Consumer protection rule could impact an estate plan

Many times, financial rules are implemented by banks and government agencies for the purpose of protecting consumers or businesses. Sometimes, those rules can eventually have unintended negative consequences for a subset of consumers that were not taken into consideration when the rule was being written. Some Texas residents may have experienced such consequences following a Consumer Financial Protection Bureau ruling in January.

The January rule, known as the Ability to Repay rule, required banks to consider a person’s ability to repay any loan prior to giving that person a mortgage. The rule was meant to protect consumers from being trapped in mortgage arrangements that would be impossible for them to be successful in. However, in some cases, the rule was applied to heirs who were inheriting a mortgaged property.

Under the Ability to Repay rule, banks were unable to grant some heirs mortgages. That resulted in some families losing homes due to legalities, even when estate planning documents called for heirs to take ownership of properties. It’s possible there were even cases where family members, such as children or spouses, were already living in the homes when the homes were lost.

The Consumer Financial Protection Bureau issued a new interpretation of the January rule in July. The new interpretation is aimed at giving families a better chance of creating arrangements that let them maintain property ownership in keeping with a loved one’s wishes. The new rule interpretation doesn’t mean loved ones are automatically granted a mortgage or mortgage transfer, but it does remove the strict requirement regarding ability to repay.

Planning ahead for situations such as a mortgage transfer is the best way to ensure heirs are able to follow through with transferring property. Working with heirs within legal processes ahead of time reduces the chance anyone will be hit with sudden financial crises following the death of a family member.

Source: Consumerist, “CFPB Clarifies Rule That Could Cause Heirs To Lose Their Homes” Ashlee Kieler, Jul. 08, 2014