On April 26, the Consumer Financial Protection Bureau (CFPB or Bureau) issued an advisory opinion reminding the industry 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). According to the CFPB, the impetus for issuing the advisory opinion was “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.” While prompted by activity in the mortgage space, the CFPB noted that the prohibition applies to all time-barred debt.
Prior to the 2008 collapse, one common mortgage product, known as an 80/20 loan, involved a first lien loan for 80 percent of the value of the home and a second lien loan for the remaining 20 percent. Since the second mortgage holder only receives proceeds from a foreclosure sale if there are any surplus funds after paying off the first mortgage, some holders, instead of charging off the loans, sold the loans to debt buyers. According to the CFPB, “such sales often occurred unbeknownst to borrowers, who continued to receive no communications regarding the loans.” With home prices rising in recent years, some debt buyers have initiated attempts to collect. In some instances, this debt may be time-barred under applicable state law.
In its advisory opinion, the CFPB affirms that: (1) the FDCPA prohibits a debt collector from suing or threatening to sue to collect a time-barred debt; and (2) this prohibition applies even if the debt collector neither knows nor should know that the debt is time barred. “Accordingly, an FDCPA debt collector who brings or threatens to bring a [s]tate court foreclosure action to collect a time-barred mortgage debt may violate the FDCPA and Regulation F.”
The CFPB also notes in its opinion that debt collection activity is subject to the other prohibitions of the FDCPA whether or not that debt is time-barred. For example, debt collectors are prohibited from falsely representing the character, amount, or legal status of any debt, threatening to take any action that cannot legally be taken, and selling or placing for collection a debt that the debt collector knows or should know has been paid, settled, or discharged in bankruptcy.
In the press release that accompanied the issuance of the advisory opinion, the CFPB concluded by warning, “the CFPB and state attorneys general have the authority in appropriate circumstances to take action against institutions and individuals violating the [FDCPA] and Regulation F. The CFPB will be monitoring the debt collection market for violations related to time-barred mortgages as well as to time-barred non-mortgage debt.”