Disclosure Rules on Mortgage Assumptions
February 19, 2001, Reviewed January 9, 2008
In the case of an assumed mortgage, neither the home seller nor the lender is responsible for disclosing all the details of the loan. Hence, the buyer who did not know that the assumed loan has a prepayment penalty clause has no one to blame but himself.
"When I purchased my home two years ago, I assumed the mortgage of the seller. Recently I applied to refinance, and was told that I had to pay a $5,000 prepayment penalty. The loan documents I was given when I assumed the mortgage included a truth-in-lending form that refers to a prepayment penalty, but does not give the amount. I was told that the details are in the promissory note signed by the prior owner, which I had never seen. I requested a copy of the note from the lender, and sure enough, it shows a penalty of 5% of the original mortgage amount if the balance is paid off in the first 5 years. Should this have been disclosed to me when I assumed the mortgage?"
Yes, the full details of the prepayment penalty should have been disclosed to you at the time you assumed the seller’s mortgage. Whose responsibility was it to assure that the disclosure was made? Yours.
The seller should have given you the note, since full responsibility for paying it was being shifted to you, but for some reason he didn’t. Perhaps it was lost. It was your duty to request it, and if the seller didn’t have it, to request a copy from the lender, as you ultimately did.
Assuming someone’s debt without reading the note is a lot like buying a used car without driving it. When you get stuck, there is no one to blame but yourself.
Buyers and borrowers are always responsible unless the law imposes a special disclosure responsibility on the seller or the lender. In the case of an assumed mortgage, neither the seller nor the lender is responsible for disclosing all the details of the loan.
What troubles me about your story is that the Government may unwittingly have encouraged you to be careless.
You knew that mortgage lenders are subject to extensive disclosure requirements, without knowing exactly what the coverage of the requirements was. It was not implausible for you to assume that a matter as important as the size of a prepayment penalty would be a required disclosure. Neither was it unreasonable to assume that a consumer who assumed a mortgage would be protected just as well as the one who took out the mortgage in the first place.
But it is a mistake to assume that government regulations are always going to be consistent and complete. The fact is that the mandatory disclosure rules do not cover everything that is important.
Hardly a day goes by that I don’t hear from a borrower who has been surprised (sometimes shocked) to discover what is not covered. Their question invariably is "Why wasn’t this disclosed to me and who was responsible (other than me)?"
The analogy to public welfare programs is compelling. Programs intended to provide temporary support for people "down on their luck" instead create a culture of permanent dependency. Mandatory disclosure rules, designed to help consumers navigate through a complex market, may create a culture of "information acceptance."
If you assume that everything important is covered by the mandatory disclosure rules, you are not going to be on your guard, as you would be when you buy a used car. Yet you should be on your guard when you take a mortgage, even more than when you buy a used car.
In the case of an assumed mortgage, neither the home seller nor the lender is responsible for disclosing all the details of the loan. Hence, the buyer who did not know that the assumed loan has a prepayment penalty clause has no one to blame but himself.
Who Is Responsible For Disclosures on an Assumed Mortgage?
"When I purchased my home two years ago, I assumed the mortgage of the seller. Recently I applied to refinance, and was told that I had to pay a $5,000 prepayment penalty. The loan documents I was given when I assumed the mortgage included a truth-in-lending form that refers to a prepayment penalty, but does not give the amount. I was told that the details are in the promissory note signed by the prior owner, which I had never seen. I requested a copy of the note from the lender, and sure enough, it shows a penalty of 5% of the original mortgage amount if the balance is paid off in the first 5 years. Should this have been disclosed to me when I assumed the mortgage?"
Yes, the full details of the prepayment penalty should have been disclosed to you at the time you assumed the seller’s mortgage. Whose responsibility was it to assure that the disclosure was made? Yours.
The seller should have given you the note, since full responsibility for paying it was being shifted to you, but for some reason he didn’t. Perhaps it was lost. It was your duty to request it, and if the seller didn’t have it, to request a copy from the lender, as you ultimately did.
Assuming someone’s debt without reading the note is a lot like buying a used car without driving it. When you get stuck, there is no one to blame but yourself.
Buyers and borrowers are always responsible unless the law imposes a special disclosure responsibility on the seller or the lender. In the case of an assumed mortgage, neither the seller nor the lender is responsible for disclosing all the details of the loan.
Government May Encourage Borrowers to be Careless
What troubles me about your story is that the Government may unwittingly have encouraged you to be careless.
You knew that mortgage lenders are subject to extensive disclosure requirements, without knowing exactly what the coverage of the requirements was. It was not implausible for you to assume that a matter as important as the size of a prepayment penalty would be a required disclosure. Neither was it unreasonable to assume that a consumer who assumed a mortgage would be protected just as well as the one who took out the mortgage in the first place.
But it is a mistake to assume that government regulations are always going to be consistent and complete. The fact is that the mandatory disclosure rules do not cover everything that is important.
Hardly a day goes by that I don’t hear from a borrower who has been surprised (sometimes shocked) to discover what is not covered. Their question invariably is "Why wasn’t this disclosed to me and who was responsible (other than me)?"
The analogy to public welfare programs is compelling. Programs intended to provide temporary support for people "down on their luck" instead create a culture of permanent dependency. Mandatory disclosure rules, designed to help consumers navigate through a complex market, may create a culture of "information acceptance."
If you assume that everything important is covered by the mandatory disclosure rules, you are not going to be on your guard, as you would be when you buy a used car. Yet you should be on your guard when you take a mortgage, even more than when you buy a used car.