Home Equity Lending News

Zombie 2nd Foreclosure Doesn’t Hold Up as CFPB Issues Warning


An Alabama-based bank that tried to foreclose on a home-equity line of credit in Tennessee many years after its maturity was stymied recently by a federal appeals court. A growing volume of similar foreclosure actions on dormant junior-lien debt has caught the attention of the mortgage industry’s enforcer in chief.

Regions Bank’s attempt to take the home was barred by the state’s 10-year statute of limitations, according to the U.S. Court of Appeals for the Sixth Circuit, which noted that the bank had not shown that the maturity date of the loan was extended.

Tennessee law provides that “liens of mortgages, deeds of trust, and assignments of realty executed to secure debts, shall be barred, and the liens discharged, unless suits to enforce the same be brought within ten (10) years from the maturity of the debt.”

The court also scolded the Birmingham, Alabama-based bank for “lack of diligence” and failure to comply with state law requiring that lien extensions and contracts involving interests in real property be in writing.

“Had the bank simply memorialized an extension to the loan’s maturity date in writing as required by [Tennessee state law], it would not be in this situation,” the appeals court stated.

Jennifer Elmore, a spokeswoman for Regions Bank, said, “We respect the court’s decision, and we are pleased to move forward and put this matter behind us.”

The case underscores the importance of timely loan enforcement for HELOC lenders and making sure that loan extensions are in writing and recorded.

The defendant and homeowner, Marvin Fletcher, obtained a HELOC in 1997 for $200,000 from Regions Bank, then known as Pioneer Bank. The loan terms were monthly interest payments with a balloon payment due in May 2007.

However, when the loan matured in 2007, the bank did not demand the balloon payment, refinance the loan, nor foreclose on the property. Instead, it accepted interest payments until 2017.

Marvin Fletcher died in 2009. His sons continued the HELOC payments. The bank collected $100,000 in interest after Marvin Fletcher’s death.

The brothers claim they never requested an extension of the loan’s maturity date, never discussed extension terms with the bank nor did they sign a written modification with the bank. They contacted the bank in 2017 when the lender demanded the entire debt. The bank said it was foreclosing on the property and that “no further discussion would take place.”

The bank filed a foreclosure action in October 2018 in state court, requesting a declaration that the loan’s maturity date had been extended and that it be granted the right to foreclose. The trial court granted summary judgment to the brothers, ruling that the statute of limitations for collecting the debt had expired.

Regions appealed.

On appeal, the bank made several arguments. The bank said (1) there was an oral modification to the loan, and (2) that it had the unilateral right to extend the loan if the change in terms “unequivocally benefitted” the borrower, and (3) that the defendants’ continuation of the monthly interest payments showed an agreement to extend the loan’s maturity date and excused any writing requirement.

The appeals court disagreed.

Oral modifications to liens on real property are forbidden under state law, the appeals court said. The appeals court noted that state law requires that liens can be extended beyond 10 years only by a “duly executed and acknowledged” written instrument. The written instrument had to contain a brief description of the facts with reference to the original lien and state that the lien will continue for a specific period of time, the court noted.

In addition, the court noted that the “Statute of Frauds” provides that agreements to transfer an interest in land must be in writing. The Statute of Frauds is a common law doctrine requiring that certain types of contracts, such as the sale of land, be in writing. The purpose of the Statute of Frauds is to prevent swindles from occurring.

A written instrument is required under state law and the Statute of Frauds, the Sixth Circuit declared.

The court was skeptical that extending the loan maturity date benefited the borrower and noted that state law forbids such an act unless the modification is important enough to be treated as a new agreement.

As for the continuation of the interest payments, the court noted that payment of principal or interest does not toll the statute of limitations placed on deeds of trust under state law. The court said that while the state’s top court had recognized partial performance as an exception to the Statute of Frauds, partial performance is not available when the agreement involves an interest in real property.

The Sixth Circuit noted that according to the plain language of state law, unless the original maturity date of May 10, 2007, was extended, the loan was discharged on May 10, 2017, and the bank’s October 2018 lawsuit was time-barred.

As a result, the appellate court ruled against the bank.

The court’s decision was issued in the wake of the nation’s top consumer watchdog indicating that debt collector practices for “zombie mortgages” are on state and federal regulators’ scope. The director of the Consumer Financial Protection Bureau has warned that the federal agency has heard increasing reports of debt collectors trying to resurrect expired second mortgages. CFPB Director Rohit Chopra explained the agency is monitoring debt collectors who try to collect on second mortgages and other debt securing properties where the debt is many years, even decades old.

The CFPB issued an advisory opinion on April 26 clarifying that a covered debt collector who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt violates the Fair Debt Collection Practices Act.

“Some debt collectors, who sat silent for a decade, are now pursuing homeowners on zombie mortgages inflated with interest and fees,” CFPB Director Rohit Chopra said. “We are making clear that threatening to sue to collect on expired zombie mortgage debt is illegal.”

Many of the “zombie mortgages” stem from 80/20 loans that were popular shortly before the 2008 financial crisis. Lenders offered borrowers, many of them subprime, “piggyback mortgages.” This 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 of the home’s purchase price.

Lenders often failed to pursue payment for the second mortgage and reportedly sold the loans to debt collector’s for pennies on the dollar. With the recent run-up in home prices, some debt collectors are demanding the mortgage balance, interest, and fees, and threatening foreclosure.

Chopra said the bureau and state attorneys general have authority to act against institutions and individuals violating the Fair Debt Collection Practices Act. He also encouraged employee whistleblowers to contact the CFPB if they have information about such violations.


The case is Regions Bank v. Fletcher, et al., United States Court of Appeals for the Sixth Circuit, No. 22-5725, May 4, Published, 2023.