The Deceased Borrower Minefield – Loan Servicing and Modification Issues After The Borrower Has Passed Away
Jeremy Shulman, Partner, & Daniel Armstrong, Associate,
Anglin Flewelling Rasmussen Campbell & Trytten LLP
There are numerous potential pitfalls that may arise following the death of a borrower and during the family’s attempts to take action on the loan. Issues range from the fairly mundane to claims that form the basis of complex class actions.
More mundane issues include communications between the deceased’s family and the servicer with the initial exchange of verifying documents such as a death certificate, trust agreement, will, and proof of identification. More difficult issues involve communications between the servicer and the family on loan modifications where the lender may not properly take the death of the borrower into account.
Deceased borrower issues are at the forefront of new rules, regulations and litigation. This article provides an overview of those issues and concludes with the Consumer Financial Protection Bureau (CFPB) Regulations on successor-in-interest communications.
The Garn–St. German Act and Due On Sale Restrictions
Well-known is the Garn St. Germain Act Depository Institutions Act of 1982, which addressed some deceased borrower issues. Among other rules, the Act restricts enforcement of due on sale clauses in providing that: “[w]ith respect to a real property loan secured by a lien on residential real property containing less than five dwelling units . . . a lender may not exercise its option pursuant to a due-on-sale clause upon . . . (5) a transfer to a relative resulting from the death of a borrower.” While compliance with Garn–St. Germain restrictions have been relatively straight forward, more recent deceased borrower/loan modification issues have proven more difficult to navigate.
Recent Deceased Borrower/Loan Modification Litigation
The case of McGarvey v. JP Morgan Chase Bank, N.A. is as a putative class action pending in the United States District Court for the Eastern District of California. McGarvey exemplifies issues that can arise when a lender is unsure or unaware of a borrower’s passing and moves forward with routine loss mitigation and pre-foreclosure servicing.
In McGarvey, lead plaintiff was a successor trustee of a family trust. Plaintiff advised the lender of the borrower’s passing in 2004 and provided the lender with trust papers and other documentation. Plaintiff then made payments on the loan for the next five years until a 2009 default. The lender sent multiple letters to plaintiff soliciting modification applications. Yet, in other communications, the lender advised plaintiff that she could not modify the loan as a non-borrower. Plaintiff was eventually placed in a modification trial plan, which was later terminated “because she was not eligible as a non-borrower.” The Court was troubled that the lender “treated plaintiff as the borrower for some purposes, but not others.” Plaintiff filed claims for negligence, promissory estoppel, and unfair competition.
While the McGarvey Court dismissed the promissory estoppel claim for lack of “a clear and unambiguous promise,” the Court allowed claims for negligence and unfair competition to survive. Deviating from the traditional rule that a lender owes no tort duty of care, the Court found that dealings with a non-borrower were outside the scope of “conventional lending” and that “[d]efendant owes plaintiff and those in similar circumstances a duty to exercise ordinary care in the loan modification process.” The Court further found that plaintiff had stated a viable claim under the unlawful, unfair, and fraudulent prongs of the California Unfair Competition Law. McGarvey illustrates potential exposure that can arise when the lender begins a loan modification process without confirming how the borrower’s death might affect loan modification eligibility.
2013 Amendments To HAMP Guidelines
In an attempt to address McGarvey-like situations, guidelines for the Home Affordable Modification Program (HAMP) were updated effective September 2013 to include new deceased borrower provisions. The non-GSE HAMP Handbook added Section 8.8 to prior section 8.9 on deceased borrowers. New Section 8.8 provides that: (1) non-borrower successors may be considered for HAMP if they meet all applicability criteria, (2) the servicer is to evaluate the request as if the successor was the borrower, and (3) if assumption is permitted, then the assumption and modification applications should be processed contemporaneously. Section 8.9 provides for certain notices to and other procedures regarding successors-in-interest if the borrower passes away during a HAMP trial plan such that a successor can attempt loan assumption and modification.
CFPB Regulations On Deceased Borrower Issues – 12 C.F.R. 1024.38(b)(1)(vi)
CFPB has also regulated in the area of deceased borrower issues. On February 14, 2013, the CFPB issued a final rule adding section 1024.38 to Regulation X of the Real Estate Settlement Procedures Act. That section requires servicers to maintain policies and procedures on certain objectives, including prompt communications with the successors-in-interest of deceased borrowers.
In the October 15, 2013 CFPB bulletin, the Bureau expressed an intention to address complaints that servicers were either refusing to speak to a successor-in-interest or were making unreasonable demands for documents to prove the successor-in-interest’s claim to the property.
The bulletin provides examples of best practices, which include:
Promptly providing any party claiming to be a successor-in-interest a list of all documents required to establish the death of the borrower and the identity and legal interest of the successor-in-interest.
Promptly identifying any issues that the servicer must consider in reviewing the rights and obligations of successors-in-interest, including the eligibility of the successor-in-interest to continue making payments on the mortgage loan and eligibility for loss mitigation options.
Providing employees with information and training regarding the effect of laws and investor and other requirements on the servicer’s obligations following the death of a borrower.
The area of deceased borrower loan servicing will continue to be ripe for compliance and litigation issues. Lenders and servicers should consider internal policies and training of personnel that allow for the quick processing of a family member’s request to be added to the deceased’s account and the accurate handling of loan modification applications for successors-in-interest.
The Deceased Borrower Minefield: Loan Servicing and Modification Issues After The Borrower Has Passed Away was published in the Winter 2014 issue of the California Mortgage Bankers Association's "California Mortgage Finance News." Click The Deceased Borrower Minefield -- AFRCT 2014 for a copy.
Congratulations to lead author Jeremy Shulman and co-author Daniel Armstrong
 12 U.S.C. §1701J—3(d).
 2013 U.S. Dist. LEXIS 147542 (E.D. Cal. Oct. 10, 2013)
 12 C.F.R. 1024.38, as published in 78 FR10695 (Feb. 14, 2013).
 12 C.F.R. 1024.38(b)(1)(vi).
 CFPB Bulletin 2013-12: Implementation Guidance for Certain Mortgage Servicing Rules (October 15, 2013).