The Consumer Financial Protection Bureau put out an advisory opinion warning that debt collectors seeking balances, interest and fees on long-ago
The zombie second mortgages (in which a first lien and a second lien are made simultaneously) were the subject of an April 26 field hearing in Brooklyn, New York.
"We see how often the system is not working for homeowners," CFPB Director Rohit Chopra said in his opening remarks. "But instead of creating wealth, it's really about 'how can I figure out ways to drain it?'"
The CFPB announcement was made the same day the U.S. Supreme Court heard
Lately, the regulator, along with New York Attorney General Letitia James, have received complaints from consumers who originally took the second liens in order to push their loan-to-value ratio to 80% and bypass down payment or mortgage insurance requirements. The borrowers were contacted for repayment even though no communication has taken place since they originally defaulted on this note.
James said her office has seen an increasing number of complaints regarding debt collection attempts, describing Brooklyn as the epicenter for those efforts.
"I find this practice predatory and abusive and an affront to the American dream of sustainable homeownership," James said. "Debt buyers are seeking to extract wealth, particularly from communities of color, that should belong to the homeowners, not private equity firms and debt buyers."
Many of the consumers contacted are minority, first-time home buyers and/or seniors.
The piggyback product was popular during the mid-2000s boom and cited as a reason behind the volume of foreclosures during the subsequent bust.
When the 80% first and 20% second liens were created, the notes
Many second lienholders did not pursue the borrower after the default and instead sold the loans for pennies on the dollar, the CFPB said. Allegedly, debt collectors are now going after borrowers that were able to save their homes with threats of foreclosure, looking to capitalize on rising home values.
In many states where the statute of limitations has expired, these debts are time-barred for collections. While New York has such a bar, neighboring Connecticut does not, hearing participants said.
"Debt collectors do not get to claim ignorance of the law or ignorance of the debt's age," Chopra said. "If the statute of limitations has expired, taking legal action threatening….foreclosure may be illegal no matter what the debt collector claims to have known."
The CFPB is warning that the FDCPA prohibits debt collectors from suing or threatening legal action on a time-barred obligation, and the law applies regardless of what they knew or should have known about the applicable statute of limitations.
"When the CFPB originally proposed Regulation F, it received more than 15,000 comments," a statement from Scott Purcell, chief executive officer of ACA International, a membership organization for the credit and collections industry, said. "This underscores the interest in, and necessity of, a transparent rulemaking process for implementing Regulation F."
Regulation F is what implements the FDCPA.
"ACA's Code of Conduct already addresses the need for effective systems to take into account the complexity and variation of each state's laws dealing with statute of limitations requirements, as well as the requirements under the FDCPA and Regulation F," the statement continued.
Panelists at the Brooklyn event said several borrowers received modifications for their first mortgage and were told that resolved their second lien. But the borrowers received no communications from the second lienholder or servicer regarding the loan status.
"There is no magic legal bullet for these cases," said Andrea Bopp Stark, senior attorney at the National Consumer Law Center. "And that is why it's so important for the CFPB to take action now to deter future conduct."
Collections agents are reportedly targeting borrowers who have already paid down a large percentage of the principal on the mortgage because it is an indicator the property has equity, Bopp Stark added.
However, the actual extent of this problem is unknown, because much of the information is anecdotal, Bopp Stark said.
Brooklyn homeowner Rose Prophete was contacted by a debt collector regarding a second lien that she believed had been extinguished via a modification.
She stated she was not the only person in her neighborhood similarly situated. However, her encouragement of others in the same circumstances to reach out for legal help is falling on deaf ears.
Prophete tells her neighbors, 'Listen, I have somebody that helped me. Would you like to go and explain what happened?' But they don't take help because they feel ashamed, she continued.
