Housing advocates target high interest rate on municipal tax liens and sewage fees

HARTFORD — An 18percent interest rate for overdue local property taxes and sewer-service fees is exorbitant and threatens private home ownership while municipally appointed lawyers and private debt collectors are getting wealthy and taking over properties across Connecticut, state housing advocates charged on Thursday.

In supporting a bill that has failed in recent years but would cap the tax-lien interest rate at 12 percent, advocates and lawyers told the legislative Banking Committee that the high rate has created a system in which small groups of the private firms designated to work for local tax collectors have become predatory, with inflated fees and other unexplained, surprise expenses presented to homeowners.

It has become a system in which residents around the state face escalating back taxes and fees to the point that they lose their homes to entities that buy up their debt then profit from foreclosure sales. Local tax collectors support the current system because it create a cash flow system in the millions of dollars to help finance local budgets.

“We support anything that would make tax liens less attractive for debt buyers,” said Jeffrey Gentes, co-supervisor of the Housing Clinic at Yale Law School who heads the Connecticut Fair Housing Center. “We also believe that the attorney fee limits are sorely needed to address rampant abuse by the attorneys who handle foreclosures. How about if you take 12 percent? Twelve percent as secured investment is awfully good.”

Gentes said the practice of local tax collectors, several of whom testified against the proposal, usurps their appointed jobs to collect local property tax revenue.

“Tax collectors want the ability to do something that we oppose, which is essentially turn their communities and their residents into financial instruments, and sell off tax liens to third-party buyers,” Gentes said. “The places that are relying on it are places that I just don’t think are well-managed, and I think the tax liens are a symptom for a lot of these communities.”

Gentes pointed to opposition to the legislation from officials in West Haven and Danbury. “Danbury says if you take this away from us then we’ll stop selling tax liens. I think that’s great. In this case, it’s just lowering the rate from 18 down to 12. If that causes towns to say maybe we need to be the ones handling our own tax collection that’s also great.”

State Rep. Jason Doucette, D-Manchester, cochairman of the committee, recalled that in 2021, the legislature approved a bill that created some safeguards for homeowners by requiring lien holders to provide homeowners details on amounts owed.

Gentes said there is an active class-action lawsuit involving a Danbury resident against one of the private lien buyers for alleged inflated fees and other expenses. “Of course, you don’t get those fees from your tax collector,” Gentes said. “You still have a phenomenal investment for these tax lien buyers. They get a secured investment, ahead of the banks, ahead of any other lender, and they get it at 18 percent.”

State Sen. Patricia Billie Miller, D-Stamford, co-chairwoman of the committee, asked whether people lose their homes.

“Oh sure,” Gentes said. “We were representing people in foreclosure sales, foreclosure judgments, and the thing is if you miss a year of taxes and they sell it off to the lien holder, the lien holder just sits back and waits for your equity to be stripped. They actually wait on the foreclosure until it hits a certain number and then they’ll proceed to start with the collection. People come to us and usually the tax lien holder has been sitting on it for years.”

In prepared testimony filed with the committee, Scott Ferguson, the Danbury tax collector, opposed the legislative proposal.

“The City of Danbury uses lien assignments as its primary recovery method for delinquent real estate taxes,” Ferguson wrote. “The institutions that purchase liens invest significant time, expense and risk during the collection process. By lowering the interest rate on assigned liens, lien assignments would effectively end. The revenue impact just for the city of Danbury would be $1.3 million per year, and would have a major revenue impact for all the cities and towns that rely on lien assignments.”

“Tax liens are often purchased by institutional investors under municipal contracts,” wrote Cory Gumbrewicz, Milford’s tax collector. “The investors are keen on purchasing delinquent tax liens due to the post-assignment interest accruals they can earn.”

Tom Mangello, president and CEO of the Connecticut Bankers Association, and Art Corey, the association’s general counsel, support the proposed bill to cut the interest rate.

“Under current law, these private third parties are allowed to continue to collect interest — and compound it — at a rate of 18-percent per year,” the bankers said. “Lien buyers also receive a statutory super-priority lien status, which nearly guarantees they will receive 100% of the tax lien and interest, when the property is sold. This effectively and unfairly gives debt buyers the same rights as municipalities, when charging interest and foreclosing on the property.”

Tactics currently include the private firms allowing the interest to grow and compound, in some cases for years, the bankers said.

“Indeed, it is a disincentive to resolve the purchased tax lien with the homeowner because the unnaturally high rate of interest turns it into a long-term investment.,” said the bankers, who appeared in person but whose testimony on the tax lien issue was written. “Also harmed by this process is the loan’s investor (such as Fannie Mae or Freddie Mac) who financed the mortgage, and typically must pay the debt buyer first from any proceeds left on the property after the foreclosure,” the bankers testified.