February 1, 2017
by Caren Castle
The Wolf Firm
USFN Member (California)
and Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)
Anyone who has practiced in the mortgage loan servicing area for more than a few years has likely encountered an unfortunate situation: a borrower has passed away or has been divorced and the questions as to who has the right to communicate with the mortgage lender, to apply for loss mitigation, and to receive a notice of foreclosure needed to be answered.
With the upcoming Consumer Financial Protection Bureau’s (CFPB or Bureau) mortgage servicing rule amendments, starting in April 2018 servicers will be bound by new regulations governing how lots of these questions should be answered. Servicers should not delay, however, in considering changes to their processes in order to comply. Further, the California legislature has enacted a state version of the successors in interest law (SB 1150) — effective January 1, 2017.
In this article, the potential differences in these federal and California State laws are discussed to assist with servicing compliance. [For a primer on the California bill, please see the USFN e-Update article written by Caren Castle and published October 11, 2016; it is archived in the Article Library at www.usfn.org.]
Definition Differences: CFPB Rules have Broader Definitions
In designing and implementing procedures to track the California process, servicers should make sure that they have flexibility so that when the April 2018 federal regulations are effective, they are able to expand the scope of who qualifies as a successor in interest. The California law identifies specific categories of successors — including spouses, domestic partners, parents, grandparents, adult children, adult grandchildren, adult siblings, or joint tenants; these successors can only obtain status after the death of the borrower.
The CFPB rule is broader and defines potential successors as relatives of the borrower, spouse, children, and ex-spouse. Rather than concentrating on the relationship to the borrower, the Bureau instead focused on how the transfer occurred, and it includes transfers that arise through divorce and amongst family members when the borrower is still living. Thus, compliance implementation will be greater when the federal regulation takes over, as the field of potential successors in interest is broader.
California further limits successors to those who occupied the subject property for the six months preceding the death of the borrower, and they must have occupied the property at the time of the borrower’s death. Establishing proof of this qualification will be a bit tricky, and it is important to note that the federal rules do not have an occupancy requirement. So, in April 2018, California successors will not be bound by this restriction because the Real Estate Settlement Procedures Act (RESPA) will provide the floor in terms of rights for the successors. This takes us back to the earlier point that servicer compliance processes must be flexible in order to adjust next year to the increase in successor rights under the federal law.
CA SB 1150 is specific in providing time frames for the completion of the determination process. The potential successor is given 30 days from the time he communicates the death of the borrower to provide evidence of the death in the form of a death certificate. After that is provided, the potential successor then has 90 days to provide documentation of his relationship with the deceased debtor and of his occupation of the property for the six months preceding the borrower’s death.
Under RESPA the triggering event is not limited to the death of the borrower; it includes notice that the property has transferred to any third party or that there might have been a divorce of the borrower. The federal regulations are very vague about how much time the potential successor has to deliver the documents. The regulations use terms like “prompt” and “reasonable” to describe the process, acknowledging that each of these situations is different and that context matters when determining how long something should take. That said, the servicer has five days to acknowledge a request from a potential successor (the acknowledgment must be in writing) and the servicer has 30 days to provide a list of the documents that are “reasonably” required to confirm the successor in interest.
Default Differences: CA Law has more Foreclosure-related Protection
If a loan is in default, the federal successor in interest rules do not operate independently to compel the servicer to stop any pending foreclosure action. Federal regulation operates to allow a process to confirm a successor and provides any confirmed successor in interest with the right to submit a loss mitigation application and, therefore, obtain a hold on proceeding to first legal, judgment, order of sale, or sale. Still, the rule itself doesn’t provide a pause to a foreclosure while a successor is being confirmed.
Contrast this to the California law, which requires that a foreclosure may not commence or proceed until the successor in interest status is confirmed, if the borrower dies prior to recordation of the notice of default. SB 1150 confers 120 days for this process to conclude (30 days for the successor to provide the death certificate plus 90 days for the successor to provide all the documentation of heirship).
Differences in Rights of Confirmed Successors: Mixed Bag
Under California law, the servicer must confirm (or deny) the successor and has ten days to provide a letter with basic information about the loan, including balance, interest rate (and reset rates/dates if applicable), default information, delinquency information, monthly payment amounts, and the total amount required to pay off the loan. All successors in California have a right to apply for an assumption of the loan, as long as it is assumable. An important right held by California homeowners is to privately sue the servicer or beneficiary if there is a violation of the successor in interest law, similar to the private right found in the state’s Homeowner Bill of Rights.
The federal regulations, like the California law, require disclosure of certain information to successors. The amount of information that must be disclosed will depend on whether the confirmed successor sends the newly created acknowledgment notice. This notice can be returned to the servicer at any time after confirmation, but it provides notice to the successor that it has been confirmed, that the successor is not liable for the debt unless it specifically assumed the debt, and that the successor may obtain periodic payment statements, as well as transfer notices if the acknowledgment is returned to the servicer. However, if a servicer fails to follow the successor in interest provisions, the rights to sue a servicer are less clear, since many of the rights arise under the General Servicing Policies and Procedures section of RESPA (12 C.F.R. 1024.38), which doesn’t have a private right of action. If a potential successor is denied the right to be confirmed and then the right to obtain loss mitigation, there might be a way to pursue a servicer through the private right of action that arises under the loss mitigation sections of RESPA (12 C.F.R. 1024.41).
CA SB 1150 Section 1 (g) states, “It is the intent of the Legislature that this act work in conjunction with federal Consumer Financial Protection Bureau servicing guidelines.” SB 1150 also provides the following in Section 2:
(4) … (k) (1) Any mortgage servicer, mortgagee, or beneficiary of the deed of trust, or an authorized agent thereof, who, with respect to the successor in interest or person claiming to be a successor in interest, complies with the relevant provisions regarding successors in interest of Part 1024 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1024), known as Regulation X, and Part 1026 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1026), known as Regulation Z, including any revisions to those regulations, shall be deemed to be in compliance with this section.
(2) The provisions of paragraph (1) shall only become operative on the effective date of any revisions to the relevant provisions regarding successors in interest of Part 1024 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1024), known as Regulation X, and Part 1026 of Title 12 of the Code of Federal Regulations (12 C.F.R. Part 1026), known as Regulation Z, issued by the federal Consumer Financial Protection Bureau that revise the Final Servicing Rules in 78 Federal Register 10696, of February 14th, 2013.
When comparing various provisions of these laws — including the scope of potential successors, the amount of protection when a loan is in foreclosure, and the specific rights given to confirmed successors — it is unclear whether a servicer would be safe in complying solely with federal law. For example, if a California successor has a right to not have a notice of default recorded during the 120-day confirmation process, yet the federal regulations don’t halt foreclosures during the confirmation process, will Section 2 of SB 1150 protect a servicer who complied with the federal law when the state law provided more protections covering a loan in foreclosure? Would this provision be ripe for a Bureau determination on whether the federal rules are inconsistent with state law under 12 C.F.R. 1024.5(c)(3)?
There is truly a remarkable granting of rights with these amendments, provided that they stand the test of time given the current political shakeup in the United States. Never before has a group of individuals, who were not parties to the original mortgage contract, been given the protections that are provided in California — and will, in April 2018, apply to all qualified individuals covered under the CFPB rules.
As the regulations become effective and operative, there will be many challenges in implementation and proper application. Litigation will likely result, and the courts will weigh in on this new area of law.
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