[Federal Register Volume 79, Number 137 (Thursday, July 17, 2014)]
[Rules and Regulations]
[Pages 41631-41633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-16780]

Rules and Regulations
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Federal Register / Vol. 79, No. 137 / Thursday, July 17, 2014 / Rules 
and Regulations

[[Page 41631]]


12 CFR Part 1026

[Docket No. CFPB-2014-0016]
RIN 3170-ZA00

Application of Regulation Z's Ability-To-Repay Rule to Certain 
Situations Involving Successors-in-Interest

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule.


SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
issuing this interpretive rule to clarify that the Bureau's Ability-to-
Repay Rule incorporates the existing definition of ``assumption'' under 
Regulation Z.

DATES: This clarification is effective July 17, 2014 and applicable 
beginning July 8, 2014.

FOR FURTHER INFORMATION CONTACT: William R. Corbett, Senior Counsel, 
Office of Regulations, Consumer Financial Protection Bureau, 1700 G 
Street NW., at (202) 435-7700.


I. Background

    The Bureau is issuing this interpretive rule to clarify that where 
a successor-in-interest (successor) who has previously acquired title 
to a dwelling agrees to be added as obligor or substituted for the 
existing obligor on a consumer credit transaction secured by that 
dwelling, the creditor's written acknowledgement of the successor as 
obligor is not subject to the Bureau's Ability-to-Repay Rule (ATR 
Rule), Sec.  1026.43, because such a transaction does not constitute an 
assumption as defined by Regulation Z Sec.  1026.20(b).\1\

    \1\ This interpretive rule refers generally to ``creditors.'' 
Under Regulation Z the term ``creditor'' generally means the one to 
whom the obligation is initially payable. See Sec.  1026.2(a)17. 
Where a mortgage has been sold after consummation, the original 
``creditor'' may no longer be in position to agree to add an 
obligor. When evaluating whether acknowledging a new obligor 
triggers the requirements of Sec.  1026.20(b) or Sec.  1026. 43, 
servicers and assignees of the original obligation may rely on this 
interpretive rule.

    In the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010), (Dodd-Frank Act), Congress 
established the Bureau and generally consolidated the rulemaking 
authority for Federal consumer financial laws, including the Truth in 
Lending Act (TILA) and the Real Estate Settlement Procedures Act, in 
the Bureau, effective July 21, 2011.\2\ Historically, Regulation Z, 
which was issued by the Board of Governors of the Federal Reserve 
System (Board), 12 CFR part 226, had implemented TILA. On December 22, 
2011, pursuant to the Dodd-Frank Act and TILA, as amended by the Dodd-
Frank Act, the Bureau published an interim final rule establishing a 
new Regulation Z (Truth in Lending), 12 CFR part 1026, implementing 
TILA (except with respect to persons excluded from the Bureau's 
rulemaking authority by section 1029 of the Dodd-Frank Act). The 
interim final rule substantially duplicated the Board's Regulation Z, 
as it existed at that time, making only non-substantive, technical, 
formatting, and stylistic changes.

    \2\ See, e.g., sections 1011 and 1021 of the Dodd-Frank Act, 12 
U.S.C. 5491 and 5511 (establishing and setting forth the purpose, 
objectives, and functions of the Bureau); section 1061 of the Dodd-
Frank Act, 12 U.S.C. 5581 (consolidating certain rulemaking 
authority for Federal consumer financial laws in the Bureau); 
section 1100A of the Dodd-Frank Act (codified in scattered sections 
of 15 U.S.C.) (similarly consolidating certain rulemaking authority 
in the Bureau). But see section 1029 of the Dodd-Frank Act, 12 
U.S.C. 5519 (subject to certain exceptions, excluding from the 
Bureau's authority any rulemaking authority over a motor vehicle 
dealer that is predominantly engaged in the sale and servicing of 
motor vehicles, the leasing and servicing of motor vehicles, or 

    Beginning January 10, 2013, the Bureau issued several final rules 
implementing amendments to TILA under the Dodd-Frank Act (the Title XIV 
Final Rules), including the ATR Rule.\3\ On February 13, 2013, the 
Bureau announced an initiative to support implementation of its new 
mortgage rules,\4\ under which the Bureau would work with the mortgage 
industry and other stakeholders to ensure that the new rules could be 
implemented accurately and expeditiously.

    \3\ On January 10, 2013, the Bureau issued the January 2013 ATR 
Final Rule. 78 FR 6407 (Jan. 30, 2013). That same day the Bureau 
issued the 2013 Escrows Final Rule, and the 2013 HOEPA Final Rule. 
78 FR 4725 (Jan. 22, 2013); 78 FR 6855 (Jan. 31, 2013). On January 
17, 2013, the Bureau issued the 2013 Mortgage Servicing Final Rules. 
78 FR 10695 (Feb. 14, 2013); 78 FR 10901 (Feb. 14, 2013). On January 
18, 2013, the Bureau issued the 2013 ECOA Valuations Final Rule and, 
jointly with other agencies, the 2013 Interagency Appraisals Final 
Rule. 78 FR 7215 (Jan. 31, 2013); 78 FR 10367 (Feb. 13, 2013). On 
January 20, 2013, the Bureau issued the 2013 Loan Originator Final 
Rule. 78 FR 11279 (Feb. 15, 2013). Pursuant to the Dodd-Frank Act, 
which permitted a maximum of one year for implementation, most of 
these rules became effective on January 10, 2014.
    \4\ Press Release, Consumer Financial Protection Bureau, CFPB 
Lays Out Implementation Plan for New Mortgage Rules (Feb. 13, 2013), 
available at http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-lays-out-implementation-plan-for-new-mortgage-rules/.

    Since the issuance of the Title XIV Final Rules, industry and 
consumer advocates have expressed uncertainty about the application of 
the ATR Rule in situations where a successor seeks to be added as an 
obligor or substituted for the current obligor on an existing mortgage. 
The Bureau has been asked whether the creditor is obligated under the 
ATR Rule to determine the successor's ability to repay the mortgage 
before formally adding the successor as an obligor. Often, this issue 
arises upon the death of the obligor, with the surviving spouse or 
children asserting rights under the mortgage, but it may also present 
itself in other settings, such as in separation or divorce, after a 
transfer from living parents to children, or a transfer to an inter 
vivos trust of which the consumer is the beneficiary. If the ATR Rule 
applies when a creditor adds a successor as an obligor, such 
transactions may be less likely to occur. There can be significant 
consequences for a successor that is not able to become an obligor on a 
mortgage. For instance, if the successor seeks a modification of the 
existing transaction as part of trying to retain the home, the creditor 
may refuse to modify the terms of the debt on the grounds that the 
successor is not a party to the existing obligation and therefore 
cannot enter into a modification agreement.\5\

    \5\ As discussed in part II below, most workout agreements are 
not ``refinancings'' subject to the ATR Rule. However, creditors 
generally require a successor to enter into an assumption agreement 
prior to or simultaneous with the execution of the modification 
agreement in part because creditors are concerned about their 
ability to enforce the terms of the modified debt absent a written 
agreement, executed by an obligor with authority.


[[Page 41632]]

    In general, as discussed in part II below, in these situations, 
where the addition or substitution of the successor as the obligor is 
not an ``assumption'' under Sec.  1026.20(b), such addition or 
substitution is not subject to the ATR Rule's requirements. A creditor 
may rely on this interpretation as a safe harbor under section 130(f) 
of TILA. The Bureau plans to incorporate this interpretation into 
Regulation Z's Official Interpretations at a later date.
    The Bureau is aware of other questions related to a servicer's 
obligations under the 2013 Mortgage Servicing Final Rules with respect 
to successors. Under Regulation X Sec.  1024.38(b)(1)(vi), servicers 
are required to maintain policies and procedures reasonably designed to 
ensure the servicer can promptly identify and facilitate communication 
with the successor-in-interest of a deceased borrower upon notification 
of the death of the borrower. On October 15, 2013, the Bureau issued a 
guidance bulletin providing examples of servicer practices the Bureau 
would consider to be components of the policies and procedures mortgage 
servicers must have in place to comply with these requirements 
regarding successors-in-interest.\6\ The Bureau is monitoring these 
issues to determine whether they require further guidance or 

    \6\ CFPB Bulletin, 2013-12 (Oct. 15, 2013), http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing_bulletin.pdf.

II. Application of ATR to Certain Situations Involving Successors-in-

    The Bureau has received many questions regarding the applicability 
of the ATR Rule where a successor acquires a home that is the 
collateral for an existing consumer credit transaction and seeks to 
become an obligor on that transaction. A successor is a person who 
receives legal interest in a property, typically by a transfer from a 
family member, by operation of law upon another's death, or under a 
divorce decree or separation agreement.\7\ In all of these situations, 
where the successor acquires property that is subject to a mortgage, 
the successor is not personally liable for the associated debt, but may 
choose to assume the debt. The Garn-St Germain Depository Institutions 
Act of 1982 prohibits the creditor from exercising a due-on-sale clause 
based upon certain types of transfers, including the common situation 
of transfer upon death of a relative.\8\ Even where a due-on-sale 
clause may be exercised, however, creditors may agree to add the 
successor as a named obligor under the loan contract.

    \7\ The term successor also may include an inter vivos trust, 
created by a borrower who transfers his or her property into the 
trust in which the obligor is or remains a beneficiary.
    \8\ See 12 U.S.C.1701j-3(d).

A. Application of the ATR Rule to a Change in Obligors

    Under Regulation Z Sec.  1026.43, the ATR Rule applies to any 
``covered transaction'' defined, with certain enumerated exceptions, as 
``any consumer credit transaction that is secured by a dwelling . . . 
including any real property attached to a dwelling.'' Under Sec.  
1026.43(c), a creditor must make a reasonable and good faith 
determination that the consumer has the ability to repay at or before 
consummation of the covered transaction. Similarly, Regulation Z 
generally requires creditors to provide disclosures required under 
Sec.  1026.18 or Sec.  1026.19 to consumers before consummation of 
certain closed-end loans. In certain circumstances, however, creditors 
and consumers agree, after consummation, to changes to an existing 
transaction that are treated as a ``new transaction'' under Regulation 
Z, requiring new disclosures. Section 1026.20(a) and (b) provide that 
if a creditor and consumer engage in activity that constitutes a 
``refinancing'' or an ``assumption,'' the creditor must make new 
disclosures. Comment 43(a)-1 is consistent with this approach in 
excluding from the scope of Sec.  1026.43 changes to the loan that are 
not a refinancing under Sec.  1026.20(a).
    The terms ``refinancing'' and ``assumption'' are each assigned a 
specific meaning in Sec.  1026.20(a) and (b). These terms generally 
define when a change in a closed-end loan's terms or obligors 
constitutes a new transaction under Regulation Z. For example, under 
Sec.  1026.20(a), a refinancing occurs when an existing obligation is 
``satisfied and replaced by a new obligation undertaken by the same 
consumer.'' Certain changes to the loan's terms, including, generally, 
workout agreements for delinquent borrowers, do not meet the definition 
of a ``refinancing,'' under Sec.  1026.20(a). See Sec.  1026.20(a)(4); 
comment 20(a)(4)-1. As comment 43(a)-1 makes explicit, such agreements 
are therefore not covered transactions and are not subject to Sec.  
    Section 1026.20(a) and (b) address different types of events. 
Section 1026.20(a) addresses changes to a loan's terms--such as an 
increase in the interest rate in a transaction initially disclosed as a 
fixed-rate transaction. In contrast, Sec.  1026.20(b) applies to 
changes in the loan's obligors. Under Sec.  1026.20(b) an assumption 
occurs when--and only when--the creditor ``expressly agrees in writing 
with a subsequent consumer to accept that consumer as a primary obligor 
on an existing residential mortgage transaction.''
    The Bureau believes that just as comment 43(a)-1 explicitly 
incorporates the definition of ``refinancing'' in Sec.  1026.20(a)--and 
the limitations on that definition--into the scope of Sec.  1026.43, 
so, too, the ATR requirement in Sec.  1026.43 should be interpreted to 
incorporate the existing Regulation Z standard for transactions 
involving a change of obligors set forth in Sec.  1026.20(b). Unless 
the change satisfies the definition of an ``assumption'' under Sec.  
1026.20(b), a change of obligors does not trigger the ATR requirements 
under Sec.  1026.43.
    The Bureau's interpretation is consistent with comment 43(a)-1 and 
consistent with the Bureau's purposes in issuing the Ability-to-Repay 
Rule. This interpretation applies a standard to transactions that 
involve new obligors that is consistent with the standard that exists 
in Regulation Z generally. The Bureau believes it would be potentially 
incongruous to interpret Sec.  1026.43 as never applying to 
transactions involving a new obligor, which by definition are excluded 
from being refinancings under Sec.  1026.20(a). The Bureau also 
believes that interpreting Sec.  1026.43 as either never applying to 
transactions with new obligors or as applying to some transactions with 
new obligors based on a standard other than the familiar rule set forth 
in Sec.  1026.20(b) would not be consistent with the policies 
underlying the ATR Rule, the Bureau's intent in promulgating the rule, 
or the public's understanding of Regulation Z.

B. The Addition of a Successor as Named Obligor Generally Does not 
Constitute an ``Assumption''

    As noted above, Sec.  1026.43 should be interpreted to incorporate 
the existing standards under Sec.  1026.20(b) for determining whether a 
transaction is an ``assumption.'' An assumption under Sec.  1026.20(b) 
occurs when the creditor agrees in writing to accept a subsequent 
consumer as a primary obligor on an existing ``residential mortgage 
transaction.'' A ``residential mortgage transaction'' is a transaction 
in which a consumer finances the acquisition or initial construction of 
the consumer's principal dwelling. See Sec.  1026.2(a)(24). For 
purposes of determining whether the transaction is an ``assumption,'' 
the creditor must look to whether the new

[[Page 41633]]

obligor is seeking to finance the acquisition of that subsequent 
consumer's principal dwelling.\9\ Whether the existing extension of 
consumer credit was a residential mortgage transaction as to the 
existing primary obligor is immaterial.

    \9\ Comment 20(b)-2 states that creditors ``must look to the 
assuming consumer in determining whether a residential mortgage 
transaction exists.'' (emphasis added.)

    A residential mortgage transaction does not arise where a successor 
takes on the debt obligation that is secured by property the successor 
previously acquired.\10\ In these situations, Sec.  1026.20(b) does not 
apply when the successor agrees to be added as an obligor on an 
existing mortgage loan. Although these transactions are commonly 
referred to as assumptions, they are not assumptions under Sec.  
1026.20(b) because the transaction is not a residential mortgage 
transaction as to the successor. Accordingly, the ATR Rule in Sec.  
1026.43 does not apply to a transaction in which a successor seeks to 
take on the debt secured by property that the successor previously 

    \10\ As comment 2(a)(24)-5 states, the term residential mortgage 
transaction ``does not include a transaction involving a consumer's 
principal dwelling if the consumer had previously purchased and 
acquired some interest to the dwelling even through the consumer had 
not acquired full legal title.''

    In contrast to the successor situation described above, if a 
consumer without an existing interest takes on the obligation of the 
existing borrower in order to finance the acquisition of the consumer's 
principal dwelling, the transaction is a residential mortgage 
transaction. In such a case, where the creditor expressly agrees in 
writing to the new primary obligor, an assumption has occurred under 
Sec.  1026.20(b), and it is subject to the ability-to-repay 
requirements in Sec.  1026.43, in addition to other requirements of 
Regulation Z. Moreover, where a creditor adds a successor as the 
obligor, whether that event is subject to Sec.  1026.43 or not, the 
extension of credit remains a consumer credit transaction under 
Regulation Z. The creditor, assignee, or servicer must comply with any 
ongoing obligations pertaining to the extension of consumer credit, 
such as the requirement to provide monthly statements in Sec.  1026.41 
and the requirement to notify the obligors of adjustments to the loan's 
interest rate in Sec.  1026.20(c) and (d).

III. Regulatory Requirements

    This rule articulates the Bureau's interpretation of Regulation Z, 
and the Truth-in-Lending Act. It is therefore exempt from the APA's 
notice and comment rulemaking requirements pursuant to 5 U.S.C. 553(b).
    Because no notice of proposed rulemaking is required, the 
Regulatory Flexibility Act does not require an initial or final 
regulatory flexibility analysis. 5 U.S.C. 603(a), 604(a).
    The Bureau has determined that this rule does not impose any new or 
revise any existing recordkeeping, reporting, or disclosure 
requirements on covered entities or members of the public that would be 
collections of information requiring OMB approval under the Paperwork 
Reduction Act, 44 U.S.C. 3501, et seq.

    Dated: July 1, 2014.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2014-16780 Filed 7-16-14; 8:45 am]