The CFPB has issued a final rule interpreting the ability-to-repay (ATR) rule in certain situations where a mortgaged property has been transferred to a successor-in-interest. The rule spells out when a servicer may substitute or add a successor as the new obligor on an existing mortgage without triggering the ATR and closing disclosure requirements under Regulation Z, including the following examples:

• Death: A surviving spouse or child receives a legal interest in a property after the death of the original borrower.

• Divorce: A spouse receives a legal interest in a property after a separation or divorce.

• Transfer from a family member: A child receives a legal interest in a property transferred from his or her living parents.

• Trust: An inter vivos trust receives a legal interest in a property from the original borrower, who is the beneficiary of the trust.

The CFPB’s examples are all transactions in which a successor has assumed a mortgage, but the transaction does not fall into Regulation Z’s definition of an “assumption.” The final rule definitively states that the addition of a successor to a mortgage that does not fall into Regulation Z’s definition of “assumption” will not be subject to the ATR rule.

To determine whether a transaction should be considered an “assumption,” the final rule refers to the existing rule and commentary under 12 CFR 1026.20(b), which define the term “assumption.” Subsection (b) excludes from the definition of “assumption” any transaction in which a successor voluntarily signs on to a mortgage loan that is secured by property that the successor already has acquired. As a result, the examples given above are not “assumptions,” because the successor already would have acquired the property (whether by law or agreement) before assuming the mortgage.  Because those transactions are not considered “assumptions,” the final rule states that the ATR rule does not apply to them.

The CFPB also states that it eventually will incorporate this interpretation into the Official Staff Commentary for the ATR rule. It also will continue to monitor issues under the RESPA servicing rule’s requirement to communicate with the successor-in-interest of a deceased borrower under 12 CFR 1024.38(b)(1)(vi) and its October 2013 Guidance Bulletin.

For additional information about the final rule, see the CFPB’s press release.