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October 3, 2024 Sabrina Zafar

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IN PRECEDENT-SETTING SETTLEMENT, AG CAMPBELL PROTECTS HOMEOWNERS FROM "ZOMBIE SECOND MORTGAGES"

Agreement Requires Mortgage Servicing Company to Permanently Cease Collections on All Mortgage Loans in Massachusetts, Effectively Relieving Over $10M in Debt for Consumers

BOSTON – Attorney General Andrea Joy Campbell has reached a precedent-setting settlement with mortgage servicer Franklin Credit Management Corporation (Franklin Credit). The settlement resolves allegations that the company violated Massachusetts consumer protection laws by improperly attempting to collect on debts in its portfolio of primarily second-lien mortgages after failing to communicate with borrowers or provide required statements for many years, as well as failing to comply with critical foreclosure-prevention measures.

These mortgages, which were typically originated prior to the financial crisis of the late 2000s and allegedly experienced years of silence from mortgage servicers before collections resumed or foreclosure processes were initiated, are commonly known as "zombie second mortgages."

As part of the settlement, Franklin Credit will cease collecting and attempting to collect the debts of its entire Massachusetts mortgage loan portfolio. The company also will not transfer or sell any of these loans to another entity, effectively relieving the burden of over $10 million in debt for hundreds of Massachusetts borrowers. In addition, Franklin Credit will make a monetary payment of $300,000 to the Commonwealth and change its business practices to comply with state laws if it seeks to service any future mortgages in Massachusetts.

"Zombie second mortgages are ancient debts that servicers quietly sit on for years before attempting to collect on them. This unfair and harmful practice blindsides consumers, often putting them at new risk of losing their homes," said AG Campbell. "I am incredibly proud of this settlement, the first of its kind for my Office, which sets a precedent that puts mortgage servicers on notice that this unlawful conduct will not be tolerated."

"This settlement marks a groundbreaking step toward ensuring that no Massachusetts homeowner is trapped by a debt they believed was long behind them, and it sends a powerful message to lenders and servicers who appear after years of no communication to foreclose on borrowers' homes that such practices violate Massachusetts consumer protection laws," said Andrea Bopp Stark, Senior Attorney at the National Consumer Law Center. "This settlement should encourage other states to take action to protect homeowners who have been unfairly burdened by zombie second mortgages."

"This important action by the Attorney General puts zombie second mortgage holders on notice that they can't sidestep significant homeowner protections and then seek to foreclose on Massachusetts' homeowners," said Todd Kaplan, Senior Attorney at the Consumer Rights Unit of Greater Boston Legal Services.

The settlement resolves the AGO's claims that Franklin Credit violated a Massachusetts foreclosure-prevention law, known as "35B", which requires mortgage servicers to make a good faith effort to help borrowers avoid foreclosure by notifying them of their right to pursue a more affordable modified loan. The AGO claims that the company severely delayed communicating with borrowers, including delaying sending required "35B" notices, preventing borrowers from obtaining assistance until their unpaid balance was too large to allow a successful modification of the loan. Moreover, the AGO alleges that when the company did send the required "35B" notices, it failed to take required steps to respond to and assist borrowers, and in some instances unlawfully charged up-front payments as a prerequisite to entering a modification, further impeding borrowers' ability to cure or modify their mortgages.

Additionally, the settlement resolves the AGO's claims that the company violated Massachusetts debt collection regulations, which protect consumers from unfair or deceptive debt collection practices, including by improperly attempting to collect time-barred second mortgage debts from consumers who already lost their homes to foreclosure.

The harm associated with Franklin Credit's alleged unlawful conduct is representative of problems associated with collection on "zombie second mortgages." The AGO's settlement with the company sets an important precedent that unlawful conduct during the collection of such loans is unacceptable, meaningfully protecting borrowers of such second mortgages across the Commonwealth.

Prior to the 2008 financial crisis, mortgage lenders often provided consumers who were borrowing all or nearly all of the cost of their home with two independent loans, a primary and secondary loan. The Attorney General's Office (AGO) asserts that it was frequently unclear to borrowers that they had two independent loans. Accordingly, during the financial crisis, when many of these borrowers experienced foreclosure or modified their first loan to avoid foreclosure, the AGO alleges that borrowers often believed their second mortgage was satisfied or extinguished as well. Now, after long periods of failing to communicate with borrowers or take any action to collect on the second mortgages, often for a decade or more, some debt collectors are attempting to collect on these loans. The term "zombie second mortgages" refers to the harmful practice of resurrecting such ancient debt.

This matter was handled by Assistant Attorneys General Matthew Lashof-Sullivan, Daniel Bahls, and Mercy Cover, along with Division Chief Yael Shavit, all of the AGO's Consumer Protection Division.

Consumers who believe they may have been subject to an unfair or deceptive business practice, including by a mortgage servicing company, may file a consumer complaint with the AGO.

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