Written by Michael Thurmond, as originally published in The Reverse Review.

It is a simple fact of life and law: You should be told when something is happening to your things! In the context of a HECM loan, it means that anyone who has an interest in a property that was used as security for a loan must be given notice before something occurs that will impact them. That is the basic theory of legal notice.However, after the death of the primary borrower on a HECM loan, heirs or beneficiaries are often unaware of the existence of the HECM debt. Sometimes they don’t know that they even have an interest in a property. This article will try to illuminate how this unknown interest occurs and what must be done before the lender can initiate a foreclosure action, if needed.

First, we need to have a basic understanding of some legal terms. In this article, the following are used:

Default will vary with the context but generally refers to a failure to abide by the terms of an agreement or failure to complete a duty, promise or obligation under a contract.

Interest as used with real property rights indicates that a person has a right to do something with the property. Every property has a “bundle of rights” that can impact it and an interest can be any one of these from fee simple ownership to the right to occupy for a period of time via a lease.

Notice indicates that a formal (normally written) advisement has been furnished to a party that provides knowledge of actions that may impact them. This may include actions to determine if any property interest exists. It is imperative that legal notice (either actual or constructive) is to be given to all interested parties for a final judgment to provide clear and marketable title to the real property.

(These are not exhaustive definitions and like most things in the law, they can be much more complex in application. However, these definitions will help explain the depth of the potential problems of notice.)

There are five events that may require acceleration of the HECM loan debt and therefore require legal notice to be provided. Four are fairly straightforward events and will occur with the borrower as the interest holder. In those cases, notice will not be an issue since the identity of the borrower is well known. The last one is the most frequent default for these loans and is potentially the most problematic: death of the primary borrower and/or surviving spouse in the home. This event can be the starting point for the “unknown interest” issues, which can delay resolution.

Here is a common scenario:

George, a widowed borrower, obtains a lump-sum HECM in 2010. He uses the money to enjoy his golden years. Sadly, when George dies in 2015 his only son has been dead for over two years. George has no surviving children or grandchildren and did not leave a will. In this case, the vesting of the borrower’s interest in the secured real property will be determined by the intestate succession laws of the state where that property is located (see the excellent article “Legal: Probate 101” by Alexander J. Chaudhry, The Reverse Review, August 2015). In short, this means the property interest will normally pass to members of the borrower’s family in a specific order. Once the interest passes by law outside the immediate family, the actual knowledge of the HECM loan or of the property itself becomes more unlikely. Many statutes continue intestate succession, if necessary, past blood relatives and include heirs of a pre-deceased spouse as if they had inherited from the primary borrower prior to their death.

All things considered, it is easy to see how distant members of a family who may not even be aware of the death of this distant relative could be totally unaware of the HECM loan.

While the intestate statutes can be complicated, they will also be part of the answer. The solution is to ensure accurate heir searches are performed as early as possible after the death of the borrower is discovered and updated prior to the commencement of any legal actions. Since notice is paramount for successful HECM litigation, these heir searches must be prioritized. Done correctly, these searches can help timelines and provide marketable title for those files that must proceed through the foreclosure process.

Since it is clear that early, accurate deceased borrower searches will save time and provide quick and clear resolution on the back end of the HECM process, the priority of this simple step should be carefully reviewed by servicers, lenders and law firms alike.

One last word of caution: The fair debt collection laws (both Federal FDCPA and state counterparts) have been interpreted by some courts to define lenders, servicers or litigation law firms filing the foreclosure case as “debt collectors” and therefore restricting those entities from contacting potential heirs without exposure to penalty. Attentiveness to these requirements is certainly key.