The Consumer Financial Protection Bureau's pending rule for mortgage servicers regarding successors-in-interest has the potential to put several more nails in the mortgage lending industry's coffin, potentially making investments in mortgages even more unattractive than they are today. With the proposed rule, the CFPB both misdiagnosed the problem and introduced regulation that would exacerbate the actual issues.
Purportedly, the CFPBs' "Successor-in-Interest" proposal was intended to: help those inheriting property or obtaining property in a divorce settlement — i.e., "successors" — obtain mortgage modifications if the property's new occupant is not able to afford the mortgage payments; and help successors get access to loan account information, even though the property's new occupant is not the mortgage borrower.
The stated purpose of the proposed rule does not make much sense because successors can and do obtain loan modifications and account information today. All the successor needs is the permission of the borrower or the borrower's estate, if the borrower has died.
Instead, this rule would give the successor all of the borrower's loan information, even if the borrower objects and without regard to the borrower's privacy rights. This would conflict with privacy laws, which the CFPB did not propose to amend. It would also invite fraud, such as identity theft.
The CFPB heard complaints that servicers require probate documents from successors even when it is clear that the successor owns the mortgaged property, but is not on the mortgage loan. The CFPB apparently assumed, incorrectly, that servicers request probate documents to determine whether a due-on-sale clause is exercisable. In fact, privacy laws are the reason.
Privacy laws often prohibit servicers from providing loan information to successors who own the property, but do permit sharing information with the borrower or the representative of a borrower's estate. Servicers need to confirm who represents the estate, and probate may be the only way to verify this information.
The CFPB proposed to restrict servicers' ability to request probate documents when an estate is not required to be probated. The CFPB did not propose to fix the privacy restriction on providing information to the successor who actually owns the property (unless that person also represents the estate). Even if the proposal were final, it would "solve" the wrong problem and not solve the actual problem.
The rulemaking would have a purpose if the actual intent is to require servicers to modify a loan without the borrower's knowledge or consent, or even over the borrower's objection. This would be grossly unfair to borrowers.
In addition, it would mandate loan assumptions for successors, and modify the loan if the successor is not able to afford the mortgage payments.
Under this construct, borrowers will have the perverse incentive to transfer their property, or an interest in their property, to a successor who will get modified mortgage payments because the successor has less income and assets than the borrower.
This would run roughshod over investors' contracts and remedies.
Although these were recommendations that have been made by the National Consumer Law Center, the CFPB did not actually state that these were the intended purposes of the rule.
The CFPB's proposed "successors-in-Interest" rule is based on a misdiagnosis of the problem; its stated purposes does not make sense; and the apparent purpose, although not officially proposed, would be harmful the borrowers and investors alike.
Moreover, three federal statutes prohibit the CFPB from interfering with contractual mortgage remedies, which the CFPB's proposed rule would do. Another statute prohibits the CFPB from writing regulations governing due-on-sale procedures, which the rule also would do.
Ultimately, mortgage consumers bear the brunt of any rules that are either ill-conceived or do not work. If the CFPB wants to fix the problem that they misdiagnosed, we would recommend that they request input on the significant privacy issues involved, while permitting mortgage servicers to continue to protect against mortgage fraud.
Anne Canfield is the executive director of the Consumer Mortgage Coalition.