouse (presumably the spouse who's been "awarded" the home in the settlement) can handle the payments. If the creditor won't accept the remaining spouse, either the two ex-spouses will have to continue paying the mortgage obligation, sell, or face foreclosure.

In the case in which an heir gets title to the family home but doesn't want to take over the loan obligation, the estate will remain liable. That could ultimately require the sale of the home, or the bank will have to foreclose.
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#1938694 - 07/08/14 08:51 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
Ninky Offline
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I got excited about this, but realized this only says that IF you accept a successor, you can add them to the note without qualifying them through the ATR rquirements. Is that right? Our Loan Policy does not allow us to add an obligor. Our Home Equity and Home Improvement loans have a due on sale clause. Isn't accepting a successor as an obligor a legal issue? Am I oversimplifying, that this basically allows you to accept an obligor without running the ATR drill IF you can legally accept an obligor. I really do hope I am wrong.

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#1938711 - 07/08/14 09:10 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
Mel in WA Offline
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At our bank, we ask the heir to refinance (bank policy) in order to remove the decedent. In the case of a refinance, all bank underwriting standards (including ATR) still apply. Does this CFPB guidance eliminate ATR from modifications only or refinances as well?

It appears we could process a modification to simply add Sam to the note, eliminating ATR requirements for Sam. Is this a common practice at other institutions?

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#1938723 - 07/08/14 09:22 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
John Burnett Offline
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If you step into the refinancing swamp, this ruling won't apply. The reason for the interpretation is to facilitate an heir's taking over the obligation in cases where it's agreed to by the heir and the creditor or assignee of the loan. But if you create a new note to replace the current one, that's a refinance, and you lose the ability to bypass ATR.

You may want to discuss this ruling with counsel with respect to your due-on-sale clauses. The ruling says that there's not a sale involved in inheriting real estate or transferring title into a family trust, etc.
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#1939595 - 07/10/14 08:36 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
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I have read through this interpretation and have one question that is not directly adressed. It seems to assume your exact scenario. The SOLE person on the note dies. What is more common is that ONE of the two die and the remaining borrower wants to add their child. So this heir "doesn't already have an interest" as this interpretation points out.

Interested in your thoughts about the applicability of ATR in this scenario.

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#1939914 - 07/11/14 05:27 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
John Burnett Offline
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The interpretation says it could apply also "after a transfer from living parents to children," presumably on the theory that there's not an assumption (since the change would not involve a residential mortgage loan transaction) and, unless a refinancing is involved (presumably, it would not be involved as part of the adding of the child as an obligor), the ATR requirement would not be implicated.

Again, the creditor/assignee would not be obligated to accept the added obligor (for example, if he/she has a horrendous credit record).
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#1954306 - 08/19/14 12:27 PM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
JoAnne Offline
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The following question was asked of me: Does the party to which the property has been transferred ever have to qualify under ATR? Example: Jane Smith dies and Joe Smith inherits the property. The Bank rewrites the loan into Joe Smith's name at maturity of the original indebetedness to Jane Smtih. Does the new rewrite have to qualify under ATR?

I say yes because, as John said above, you have stepped into the refinancing swamp, but I want to make sure I am umnderstanding everything correctly. What is tripping me up is the definition of refinancing under 1026.20(a) - when an existing obligation is satisfied and replaced by a new obligation undertaken by the [/u]same[u] consumer. As successor-in-interest, would Joe Smith be considered the "same consumer?"
Last edited by JoAnne; 08/19/14 12:30 PM.
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#1954994 - 08/20/14 01:26 AM Re: ATR Rule doesn't apply to successors-in-interest John Burnett
rlcarey Offline
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Joe is not the same consumer. It is a brand new transaction.

The estate would be paying off the loan to the bank prior to the estate being closed out, the title would then be transferred to Joe and Joe could get a loan if he qualified to pay the estate back the cash if the estate did not have enough cash to pay off the bank and settle the rest of the estate equitably. This however does sometimes happens simultaneously.

This loan will not go to maturity unless the estate is still open and the loan is maintained current. If the loan matures prior to the distribution of assets, the estate would be required to renew the loan.

A heir does not just step into the shoes of the decedent. If the heir cannot afford the loan, the bank is under no obligation to loan Joe any money on the house. The ruling states that you may allow Joe to be added as an obligor on the existing credit, but you would be under no obligation to do so. I really don't think that the CFBP really thought through all the legal ramifications of their so called ruling. It is not how things work most of the time in the real world.
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