When the Consumer Financial Protection Bureau (CFPB) released a sweeping series of amendments to its mortgage servicing rules last fall, some of the most significant changes dealt with the regulatory framework surrounding successors in interest. So sweeping, in fact, that the CFPB allowed servicers 18 months from the finalization of the rule amendments to implement the changes, which are slated to go into effect on April 19, 2018.
Broadly speaking, the amendments include three changes concerning scenarios in which a “borrower transfers a legal interest in mortgaged property to a successor in interest.”
The first of those changes has to do with defining the term “successor in interest.” In the past, that successor was confined to the literal definition of someone who receives property when a borrower dies. The new CFPB servicing rules expand the definition, however, to include property transfers resulting from a divorce or legal separation, as well as certain other categories of property transfer (such as a transfer into a family trust or a transfer that occurs when someone has been declared mentally incompetent) that occur while the borrower is still alive.
The second change impacts how a servicer “confirms a successor in interest’s identity and ownership interest in the property securing the mortgage loan,” including the servicer’s obligation to respond to a written request from a potential successor in interest and details about the documentation that must be provided (and subsequently reviewed and verified by the servicer) to confirm the identity of the successor. The new rules also outline some specific policies and procedures that servicers must put in place to ensure that these guidelines are followed.
The third major change provides that once a successor in interest is confirmed, a successor may be treated as a borrower and have access to loan servicing information, as well as be entitled to periodic payment statements, loan payoff information and potential loss mitigation protections, including early intervention and the right to apply for a foreclosure avoidance measure.
Although planning and preparation for adopting and adhering to the new rules is already well under way, servicing professionals would be wise to take the time required to study the motivation behind these upcoming changes, appreciate the concrete steps they will need to take to comply with the new rules, and understand the potential benefits and challenges that could arise when the amendments take effect next April.
Part of the genesis of these new rules and regulations comes from a lack of uniformity in both policies and practices of servicers and investors in terms of handling interactions with successors. This lack of uniformity confused consumers, causing a high volume of complaints filed with the CFPB, state regulators and attorneys general.
The overall goal of the CFPB with these successor in interest rules is to streamline communication and allow more continuity in the servicing process after a death, a divorce or other transfer of property rights from the borrower to a successor. The amendments provide that successors in interest will have mechanisms in place that make it easier to communicate with the lender/servicer, prove their identity with specific documents and preserve/secure their rights. This structure will also be helpful for the many servicers and banks that have traditionally been leery of the complications and potential liabilities associated with verifying identity and providing private information to a third party.
It is unclear whether a confirmed successor will be entitled to certain foreclosure notices. Many state foreclosure statutes (both judicial and non-judicial) require that any party who has a recorded interest in real property must be provided with notice of a pending foreclosure. In a judicial foreclosure, those parties are often named a defendant in the lawsuit and are served with a summons and complaint. If these successors are not reflected in the public record through a deed or other conveyance document, foreclosure laws might not require notices to be sent to those successors. Best practice, however, will be to pass the information on to any confirmed successor to the foreclosure firm or trustee to ensure that any possible notices are provided, whether or not state law requires.
The new CFPB rules should provide some important guidance about what constitutes sufficient proof when verifying the identity of successors in interest. State-to-state differences will need to be overcome, as the CFPB was intentionally trying to do away with the one-size-fits-all form-letter approach that was being utilized by servicers in addressing questions and inquiries from potential successors. These letters and requests for further information are cited by the CFPB in both the bulletins issued prior to the amendments and the amendments themselves.
The amendments include an interpretation that the list of documents a servicer must request to confirm a successor 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.” Tailoring these letters to those three circumstances will take time and effort and will not allow for easy automation of the process of responding to potential successors.
To be compliant in April, servicers will need to be familiar with the succession and property transfer laws in all 50 states (and sometimes these vary from county to county). They will need to not only identify potential successors in interest, but also have policies and procedures in place to communicate with them effectively, advise them as to what documents they will need to produce to provide proof of identity and interest, and be able to verify those documents once they are produced. That will require a level of legal analysis that many/most servicers are simply not currently equipped to provide.
Potential issues with respect to document interpretation and verification are particularly concerning. Hurdles range from privacy concerns to simple logistics: How do you know that the person who faxed you the driver’s license looks like the face on the license? Interpreting wills and probate documents and verifying identity have historically not been required skills of the average mortgage servicing professional. And with legal instruments such as divorce decrees, separation agreements and inter vivos trusts, these issues will only become more complex. The most compliant servicers will work closely with their local counsel to obtain guidance, support and expertise on these topics from both a broad perspective and a potential successor loan level, as well.
And once the potential successor is confirmed and the servicer is asked for a copy of the origination application so he or she can obtain financial account information related to the original borrower (who might still be alive, depending on the situation), should the servicer provide that information? Will the bank prudential regulators allow such access to these confirmed successors? Will the borrower have a cause of action for violation of any privacy rights and/or violation of consumer rights under the Fair Debt Collection Practices Act (FDCPA) if the information is disclosed to a successor in interest?
The CFPB attempted, through a simultaneously published interpretive rule, to limit that exposure by declaring that compliance with the successor in interest amendments would not subject a servicer to liability under the FDCPA. However, it is unclear if the CFPB’s interpretation will hold much weight in any state or federal court or in the eyes of any other regulator. Judges and regulators might look at the letter of the privacy regulation or the FDCPA text itself to make the determination in any given situation.
The effective date of the new guidelines is less than a year away; banks and servicers should start preparing now, working to understand the details of the new guidelines and how they apply to them. Some may need to make significant investments in new technology; update their systems and software; and develop and deploy new policies, processes and procedures to ensure compliance.
These are not small changes, and they require time, training and resources to implement them effectively. Failing to comply with the new rules could subject a servicer to an enforcement action (especially if it was the subject of the numerous potential successor complaints on the CFPB database). And institutions that do comply without sufficient compliance analysis considering federal privacy regulations and the FDCPA could potentially violate federal privacy laws – and find themselves exposed to a host of other regulatory and legal liabilities. This is not easy stuff.
For now, foreclosure attorneys should be working to help their servicer clients understand what documents they will need to ask for and be able to verify them (which varies from one jurisdiction to the next). A trusted compendium of those nationwide jurisdictional specifics will be an invaluable resource both now and in the years to come. The upcoming transition may be confusing for the industry – at least at first. In the long run, however (assuming that these rules are rolled out intelligently and practiced diligently), additional clarity and consistency for servicers and more options for consumers will be a positive and productive development.
With excellent implementation, servicers will be able to help borrowers and successors navigate options after a death, a divorce or an otherwise challenging time in their lives. This is a goal worth achieving.
Edward Kirn is president of USFN and is a partner at Powers Kirn LLC in the greater Philadelphia area. Wendy Walter is a partner of McCarthy Holthus LLP’s Pacific Northwest division. Lee Perres is a managing partner of McCalla Raymer Leibert Pierce in Illinois. They can be reached at firstname.lastname@example.org, email@example.com and firstname.lastname@example.org.