CFPB Issues Further Guidance on ‘Zombie Mortgages’

Published by DS News | April 26, 2023

Debt collectors now attempting to collect on these zombie second mortgages may be in violation of the Fair Debt Collection Practices Act.

The Consumer Financial Protection Bureau (CFPB) has issued guidance to protect consumers from illegal collection tactics on so called “zombie mortgages” due to the fact that it is illegal for debt collectors to sue or even threaten to sue to collect on these debts past the statue of limitations or in other illegal fashions. 

Covered by the Fair Debt Collection Practices Act, collectors cannot threaten to foreclose on homes with debts due past the statue of limitations—this advisory opinion clarifies that a covered debt collector who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt which violates the Fair Debt Collection Practices Act. Time-barred debt is one whose statute of limitations has expired. 

The CFPB is issuing today’s advisory opinion 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 that may be unenforceable in court. 

“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.” 

According to the release, leading up to the 2008 financial crisis, many lenders relied on predatory practices to lock homebuyers into mortgages they could not repay. In the case of today’s advisory opinion, the CFPB is focusing on “piggyback” mortgages. Generally, this piggyback mortgage product, known as an 80/20 loan, involved 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.

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