In August of 2016, the Consumer Financial Protection Bureau (CFPB) issued a final rule (2016 Mortgage Servicing Rule) which, in pertinent part, sought to clarify, revise, and amend certain mortgage servicing provisions under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA), as those provisions related to and impacted “successors in interest” to borrowers with a legal interest in real property subject to a mortgage loan.
Thereafter, on April 19, 2018, the CFPB amendments went into effect, and the rule became operational.
While lenders, mortgage servicers, and their legal counsels are certainly well aware of the rule and the associated regulations by this point in time, and the vast majority of those involved in the mortgage loan servicing industry have implemented stringent processes and strategies for accounting for and complying with RESPA and TILA, this article seeks to revisit and highlight those rules and regulations, while also identifying some recurring issues that continue to impact mortgage servicing, as well as the litigation stemming therefrom.
The Regulatory Framework: Who Is a Successor In Interest?
The modern treatment of successors in interest stems from amendments to Regulation X and Regulation Z, promulgated by the Consumer Financial Protection Bureau. Under these rules, a “successor in interest” is broadly defined as a person who acquires an ownership interest in property securing a mortgage loan through specified types of transfers, including those arising from death, divorce, or certain trust arrangements.
Crucially, the regulations distinguish between a “potential” successor in interest and a “confirmed” successor in interest. A successor becomes “confirmed” once the servicer verifies both the individual’s identity and ownership interest in the property. That distinction is not merely semantic, as, upon confirmation, the successor in interest is thereafter treated as a “borrower” for purposes of the mortgage servicing rules, regardless of whether or not the successor has formally assumed the loan in question.
Indeed, the confirmation of a successor in interest carries significant implications, in consideration of the fact that a “confirmed” successor is entitled to the same protections as the original borrower under RESPA, including rights related to loss mitigation, error resolution, and access to loan information.
Servicer Obligations: When Duties Are Triggered
While certain servicer obligations, with respect to successors in interest, are triggered upon confirmation, other obligations often arise at an earlier stage, upon the servicer’s receipt of an indication that a person may qualify as a successor. This “inquiry notice” framework requires servicers to promptly respond to communications received from a potential successor in interest, evaluate documentation provided, and, ultimately, to make determinations regarding successor status within a reasonable time.
Inarguably, the regulations impose a balancing act of sorts as, while servicers have been granted the authority to require the submission of documentation sufficient to definitively establish the identity and ownership of the individual claiming “successor in interest” status, servicers still must be careful not to create a perception that the requirements imposed are excessively demanding and/or outside of what is actually necessary, as the CFPB explicitly enacted the 2018 rule change in response to reports that servicers were demanding unreasonable or unavailable documentation, or were otherwise refusing to communicate with potential successors in interest altogether.
Per the CFPB:
“Successors in interest are a particularly vulnerable group of consumers, who often must make complex financial decisions with limited information during a period of extreme emotional stress. Successors in interest may be more likely than other homeowners to experience a disruption in household income and, therefore, may be more likely than other homeowners to need loss mitigation to avoid foreclosure.”
In consideration of the foregoing, the governing standards related to certain items, such as whether
documentation requests are “reasonable” or determinations are made “promptly,” are inherently fact specific, and, as a result, create fertile ground for dispute. From a litigation perspective, these ambiguities often
form the basis for potential causes of action, particularly where delays in confirming successor status affect the availability of loss mitigation or foreclosure alternatives.
Loss Mitigation and Foreclosure: A Critical Intersection
As has been shown time and time again, and as is as important today as it has ever been, the designation of a successor in interest becomes particularly consequential in the context of loss mitigation and foreclosure proceedings as, once a successor is confirmed, the servicer must then treat any loss mitigation application received by the successor as if it had been submitted by a borrower, and must otherwise evaluate the application in accordance with applicable regulatory timelines and procedures.
This requirement, pursuant to 12 CFR §1024.30(d), gives rise to several critical implications, including but not limited to the following:
- A confirmed successor may pursue loan modification or other loss mitigation options.
- The servicer must acknowledge and respond to applications in compliance with RESPA timelines.
- Foreclosure activity may be restricted while a complete application is under review.
The failure of a loan servicer to properly and/or timely evaluate and confirm a successor in interest can
therefore disrupt the loss mitigation process and expose servicers to allegations of “dual tracking”—that is, the pursuit of a foreclosure action while also simultaneously failing to properly evaluate a legitimate successor in interest’s potential loss mitigation options.
Litigation Pitfalls Arising From Improper Designation
As alluded to above, one of the most potentially detrimental impacts of a failure to properly evaluate an
individual for successor in interest status is that it opens a servicer to litigation. More specifically, under the 2018 amendment to Regulation X, confirmed successors in interest, having the status of borrowers, may assert a cause of action for RESPA violations.
While Regulation X does not impose a duty on a servicer to provide any borrower (and therefore any confirmed
successor in interest) with any specific loss mitigation option, loan servicers are nonetheless required to evaluate complete loss mitigation applications received more than 37 days before a foreclosure sale for potential loss mitigation options (if any), in accordance with 12 CFR § 1024.41. The failure of a servicer to comply with the requirements of Regulation X and/or RESPA, in general, may ultimately open up servicers to liability to a successor in interest for damages and costs incurred by the successor, as a result of the servicer’s violation of the regulations, just as if that successor had been a borrower themselves.
Indeed, there continues to be emerging litigation over issues arising as a result of successor in interest
claims, and servicers (along with their respective counsels) should, accordingly, be aware of and educate themselves regarding all holdings that may impact their areas of operation. To that end, it is paramount that servicers understand the importance of properly evaluating potential successors in interest to minimize the risk of costly litigation to the greatest extent possible.
Conclusion
Overall, the simplified takeaway is that there must be a continued and, perhaps even an increased, emphasis placed by servicers on the further development and maintenance of procedures for addressing and processing requests related to successor-in-interest claims. Even though non-parties to the loan documents are not bound by those instruments and may not have a viable claim for loss mitigation or property retention, servicers must nonetheless adequately handle and assess all successor in interest claims received, in accordance with CFPB regulations, or else risk claims of impropriety, and the potential costs and consequences of litigation associated therewith.
