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2.11 Challenges for Successors in Interest

It can be particularly challenging to prevent a foreclosure when the owner inherited a home or was awarded it in a divorce. Often these homeowners were not the original borrower on the mortgage loan but have lived in the house for years, or even decades. These homeowners are called “successors in interest” or “successors” because they succeeded to ownership of the home after a death or family breakup. Federal law prevents the creditor from invoking a “due on sale” clause based on such a transfer.223 But successors in interest face numerous problems when dealing with mortgage servicers. These include: communication issues; unreasonable documentation requirements; the inability to obtain workouts with assumptions; limited access for domestic violence survivors; limited foreclosure protections; and fewer enforceable rights.

The first challenge typically encountered by a successor is simply obtaining information from the servicer. Many servicers will refuse to talk to successors or will provide only limited information until the successor has provided certain documentation. Under the Real Estate Settlement Procedures Act (RESPA), a servicer has the right to ask a successor to provide documentation showing that they own the house and that they became the owner of the house through an intra-family transfer that enables them to continue paying on the mortgage.224 However, servicers often request proof of ownership that is difficult or impossible to obtain, refuse to accept a document that is legally sufficient to prove ownership, or request the same documents over and over again.

Many times, the transfer of ownership through a death or family breakup coincides with a loss of income that causes the successor to fall behind on the mortgage payments. Often the successor needs a loan modification, to bring the loan current and adjust the payment to an affordable level, and could qualify for one under existing modification programs. These modifications not only benefit the homeowner but also provide community stability through reduced foreclosures and vacancies, as well as financial benefits to investors provided by performing loans. Yet a substantial number of these successors currently face foreclosure due to widespread confusion about their rights and options.225 Successors are often told by servicers that, as a non-borrower, it is not possible for them to obtain a loan modification. Typically this is not true. The loan modification rules that apply to the vast majority of residential mortgages, including GSE and FHA loans, require a successor in interest after a death or divorce to be evaluated for a modification under the same rules that apply to the borrower. If they qualify for the modification based on documented household income, the servicer should approve the successor for a simultaneous loan modification and assumption.

Sometimes a successor in interest progresses in the modification process so as to actually receive a trial period plan and make payments pursuant to that plan, only to then receive a modification agreement in the name of the absent (or deceased) borrower. Servicers sometimes refuse to correct this mistake, and insist that the modification will not be honored without the original borrower’s signature.

A practical approach to assisting successors in interest is available in § 4.8, infra. Regulations under RESPA also provide guidance on how servicers should treat successors in interest.226 As of April 19, 2018, these regulations require confirmed successors in interest to be treated as borrowers for purposes of RESPA’s loss mitigation provisions.227 Even prior to the new regulations’ effective date, several courts held that the successor, as the representative of the borrower’s estate, may pursue a RESPA claim on behalf of the deceased borrower.228 Other courts have held that successors who were originally signatories to the security instrument, but not the note, also have standing to pursue RESPA claims.229

Other statutory claims, such as UDAP violations, contract claims, and tort claims, including fraud or fraudulent misrepresentation, may apply to the servicer’s conduct with respect to the successor in interest. State law may also provide successors in interest certain rights and remedies against mortgage servicers.230

For successors facing foreclosure, chapter 13 provides another option. The vast majority of bankruptcy courts have held that a successor homeowner may treat the mortgage secured by their home in a chapter 13 plan, even if they are not the borrower on the note and has no personal liability on the debt.231

Footnotes

  • 223 {218} See § 4.8, infra.

  • 224 {219} See 12 U.S.C. § 1701j-3(d).

  • 225 {220} See § 3.2.3, infra. See also Nat’l Council of La Raza & Nat’l Hous. Res. Ctr., Are Mortgage Servicers Following the New Rules? A Snapshot of Compliance with CFPB Servicing Standards (Jan. 9, 2015); Cal. Reinvestment Coalition, Chasm Between Wods and Deeds X: How Ongoing Mortgage Servicing Problems Hurt California Homeowners and Hadest-Hit Communities (May 2014), available at www.calreinvest.org.

  • 226 See § 3.2.3, infra.

  • 227 Id.

  • 228 {223} See Covino v. Wells Fargo Bank, 2018 WL 4616071, at *6 (D.N.J. Sept. 26, 2018) (denying motion to dismiss RESPA claim by deceased borrower’s son; son was “next of kin and the executor of his estate [so] requests were made by an agent of the borrower.”); Kralovic v. JP Morgan Chase Bank, 2015 WL 252315 (N.D. Ohio Jan. 20, 2015); Wilson v. Bank of Am., 48 F. Supp. 3d 787 (E.D. Pa. 2014); § 3.2.2, infra.

  • 229 {224} See Washington v. Green Tree Servicing, L.L.C., 2017 WL 1857258 (S.D. Ohio May 5, 2017), adopted, 2017 WL 2599252 (S.D. Ohio June 15, 2017); Frank v. JP Morgan Chase Bank, 2016 WL 3055901 (N.D. Cal. May 31, 2016); § 3.2.2, infra.

  • 230 {225} See, e.g., Cal. Civ. Code § 2920.7 (West) (effective Jan. 1, 2017) (detailing treatment for successors in interest and providing successors with remedies under other state law provisions).

  • 231 {226} See In re McNeal, 2011 WL 4381725 (Bankr. M.D. Fla. Sept. 1, 2011) (son who inherited a one-tenth interest in home from his mother and subsequently received quitclaim deeds from four of nine co-owners could include mortgagee’s claim in his bankruptcy plan); In re Flores, 345 B.R. 615 (Bankr. N.D. Ill. 2006); In re Trapp, 260 B.R. 267, 268 (Bankr. D.S.C. 2001); In re Rutledge, 208 B.R. 624 (Bankr. E.D.N.Y. 1997); In re Hutcherson, 186 B.R. 546 (Bankr. N.D. Ga. 1995) (daughter inherited home from mother); In re Lumpkin, 144 B.R. 240 (Bankr. D. Conn. 1992) (daughter received home by quitclaim deed from mother). See also National Consumer Law Center, Home Foreclosures § 9.4.1 (2019), updated at www.nclc.org.