United States

CFPB clarifies Ability-to-Repay rule for successors-in-interest


Since the issuance of the Title XIV Final Rules amending the Truth in Lending Act (TILA), there has been some confusion over how to apply the Ability-to-Repay rule (ATR rule) to situations involving successors-in-interest. This new rule should simplify the process of inheriting a loan.

Questions commonly arise when a mortgage holder dies and his heir inherits the loan. For example, does the addition of the successor's name to the mortgage trigger the ATR rule? Is the creditor required to determine the heir's ability to repay a mortgage before formally adding that heir as an obligor? 

This issue commonly arises when a spouse or offspring acquire rights to property upon the death of a mortgage holder, but it may also arise in cases of divorce or following a transfer of property from living parents to a child. In any of these cases, application of the ATR rule can make it more difficult for the successor to exercise his rights under the mortgage. For example, the creditor may refuse to modify the terms of the debt on the grounds that the successor is not a party to the existing mortgage and therefore, cannot enter into a modification agreement. This can greatly complicate the transaction for the successor and make it difficult for him to keep the home. 

A new interpretive rule offers guidance on this issue. The July 11, 2014, ruling by the Consumer Financial Protection Bureau (CFPB) states that in cases where there is an addition or substitution of a successor as obligor on a mortgage, the creditor is not subject to the ATR rule, because the transaction does not constitute an assumption as defined by Regulation Z.  

Regulation Z (12 CFR section 1026.20) defines an assumption as occurring when the creditor accepts a subsequent consumer as a primary obligor on an existing mortgage.  To determine whether the transaction is an "assumption," the creditor must assess whether the subsequent party is also seeking to finance the acquisition of a previously acquired dwelling. A residential mortgage transaction does not arise where a successor takes on the debt obligation secured by previously acquired property. Although these transactions are commonly referred to as assumptions, they are not assumptions under the terms of section 1026.20 because the transaction is not a residential mortgage transaction as to the successor. Accordingly, the ATR rule in section 1026.43 does not apply to a transaction in which a successor seeks to take on the debt secured by property that the successor previously acquired.

To put it more succinctly, under Regulation Z, a creditor must make a reasonable determination that the consumer has the ability to repay the mortgage obligation. However, if the addition or substitution of the successor as the obligor is not a "refinance" under section 1026.20(a) or an "assumption" under section 1026.20(b), then it is not subject to the requirements of the ATR rule.