State Proposal Targets Mortgage Deficiency Debt Collection

Lawmakers in Maryland early next year will consider a bill that would dramatically lower the allowed time debt collectors have to pursue mortgage deficiency debt collection after a home foreclosure.

When a lender forecloses on a house backed by a defaulted mortgage, the amount recovered from the sale, or valuation, of the home often does not cover the entire remaining loan. The leftover total is called a deficiency balance. Banks often place deficiency balances with third party debt collection agencies or law firms, or sell the debt outright.

Current Maryland law, similar to most other states, provides exemptions to debt statutes of limitations that allow debt collectors to file a collection suit up to 12 years after a foreclosure. [For more information on state statutes of limitations for debt, see Time is Running Out: Statute of Limitations for Debt Collection.]

With additional allowances to collect a judgment after it is won, and further extensions available after that, the total time a homeowner may be on the hook for a deficiency balance after a foreclosure is 36 years.

“It smacks of debtors prison and indentured servitude,” Maryland State Sen. Jamie B. Raskin (D-Montgomery) told The Washington Post. “People should not be indentured servants to the mortgage they used to hold.”

Sen. Raskin plans to introduce the bill when the Senate reconvenes on January 8. His bill would give debt collectors only 180 days after a foreclosure to pursue mortgage deficiency balances in court.

While the bill greatly reduces the time for collectors to go after mortgage debt, it would not retroactively apply to previous foreclosures or cases that are currently in the system. The protections would be extended only to foreclosures occurring after the law is in effect. The bill would also not apply to commercial properties.

The housing bust that began in 2008 led to unprecedented levels of home foreclosures in the U.S. The treatment of debtors forced into foreclosure has been near the top of nearly every financial regulatory agency’s agenda.

The issues many lenders had with robo-signing affidavits in foreclosure proceedings is very well documented. That particular practice also led to widespread action against debt buyers who used the tactic for non-mortgage debt.

The CFPB has turned its eye to mortgage servicing and collection. The Bureau recently provided guidance on new mortgage servicing rules under the FDCPA. A federal appeals court also recently weighed in on mortgage debt collection practices in a case involving the use of a law firm’s letterhead.