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Assignee Liability for Predatory Lending

posted by Kathleen Engel and Patricia McCoy

Undoubtedly, any debate over a predatory lending bill in Congress will have to address the question: who should bear the costs of abusive lending?  Right now, borrowers, their neighbors and their towns bear most of these costs.  In contrast, the secondary market, which finances abusive loans through securitization, successfully insulates investors from most of the risks of predatory lending.  This imbalance needs to change. 

There are a number of rationales for imposing assignee liability on the trusts that hold securitized predatory loans.  We mention a few here.  It costs less for trusts and investment banks -- as part of securitizations -- to screen loans for predatory terms than it collectively costs borrowers to hire attorneys to review their loan transactions.  One study by the Center for Responsible Lending (see www.responsiblelending.org) estimated that automated review of loan files cost less than one dollar per file and manual review cost $43, or about three percent of origination costs. 

The argument for assignee liability is particularly compelling when it comes to foreclosures.  Usually, if a securitized trust is the one seeking foreclosure, not the original lender, the holder-in-due course rule prevents the borrower from asserting defenses to foreclosure based on wrongdoing at origination.  This means borrowers can lose their homes even if their loans were procured through most types of fraud. The holder-in-due course rule also hamstrings borrowers’ ability to pursue affirmative predatory lending claims against securitized trusts.  In both cases, borrowers lose and purchasers gain when loans are sold.  Yet borrowers are never compensated for their loss of rights.

Even if assignees of predatory loans wanted to help victims of predatory lending, their hands are often tied.  This is because securitization contracts, to insure promised cash flows, typically hamper trustees of securitization trusts from reforming the loan terms.

Given that trusts, working with investment banks, can efficiently police predatory lenders and that borrowers are not compensated when the holder-in-due course rule strips them of remedies, we believe that carefully crafted assignee liability is a necessary component of any anti-predatory lending legislation.

As a final note, we have enjoyed writing these blogs and thank the creators of Credit Slips for giving us this opportunity to share some of our thoughts.

Comments

A major underlying assumption is that consumers do not act out of self interest but lenders do so. This is a testable hypothesis and should be tested before asserted. I would posit that both consumers and lenders are acting in their self interest (both acting as Williamson would suggest - "self seeking with guile").

Your assertion that the borrower is not compensated is incorrect. They are the sole beneficiary of all gains associated with the property. Over the past five years this has been very substantial. Further, much of the speculation in this market has been created by the borrowers. Your error here lies in the fact that you are looking only at the back end of the transaction.

I would suggest that you more broadly frame the problem. First by explicitly articulating borrow and lender motives (and knowledge). Second viewing the complete transaction and all associated cash flows (transacted and potential).

contracts can adjust, or congress can mandate -
exceptions to HIDC exist,
a comprehensive solution must be fashioned...
www.helphomeowners.org
www.help4thelenders.com
www.buybacklitigation.com

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Is there a specific law that mandates an assignee "must" perform due diligence when purchasing a loan. More to the point the affordability factor, since most predatory loans included a false inflated income on the 1003.
Thanks

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