Ensuring smooth post-separation transfer by circumventing the ability-to-repay rule
Posted on 08/06/2014 at 11:29 AM by Mary Zambreno
The CFPB recently took action to ensure successors of mortgages (such as spouses or children of a deceased family member, or an ex-partner in a divorce) may take over a mortgage without having to be approved under the criteria of the recently enacted Ability-to-Repay Rule. The CFPB's interpretive rule ensures that successors of mortgages have the tools at their disposal to stay in their homes and continue making payments on the property. The Ability-to-Repay rule was enacted to ensure lenders issue mortgages only to those who can afford to repay them; the ATR rule require[s] creditors to make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling.
Applying the ATR rule to successors of mortgages could preclude transfers of property to a surviving spouse in the event of a death or an ex-partner in the event of a divorce if there is any outstanding debt left on the mortgage and the successor obligor is deemed unable to repay the loan. However, the CFPB's ruling permits the successor to be formally added to the mortgage as a borrower/obligor without undergoing ATR Rule approval by virtue of possessing title to the mortgage. Being formally added to the mortgage empowers the successor to more easily obtain account information, pay off the loan, or try to obtain a loan modification. This interpretive rule helps to ensure the smooth transfer of a home in the event of a divorce. Formal status as a borrower under the mortgage empowers the spouse who retains the house to seek a loan modification to make the terms of the loan more affordable under changed circumstances following divorce, for example. The rule could also help expedite divorce proceedings and the separation of assets given that the spouse who retains the mortgage does not need to obtain approval under ATR Rule criteria to be added to the mortgage. Given the disarray and altered financial circumstances that often occur after a divorce, the CFPB's interpretive rule helps to preserve stability in homeownership and helps alleviate concerns of losing the home for the spouse who retains the mortgage.
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