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New CFPB guidance takes aim at ‘zombie mortgages’

The guidance comes amid an uptick debt collectors seeking to collect on mortgage debt that's past the statute of limitations

The Consumer Financial Protection Bureau (CFPB) issued guidance this week for debt collectors seeking to foreclose on homes with mortgages past the statute of limitations, also known as “zombie mortgages.”

The guidance comes in the form of an advisory opinion pertaining to the Fair Debt Collection Practices Act (FDCPA) and implementation of Regulation F. The guidance notes that a covered debt collector “who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt may violate the [FDCPA] and its implementing regulation.”

Time-barred debt refers to debt in which the statute of limitations has expired. The CFPB is issuing this guidance due to an uptick in reports of debt collectors attempting to act on these mortgages.

“Some debt collectors, who sat silent for a decade, are now pursuing homeowners on zombie mortgages inflated with interest and fees,” said CFPB Director Rohit Chopra in an accompanying announcement. “We are making clear that threatening to sue to collect on expired zombie mortgage debt is illegal.”

This latest guidance stems from the actions of predatory mortgage lenders observed in the run-up to the 2007-08 financial crisis, where some homebuyers were entered into mortgages they could not repay, the CFPB said.

“In the case of [this] advisory opinion, the CFPB is focusing on ‘piggyback’ mortgages,” the Bureau said. “Generally, this piggyback mortgage product, known as an 80/20 loan, involved a first lien loan for 80% of the value of the home and a second lien loan for the remaining 20% of the home’s valuation.”

Lenders generally did not pursue homeowners on debts related to the second mortgages, opting instead to sell the debts to debt collectors for “pennies on the dollar,” the Bureau said.

“Now, over a decade later, and often without any intervening communication with homeowners who were able to save their homes, some of these debt collectors are demanding the mortgage balance, interest, and fees, and threatening foreclosures on families who do not or cannot pay,” the Bureau said.

Debt collectors who are now attempting to collect on these mortgages may be in violation of the FDCPA, and the advisory opinion is designed to remind debt collectors under CFPB’s jurisdiction that FDCPA and Regulation F bar them from attempting to collect a time-barred debt; and that this applies even if the collector is not aware that the debt they’re seeking to collect on is time-barred.

In appropriate instances, the CFPB says it will coordinate with state attorneys general to take action against institutions that are believed to be in violation of the FDCPA and Regulation F. The Bureau says it will be “monitoring the debt collection market for violations related to time-barred mortgages as well as to time-barred non-mortgage debt.”

In an event announcing the guidance, Director Chopra was joined by New York State Attorney General Letitia James, representatives from the congressional offices of Sen. Chuck Schumer and Rep. Hakeem Jeffries, and an impacted New York mortgage-holder.

“Brooklyn is my home and it’s a beautiful borough,” James said. “But it’s also one of the national epicenters of this zombie second mortgage crisis. This issue is of great concern to me personally and to my office.”

Director Chopra also emphasized the intent of the new guidance in his own remarks.

“Debt collectors subject to this law cannot use — or threaten to use — judicial processes, such as foreclosure actions to collect the debt,” Chopra said. “And in most states, foreclosure actions are indeed subject to a statute of limitations, like here in New York. This means that for many zombie mortgages, the statutes of limitations have passed.”

Chopra reiterated that when a debt collector threatens, or actually sues, to collect a time-barred debt, including threatening the borrower with foreclosure, they may be breaking the law.

“Debt collectors do not get to claim ignorance of the law or ignorance of the debt’s age if the statute of limitations has expired,” he said.

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