Advisory asserts attempting to foreclose on ‘zombie mortgages’ is illegal, with focus on ‘piggybacks’

A debt collector who brings or threatens to bring a state court foreclosure action on a mortgage that is past the statute of limitations may violate the Fair Debt Collection Practices Act (FDCPA) and implementing rules, the federal consumer financial protection agency said Wednesday.

The Consumer Financial Protection Bureau (CFPB) said its guidance on “time-barred” debts (one whose statute of limitations has expired), was issued after debt collectors attempted to foreclose on silent second mortgages, (“zombie mortgages”) that consumers thought were satisfied long ago and that may be unenforceable in court.

The bureau indicated its advisory was issued to make clear that threatening to sue to collect on expired zombie mortgage debt is illegal.

In particular, the bureau said it was focusing on “piggyback” mortgages. It described the product as an 80/20 loan, which involves 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.

“By and large, lenders did not pursue homeowners on second mortgages, instead selling off these mortgages to debt collectors for pennies on the dollar,” the bureau asserted. “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 CFPB said debt collectors now attempting to collect on these zombie second mortgages may be in violation of the FDCPA.

CFPB Issues Guidance to Protect Homeowners from Illegal Collection Tactics on Zombie Mortgages