CFPB Warns Debt Collectors about Old Loans
Some housing-crisis-era loans a decade ago had “piggyback” mortgages – part of a 20% down payment – and some debt collectors recently started to demand money.
WASHINGTON, D.C. – The 2008 housing crisis continues to haunt some Americans. Debt collectors who sat on mortgage defaults are starting to resurrect them and demand payment.
In the years leading up the 2008 housing crisis, many lenders offered “toxic loans” to homebuyers who had no reasonable ability to repay. As part of that process, they often relied on “piggyback” loans. Also known as an 80/20 loan, it involved a first lien loan for 80% of the value of a home and a second lien loan for the remaining 20% – the rough equivalent of a down payment.
When the real estate market crashed, many lenders sold those piggyback loans – also called silent second mortgages or zombie mortgages – to debt collectors for pennies on the dollar without ever contacting borrowers to tell them they still owed the money.
Now some of these debt collectors are demanding the mortgage balance, interest and fees. And they’re threatening foreclosures on families who do not or cannot pay.
“Some debt collectors, who sat silent for a decade, are now pursuing homeowners on zombie mortgages inflated with interest and fees,” says Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra. “We are making clear that threatening to sue to collect on expired zombie mortgage debt is illegal.”
On Wednesday, CFPB – the federal agency overseeing U.S. consumer issues – published guidance on debt collectors covered by the Fair Debt Collection Practices Act. It says many of their demands are no longer valid because they’ve passed the statute of limitations.
Debt collectors now attempting to collect on these zombie second mortgages may be in violation of the Fair Debt Collection Practices Act. The CFPB’s advisory opinion reminds covered debt collectors that:
- The Fair Debt Collection Practices Act and its implementing Regulation F prohibit a debt collector from suing or threatening to sue to collect a time-barred debt.
- The prohibition applies even if the debt collector does not know that the debt is time barred. Accordingly, any debt collector covered under the Fair Debt Collection Practices Act may violate the law if they bring or threaten to bring a state court foreclosure action.
CFPB says it will be monitoring the debt collection market for violations related to time-barred mortgages as well as to time-barred non-mortgage debt:
- Read the advisory opinion, Fair Debt Collection Practices Act (Regulation F); Time-Barred Debt.
- Read the blog, Zombie second mortgages: When collectors come for long forgotten home loans.
Consumers can submit complaints about zombie mortgages, time-barred debts and other financial products or services by visiting the CFPB’s website or calling (855) 411-CFPB (2372).
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