The Bay State’s Attorney General says she’s struck a significant blow against the “zombie” scourge threatening some Massachusetts residents.
On Thursday, Attorney General Andrea Joy Campbell announced her office had reached a “precedent-setting settlement” with Franklin Credit Management Corporation over their alleged practice of reanimating long dead second mortgages — typically originating from before the Bush-era housing crisis — and using them to eat away at residents’ finances in violation of state regulation.
“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,” Campbell said in a statement.
According to the Attorney General’s office, before the 2008 financial crisis, it wasn’t uncommon for mortgage lenders to provide new home buyers a home mortgage and a loan for the down payment and — too often — borrowers were not made aware they were actually taking out a pair of loans.
After the housing market crashed, many buyers found themselves restructuring their loans or facing foreclosure, and some thought that was the end of things.
The second loan, however, was not always satisfied by either foreclosure or restructuring. Franklin, the AG’s office says, brought up some of that debt, let it fester for years, and then breathed new life into it.
“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,” Campbell’s staff explained.
The settlement means other debt servicers now know such necromantic practices won’t fly in the Bay State, according to Andrea Bopp Stark, Senior Attorney at the National Consumer Law Center.
“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,” she said in a statement.
The settlement, according to the Attorney General’s Office, requires Franklin cease collections in the Bay State, “effectively relieving the burden of over $10 million in debt for hundreds of Massachusetts borrowers.”
“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,” Campbell said.
According to court documents, Franklin agreed to the settlement “only in order to avoid the expense and risk of litigation” but nevertheless “denies the AGO’s allegations.”
“After a years-long investigation, Franklin Credit Management Corporation is pleased to have resolved the matter with the Massachusetts Attorney General’s Office. The company denies the allegations and there is no admission of liability. While it maintains that its practices were compliant with Massachusetts law, it believes the settlement is in the best interests of the company,” their legal counsel told the Herald.
Campbell’s office made clear acknowledgement in the settlement agreement of the company’s “cooperation throughout the investigation.”
