The Consumer Financial Protection Bureau (“CFPB”) recently issued advisory guidance on the enforcement of time-barred mortgage loans.  A time-barred mortgage loan is one where the statute of limitations has expired.  The statute of limitations for mortgage loans are typically created by state law, and vary by jurisdiction.  In some cases, they create an affirmative defense for the consumer that prohibits a debt collector from suing to collect the debt.  In other cases, judicial foreclosure actions are also subject to a statute of limitations.  The CFPB indicated that its opinion was issued in light of a series of actions by debt collectors attempting to foreclose on “silent second mortgages,” also known as “zombie mortgages,” that consumers thought were satisfied long ago and may now be unenforceable. 

The CFPB attributes this trend to practices that occurred in the years leading up to the 2008 financial crisis, when to make home purchases affordable, some lenders coupled first mortgage loans with second mortgage loans.  These “piggyback” mortgages often involved a primary mortgage for 80% of a property’s value, with a second mortgage for the remaining 20%.  During the financial crisis, struggling borrowers paid their first mortgage loans, but failed to pay their second mortgage loans.  According to the CFPB, many lenders did not pursue collection on the second mortgages during the financial crisis, due to declining home values, which meant that in a foreclosure no sale proceeds would remain after payment of the first mortgage.  Instead, lenders sold their second mortgage loans for a fraction of their value.  The CFPB alleges that, over a decade later, and without any intervening communication to borrowers, debt collectors are now demanding the second mortgage balance, interest, and fees and are threatening foreclosure on borrowers that do not pay.

In the advisory guidance, the CFPB states that it is illegal to sue or threaten to sue to collect on time-barred zombie mortgages.  The CFPB states that debt collectors that nonetheless attempt to do so may be in violation of the Fair Debt Collection Practices Act (“FDCPA”) and Regulation F, warning that:

  • The FDCPA and its implementing Regulation F prohibit a debt collector from suing or threatening to sue to collect time-barred debt, and
  • The prohibition applies even if the debt collector does not know that the debt is time- barred.

Debt collectors should review the applicable statutes of limitations for jurisdictions in which they are collecting and confirm they know the age of their loans to reduce compliance risk.  They should also be mindful that another issue identified by the CFPB was debt collectors’ failure to sufficiently communicate with borrowers.  Debt collectors dealing with older loans where the statute of limitations has not run should consider attempting additional communications with borrowers before initiating foreclosure proceedings, to mitigate borrower surprise and to avoid increased attention from the CFPB.