Newrez beats zombie seconds suit over decades-old HELOC debt

Newrez has defeated a class action lawsuit regarding "zombie" second mortgages, after a judge rejected a borrower's arguments around a lack of monthly statements from the servicer. 

U.S. District Judge Allison Burroughs granted the company's motion to dismiss the suit Monday, giving Massachusetts plaintiff Eva Hodges 21 days to refile her complaint. The case is one of at least three federal challenges to Newrez over its resumed collection of long-dormant second liens originated around the time of the Great Financial Crisis. 

Hodges last year sued Newrez, its Shellpoint servicing arm, and Bank of New York Mellon, the assignee and current holder of her HELOC, for violating the Fair Debt Collection Practices Act. Following a bankruptcy, Hodges didn't receive any monthly statements for the loan between 2008 to 2024, before Shellpoint said she owed just over $200,000 and threatened foreclosure. 

The lawsuit initially purported violations of the Truth in Lending Act, which requires borrowers receive periodic statements. However, Hodges dropped the TILA claim and challenged Newrez for violating the FDCPA, for piling interest and fees on the HELOC during the stretch in which she did not receive statements. 

Judge Burroughs in a memorandum and order Monday wrote Hodges couldn't use the FDCPA to enforce a TILA obligation, and cited a separate, similar challenge to the servicer dismissed by a federal judge last October. 

"More generally, courts have consistently ruled that the FDCPA 'is not properly used as an enforcement mechanism for the TILA,' especially where the plaintiffs could not succeed on a TILA claim, independently," wrote Burroughs, citing other case rulings. 

Attorneys for Hodges did not respond to requests for comment Wednesday. Newrez and BNY declined to comment.

Zombie seconds cases decades in the making

Hodges obtained a HELOC from Countrywide Home Loans in 2005 for a Plymouth home, with an initial principal balance of $100,000. She filed for chapter 7 bankruptcy in 2008, with her HELOC balance remaining the same. After the bankruptcy discharge, the homeowner said she stopped receiving monthly statements for the second lien.

Shellpoint assumed the servicing rights in 2013, and sent Hodges a notice of default and notice of intent to foreclose in January 2024. The servicer began sending her monthly statements and said she owed just over $100,000 in interest for a total of $200,090.51. The company acknowledged not sending her monthly statements because of her bankruptcy. 

The plaintiff filed her lawsuit in January. In dismissing her complaint, Burroughs said Hodges failed to identify the entity that was required to send her periodic statements during the 16-year stretch in question. 

Newrez has also not settled with plaintiffs nor approached trial in other zombie seconds lawsuits in federal court, which raise similar legal arguments over "80/20" loans. Separately, the company recently failed to reach an agreement in a mediation session with a borrower who filed a "pay-to-pay" lawsuit.

The zombie seconds complaints reference the Consumer Financial Protection Bureau's 2023 guidance warning debt collectors regarding long-dormant liens, although the regulator has remained in stasis since the Trump administration took over. California also filed its own zombie seconds law last summer, and trade groups are currently challenging that enforcement.