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Homeowners Are Protected From “Zombie Mortgages” By New CFPB Regulations

What is “Zombie Second Mortgage”?

The origin of these “zombie” mortgages may be traced back to “piggyback” mortgages, when a mortgage, also known as a “80/20 loan,” consisted of a first lien loan for 80% of the home’s value and a second lien loan for the remaining 20%. The second mortgages were typically not pursued by lenders; instead, they were frequently sold to debt collectors. Now, some of those debt collectors are unexpectedly showing up, demanding the outstanding mortgage balance plus interest and fees, and threatening to foreclose if the debtors fail to pay.

Alarming what are commonly referred to as “zombie second mortgages,” the Consumer Financial Protection Bureau has received a troubling number of consumer complaints and heard from advocates. Homeowners can believe that mortgage debt has been discharged, modified, or was previously satisfied through bankruptcy. Years later, debt collectors contact the homeowner, threatening to foreclose on their home and demanding they pay the remaining balance of their mortgage, plus years’ worth of interest and fees.

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FDCPA and Regulation

The FDCPA and Regulation restrict certain debt collectors from suing to collect debt or threatening to foreclose on residences with mortgages that are past the statute of limitations, or “time-barred” debt, according to a CFPB advisory opinion released on April 26, 2023. Such instructions are the outcome of efforts taken by some debt collectors to foreclose on “zombie mortgages,” or silent second mortgages, which consumers believed had been paid but which are probably not legally enforceable.

The CFPB guidance.

The CFPB is now taking action to safeguard consumers from fraudulent activities including zombie debt and zombie mortgage foreclosure. The CFPB states that it released the guidance to remind debt collectors closing on zombie mortgages that the FDCPA and Regulation F forbid such debt collectors from filing lawsuits or threatening lawsuits on zombie mortgages if the debt is time-barred.

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This prohibition holds true even if the debt collector is unaware that the debt is time-barred. In a statement accompanying the advisory opinion, CFPB Director Rohit Chopra reiterated that the agency wanted to make it clear that threatening to sue to recover on an expired zombie debt was in and of itself illegal.

The CFPB’s advisory opinion emphasizes the bureau’s focus on debt collection activities that, whether intentionally or not, violate the FDCPA. Creditors and debt collectors should be alert and knowledgeable about local, state, and federal laws governing debt collection as well as any applicable statutes of limitations.

The CFPB has issued guidance making it clear that using or threatening to utilize judicial processes, such as foreclosure, to collect a debt after a state’s statute of limitations has run its course may be against the law for debt collectors pursuant to the Fair Debt Collection Practises Act. Learn more about the advice of today.

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