Successors in Interest Revisited
It has been some time since the changes to the Mortgage Servicing Rules related to Successors in Interest took effect. From what we have seen during our in-bank reviews, these changes/ requirements are still flying under the radar in many banks, which really isn’t that surprising. From a regulatory perspective, there was a lot going on in 2018, from the new HMDA rules, the TRID 2.0 changes, to the BSA Customer Due Diligence and Beneficial Ownership requirements. As a result, we felt it might be a good idea to revisit a few key things regarding this Rule.
Small Servicer Exception Does NOT Apply
Any time there is a rule change, the first question should always be: Does the change apply to me? Generally, the Mortgage Servicing Rules apply to any entity that “services” consumer mortgage loans whether the loan is retained in-house or sold to an investor. You are deemed to be “servicing” a loan if you receive any scheduled periodic payments from a borrower (including funds for an escrow account) and make those payments to the owner of the loan or other third parties.
The Mortgage Servicing Rules are particularly confusing; however, because some of the requirements have a “Small Servicer” exemption and others do not. While that allows smaller banks to technically avoid some of the servicing requirements, there is no general Small Servicer exemption for the Successor in Interest requirements. If you are a Small Servicer looking to determine what your obligations are if you have a successor in interest scenario pop up, you need to look at each individual regulatory requirement to see if an exemption applies. For example, if you’re exempt from the periodic statement requirements, you wouldn’t need to provide a periodic statement to a successor in interest. In light of the confusion, we have seen some small servicers incorrectly assume that none of the Successor in Interest provisions apply to them.
What is a Successor in Interest?
The Successor in Interest requirements, and really all of the Mortgage Servicing Rules in general, were conceived in the wake of the global financial crisis and the mortgage bubble burst. There were significant servicing failures across the board. One such failure was the unwillingness to clearly communicate with borrowers and, in turn, successors in interest. As a result, the servicing rules were intended, in part, to provide some baseline requirements.
So what exactly is a “successor in interest”? It actually is a legal term that applies to all kinds of areas, products liability, labor law, employment law, contracts and, of course, real estate. Under both Regulation Z and RESPA, a successor in interest is generally a person or entity that receives, through some type of transfer, an ownership interest in a dwelling (under Regulation Z) or residential real property (under RESPA) that secures a closed-end loan. As the CFPB wrote with the Final Rule, Successors in interest are homeowners whose property is subject to foreclosure if the mortgage loan obligation is not satisfied, even though the successor in interest may not have assumed that obligation…or otherwise be liable on the obligation.
So, how can a successor in interest scenario come about? A relative can inherit property after the death of the owner; property interests can be assigned during a divorce; or there could be some other type of legal proceeding that creates a property interest like the dissolution of a trust. The point is, there are plenty of ways a successor in interest scenario could be created. The real trick is recognizing them and knowing what to do when you have one!
Potential versus Confirmed Successors
There are two varieties of “successors” to keep in mind, “Potential Successors” and “Confirmed Successors”. If someone comes to you saying they’ve received an ownership interest in a dwelling or property that secures one of your loans, you’re likely going to look to confirm 1) the identity of the person; and 2) the person’s ownership interest in the property securing the loan. Once you do so, the person becomes a “Confirmed Successor”.
You need to be able to quickly recognize when you have a Potential Successor and communicate whatever you need to confirm them. If you receive a written notice from a Potential Successor that allows you to identify who they received their property interest from and the applicable loan, it must be treated as a request for information under the servicing rules. This includes any written statement that indicates there is an ownership transfer as a result of death, divorce, etc. Potential Successors must then be provided with a written description of what is needed to confirm their identity and ownership interest.
You will also need to provide them with contact information, including a phone number, for further assistance. However you become aware of a potential successor, be ready to communicate with them.
How you confirm the successor’s status may vary depending upon the situation. For example, it might be through a Death Certificate, Will or Court Order. One major thing to keep in mind is that you cannot ask for unnecessary documents. You can only require what is necessary under State Law; you cannot raise the bar! In other words, you will need to know what documents you need from the Potential Successor when you ask for them. In addition, you cannot require the same thing multiple times. So, once a Potential Successor gives you what you have requested, you cannot force them to resubmit the information! Probably most importantly, do not refuse to communicate with a potential successor. Believe it or not, all of these things happened, which is why we now have a rule.
If you’re not a small servicer (i.e. a Large Servicer), you must have policies and procedures in place to assist in your communication with potential and confirmed successors in interest. Those policies and procedures must help you promptly communicate what documents you need to confirm a potential successor as well as your determination of whether the successor in interest is confirmed. While small servicers don’t technically need policies and procedures, we would definitely recommend them, considering all the different scenarios that can come up.
Requirements
A Confirmed Successor in Interest must be considered a borrower under both the RESPA and the TILA Mortgage Servicing Requirements. It is important to emphasize that this is without taking on any liability of the loan. The applicable servicing requirements are as follows:
RESPA Mortgage Servicing Requirements:
- Continuity of Contact*
- Early Intervention*
- Error Resolution Requests
- Escrow Account Statements
- Force-Placed Hazard Insurance
- General Servicing Policies and Procedures*
- Loss Mitigation*
- Requests for Information
- Servicing Transfer Notices
- Timely Escrow Payments and Treatment of Escrow Account Balances
*Small Servicer Exemption
TILA Mortgage Servicing Requirements:
- Payment Processing
- Payoff Statements
- Escrow Account Cancellation Notices
- Periodic Statements/Coupon Books*
- Rate Change Notices
- Mortgage Transfer Notices
*Small Servicer Exemption
However, if a required disclosure/notice is currently being provided to a borrower, an additional notice to a Successor is not required. Also keep in mind that just because you confirm a successor and provide them information, it DOES NOT allow you to stop providing information to the Borrower(s)!
Optional Notice/ Acknowledgment
So, once confirmed, Successors are entitled to certain rights as if they were a borrower under the mortgage servicing rules. Once you have a Confirmed Successor in Interest, there is an optional Notice and Acknowledgment Form. While you don’t have to provide it, there are specific content requirements if you do. (See our October 2016 Newsletter.) If you send the form but it’s NOT returned you do not have to provide the following to the Confirmed Successor:
- Early Intervention (Live Contact or Written Notice)*
- Escrow Account Cancellation Notices
- Escrow Account Statements
- Force-Placed Hazard Insurance Notices
- Mortgage Transfer Disclosures
- Periodic Statements/Coupon Books*
- Rate Change Notices
- Servicing Transfer Notices
*Small Servicer Exemption
However, regardless of whether the acknowledgment is returned, the Successor is entitled to submit error notices, information requests, and request a payoff statement. An explanation of those rights and how to use them must be included in the Notice/Acknowledgment.
While the loss mitigation requirements have a Small Servicer exemption, we believe the regulatory requirements provide good guidelines, even if you’re a Small Servicer not technically subject to them. If you receive a loss mitigation application from a Potential Successor (before confirmation), you may review and evaluate it, but are not required to do so. You can wait until after you have confirmed the Successor. However, you must keep the original information submitted and review it upon confirmation.
We hope this little refresher on the Successor in Interest Rule is helpful. While these scenarios may not occur every day, you need to be prepared to handle them when they do. If not handled well, these scenarios are complaints waiting to happen…complaints that, if escalated, will likely raise the eyebrow of your regulator. Now may be a good time to make sure that everyone in your bank is on the same page and to clear up any misconceptions.
Written by The Banker's Compliance Consulting Team. Learn all about them here - https://www.bankerscompliance.com/about-bank-compliance-consulting/our-team/.
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