IBA Compliance Connection

Your go to source for compliance!

A borrower with a residential mortgage died, and their spouse (who signed the mortgage but is not on the note) is living in the property. The deceased borrower also had a car loan solely in their name. The mortgage and the car loan have not been paid for several months, and the spouse has not responded to our communications. What steps can we take moving forward?

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Since the spouse has not responded to your communications, and presumably has not indicated an interest in assuming either loan, we generally recommend following the same procedures you would follow when a living borrower has defaulted on a residential mortgage loan or a car loan — with the caveats addressed below. We also recommend conferring with your bank counsel regarding potential foreclosure and repossession actions.

Mortgage Loan

The RESPA servicing rules require a servicer that learns of a borrower’s death to promptly facilitate communication with any potential successors in interest who may have acquired an ownership interest in the property when the borrower died. If the borrower had a will, we recommend reviewing it to determine if there are any other potential successors in interest besides the spouse with whom you should initiate communication.

If your loan documents contain a “due-on-sale” clause authorizing you to accelerate the loan balance if the mortgaged property is transferred without your prior consent, federal law prohibits the enforcement of such clauses when the transfer is due to the death of a borrower. However, given that the mortgage loan appears to be in default due to several months of non-payment, we believe you may proceed with a foreclosure action against the property according to the terms of your mortgage and note and the Illinois Mortgage Foreclosure Law — provided the action is not subject to any pandemic-related restrictions.

Single-family mortgages backed by Fannie Mae or Freddie Mac and single-family mortgages insured by the Federal Housing Administration or guaranteed or insured by the Department of Agriculture or Department of Veterans Affairs are subject to foreclosure moratoriums that have been extended through June 30, 2021. Some Illinois circuit courts also have imposed their own restrictions related to foreclosure actions, such as the Circuit Court of Cook County, where residential foreclosure actions may proceed only through the entry of judgment of foreclosure, after which they are automatically stayed pending further order of the court. Consequently, we recommend reviewing whether the mortgage loan is subject to any foreclosure moratoriums and determining whether there are any foreclosure restrictions in the jurisdiction where the mortgaged property is located.

Also, note that under Illinois Executive Order 2020-72 (as amended by Executive Order 2020-74), residential eviction orders arising out of foreclosure cases may be enforced only if no occupants have signed a Tenant Declaration Form (available from the Illinois Housing Development Authority) or if an occupant poses a direct threat to other tenants or to the property. Currently, these restrictions are effective through March 6, 2021, but they may be extended further.

In addition, if you proceed with filing a foreclosure action, you must name a personal representative for the deceased borrower for the court to acquire jurisdiction over the proceeding. Alternatively, if the borrower has a probate estate, you may choose to forgo foreclosing the mortgage and instead elect to have the estate manage and dispose of the property. However, in such case you would be subject to the Illinois Probate Act’s classification of claims, which would require payment of administrative expenses before payment of your bank’s claim.

Car Loan

Regarding the car loan, we believe you may proceed with repossession according to the terms of your loan agreement and the relevant provisions of the Uniform Commercial Code and Illinois Vehicle Code or, if the borrower has a probate estate, you may choose to have the estate dispose of the vehicle. As mentioned above, allowing the estate to dispose of the vehicle would subject your claim to the Probate Act’s classification of claims.

Additionally, we note that while vehicle repossessions were temporarily suspended under COVID-19-related Illinois executive orders, they were allowed to resume as of August 23, 2020.

For resources related to our guidance, please see:

  • RESPA, 12 CFR 1024.38(B)(1)(vi)(A) (“The policies and procedures required by paragraph (a) of this section shall be reasonably designed to ensure that the servicer can: . . . Upon receiving notice of the death of a borrower or of any transfer of the property securing a mortgage loan, promptly facilitate communication with any potential or confirmed successors in interest regarding the property . . .”)
  • RESPA, 12 CFR 1024.31(a) (“Successor in interest means a person to whom an ownership interest in a property securing a mortgage loan subject to this subpart is transferred from a borrower, provided that the transfer is: (1) A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; (2) A transfer to a relative resulting from the death of a borrower; (3) A transfer where the spouse or children of the borrower become an owner of the property . . .”)
  • National Housing Act, 12 USC 1701j-3(a)(1) (“For the purpose of this section . . . the term ‘due-on-sale clause’ means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent . . .”)
  • National Housing Act, 12 USC 1701j-3(d) (“With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon . . . (3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; . . . (5) a transfer to a relative resulting from the death of a borrower . . .”)
  • FHFA Extends Foreclosure and REO Eviction Moratoriums (February 9, 2021) (“Today, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac (the Enterprises) are extending the moratoriums on single-family foreclosures and real estate owned (REO) evictions until March 31, 2021. The foreclosure moratorium applies to Enterprise-backed, single-family mortgages only.”)
  • HUD, Mortgagee Letter 2021-05 (February 16, 2021) (“FHA-insured Single Family Mortgages, excluding vacant or abandoned Properties, are subject to an extension to the moratorium on foreclosure through June 30, 2021. The moratorium applies to the initiation of foreclosures and to foreclosures in process.”)
  • Veterans Benefits Administration, Circular 26-21-05 (February 16, 2021) (“Due to the ongoing COVID-19 national emergency and its impact on Veteran borrowers, all properties secured by VA-guaranteed loans, including those previously secured by VA-guaranteed loans but currently in VA’s REO portfolio, are subject to a moratorium on foreclosure and eviction through June 30, 2021. Except with respect to a vacant or abandoned property, the moratorium applies to the initiation of foreclosures, the completion of foreclosures in process, and evictions.”)
  • Circuit Court of Cook County, County Department, Chancery Division, General Administrative Order No. 2020-15 (December 16, 2020) (“Residential foreclosures, where a mortgagor or any resident or tenant lives in the property, may proceed through entry of the judgment of foreclosure. Service of process, routine motions for matters such as special representatives and special process servers, may commence in the normal course for residential cases. . . . After entry of the judgment of foreclosure, the case will be automatically stayed until further order of the court. No sales shall be scheduled or held until further order of the court unless exigent circumstances are raised with the Court first.”)
  • Illinois Executive Order 2020-72 (“Section 1. For purposes of this Executive Order, the following terms are defined as set forth below: a. ‘Covered Person’ means any tenant, lessee, sub-lessee, or resident of a residential property who provides to their landlord, the owner of the residential property, or other person or entity with a legal right to pursue an eviction or possessory action, a Declaration under penalty of perjury indicating that . . .

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Section 2. A person or entity may not commence a residential eviction action pursuant to or arising under 735 ILCS 5/9-101 et seq. against a Covered Person unless that person poses a direct threat to the health and safety of other tenants or an immediate and severe risk to property.”)

  • Illinois Executive Order 2020-74 (“Section 7. A person or entity may not commence a residential eviction action pursuant to or arising under 735 ILCS 5/9-101 et seq. against a tenant who does not owe rent unless the tenant poses a direct threat to the health and safety of other tenants or an immediate and severe risk to property. A tenant shall not be required to provide a Declaration if they are covered by this section.”)
  • Illinois Executive Order 2021-04 (“Executive Order 2020-72, as amended by Executive Order 2020-74 and Executive Order 2021-01, is re-issued in its entirety and extended through March 6, 2021.”)
  • IICLE, Estate Administration Fundamentals 2019 Edition, Chapter 5 — Claims Against the Estate (“Note, however, that the Supreme Court has held that a secured creditor must name the personal representative for a deceased mortgagor in a mortgage foreclosure proceeding involving the secured property for the circuit court to acquire subject-matter jurisdiction over the proceeding. ABN AMRO Mortgage Group, Inc. v. McGahan, 237 Ill.2d 526, 931 N.E.2d 1190, 342 Ill.Dec. 7 (2010).”)
  • ABN AMRO Mortgage Group, Inc. v. McGahan, 931 N.E.2d 1190, 1192 (2010) (“The question at issue here is whether a mortgagee must name a personal representative for a deceased mortgagor in a mortgage foreclosure proceeding in order for the circuit court to acquire subject matter jurisdiction. For the reasons that follow, we conclude that it must.”)
  • IICLE, Estate Administration Fundamentals 2019 Edition, Chapter 5 — Claims Against the Estate (“However, when the secured creditor elects to forgo its remedy of foreclosing the lien to extinguish the debt and instead elects to have the estate manage and dispose of the property, the creditor subjects itself to the classification of claims under the Probate Act. . . . In that situation, the proceeds from the sale of the secured property are subject to the priority classification that requires payment of administrative expenses before all other claims, and the secured creditor has ‘no superior rights in the matter of classifying claims.’ . . .  The rationale is that the secured creditor benefited from the estate’s efforts to collect and disburse the funds and that the creditor’s ability to satisfy claims would be seriously compromised without the orderly administration of estates. A creditor who does not wish to be subject to the Probate Act’s classification of claims can elect to foreclose the security lien on its own.”)
  • Probate Act of 1975, Article XVIII, Claims Against Estates, 755 ILCS 5/18-10 (“All claims against the estate of a decedent are divided into classes in the manner following: 1st: Funeral and burial expenses, expenses of administration, and statutory custodial claims. . . . 7th: All other claims.”)
  • Illinois UCC, 810 ILCS 5/9-609 (Addressing a secured party’s right to take possession of collateral after default.)
  • Illinois Vehicle Code, 625 ILCS 5/3-114 (Addressing vehicle repossession with and without assignment of title.)
  • Illinois Executive Order 2020-16 (March 28, 2020) (“Section 1. Beginning March 27, 2020 and continuing for the duration of the Gubernatorial Disaster Proclamation, the provisions of the Uniform Commercial Code, 810 ILCS 5/9-609, regarding the possession or usability of a vehicle, and the provisions of the Illinois Vehicle Code, 625 ILCS 5/3-114, regarding the repossession of vehicles, are suspended. . . .”)
  • Illinois Executive Order 2020-48 (July 24, 2020) (“Executive Order 2020-16 is re-issued in its entirety and extended through August 22, 2020, whereafter Section 1 shall be rescinded.”)