Zombie Mortgages: CFPB Warns Against Illegal Time-Barred Debt Collection

Officials at the Consumer Financial Protection Bureau have issued a reminder about zombie mortgages, saying threatening homeowners regarding uncollected time-barred debts violates the Fair Debt Collection Practices Act.

The guidance warns that it is illegal for debt collectors to threaten foreclosure on silent second mortgages with statutes of limitations that have expired.

“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. “We are making clear that threatening to sue to collect on expired zombie mortgage debt is illegal.”

The CFPB points to “piggyback” mortgages in particular, also known as 80/20 loans. Homebuyers would be given a first lien loan for 80% of the home’s value and a second lien loan for the other 20%.

“During the worst of the foreclosure crisis and Great Recession, when so many homeowners struggled to pay mortgages that had been sold to them with no regard for their ability to pay or even the value of the home, many holders of second mortgages stopped communicating with borrowers who had fallen behind and sold off the loans to debt collectors for pennies on the dollar – writing the debt off their books and taking the first loss,” Chopra explained in prepared remarks at a field hearing in Brooklyn.

Zombie second mortgages are especially a problem for older borrowers, lower-income borrowers, and borrowers in communities of color.

Instances of harassment over zombie mortgages have seen a “concerning” increase, CFPB officials say.

As property values have risen, these loan holders see an opportunity to wring more money from the debt and are suddenly eager to communicate with homeowners they have long ignored.

Debt collectors engaging in this practice past a debt’s statute of limitations are in violation of the Fair Debt Collection Practices Act, even if the collector doesn’t know the debt is time-time barred.

The CFPB 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.”

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