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The Consumer Financial Protection Bureau (CFPB) issued an advisory opinion last month to affirm that the Fair Debt Collection Practices Act (FDCPA) and its implementing Regulation F prohibit a debt collector, as that term is defined in the statute and regulation, from suing or threatening to sue to collect a time-barred debt.

The advisory opinion concerns “piggyback” mortgages “in which high-interest second mortgages were issued simultaneously with the origination of the first mortgage.”

As further explained by the CFPB, one common form of the piggyback mortgages was the “80/20 loan” in which the first loan covered 80 percent of the value of the home and the piggyback mortgage covered the remaining 20 percent. These became colloquially known as “Zombie Mortgages” due to the tendency for the mortgages to be forgotten and unpaid by borrowers for several years before its sudden reappearance by way of a default notice and foreclosure complaint.

Due to the increased frequency of these collection actions on these so called Zombie Mortgages, the CFPB warns in its advisory opinion that because of “the amount of time that has lapsed on these long-dormant loans, some have likely become barred under State law.”

Accordingly, the CFPB issued its advisory opinion “to affirm that:

  1. the FDCPA and its implementing Regulation F prohibit a debt collector, as that term is defined in the statute and regulation, 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”; and as a result, “an FDCPA debt collector who brings or threatens to bring a State court foreclosure action to collect a time-barred mortgage debt may violate the FDCPA and Regulation F.”

While superficially, the advisory opinion is very straightforward, and will likely prove to be a source of additional headaches for banks, mortgage servicers, lien holders, foreclosure counsel, and debt buyers. But, on a more substantive level, the opinion is a bit of a head-scratcher as to what it actually changes or clarifies for the enforcement of these second priority mortgages. In effect, the opinion appears to simply be a warning that parties holding or attempting to collect on these dormant second priority mortgages will be subject to heightened scrutiny.

As noted by the CFPB, Regulation F “prohibits a debt collector from suing or threatening to sue to collect a time-barred debt.” See 12 CFR § 1006.26.

That sounds like an easy concept, but the CFPB’s advisory opinion includes some very strong language which suggests that the filing a foreclosure complaint as to a time-barred debt is always a violation of the FDCPA or Regulation F. In actuality, the result is a bit more nuanced, and the advisory opinion makes some very broad legal statements which do not provide a full picture of the issues.

The most notable issue absent in the advisory opinion is that the enforcement of the security interests held by the second-priority mortgage is separate and apart from the collection of the debt itself. Put another way, while the debt itself may be no longer personally enforceable against the borrower for a variety of reasons including limitations issues that do not automatically result in the unenforceability of the lien. 

It is also important to recognize that the mere fact that a debt has been in default for years does not necessarily mean that the statute of limitations period has begun to run, as many states recognize that for installment loans, each missed payment is a separate default and the limitations period to enforce the lien does not begin until after the loan has been accelerated or otherwise matured pursuant to its terms.  See e.g., Texas (Tex. Civ. Prac. & Rem. Code § 16.035(e); Alcala v. Deutsche Bank Nat’l Trust Co., 684 Fed.Appx. 436 (5th Cir. 2017)).

In New York, the limitations period is governed by a six-year period following the “due date for each unpaid installment”, the date the full amounts are due, or “when the mortgage debt has been accelerated.”  Zinker v. Makler, 298 A.D.2d 516, 517 (N.Y. App. 2002). Consequently, a mortgagee may not be able to collect on the entire amounts due on the loan (i.e. those amounts beyond the six-year period), but still proceed with filing a foreclosure action to enforce its lien interests in the mortgage. 

The CFPB relies heavily upon an opinion from the Second Circuit which determined that an in rem mortgage foreclosure proceeding, under certain circumstances, is still subject to the FDCPA (Cohen v. Rosicki, Rosicki & Associates, P.C., 897 F.3d 75, 83 (2d Cir. 2018)). But, the CFPB fails to acknowledge that the Second Circuit’s holding in Cohen is not determinative of this issue, and that some clear disagreement exists as to its applicability. For instance, in Barnes v. Routh Crabtree Olsen PC, 963 F.3d 993, 999 (9th Cir. 2020), the Ninth Circuit noted its disagreement with Cohen and refused to hold that “as a categorical matter, a person who initiates a judicial foreclosure proceeding is attempting to collect a debt.”

The issue and tact raised by the CFPB in the advisory opinion is similar to its (erroneous) stance against the filing of bankruptcy claims for time-barred debts, and it ultimately lost this argument in the Midland Funding case before the Supreme Court. See in Midland Funding LLC v. Johnson, 581 U.S. 224, 137 S.Ct. 1407, (2017). 

Contrary to the CFPB’s amicus brief submitted in the matter, the Supreme Court determined in Midland Funding that filing a bankruptcy claim for a time-barred debt is not a violation of the FDCPA and recognizing that the law in “many States, provides that a creditor has the right to payment of a debt even after the limitations period has expired.” 581 U.S. at 228.

Relatedly, it has been the long-standing axiomatic principal that “a creditor’s right to foreclose on the mortgage survives or passes through the bankruptcy.” Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2153 (1991).

Reading between the lines in the CFPB’s current advisory opinion, the CFPB should have emphasized that a “foreclosure action to collect on a time-barred mortgage debt MAY violate the FDCPA and Regulation F.” Stakeholders in these second priority mortgages should not despair that the CFPB has created some new rule or regulatory scheme in its advisory opinion.

Clearly though, anyone seeking to enforce its mortgage interests on a time-barred debt (or discharged debt) needs to proceed cautiously. Regardless as to the legal efficacy of its advisory opinion, the CFPB is indicating that it is going to be examining this issue very closely and parties foreclosing on these types of purported “zombie mortgages” need to be extra careful to comply with the FDCPA and Regulation F. The advisory opinion is also likely to call the attention of the consumer bar, and we can expect an uptick in litigation on this issue as well.

Mortgagees and foreclosure counsel need to be particularly aware of the statute of limitations periods for the enforcement of the mortgage. As noted above, the time period for the collection on the borrower’s personal liability on the note may be shorter than the time period allowed to enforce the lien. However, in many states, the enforcement period for the note and the mortgage are one in the same.  See e.g., Illinois (10-year period for note and foreclosure action (735 ILCS 5/13-206; 735 ILCS 5/13-115)). At a minimum, the interested parties need to be clear in communicating with their consumers that their personal liability on these debts is barred by the applicable statute of limitations. 

Similar disclosures and notices for debts discharged in bankruptcy should be implemented, the loans should be flagged for the appropriate disclosures, and communications should be limited to only those required under the applicable law and regulations for proceeding with a foreclosure.  

Foreclosure counsel also needs to be particularly careful in its pleadings to ensure that no deficiency judgments are sought and that the potential time-barred aspect of the debt is clearly indicated.

About Cole Braun: Cole Braun is Special Counsel in the Adams and Reese Nashville office, representing business clients in commercial litigation, consumer credit litigation, financial services, and insurance recovery and advisory services.