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Revival of Time-Barred Zombie Mortgages May Come Back to Haunt Debt Collectors

Philip R. Stein & Enza G. Boderone

Image of money in the shape of a houseLast month, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion on the attempted enforcement of time-barred alleged debt collection rights as to second mortgage loans. It is a violation of the Fair Debt Collection Practices Act (FDCPA) and its implementing Regulation F to sue or threaten to sue on a time-barred debt, including mortgage loans. The CFPB issued its opinion in light of a series of actions by debt collectors attempting to foreclose on so-called “zombie mortgages” that were originated in the early 2000s and have been dormant for many years. These mortgages originated at a time when lenders issued to borrowers first mortgage loans for 80 percent of a property’s value coupled with a second mortgage loan for the remaining 20 percent. During the financial crisis, struggling borrowers often paid their first mortgage loans, but were unable to pay off their second mortgage loans. Many lenders did not pursue collection on these mortgages due to a number of factors, including declining home values and insufficient foreclosure proceeds to pay off the second mortgage. Some lenders wrote these mortgages off and others sold them for pennies on the dollar. However, the CFPB alleges that recently, as home prices have increased, and borrowers have paid down their mortgage debt, more are hearing from companies attempting to collect on the second mortgages after many years of silence. According to the CFPB, these companies have taken an aggressive approach, often demanding the outstanding balance on the second mortgage, plus exorbitantly high fees and interest, and threatening to foreclose if the borrower fails to pay. These borrowers thus may be faced with a choice between entering into onerous payment plans or foreclosure of their property.

The advisory explains that “a debt collector who sues or threatens to sue a consumer to collect a time-barred debt explicitly or implicitly misrepresents to the consumer that the debt is legally enforceable, and that misrepresentation is material to consumers because it may affect their conduct with regard to the collection of that debt, including whether to pay it.” In addition, Regulation F’s prohibition on suits and threats of suit on time-barred debt is subject to a strict liability standard. A debt collector is defined under FDCPA as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”

If you are a debt collector as defined under the Fair Debt Collection Practices Act, then before seeking any type of action in connection with a zombie mortgage, you should determine your state’s statute of limitations as it varies state to state. In Florida, mortgage foreclosure actions are subject to a five-year statute of limitations, which generally begins to accrue on the date of the borrower’s default.  In New York, there is a six-year statute of limitations, which accrues after debt acceleration. California has a four-year statute of limitations for judicial foreclosures; however, the statutory limitation period for non-judicial foreclosures is either 10 or 60 years depending on the terms of the deed of trust. Moreover, given that the CFPB has warned against insufficient communication with borrowers in their attempt to collect, before undertaking any enforcement action, debt collectors should take steps to sufficiently and appropriately communicate with borrowers about their mortgage debt liability. 

The CFPB also notes that entities selling or collecting on second mortgages who are also mortgage servicers may also be subject to certain requirements under the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the CFPB’s mortgage servicing regulations. As an example, the CFPB explains that unless an exemption applies, their mortgage servicing regulations require servicers to provide periodic statements to consumers. Failure to provide such periodic statements on these second mortgage loans exposes mortgage servicers to liability.

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