On April 26, 2023, the CFPB issued an advisory opinion clarifying that a debt collector who brings or threatens to bring a foreclosure action to collect a time-barred mortgage debt may violate the Fair Debt Collection Practices Act (FDCPA) and its implementing regulation. The CFPB also issued two related blog posts on the topic: CFPB Issues Guidance to Protect Homeowners from Illegal Collection Tactics on Zombie Mortgages and Zombie second mortgages: When collectors come for long-forgotten home loans.

CFPB Director Rohit Chopra stated,

“Some debt collectors, who sat silent for a decade, are now pursuing homeowners on zombie mortgages inflated with interest and fees” and “We are making clear that threatening to sue to collect on expired zombie mortgage debt is illegal.”

The CFPB calls out predatory tactics relating back to the 2008 financial crisis that trapped borrowers in home loans they could not afford, focusing on “piggyback” or 80/20 mortgages. The CFPB characterizes these mortgages as “silent second mortgages” and “zombie mortgages” and broadly claims in the advisory opinion that “[m]any borrowers, having not received any notices or periodic statements for years, concluded that their second mortgages had been modified along with the first mortgage, discharged in bankruptcy, or forgiven.” The CFPB’s focus is on lenders and collectors who did not actively collect on the “long-dormant” second mortgages who are now demanding repayment of the mortgage and threatening foreclosure.

Reminder to Debt Collectors

The advisory opinion was issued to “remind” debt collectors that their current efforts may be barred under state law and are also a violation of the FDCPA and Regulation F. The advisory opinion has two key statements:

1. The FDCPA and Regulation F prohibit a debt collector from suing or threatening to sue to collect a time-barred debt.

   • As the CFPB stated in 2021, “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.”

2. The prohibition applies even if the debt collector does not know that the debt is time barred

   • Regulation F’s prohibition on suits and threats of suit on time-barred debt is subject to a strict liability standard.

   • Any debt collector covered under the FDCPA who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt may violate the law.

A Takeaway for Lenders and Collectors

Therefore, lenders and collectors holding aged second mortgages should be mindful of the relevant state statute of limitations impacting the loan before proceeding with any collection activity.