Assignee Liability in The Secondary Mortgage Market

Assignee Liability in the
Secondary Mortgage Market:
Position Paper
of the
American Securitization Forum
June 2007
Table of Contents
I. Executive Summary ...........................................................................................................2
II. Introduction........................................................................................................................7
III. The Growth of the Secondary Mortgage Market has Increased the Availability of
Mortgage Credit to Subprime Borrowers .......................................................................8
A. The Importance Of The Secondary Market As A Capital Source for Subprime
Loans ..........................................................................................................................8
B. The Securitization Process .........................................................................................9
IV. Recent Calls to Extend Liability for Abusive Loan Origination Practices to the
Secondary Mortgage Market are Misguided ................................................................11
A. Recent Turmoil In The Housing Market, And Its Causes And Consequences ........11
B. The Current Status Of The Law Governing Assignee Liability...............................12
C. The Analysis Underlying the Expansion Of Assignee Liability Through
HOEPA And Many State Laws Is Fundamentally Misguided.................................15
1. Secondary market participants have no incentive to purchase predatory
loans ..................................................................................................................15
2. Secondary market participants are not well-suited to regulating the
primary market, and trying to force them to conduct such regulation
would increase the cost borne by subprime mortgage borrowers .....................16
3. The primary market actors directly responsible for harmful predatory
practices already are subject to extensive, if sometimes ineffective,
government regulation ......................................................................................19
4. Shifting the burden for predatory practices from cheated subprime
borrowers to passive investors and other subprime borrowers simply
shifts the burden of predatory practices among innocent parties......................19
D. Why The Holder Rule Approach Should Not Be Applied To Mortgage Credit......20
V. Recommendations for a New Framework for Assignee Liability ...............................21

A. Entities Covered By Assignee Liability ...................................................................22
B. Mortgage Loan Triggers For Coverage....................................................................22
C. Prohibited Practices And Restrictions On Loan Terms............................................23
D. Scope Of Assignee Liability ....................................................................................24
E. Limitations On Monetary Liability For Assignees ..................................................25
F. Limitations On Rescission Claims Against Assignees ............................................25
G. Types Of Legal Action Against Assignees ..............................................................26
H. Safe Harbor Based Upon Loan Review ...................................................................27
I. Statute of Limitations ...............................................................................................29
J. Right to Cure Errors In Loan Documents ................................................................30
K. Uniform National Standard ......................................................................................30
VI. Conclusion ........................................................................................................................31

I. Executive Summary
A significant percentage—by some estimates, more than half—of the recent rise in home
ownership in the United States can be attributed to the expansion of subprime credit. The
increasing flexibility and ability of lenders to price loans to take into account the higher risk
of default posed by subprime borrowers has driven this expansion. This increased flexibility
is in turn the direct result of major structural changes in the market for mortgage financing,
as the development and refinement of the process whereby mortgage loans are securitized
has permitted the private secondary mortgage market to provide capital to subprime
mortgage loan originators. By allowing for disaggregation of the idiosyncratic risks
associated with both individual loans and loan originators, securitization enables investors to
take a relatively secure and quantifiable investment position on subprime mortgage lending.
The remarkable expansion of subprime credit that has occurred over the last two decades,
and the dramatic growth in home ownership that it has facilitated, would have been
impossible without a functioning market for the product of the securitization process—
mortgage-backed securities that investors can buy and sell on markets like any other
commodified asset.
The recent volatility of the housing market, in combination with the increasing number of
subprime borrowers who have taken out mortgage loans, often under terms that are not
appropriate to their circumstances, has resulted in a substantial rise in levels of borrower
default and foreclosure. The vast majority of subprime loans are extended through legitimate
and transparent lending practices, and the basic reality is that defaults happen even when the
conduct of originators and brokers is exemplary. Moreover, in a disturbingly large number
of instances, borrowers get themselves into trouble by making misrepresentations during the
loan application process about their income or intention to occupy the property.
Nevertheless, the American Securitization Forum (the “ASF”) 1 is concerned that some
subprime borrowers appear to have been victimized by the abusive lending practices
involving fraud, deception, or unfairness that are grouped under the term “predatory lending”
and that such predatory practices, among other factors, have contributed to the current
problems in the subprime market. The ASF also agrees that capital provided through
securitizations, along with capital from a variety of other sources, has sometimes been
harnessed by unscrupulous lenders and brokers engaged in predatory practices. However, the
ASF believes that further expansion of the liability to which direct and indirect assignees of
mortgage loans are subject would be an unwise and unfair mechanism for remedying the
problems in the subprime loan origination process, unless such expansion is undertaken in a
careful, reasoned, and balanced manner. This paper seeks to offer a roadmap for a
potentially fruitful legislative approach to this issue at the federal level.
1
The ASF is a broad-based professional forum of over 350 organizations that are active participants in the U.S.
securitization market. Among other roles, ASF members act as issuers, investors, financial intermediaries and professional
advisers working on securitization transactions. ASF’s mission includes building consensus, pursuing advocacy and
delivering education on behalf of the securitization market and its participants. This position paper was developed
principally in consultation with ASF’s Subprime Mortgage Finance Task Force and Assignee Liability Working Group, with
input from other ASF members and committees. Additional information about the ASF, its members and activities may be
found at ASF’s internet website, located at www.americansecuritization.com. ASF is an independent, adjunct forum of the
Securities Industry and Financial Markets Association.
2
Assignee Liability in the Secondary Mortgage Market:
Position Paper of the American Securitization Forum
June 2007
An ad hoc body of federal and state law currently governs the extent to which secondary
market assignees that are innocent of any wrongdoing may nonetheless be subject to liability.
The primary component of the federal statutory scheme governing liability for assignees is
the Truth in Lending Act (“TILA”), which was amended and supplemented in 1994 by the
Home Ownership and Equity Protection Act (“HOEPA”). HOEPA applies narrowly to
certain high-interest and high-fee equity loans (“covered loans”) that are perceived as
potentially predatory, and imposes strict liability on voluntary participants in the market for
covered loans for violations committed by loan originators. In addition to federal law, a
number of states and localties have responded to the problem of abusive loan origination by
promulgating legislation that imposes liability on assignees. Although these state and local
laws generally build on the HOEPA approach, they often have triggers that are set at levels
that are lower than the HOEPA triggers, and they also usually impose more severe and more
subjective restrictions on covered loans than does HOEPA.
The premise behind the calls for expanded assignee liability—that the secondary subprime
mortgage market aids and abets predatory practices by primary lenders and brokers—is
substantially overblown. In addition to being largely unnecessary, any federal legislation that
would expose secondary market participants to assignee liability that is very high or
unquantifiable would have severe repercussions. It would likely cause a contraction and
deleterious repricing of mortgage credit, thus harming both prospective subprime borrowers
and current borrowers seeking to refinance their existing loans on more favorable terms—
especially those borrowers with impending rate increases on their adjustable rate mortgage
loans. And this contraction and repricing would occur at precisely the time when the
provision of further liquidity, spurred by the willingness of investors to expose themselves to
additional risk, is essential to ensuring the financial health of the housing market. Thus, a
poorly thought-out expansion of assignee liability in response to present concerns about
predatory lending practices in the subprime sector would serve merely to multiply the
number of victims of those practices.
Many of the proponents of expanded assignee liability assert that the flow of capital from the
secondary market to loan originators constitutes a major factor contributing to the frequency
of lending abuses in the loan origination process. These proponents envision investors,
investment banks, and the other financial entities that participate in the secondary market
taking on additional roles as regulators of subprime mortgage lenders and brokers, exercising
oversight functions over current bad practices, and even rationalizing inefficiencies in the
pricing and supply of subprime credit. But the analysis justifying expanded assignee liability
suffers from a number of conceptual flaws.
First, the assumption that secondary market participants are indifferent to the wrongful
conduct of primary loan originators and mortgage brokers, and care only about funneling
new capital to the primary market, is mistaken. In fact, secondary market participants
already face strong economic incentives to avoid unprofitable loans, including those that
have been originated in a predatory manner. Indeed, the recent rise in default rates and
failure of a number of originators have spurred a tightening of standards and more stringent
evaluation of loan pools by investors and securitization sponsors. Intrusive government
regulation would therefore pose a serious threat to the market’s own corrective processes.
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Second, secondary market participants simply are not well-situated to take on an additional
role conducting legally imposed, intrusive regulatory oversight over the very market in which
they participate. Indeed, because the secondary market is unable and unprepared to make the
fine distinctions between proper and improper loans that are necessary under the HOEPA
regime, HOEPA has had the predictable effect of discouraging the flow of capital to all
lenders, not just unscrupulous ones. Many state and local laws, by precipitating a complete
withdrawal of secondary market capital from the high-cost loan sector, have also had the
effect of reducing significantly the overall availability of funding for subprime lending.
Third, it is essential to remember that the actors directly responsible for the harm that results
from predatory practices—mortgage originators and brokers—already are subject to
extensive, if sometimes ineffective, government regulation. Although a more comprehensive
regulatory scheme could help reduce predatory conduct in the primary market, and predation
by mortgage brokers in particular, this goal should be pursued through government action
that is directed specifically at the culpable actors. If the current regulatory framework is
defective in its design or implementation, legislators should openly acknowledge and address
the problem rather than shifting the responsibilities of government regulators onto the
secondary market.
Fourth, most assignees are individual passive investors or entities that are far removed from
the loan origination process. These parties have nothing to do with any predatory practices
of brokers and originators, and have no way of either knowing when such practices are taking
place or reasonably discerning from review of the loan that they have invested in the fruits of
illegality. Over the short term, shifting the burden for predatory practices from the cheated
(if not necessarily blameless) home owner to the passive investor or securitization sponsor
simply shifts the burden from one innocent party to another. Over the long term, those
secondary market participants that do not exit the market entirely in response to heightened
prospective legal liability will demand a greater return on their investments as compensation
for taking on additional legal exposure. Thus, the burden of enhanced regulation will
ultimately fall on all borrowers, including the vast majority who are served by responsible
originators and brokers.
For certain consumer credit transactions that involve goods or services (but not real estate),
the Federal Trade Commission’s Holder Rule for the Preservation of Consumers’ Claims and
Defenses, which was promulgated in 1975, effectively abrogates the protections afforded
assignees by the holder-in-due-course doctrine. Many commentators point to the Holder
Rule as offering a viable model for the imposition of liability on assignees of mortgage loans.
Even to the extent that the rationales underlying the Holder Rule are persuasive in the context
of consumer credit, they are inapplicable in the mortgage context because (i) the
circumstances of cheated consumer credit borrowers are not comparable to those of cheated
mortgage borrowers, (ii) assignees of defective consumer credit are subject to a very different
incentive structure than that to which assignees of mortgage credit are subject, and (iii) the
securitization of subprime loans already presents vexing problems of risk evaluation and
mitigation that are not present in the market for consumer credit.
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June 2007
In sum, the secondary market is unsuited to playing the role of primary regulator of mortgage
lenders and brokers, and it should not be asked to do so. To the extent that there is to be
assignee liability for secondary market participants, it should be imposed pursuant to a
uniform national standard that is crafted carefully to serve the primary goal of reinforcing the
extant market forces that already provide substantial incentives for those parties that sponsor
and invest in MBSs to make responsible investment decisions. The ASF believes that such a
carefully crafted regime, even if extended to apply at triggers that are modestly lower than
the current HOEPA triggers, would be preferable to the current patchwork of state and
federal laws, which has done little more than generate tremendous costs and inefficiencies
that, at the end of the day, are shouldered by all subprime borrowers.
Any assignee liability regulatory scheme should simultaneously (i) protect and provide
redress for individual borrowers, (ii) protect the interests of secondary market participants,
and (iii) promote the systemic interests in ensuring the continued flow of capital to the
subprime market. We would expect that such legislation would amend the current legal
regime under TILA/HOEPA. The contours of a scheme that would achieve these goals and
that the ASF could support include:
• A definition of the term “assignee” that excludes certain types of entities that are not
directly involved in purchasing loans.
• Loan restrictions that are clear and objective.
• Restriction of assignee liability under the statute to violations of TILA, as amended.

The statute should be clear and explicit in establishing the scope of authorized
liability.
• Limitation of an assignee’s prospective liability to the sum of the remaining value of

the indebtedness and the total amount paid by the borrower, plus reasonable
attorneys’ fees. The ASF strongly objects to the imputation of any statutory,
enhanced, or punitive damages to an assignee based on the conduct of the lender or
broker, except in cases where the assignee acts with reckless indifference or knows of
the violation.
• Clarification of the circumstances in which a borrower can exercise the right rescind
and specification that rescission is a personal remedy which can only be raised in an
individual action.
• Authorization of borrowers to bring all those affirmative and defensive claims against
assignees that they can bring against the lender, subject to conditions to ensure both
that wronged borrowers will be able to obtain redress for their injuries and that
assignees will have the opportunity to control their litigation exposure and render the
potential scope of their liability more manageable. These conditions include:
f Restriction of the right of a defaulting borrower to assert a violation of the

statute as a defense to an innocent assignee’s enforcement of the mortgage
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agreement. Unless the assignee acts with actual knowledge of, or displays a
reckless indifference to, the originator’s violation, a borrower should be
permitted to assert such a defense only in situations where the violation
bears a reasonable relation to the default.
f Authorization of affirmative claims subject to:
an absolute defense for assignees that can demonstrate that a

reasonable person exercising ordinary due diligence could not have
determined with reasonable certainty that there had been a violation
of the law; and
a safe harbor, as described below, that would give assignees some

control over their exposure to liability from both affirmative and
defensive claims.
f Express prohibition of class action claims against assignees.
• Creation of a safe harbor that is both effective and reasonable for secondary market
participants to satisfy, thus promoting the dual goals of encouraging participation in
the covered subprime market and incentivizing those secondary actors that do
participate to scrutinize a statistically significant sample of the loans in which they
invest. In addition to maintenance of the existing protections for assignees that
purchase covered loans unintentionally, this safe harbor would afford shelter to
assignees that, at the time of the purchase or assignment of the loan or within a
certain period soon after:
f had in place policies expressly prohibiting the acceptance of covered loans

or covered loans that violate the statute;
f required by applicable contract that the assignor of covered loans represent

and warrant at the time of assignment either (i) that it will not assign either
any covered loan or any covered loan that violates the statute or (ii) that it is
a beneficiary of a representation or warranty from a previous assignor to that
effect, and the assignee will benefit from that representation or warranty; and
f had procedures in place to review either a fixed percentage of loans or a

reasonable percentage of loans in a pool, even if this review failed to detect
the loan that is the subject of a claim. This review provision of the expanded
safe harbor should have the following features:
Authorization of statistical sampling;
Allowance for assignees to satisfy the requirement by reviewing the

documentation required by a specific law, the itemization of the
amount financed, and other disclosures of disbursements;
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Authorization of post-purchase due diligence; and
Applicability of cure through the requisite loan review to the entire

chain of title, such that assignees can rely on satisfactory due
diligence performed by either the seller or any other entity in the
chain of title.
• Inclusion of a robust cure provision allowing assignees to bring their loans into
conformity with statutory requirements. Within 60 days after discovering an error,
and prior to the institution of a legal action, the creditor or assignee should be
authorized to effect cure by:
f notifying the borrower of the error and making appropriate restitution;
f if it appears that the provision of a covered loan was a mistake, modifying the
terms of the credit transaction to bring it outside of the ambit of statutory
coverage; or
f deleting any provisions in a mortgage agreement that violate applicable law

and taking other steps as necessary to prevent the violation from harming the
borrower.
• Replacement of the existing patchwork of federal, state, and local laws with a
uniform national standard for assignee liability that covers all mortgage lenders. In
particular, the statute should contain an explicit clause preempting any state or local
laws that attempt to impose assignee liability or that limit a creditor’s ability to make
certain types of mortgage loans. States would have primary enforcement authority
under the statute for state-licensed entities.
II. Introduction
The purchase of a home is a defining and life-changing event for many Americans. Over the
last two decades, through the securitization process, the capital markets have enabled
realization of the dream of home ownership by a group of “subprime” borrowers who
previously had been excluded because they could not obtain mortgage credit. However,
recent turmoil in the housing market, which along with other factors has driven up rates of
mortgage borrower delinquency and home foreclosure, now threatens these important
advancements. A disquieting number of observers place a substantial share of the blame for
the recent troubles on the capital markets, positing specifically that the increased availability
of capital for subprime mortgage lending contributes to the prevalence of abusive lending
practices perpetrated by those entities that originate and broker subprime loans. As a result,
there is a growing call from certain quarters for federal legislative action to expand the scope
of the liability to which capital market participants that are assignees of mortgage loans are
subject for the actions of loan originators and brokers.
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June 2007
Although the ASF shares the concern of legislators, bank regulators, and others regarding the
apparent increased incidence of abusive lending practices, it strongly opposes the broad
expansion of assignee liability in the subprime mortgage loan sector and has serious concerns
regarding current and potential future legislative changes at both the federal and state levels.
This report presents the ASF’s perspectives on the importance of the capital markets to
ensuring home ownership opportunities for subprime borrowers, recent developments in the
subprime sector, and the pitfalls of enhanced assignee liability.
The ASF is particularly concerned that a poorly considered expansion of assignee liability
would reduce the availability of mortgage credit for both prospective subprime borrowers
and current borrowers seeking to refinance their existing loans on more favorable terms
(especially those borrowers with impending rate increases on their adjustable rate mortgage
loans). Such a response to present concerns about predatory lending practices in the
subprime sector would serve merely to multiply the number of victims of such practices. The
report offers a framework for a potential way forward that simultaneously (i) protects and
provides redress for individual borrowers, (ii) protects the interests of capital market
participants, and (iii) promotes the systemic interests in ensuring the continued flow of
capital to the subprime mortgage market.
III. The Growth Of The Secondary Mortgage Market Has Increased The
Availability Of Mortgage Credit To Subprime Borrowers.
A. The Importance Of The Secondary Market As A Capital Source For Subprime

Loans.
Between 1989 and 2006, the percentage of Americans who owned their homes rose from 64
percent to 69 percent, an increase equivalent to 12 million additional home owners. 1 A
significant percentage—by some estimates, more than half—of this growth in home
ownership can be attributed to the increased availability of credit for “subprime” borrowers. 2
Despite possessing the desire and the means to own homes, these borrowers traditionally
have had difficulty obtaining mortgage credit because of impaired or limited credit histories,
a high debt load, or variable or hard to document income. 3 Between 1994 and 2005,
however, loans to subprime borrowers quadrupled as a percentage of total originations, from
5 percent to 20 percent. 4 This relative quadrupling was accomplished through a remarkable
increase in the total value of subprime mortgage originations, which rose from $35 billion in
1994 to $640 billion in 2006. 5 These trends are particularly salutary given that
homeownership is the primary method of wealth accumulation available to the vast majority
of subprime borrowers who are low- or middle-income. 6
Driving the beneficial increase in subprime lending was the increasing flexibility and ability
of lenders to price loans to take into account the greater risk of delinquency and default posed
by subprime borrowers. 7 Although the vast majority of subprime borrowers are able to make
their monthly loan payments in a timely manner and avoid default and foreclosure
proceedings, such borrowers do pose greater risks than prime borrowers. 8 Subprime loans
must be priced to take these risks into account.
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Technological innovation in underwriting was responsible for some of the enhanced

flexibility and ability of originators to engage in risk-based pricing, but the primary cause
was major structural changes in the market for mortgage financing. 9 Prior to the 1990s,
banks—traditionally the principal suppliers of mortgage credit—relied almost exclusively on
customers’ deposits as the source of funding for mortgage loans. Accordingly, the volume of
such deposits largely dictated the availability of mortgage credit, and the availability of credit
for nontraditional, often riskier borrowers was extremely limited. 10 Although there were
some finance companies involved in the subprime market, they tended to rely primarily on
debt to finance this lending, which also strictly constrained the volume and types of loans
that could be made. 11
Beginning in the 1990s, the private secondary mortgage market began providing the capital
to fund a dramatic expansion of lending to subprime borrowers. The key to the emergence of
the secondary market was the development and refinement of the process whereby mortgage
loans are securitized. The securitization process allows pools of mortgage loans to be
transformed into a type of security, known as a mortgage-backed security (“MBS”), that
investors can buy and sell on markets like any other commodified asset. This powerful and
efficient mechanism for linking individual borrowers to arm’s-length investors with capital
spread rapidly, and, by 2005, almost 80 percent of subprime mortgages, at a total value of
$450 billion, were undergoing securitization. 12
The securitization process functions as a pipeline through which investors seeking a

favorable investment return can supply significant quantities of capital to subprime loan
originators. In turn, the availability of an increased supply of capital and the diversification
of risks has enabled originators to escape the constraints imposed by their prior reliance on
deposits and debt as capital sources. 13 Indeed, the private secondary market is a particularly
important source of capital for subprime borrowers because the government-sponsored
enterprises—Fannie Mae and Freddie Mac—that do the lion’s share of securitizations in the
conventional prime loan mortgage market, and that also guarantee the principal and interest
income on the securities that they issue, employ underwriting guidelines that exclude most
subprime loans. 14 Quite simply, in the absence of a functioning market for MBSs, the
remarkable expansion of subprime credit that has occurred over the last two decades—and
the dramatic growth in home ownership that it has facilitated—would have been impossible.
B. The Securitization Process.
In order to fully comprehend the potential pitfalls posed by expanded assignee liability, it is
necessary to understand the nuts and bolts of the securitization process. A borrower’s only
direct dealings are with the loan originator, which supplies the capital for the loan and
decides on its terms, and often a loan broker, which will assist in bringing together the
originator and the borrower and identifying the loan terms that are suited to the borrower’s
individual circumstances. 15
Upon completion of the origination process, the originator generally will sell the loan to a
securitization sponsor, often the subsidiary of an investment banking firm, which in turn will
transfer the individual loans into a pool that aggregates subprime loans from many different
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sources. 16 The pool of loans then typically is transformed into a business entity called a
“special purpose vehicle” (“SPV”), usually a trust, which will issue the securities backed by
the loans. 17 In setting up the SPV, the sponsor will work with the rating agencies to obtain
evaluations of the credit risks associated with the various anticipated securities. 18 Before
they will grant a desirable investment-grade rating to these securities, the rating agencies will
sometimes require that the trust employ a variety of credit enhancement techniques, which
provide a financial cushion to absorb losses resulting from unanticipated rates of default on
the underlying loans. 19
Once the vehicle is established and the securities issued, an underwriter will purchase all the
securities and resell them to investors. 20 Although sometimes the loan originator will retain
the rights to service the pool of loans—a role that involves corresponding with borrowers,
processing monthly loan payments, and addressing loan delinquency—the sponsor or trustee
of the SPV often will contract with a third-party servicer to perform these functions. 21
Because they are highly differentiated and their payoff relatively unpredictable, individual
mortgage loans are unattractive assets for the general investor, who has limited time and
resources to investigate the details of potential investments. Although investors could avoid
some of the risks posed by individual loans by investing in the loan originators, originators
themselves pose idiosyncratic risks of failure—for example, originators are susceptible to
region-wide adverse events, such as declines in real estate prices, that can have a
simultaneous, negative impact on a significant number of mortgage loans. 22 By facilitating
disaggregation of the risks associated with both individual loans and loan originators,
securitization allows investors to take a pure, relatively quantifiable investment position on
subprime mortgage credit, thus attracting significant capital to the market. Other features of
the securitization process, such as the reliance on the rating agencies to evaluate the risk of
the securities backed by the pool of mortgage loans, reduce the information costs to potential
investors even further. 23
Although the story of the development of the market for MBSs is by now three decades old,
the myriad investment challenges posed by loans that are subprime meant that securitizations
involving those loans were uncommon until the early 1990s. Subprime loans are not only
generally more risky than prime loans, but also have a long-term performance that is less
predictable. Pools of subprime loans also span a much broader range of credit risks than
prime loans, meaning that the variance of the distribution of credit risks in subprime
securitizations is higher than for prime securitizations. 24
The need to overcome these and other challenges repeatedly has propelled bursts of financial
innovation that have served the interests of all parties and driven overall economic growth.
For example, sponsors gradually have designed a set of techniques for structuring MBSs to
overcome the various impediments to turning pools of mortgages into an attractive
investment vehicle for the average investor, including the long and uncertain return horizon
of mortgage loans and varying investor risk preferences. Payments on the loans in a pool are
now apt to be subdivided into different cash flow streams, which in turn back securities
partitioned according to the desired level of risk and the term of the investment. 25 As a
result, investors may have the option of investing in principal- or interest-only securities,
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securities at particular positions in the priority of payment in case the underlying borrower
defaults, and securities that are backed by loans at a particular level of maturity. 26
This ability to tailor investment vehicles to segmented investor preference has increased
significantly the attractiveness of MBSs to investors. It demonstrates the extent to which the
subprime MBS market has matured, and is a testament to the ability of the financial sector to
innovate and adapt in ways that serve both investors and the general public.
IV. Recent Calls To Extend Liability For Abusive Loan Origination Practices To
The Secondary Mortgage Market Are Misguided.
A. Recent Turmoil In The Housing Market, And Its Causes And Consequences.
Even under the best of circumstances, some subprime mortgage borrowers will default on
their loans. And the current circumstances characterizing the subprime market are not the
best. The recent volatility of the housing market, in combination with the increasing number
of subprime borrowers who have obtained mortgage loans—often at terms that are not
appropriate to their circumstances—has resulted in a substantial increase in the number of
defaults and foreclosures. 27 From 2005 to 2006, foreclosure filings increased 42 percent to
more than 1.2 million. 28 Clearly, an inordinate number of borrowers are finding themselves
saddled with mortgage debt that they cannot afford.
In spite of these troubling developments, it is important to remember that the vast majority of
subprime borrowers have benefited from the rapid expansion of subprime mortgage capital.
In addition, while there has been a rush to cast blame for the suffering of delinquent and
defaulting subprime borrowers on third parties, the reality is that many borrowers now find
themselves in trouble because of their own unwise decisions. Borrowers frequently
misrepresent their financial circumstances in applying for loans—one recent review found
that 90 percent of a sample of borrowers had inflated the income that they stated on their
mortgage loan applications, with 60 percent inflating their stated income by more than 50
percent. 29 Relatedly, the recent bull market in real estate has encouraged a rash of reckless
speculation, with many home buyers eschewing a down payment on their home purchases—
25 percent of all home buyers chose to make no down payment in 2004—or borrowing
excessively to purchase homes beyond their means. 30
Only a very small percentage of subprime loans involve abusive lending practices by loan
originators or brokers. 31 The underlying and unavoidable reality is that subprime borrowers
are more likely than prime borrowers to default, even when the conduct of originators and
brokers is exemplary. Nevertheless, the ASF accepts the proposition that capital provided
through securitizations, along with capital from a variety of other sources, has sometimes
been harnessed by unscrupulous lenders and brokers to engage in those abusive lending
practices involving fraud, deception or unfairness that are grouped under the term “predatory
lending.” Further, it is likely that such predatory practices have contributed to the current
problems in the subprime market. 32 Beyond the systemic economic and financial
implications of sharp practices engaged in by certain unscrupulous lenders and brokers, the
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ASF also is cognizant of the sometimes tragic consequences at the level of individual
borrowers, including financial ruin or the loss of a home.
Of particular concern are the risks to vulnerable borrowers who lack the experience or the
ability to evaluate loan terms offered by originators or the promises and statements made by
brokers. Instead of reading and reviewing their loan documents, many borrowers rely on
their mortgage broker to explain the terms and conditions of the loan. Although most
mortgage brokers provide borrowers with accurate descriptions of terms and conditions,
borrowers sometimes are misled. Furthermore, mortgage brokers have no duty to find
borrowers the best mortgage loan, and are compensated according to the type and amount of
the loan; therefore, a broker may have an incentive to push certain loan products that are
inappropriate for a particular borrower.
As Congress considers a variety of options for addressing problems in the subprime

mortgage market, the suggestion has come from a number of quarters that there should be an
expansion, through federal legislation, of the extent to which secondary market
participants—including passive investors, investment banks, and the other entities that
purchase or hold, however briefly, loans during the securitization process—are subject to
liability as assignees for misconduct in the loan origination process. The ASF believes that
further expansion of such assignee liability would constitute an unwise and unfair mechanism
for remedying the problems in the subprime loan origination process, unless such expansion
is undertaken in a careful, reasoned, and balanced manner.
The very existence of a national mortgage market that is liquid and efficient depends on
investment risk being manageable and quantifiable, since investors must be certain that
purchasing mortgage loans, or merely investing in such loans, will not give rise to
catastrophic legal liability and investment loss. The imposition of overly burdensome and
potentially unquantifiable liability on the secondary market—for abusive origination
practices of which assignees have no knowledge and which were committed by parties over
whom they have no control—would therefore severely affect the willingness of investors and
other entities to extend the capital necessary to fund subprime mortgage lending. 33 As a
result, at precisely the time when increased liquidity is essential to ensuring the financial
health of the housing market, schemes imposing overly burdensome assignee liability
threaten to cause a contraction and deleterious repricing of mortgage credit. By reducing the
amount of capital available for originators to lend, and thus hurting both current borrowers
seeking to refinance their existing loans on more favorable terms prior to an interest rate
adjustment and prospective borrowers entering the market for the first time, a poorly
conceived expansion of assignee liability merely would multiply the number of victims of
predatory lending.
B. The Current Status Of The Law Governing Assignee Liability.
The default assumption is that the assignee of a mortgage loan takes subject to those claims
and defenses that the borrower has against the original lender. However, the common-law
holder-in-due-course doctrine provides that an assignee that paid value for a loan in good
faith and that lacked notice of certain claims and defenses to payment that the borrower has
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against the original lender, such as fraud, takes the loan free of those claims and defenses; the
assignee remains subject to real defenses, such as duress. 34 The rationale behind the holder-
in-due-course doctrine is promotion of the free market transfer of negotiable instruments.
Indeed, by encouraging the liquid secondary market to purchase large quantities of loans
without the need for costly and intrusive vetting of each individual loan for potential claims,
the holder-in-due-course doctrine serves as an essential cornerstone underpinning the current
plentiful availability of mortgage credit to prospective home owners. The doctrine also
recognizes that, in the vast majority of cases, it is neither fair nor efficient for innocent
assignees to be held responsible for the predatory lending practices of loan originators.
It is important to remember that, although the holder-in-due-course doctrine constitutes an

important protection for innocent assignees, it does not afford an absolute protection to all
assignees. In order to benefit from holder-in-due-course status, an assignee must take the
loan in good faith and cannot have actual or implied knowledge of a variety of loan defects,
including that the loan was originated through fraudulent means. Courts will also deny
holder-in-due-course status to an assignee that has such a close connection with the
originator that the originator effectively is an agent of the assignee 35 or where knowledge of
the originator’s wrongdoing can be imputed to the assignee on some other basis, such as
joint-venture or aiding-and-abetting theories. 36 In addition, assignees that engage in
wrongful conduct themselves in connection with mortgage loans are subject to potentially
serious liability under a variety of federal and state legislation. 37
The ASF does not contest the scope of liability under these laws for secondary market
assignees that are culpable. Rather, the ASF’s concern is the ad hoc body of federal and state
law that currently subjects innocent secondary market assignees to liability. This body of
law lacks coherence and is often internally inconsistent, in part because the perception that
assignees must be held responsible for the sins of loan originators becomes more politically
salient during periods of turmoil in the housing market. At such times, there is a tendency
for lawmakers to turn to the secondary market as the deep pockets available to compensate
for the failure of regulatory authorities to effectively oversee and punish those loan
originators that engage in illegal conduct.
The primary component of the statutory scheme governing liability for assignees that has
emerged at the federal level is the Truth in Lending Act (“TILA”), which was amended and
supplemented in 1994 by the Home Ownership and Equity Protection Act (“HOEPA”). 38
The purpose of TILA is to facilitate informed decision making by borrowers, which the
statute furthers by requiring lenders to provide standardized disclosure regarding the costs
and terms of credit. To comply with the statute, lenders must use statutorily specified
terminology to explain to borrowers the salient provisions of loan agreements. 39 Lenders
that violate TILA are subject to a strict liability standard, which is breached even by
violations that are merely “technical” or “minor.” 40
In contrast with TILA’s broad applicability to most consumer loans, HOEPA applies
narrowly to certain high-interest and high-fee refinancing (“covered loans” or “HOEPA
loans”) that are perceived as potentially predatory. In 2005, such loans accounted for less
than one-half of 1 percent of originations of home-secured refinance or home-improvement
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loans. 41 HOEPA augments TILA’s disclosure provisions, requiring lenders to provide a

special statement to borrowers of covered loans that warns them of the risk that default on the
loan might lead to the loss of their homes. 42 This warning, in conjunction with standard
TILA disclosures, must be provided three days prior to loan settlement, thus affording
borrowers a “cooling-off period” to reconsider their decision. 43 HOEPA also prohibits
certain loan provisions that have been deemed to pose inappropriate risks in conjunction with
loans that are either high cost or that carry high fees. 44
As to assignee liability, TILA provides borrowers with a limited cause of action against the
assignees of creditors who have violated the statute. Although the scope of assignee liability
under HOEPA is unclear, 45 for the class of covered loans, the plain language of HOEPA
subjects assignees to liability for “all claims and defenses with respect to th[e] mortgage that
the consumer could assert against the creditor * * *.” 46 Unless the assignee can prove that it
did not know, and was reasonable in not knowing, that the loan was a HOEPA loan, this
provision at a minimum effectively eliminates the protections afforded to assignees by
holder-in-due-course status. 47
The HOEPA assignee liability provision is modeled after the Federal Trade Commission’s
Holder Rule for the Preservation of Consumers’ Claims and Defenses (the “Holder Rule”),
which nullifies the holder-in-due-course doctrine for certain types of non-real estate
consumer credit transactions, including financed sales of consumer goods or services and
certain purchase money loans. 48 The Holder Rule mandates that any contract pertaining to
such a transaction contain language subjecting the holder to liability on all claims and
defenses that the debtor could assert against the seller, such as a breach of warranty claim
related to the sale of goods that are defective. Recovery pursuant to the Holder Rule is
capped. Like the Holder Rule, the plain language of HOEPA would seem to render an
assignee liable for any claim or defense relating to a mortgage loan that the borrower could
assert against the creditor, regardless of the particular law under which the claim or defense
arises. 49
As a result of HOEPA’s authorization of broad liability for innocent assignees, loan

purchasers that wish to participate in the market for HOEPA loans can control their liability
exposure, but never eliminate it, only through painstaking scrutiny of both the content of
every individual loan and the legitimacy of practices engaged in by individual originators and
brokers. Because the statute imposes strict liability on voluntary participants in the market
for covered loans, even those assignees that take these steps are still subject to liability if they
fail successfully to discover and to avoid loans that have been made in violation of the
statute. Thus, as one commentator has observed, for loans that fall under the ambit of
HOEPA’s triggers, “consumers will generally have a strong case for extending liability for
all predatory lending claims and defenses deep into securitization conduits.” 50
In addition to these sources of federal law, over the last several years a number of states and
localities have responded to the problem of abusive loan origination by promulgating
legislation that imposes liability on assignees. Although these state and local laws generally
build on the HOEPA approach, they often have triggers that are set at levels that are lower
than the HOEPA triggers, thus reaching a larger share of the subprime market. In addition,
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these laws often impose more severe restrictions on covered loans than HOEPA, resulting in
the potential for unquantifiable and unduly burdensome liability. 51 Such liability can pose a
concrete threat to the willingness of the secondary market to continue to provide capital to
the originators of subprime loans in the affected jurisdictions.
C. The Analysis Underlying the Expansion Of Assignee Liability Through HOEPA

And Many State Laws Is Fundamentally Misguided.
Many of the proponents of expanded assignee liability assert that the flow of capital from the
secondary market to loan originators contributes to the posited prevalence of lending abuses
in the loan origination process. They paint a dark picture of insatiable investor appetite for
MBSs driving the entities that structure securitizations to demand more and more loans from
the primary market, thus incentivizing primary loan originators and brokers to engage in
inappropriate, and even fraudulent, behavior to satisfy this demand. Moreover, according to
the proponents of this view, none of the actors involved have any incentive to end the
pernicious cycle. Before loan originators incur liability or suffer losses from default, they
can transfer their loans to the secondary market, thus rendering themselves judgment proof.
And secondary market participants are protected from liability by the holder-in-due-course
doctrine.
According to those pushing for a major expansion of assignee liability, such liability will
help to break the cycle by incentivizing the secondary market to police unscrupulous
mortgage originators, to stamp out current bad practices, and even to rationalize the pricing
and supply of subprime mortgage credit.
It is true that a robust and liquid secondary mortgage market does free originators from the
need to fund mortgage loans out of their own capital resources and hold loans on their
balance sheet, and this liberation from resource constraints benefits both scrupulous and
unscrupulous lenders. However, the analysis that underlies the assignee liability provisions
of HOEPA and that continues to be advanced by the proponents of expanded assignee
liability suffers from a number of conceptual flaws.
1. Secondary market participants have no incentive to purchase predatory

loans.
The assumption that secondary market participants are indifferent to the wrongful conduct of
primary loan originators, and care only about funneling new capital to the primary market, is
mistaken. In fact, secondary market participants already face strong economic incentives to
avoid unprofitable loans, including those loans that have been originated in a predatory
manner.
From the perspective of an investor, a predatory loan is a bad loan, since the borrowers
targeted by predatory lenders tend to be economically vulnerable and financially
unsophisticated, and the terms of predatory loans frequently are inappropriately onerous, thus
increasing the risk of borrower delinquency and foreclosure. 52 Foreclosure is a costly last
resort that benefits no party involved. The loan servicers that process foreclosures are not in
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the real estate business, and often have to resell the foreclosed property at auction or at a
foreclosure sale at a substantial loss. This loss ultimately is borne by investors. The
inclusion of risky, default-prone predatory loans in the pools that back MBSs thus worsens
the benefit-risk profile of the securities and reduces their desirability to investors. Indeed, as
a result of the recent turmoil in the market, the rating agencies have been forced to
downgrade the credit ratings on a number of MBSs, thus negatively impacting the investors
who purchased these securities. 53
Moreover, investor aversion to predatory loans means that few of the large institutional
players that participate in securitizations, particularly the investment banks that distribute
MBSs, wish to lose their credibility—the very lifeblood of their business—by participating in
securitizations backed by such loans. 54 Many investment banks also hold a large share of
lower-rated securities for their own account; since they bear any initial losses, investment
banks are thus further incentivized to screen effectively.
It is also the case that, although some loan originators and brokers may be judgment proof,
the secondary market suffers when these parties incur heavy liability as a result of legal
judgments or loan default, since the sponsors of securitizations frequently have substantial
sums invested in the loan origination process. In fact, the recent failures of major subprime
lenders threaten to inflict heavy losses on the very secondary market actors—primarily
investment banks—that have been the source of much of the capital that has driven the recent
growth in subprime mortgage credit. 55
In sum, even absent the prospect of assignee liability, it is simply not in the economic self-
interest of secondary market participants to purchase predatory loans.
It also bears remembering that the subprime mortgage securitization process is still relatively
novel and complex. The recent rise in delinquencies and defaults, in conjunction with the
failure of a number of originators, has spurred a tightening of standards and more stringent
evaluation of loan pools by investors and securitization sponsors. The moment at which
market forces are correcting for prior inefficiencies (and perhaps some overexuberance) is
precisely the wrong time for intrusive government regulation, which—because it is usually
poorly targeted and blunt—runs the risk of counterproductively impeding market forces.
2. Secondary market participants are not well-suited to regulating the

primary market, and trying to force them to conduct such regulation
would increase the cost borne by subprime mortgage borrowers.
Contrary to the wishful assumptions of proponents of expanded assignee liability, investors,

investment banks, and other financial entities in the secondary market are adapted to
participating in markets, not regulating them; therefore, they have little capacity or aptitude
for such a regulatory role. A regime that authorizes the imposition of substantial liability on
assignees for the wrongful conduct of primary lenders may create strong incentives for those
secondary market participants that remain in the subprime market to endeavor to scrutinize
more closely the quality and provenance of the loans that they fund. But inevitably, such
liability also will increase the cost, risk, and complexity of secondary market operations. At
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a minimum, burdensome assignee liability will drive loan purchasers to demand higher
yielding loans for their portfolios and force loan originators to deny mortgage credit to many
subprime borrowers and impose higher rates and fees on all approved subprime borrowers.
Furthermore, the likelihood that market participants will exercise the exit option in response
to a regime that subjects them to liability that is unfair, inefficient, and potentially
unmanageable is particularly high in the case of the secondary market for subprime loans. In
general, investors must be able to value the asset in which they invest, and for a long time the
difficulty of valuing a pool of subprime mortgages retarded the development of the
secondary market. 56 Although investors have, over time, developed very sophisticated
pricing models that enable such valuations, the injection of legal risk into the calculus
threatens to render accurate valuations impossible. 57
Indeed, the advent of significantly expanded potential liability for lenders and assignees
under HOEPA has had a dramatic effect on the market for covered loans. Neither Freddie
Mac nor Fannie Mae will purchase any mortgage loan that meets the HOEPA triggers. 58
S&P initially required that HOEPA-covered loans be excluded entirely from rated
transactions, 59 and now will allow such loans in rated transactions only subject to additional
credit enhancements. 60 Given the heightened risk and uncertainty, most investors simply
will not invest in securities backed by pools containing HOEPA-covered loans, thus
depriving certain borrowers of access to any mortgage credit at all. 61 In sum, because the
secondary market is unable to make the fine, difficult distinctions between proper and
improper loans that are necessary under the HOEPA regime, HOEPA predictably has
discouraged the flow of capital to all lenders, not just unscrupulous ones. 62
Many state and local laws have also had a significant impact on the availability of secondary
market capital to fund subprime lending in the relevant jurisdictions. Such laws often impose
unmanageable liability on assignees, and rely heavily on standards that are subjective and
undetectable through review of the loan file. This makes it effectively impossible for
assignees to control, and rating agencies to assess, whether loans meet these standards. 63
Indeed, the rating agencies have announced that they will not rate MBS transactions
involving mortgage loans originated in jurisdictions that impose potentially unquantifiable or
unlimited liability on assignees. 64 Even if a law imposes assignee liability that is reasonably
limited and quantifiable, the rating agencies will only rate transactions involving covered
loans if onerous conditions are satisfied, including the provision of additional credit
enhancements and additional representations and warranties, and the performance of a
compliance review. 65 Because of the threat of liability and the difficulty of meeting the
rating agencies’ conditions, most MBS transactions exclude loans covered by burdensome
state laws. 66
There are, unfortunately, a number of specific examples of state anti-predatory lending laws
that were extraordinarily ill-conceived and poorly drafted, including laws in New Jersey,
Massachusetts, Rhode Island, and Indiana. Perhaps the worst example of problematic state
legislation was the Georgia Fair Lending Act (“GAFLA”), 67 which followed the (apparent)
HOEPA model of subjecting assignees to both defensive and affirmative liability for any
claim that the borrower could assert against the original creditor. Compounding the
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problems posed by this model, the statute authorized punitive damages against passive
investors and failed to contain important safeguards. GAFLA was also too complicated and
difficult to apply in practice; for example, it required lenders to document that a refinancing
of certain loans provided the borrower with a “net tangible benefit”—a standard that is
hopelessly subjective.
As it became clear that GAFLA subjected assignees to liability that was essentially
unquantifiable, all three of the major rating agencies announced that they could not rate any
MBSs containing any loans subject to GAFLA, thus effectively ending the secondary market
for loans originated in Georgia. 68 As a result, the availability of subprime credit declined
precipitously. In response, the Georgia legislature decided to amend GAFLA to remove
several of its worst provisions. Nevertheless, there currently is no market for the few high
cost loans originated during the period between the date on which GAFLA was enacted and
the date on which it was modified.
Likewise, the threat of assignee liability under New Jersey’s “Home Ownership Protection
Act” (“HOSA”) 69 —viewed by the National Association of Mortgage Brokers as one of the
toughest anti-predatory lending laws in the country—led S&P to refuse to rate any
securitizations that contain covered loans. 70 To the extent that there is still demand in the
secondary market for subprime mortgages originated in New Jersey, it is only because that
law contains some minimal protections for assignees, such as a safe harbor, a damages
limitation, and a prohibition of class actions. 71 Nevertheless, HOSA has made it much more
likely that creditors in New Jersey will reject a prospective subprime borrower. 72
Even laws that adopt an approach that is more moderate than GAFLA and HOSA have
staunched the flow of capital to fund covered loans and thus had a dramatic impact on the
overall availability of subprime mortgage credit. North Carolina’s high-cost mortgage
legislation, like many of the state laws that followed it, set lower triggers than HOEPA and
imposed more severe restrictions on covered loans. Although the legislation did not
explicitly impose liability on assignees, previous interpretations of North Carolina law
rendered such liability a distinct possibility, as was noted by S&P in its review. 73 Empirical
studies have shown that, predictably, this new legal exposure markedly reduced lending to
higher risk borrowers in North Carolina, with the largest impact falling on low income and
minority borrowers. 74
In addition to the specific concerns generated by the content of individual state and local
legislation, the sheer volume of these often conflicting standards compels secondary market
participants to incur substantial additional costs in investigating legal provisions and
evaluating their risk exposure. 75 Even after these resources have been expended, secondary
market participants that have purchased potentially covered loans still remain subject to
liability that is fundamentally unmanageable and unquantifiable, since the models used to
assess risk depend on the contractual terms of loans remaining stable. The rapid proliferation
of state laws imposing increasingly expansive liability thus injects significant change-of-law
risk into the investor decision-making process. Since this risk cannot be modeled effectively,
it cannot be managed by investors.
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3. The primary market actors directly responsible for harmful predatory

practices already are subject to extensive, if sometimes ineffective,
government regulation.
The actors directly responsible for the harm that results from predatory practices—mortgage
originators and brokers—already are subject to extensive, if sometimes ineffective, oversight
by state and federal regulatory authorities. 76 A corporate originator may not originate a
residential mortgage loan without a state license or a bank charter, and most—although not
all—states require all brokers to register or to hold a license before they may broker a
mortgage loan. 77 Fraud and predatory practices are illegal in every state, and violators of the
applicable laws and regulations are subject to a host of civil and criminal penalties.
Rather than shifting responsibilities onto the secondary market, legislators should
acknowledge and address any deficiencies in governmental oversight of originators and
brokers. A more comprehensive scheme for regulating the primary market could help reduce
predatory conduct, and predation by mortgage brokers in particular. For example, if the
current system of regulating mortgage brokers at the state level does not protect consumers
adequately, then a more comprehensive federal regulatory scheme could be considered. 78
Reform options that directly address any governmental regulatory failures promise to be
much more effective than reliance on the secondary market. Specific governmental bodies
are established for the very purpose of regulating lenders and brokers, and, in order to carry
out their mandate effectively, the relevant bodies collect fees and possess wide-ranging legal
authority to examine and investigate participants in the primary market. The secondary
market has neither these powers and resources nor the aptitude to carry out such a regulatory
function.
4. Shifting the burden for predatory practices from cheated subprime

borrowers to passive investors and other subprime borrowers simply
shifts the burden of predatory practices among innocent parties.
Many proponents of expanded assignee liability rest their analysis in part on the argument
that such liability corrects a fundamental unfairness. Why must an innocent borrower who is,
almost by definition, in a financially precarious situation shoulder the burden of having been
preyed upon by an unscrupulous, but now judgment-proof, originator or broker?
Of course, over the long term, investors will shift their capital out of the subprime market in
response to the imposition of burdensome liability, thus ultimately harming all subprime
borrowers. And although these proponents do have a point from the short-term perspective,
by focusing so narrowly on the plight of individual defrauded borrowers, they overlook and
undervalue the other innocent parties who would be hurt by expanded assignee liability.
Most assignees are individual passive investors or institutions far removed from the loan
origination process. 79 These parties have no way of either knowing when predatory practices
are taking place or reasonably discerning from review of the loan that they have invested in
the fruits of illegality. Shifting the burden for predatory practices from the cheated (if not
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necessarily blameless) subprime borrower to the passive investor simply shifts the burden
from one innocent party to another.
Moreover, it bears repeating that those secondary market participants that do not exit the
market entirely in response to heightened prospective legal liability will demand a greater
return on their investments as compensation for taking on additional legal exposure. This
burden, in the form of higher rates and fees for subprime loans, ultimately will fall on all
borrowers, including the vast majority who are served by responsible originators and brokers
and never subjected to predatory practices.
D. Why The Holder Rule Approach Should Not Be Applied To Mortgage Credit.
Unfortunately, the current legal framework governing assignee liability reflects the partial
adoption of elements of the rationale underlying the Holder Rule without considering the
differences presented by mortgage and other types of consumer credit. 80 For example, in
passing HOEPA, Congress explicitly embraced the theory that the mere availability of
secondary market capital as a source of funding for subprime lending is a direct inducement
to wrongful behavior by originators and brokers. 81 The assignee liability provision in
HOEPA was intended to encourage investors in the secondary market for HOEPA loans to
scrutinize more carefully the backgrounds and qualifications of those loan originators with
which they conducted business. 82 HOEPA thus endeavored to harness the incentives created
by legal liability effectively to deputize secondary market participants to police and to punish
economically the predatory lending practices of primary market actors.
Some commentators believe that federal legislation should address the question of assignee
liability simply by extending the Holder Rule to all residential mortgage loans. This belief is
mistaken because there are a number of reasons why the rationales supporting total
abrogation of the holder-in-due-course doctrine for transactions that involve goods and
services, even to the extent that they are persuasive in that context, are inapplicable in the
mortgage loan context.
First, as has been demonstrated above, local, state, and federal laws governing the primary
market for mortgage credit form a patchwork of substantive regulation that is already
complex and that continues to grow more so as the pressure for government action mounts. 83
Many of these regulations are extremely subjective, rendering compliance by arms-length
secondary market participants difficult. This is not the case for other types of consumer
credit, which tend to be governed by relatively simple, and objective, common law rules. 84
Second, state predatory lending laws often impose liability that is substantially higher than
the recovery that is possible under the Holder Rule, which imposes a cap on damages. 85
Third, the circumstances of defrauded mortgage borrowers differ in important ways from the
circumstances of borrowers of other types of consumer credit. The Holder Rule mainly
allows borrowers who incurred a debt in purchasing a defective good or service to obtain
redress. The borrower in such a situation suffers a loss that is actual and substantial. By
contrast, the value of the principal of a mortgage loan to a borrower is immutable, even if the
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loan is predatory. 86 Therefore, the amount of recovery necessary to make a victimized

mortgage borrower whole is extremely limited—for example, an amount equal to the
difference between the actual interest paid and the amount of interest that the borrower would
have paid at a “fair” interest rate. In addition, as noted above, it is often the case that
borrowers of mortgage credit share at least some of the blame—at least in comparison with
innocent assignees—when they are victimized by predatory originators and brokers; the same
cannot be said for consumers duped into purchasing defective goods or services. As a result
of these considerations, the full range of actions that can be brought against originators and
brokers of predatory subprime mortgage loans—to the extent that they afford damages to
cheated borrowers that reflect punitive principles of deterrence and retribution rather than the
narrow goal of making the borrowers whole—are not appropriately enforced against
assignees.
Fourth, assignees of consumer credit have little interest in whether the good or service is
defective, because the ability of the borrower to repay the loan is not linked to the soundness
of the product purchased. Therefore, there is an argument that the Holder Rule corrects for a
market failure. However, because borrowers of subprime mortgage loans that are predatory
are much more likely to go into default or foreclosure on those loans, secondary market
participants usually have a strong economic incentive to ensure that they do not purchase
such loans, even absent the prospect of legal liability.
Finally, the securitization of subprime loans already presents vexing problems of risk
evaluation and mitigation that are not present in the market for consumer credit. Moreover,
securitization sponsors, underwriters, and investors currently are skittish in light of the extent
to which recent the turmoil in the market has forced them to reevaluate prior risk and pricing
assumptions. This makes it highly plausible that the imposition of legal liability in a fashion
akin to the Holder Rule would drive many secondary market participants out of the market
entirely. Indeed, the experience with state predatory lending laws and HOEPA demonstrates
that this risk is more than theoretical.
V. Recommendations For A New Framework For Assignee Liability
The framework that currently governs assignee liability for participants in the secondary
subprime mortgage market applies to a limited number of high cost loans, but the costs of
compliance that it imposes on participants in the market for such loans are prohibitive. The
scheme is not workable, and certainly should not be expanded to encompass a broader share
of the subprime market.
To the extent that there is to be assignee liability for secondary market participants, it should
be imposed pursuant to a uniform national standard that is crafted carefully to serve the
primary goal of reinforcing the market forces that already provide substantial incentives for
those parties that sponsor and invest in MBSs to make responsible investment decisions.
The ASF believes that such a carefully crafted regime, even if extended to apply at triggers
that are modestly lower than the current HOEPA triggers, would be preferable to the current
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patchwork of state and federal laws, which has done little more than generate costs and
inefficiencies that, at the end of the day, are shouldered by all subprime borrowers.
The following recommendations for amendments to existing federal law assume that any new
legislation will modify the statutory scheme consisting of TILA/HOEPA. These
recommendations draw in many instances on prior suggestions for reform, particularly the
Responsible Lending Act (or, the “Ney-Kanjorski Bill”), 87 which was proposed in 2005, but
was never enacted into law. As with the recommendations that follow, the Responsible
Lending Act proposed to modify TILA/HOEPA by establishing a national uniform standard
governing assignee liability that preempted contrary state law and established objective
standards, a limitation on affirmative claims, a due diligence safe harbor, a reasonable cap on
damages, and a right to cure.
A. Entities Covered By Assignee Liability
Neither TILA nor HOEPA (nor many state laws) defines the term “assignee,” although TILA
is clear that loan servicers generally are not treated as assignees. 88 The absence of a clear
statutory definition poses the risk that courts will define the term too broadly, sweeping in
secondary market participants who are only very tangentially related to the loan.
The term “assignee” should be defined clearly and narrowly in any future legislation. In
particular, the ASF urges the exclusion of certain types of entities that are not directly
involved in purchasing loans. In addition to servicers, the following parties should be
excluded:
(i) parties possessing only a security interest in the mortgage loans and parties that
have acquired title to the loan through foreclosure;
(ii) broker-dealers and their affiliates that trade in mortgage loans and related
mortgage securities but that are not involved in any material respect in the terms and
conditions of the loans or securities;
(iii) passive investors in securities backed by a pool of mortgage loans, including

guarantors of the principal and interest of securities held by other investors; and
(iv) parties that have purchased mortgage loans under a repurchase agreement. 89
B. Mortgage Loan Triggers For Coverage
TILA, which establishes general disclosure requirements, applies to every home mortgage
loan. HOEPA, which imposes far more restrictions on the substantive contents of loans
themselves, applies only to a class of refinancings of residential mortgage loans (“high cost
mortgages”), a categorization that is triggered either by a loan’s high interest rate or its
imposition of a specified level of costs and fees. 90 The HOEPA triggers are set by
regulations promulgated by the Federal Reserve Board. For a closed-end refinancing secured
by a first lien, the triggers currently are set at (i) an interest rate at loan consummation that is
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8 percent over the comparable rate for Treasury Bills (10 percent for a subordinate lien) or
(ii) total points and fees that exceed either 8 percent of the total loan amount or an annually
adjusted fixed dollar ceiling. 91 Many state predatory lending laws have triggers that are
lower than those in HOEPA and/or require different calculations.
The ASF does not object per se to federal legislation that establishes triggers that are
modestly lower than those currently set by HOEPA and that thus brings a larger group of
mortgage loans within the ambit of potential assignee liability. However, the extent to which
lower triggers are appropriate will depend on whether the proposed legislation also (i)
effectively addresses the concerns that the ASF has regarding other aspects of the current
TILA/HOEPA scheme and (ii) avoids instituting additional inappropriate burdens on
assignees.
C. Prohibited Practices And Restrictions On Loan Terms
HOEPA diverged from the TILA disclosure model by substantively restricting the terms that
could be included in covered loans. Restricted terms include: balloon payments, negative
amortization, advance payments, default interest rates, prepayment penalties, lending without
regard to repayment ability, refinancing within the first year, loan “flipping,” and due-on-
demand clauses. 92 Although these practices—especially loan flipping—have problematic
subjective elements, 93 they generally have more objective, measurable, and well-accepted
definitions than the additional practices prohibited under state predatory lending laws.
Examples of such subjective standards under state law include prohibitions on deceptive
practices and the structuring of loans to avoid triggers and, perhaps most egregiously, the
requirement that a loan confer a net tangible benefit on the borrower.
Given their remove from the lending process, secondary market purchasers have very limited
capacity to discern whether particular loans meet subjective standards. 94 Much of the
information required to make the necessary evaluations and screen problem loans is not
present in the available loan files. Even when the information could potentially be found in
those files, secondary market purchasers simply are not situated to make fine-grained,
context-dependent evaluations—such as whether a specific loan confers a net tangible benefit
on a borrower or has been structured to avoid triggers—at a reasonable cost. 95 Most
assignees are SPVs—usually a trust—that given their limited capacity must rely in large part
upon representations and warranties from the originator or seller regarding the loan’s
compliance with applicable law. Such SPVs have no capacity to determine the suitability of
a loan for a particular borrower or to assess the details of the origination process.
In sum, even if theoretically possible, the cost of a detailed determination of compliance with
subjective standards on a loan-by-loan basis is prohibitive.
The prohibition of practices according to objective standards carries some costs for loan
originators, as it reduces their flexibility to structure loans so as to address evolving
circumstances and serve deserving borrowers. However, the costs of such reduced flexibility
are swamped by the costs borne by assignees as a result of the uncertain liability imposed by
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subjective standards. Therefore, the ASF favors federal legislation that, to the extent that it
imposes substantive restrictions on loan terms, does so clearly and objectively.
D. Scope Of Assignee Liability
Assignees of residential mortgage loans are subject to liability for TILA violations
committed by the primary originator if the violation is “apparent on the face of the disclosure
statement” and the assignee obtained the loan voluntarily. 96 The “apparent on the face”
standard is violated where (i) the disclosure statement is not in the statutorily mandated
format or fails to contain the statutorily required terms or (ii) a simple comparison of the
disclosure statement to other supporting loan documentation would have revealed that the
disclosure was deficient. 97 It is by now well-established that assignees are not liable for
TILA violations that are not apparent, although the determination as to whether a violation is
in fact apparent, on which TILA provides no guidance, is not always a simple one.
HOEPA effected a major expansion in the scope of assignee liability for covered loans,
imposing broad potential liability on secondary market purchasers for the wrongful conduct
of loan originators. However, even more than a decade after its enactment, the outer reaches
of liability under HOEPA remain somewhat murky. Indeed, a number of courts have
interpreted HOEPA as subjecting assignees to broad liability under any consumer protection
statute, regardless of whether the statute under which the borrower’s claim or defense arises
is silent or expressly conflicts with HOEPA on the question of assignee liability. 98
Such an interpretation is problematic. It implies that HOEPA authorizes assignee liability for
violations of other statutes when the body that enacted the particular statute supplying the
right, be it a state legislature or Congress, implicitly (or even explicitly) declined to subject
assignees to liability for statutory violations committed by the originator. Moreover, a
statutory scheme that both purports to establish substantive regulations applicable to covered
loans and authorizes action pursuant to a host of other sources of positive law would seem ill-
tailored to achieving a comprehensive and precise regulatory objective. In light of these
concerns, a number of courts understandably have declined to interpret HOEPA as effecting
such a dramatic expansion of assignee liability. 99
In sum, HOEPA’s lack of specificity on the scope of its right of action and whether it
authorizes affirmative claims has resulted in a split in judicial authority, adding further to the
uncertainty of secondary market participants regarding the scope of their prospective
liability.
To the extent that HOEPA is interpreted as supplying a right of action or a defense against an
assignee for any statutory violation by a creditor, it is too broad. Nor should federal
legislation authorize subprime borrowers to assert affirmative claims against assignees based
on violations of statutes that do not themselves provide a right of action to pursue such
claims. Requiring assignees to screen loan pools for compliance with one legal regime is far
more efficient and fairer than requiring them to scour every law that could give rise to a
potential claim.
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June 2007
Therefore, any new federal legislation should restrict clearly the authorization of assignee
liability to violations of TILA, as amended by HOEPA and the new legislation.
E. Limitations On Monetary Liability For Assignees
A borrower who successfully sues an assignee for a violation of TILA or HOEPA may be
entitled, subject to certain caps, to recover: actual damages, certain statutory damages,
attorneys’ fees, and enhanced damages that include all finance charges and fees that have
been incurred on the loan. 100 Borrowers who use HOEPA to sue an assignee on another right
of action may recover the sum of (i) the borrower’s remaining indebtedness and (ii) the total
amount that the borrower has paid in connection with the transaction. 101 State predatory
lending laws provide for varying degrees of assignee liability, and, in many instances, this
liability can exceed the amount of the loan and payments received by the assignee.
Any prospective federal legislation should adopt the HOEPA standard applicable to claims
brought under another right of action, and thus limit an assignee’s liability to the sum of the
remaining value of the indebtedness and the total amount paid by the borrower, plus
reasonable attorneys’ fees. The ASF strongly objects to the imputation of any statutory,
enhanced, or punitive damages to an assignee based on the conduct of the lender. Statutory,
enhanced, and punitive damages serve purposes of punishment and deterrence that are of, at
best, only limited applicability in the case of an assignee that did not know of, or participate
in, violations committed during the origination process. It hardly seems to serve the interests
of fairness to provide borrowers, even ones who have been duped by unscrupulous lenders,
with a windfall profit at the expense of innocent assignees. The secondary market is not
opposed to statutory, enhanced, or punitive damages in cases where the assignee acts
knowingly or with reckless indifference to the violations.
F. Limitations On Rescission Claims Against Assignees
TILA provides borrowers with the right to rescind certain mortgage loans until: midnight of
the third business day following consummation, delivery of the right to rescind notice
required by TILA, or delivery of all material disclosures, whichever occurs first, up to a
maximum of three years. Although the borrower is still required to repay the original loan
amount, rescission permits the borrower to cancel the loan agreement, thus rendering the
lender’s security interest void and relieving the borrower of liability “for any finance or other
charge.” 102 Although two circuit courts have concluded that the right of rescission is solely
personal, at least one other circuit is considering whether it may also be asserted through the
vehicle of a class action. 103
HOEPA also allows a borrower to assert the right to rescind provided in TILA—up to three
years from the date of loan consummation—against any assignee of the loan for any violation
of HOEPA’s disclosure requirements or its substantive provisions. 104 HOEPA is clear that
this rescission remedy is available even if the statutory violation is not apparent on the face
of the loan documents and the assignee has exercised due diligence in reviewing the loan. 105
25
June 2007
A number of courts have held that the right to rescind under TILA is available against an
assignee even if the violation was not clear on the face of the disclosure statement. 106
Regardless of whether this is an accurate interpretation of the statute, any future legislation
should clarify the circumstances in which a borrower may exercise the right to rescind, and
should specify that rescission is a personal remedy which can only be raised in an individual
action.
Rescission is a powerful remedy, and one that is subject to abuse. Since all payments that are
made to the lender up to the date of rescission are credited against the loan principal for
which the rescinding borrower remains responsible, a borrower that exercises the right-to-
rescind has received essentially no-interest financing for the period between loan
consummation and rescission.
Although the ASF generally is in favor of restricting the right of a borrower to seek
rescission against an assignee, at this time it does not actively seek modification of the status
quo.
G. Types Of Legal Action Against Assignees
As noted above in Part V.D, HOEPA subjects assignees to liability for “all claims and
defenses” that the borrower could assert against the creditor. Clearly, HOEPA authorizes
defaulted borrowers to assert a statutory violation as a defense against an assignee that seeks
to enforce the loan documents through an action for foreclosure or collection. And although
the Holder Rule on which HOEPA is based has been interpreted as limiting borrowers to
defensive actions against assignees, 107 HOEPA would also appear to authorize affirmative
claims against assignees insofar as the claim asserted is for a violation of HOEPA or TILA
by the primary originator. 108 As indicated above, however, the courts are split on the extent
to which HOEPA creates an independent authorization for affirmative claims against
assignees based on violations of other statutes that do not themselves provide a right of
action to pursue such claims. 109
This uncertainty is significant because affirmative claims, particularly those brought in the
context of class actions, are of utmost concern to the ASF. Secondary market purchasers
place a great deal of importance on the ability to evaluate and quantify their litigation
exposure with some degree of accuracy. The authorization of claims that are defensive does
not present a significant barrier to an assignee’s capacity to make such an evaluation because,
by deciding whether or not, and when, to bring a foreclosure action, assignees can control the
adjudication and timing of individual claims.
By contrast, statutory authorization of claims that are asserted affirmatively takes control out
of the hands of assignees and places it in the hands of some unidentifiable class of borrowers.
Therefore, although proponents of affirmative claims assert that they serve a deterrent
function against lax loan review by secondary market purchasers, the uncertainty resulting
from authorization of such claims means that they instead have the unintended consequence
of driving participants out of the secondary market entirely. The deterrence rationale
underlying affirmative claims is also difficult to square with the main legitimate justification
26
June 2007
for assignee liability—the provision of redress for hard-pressed borrowers facing financial
crisis because they were duped by originators or brokers. These concerns are heightened
when affirmative damages suits are brought as class actions, which are authorized under
TILA.
Despite these concerns, assuming that future federal legislation limits the federal right of
action to violations of TILA (as amended), the ASF is not opposed in principle to authorizing
borrowers to bring all claims and defenses against assignees that they can bring against the
originator or broker under the statute, subject to the following conditions:
(1) The statute should only permit a defaulting borrower to assert a violation of the
statute as a defense to the innocent assignee’s enforcement of the mortgage agreement
if the violation bears a reasonable relation to the default. 110 If the borrower’s default
is not reasonably related to a wrong committed during the origination process, and
assuming that the assignee acted in good faith and without actual knowledge of the
violation, fairness dictates that the borrower should not be able to avoid his
obligations under the loan and impose costs on an assignee. The ASF would not
oppose relaxation of this nexus requirement when the assignee acts with actual
knowledge of, or displays a reckless indifference to, the originator’s violation.
(2) Statutory authorization of affirmative claims, subject to:
(i) an absolute defense for assignees that can demonstrate that a reasonable
person exercising ordinary due diligence could not have determined with
reasonable certainty that there had been a violation of the law, and
(ii) a safe harbor, as described in Part V.H below, that would give assignees
some control over their exposure to liability from both defenses and claims.
(3) The statute should expressly prohibit class action claims against assignees. Since
HOEPA authorizes attorneys’ fees for individual actions, foreclosure of the class
action remedy would not unduly hamper the ability of individual litigants to seek
redress under the statute.
The authorization of defenses and claims subject to these conditions would ensure not only
that wronged borrowers are be able to obtain redress for their injuries, but would also afford
assignees an opportunity to control their litigation exposure and render the potential scope of
their liability more manageable.
H. Safe Harbor Based Upon Loan Review
Existing “safe harbor” provisions in those federal and state statutes that authorize assignee
liability are problematic for the ASF insofar as they afford assignees merely the opportunity
to protect themselves from liability for the unintended purchase of covered loans. For
example, HOEPA’s safe harbor for those assignees that can demonstrate by a preponderance
of the evidence that their purchase of a loan covered by HOEPA was unintentional (i.e., that
27
June 2007
a “reasonable person exercising ordinary due diligence” would not have known that the loan
was covered by HOEPA) is too narrow. 111 This safe harbor leaves assignees exposed to
strict liability for any defects in a HOEPA loan that they purchased knowingly or negligently,
even if they did take reasonable steps to avoid purchasing loans that were defective. 112 The
ability to cure that exposure should be addressed as part of any comprehensive legislation.
Moreover, at least some courts have set quite high the bar that assignees must overcome to
demonstrate the requisite due diligence under HOEPA. One court has held that an assignee
must not only conduct a review of the relevant documents and disbursements for each
individual loan, but must also analyze those documents and conduct “whatever further
inquiry is objectively reasonable given the results of the analysis.” 113 Such a standard—in
requiring (i) that “a person with knowledge of the HOEPA requirements” evaluate and
analyze the documents for each individual loan and (ii) an unspecified additional further
inquiry into the provenance of each loan—is far too demanding. 114 Given the large number
of loans involved in even relatively small securitizations, it is simply unrealistic to require
every secondary market participant that is potentially subject to assignee liability under
HOEPA to conduct such a time- and labor-intensive inquiry.
In effect, the current HOEPA standard confronts prospective loan purchasers with a
Hobson’s choice—(i) invest in high cost mortgages and incur the concomitant risk of liability
for any violation of state or federal lending laws committed during origination or (ii) avoid
the high cost mortgage market completely. In almost all cases, a rational purchaser presented
with such a choice will choose the latter option, to the detriment primarily of borrowers.
Like HOEPA, state predatory lending laws often will afford an assignee a safe harbor if the
assignee did not intend to purchase loans covered under those statutes and conducted a
reasonable loan level review designed to prevent the purchase of such loans. Even this
limited safe harbor is only partial in some states; for example, under New Jersey’s high cost
loan legislation, an assignee that has satisfied the safe harbor requirement may still be subject
to both defenses and claims for limited damages brought by individual borrowers. 115
In light of these considerations, the ASF is strongly in favor of:
(1) maintaining the existing protections for assignees that purchase covered loans
unintentionally, and
(2) adopting a safe harbor 116 that affords shelter to assignees that, at the time of the
purchase or assignment of the loan or within a certain period soon thereafter:
(i) had in place policies expressly prohibiting the acceptance of covered loans
or covered loans that violate the statute;
(ii) required by applicable contract that the assignor of covered loans represent
and warrant at the time of assignment either (a) that it will not assign either
any covered loan or any covered loan that violates the statute or (b) that it is a
28
June 2007
beneficiary of a representation or warranty from a previous assignor to that

effect, and the assignee will benefit from that representation or warranty; and
(iii) had procedures in place to review either a fixed percentage of loans or a

reasonable percentage of loans in a pool, even if this review failed to detect
the loan that is the subject of a claim. This review provision of the expanded
safe harbor should have the following features:
(a) Statistical sampling – Evidence from the securities markets

demonstrates that a legal requirement that market participants screen
based on a statistically-significant, representative sample is effective in
encouraging such screening and driving bad actors from the
marketplace. When market participants are able to immunize
themselves from liability by screening a sample of their investments,
they perceive such a requirement as reasonable and generally will
choose to both screen the loans and remain in the market.
(b) Scope of required review – In order to take shelter in the safe

harbor, assignees should only have to review the documentation
required by a specific law, the itemization of the amount financed, and
other disclosures of disbursements.
(c) Post-purchase due diligence – Assignees should be able to take

advantage of the safe harbor by performing the requisite due diligence
either pre-purchase or at a reasonable time after the purchase date.
(d) Cure applicable to the entire chain of title – Assignees should be

entitled to rely on satisfactory due diligence performed by either the
seller or any other entity in the chain of title. This would obviate the
need for the SPV and each entity in the chain of title to conduct
additional wasteful and redundant due diligence after there has been an
initial comprehensive review of the loans.
The creation of a safe harbor that is both effective and reasonable for secondary actors to
satisfy will promote the dual goals of encouraging participation in the covered subprime
market and further buttressing the incentives for those market participants that do participate
to scrutinize a statistically significant sample of the loans that they purchase. Thus, it will
ensure continued increases in the availability of low cost capital—with its attendant
benefits—for worthy subprime borrowers, while also reinforcing the existing economic
forces encouraging the secondary market to make wise investment decisions.
I. Statute Of Limitations
HOEPA establishes a one-year statute of limitations for affirmative claims for damages that
allege violations of the act itself. 117 Claims alleging violations of other statutes that are
brought via HOEPA are subject to the statute of limitations applicable to the statute that
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June 2007
supplies the right of action. A borrower seeking recoupment or a set-off against the
attempted enforcement of a loan agreement may assert defensive claims under HOEPA at
any time. All rescission claims, whether asserted affirmatively or defensively, are subject to
a three-year statute of limitations. 118
Although the ASF strongly supports limitations on the right of borrowers to assert defenses
and bring claims against assignees, it does not object to maintaining the applicable statutes of
limitations at their current levels under TILA. However, the ASF would strongly oppose any
increase in the applicable statute of limitations.
J. Right To Cure Errors In Loan Documents
TILA affords creditors and assignees the right to cure violations of the statute that are errors
within 60 days of discovery of the error, so long as cure is effected prior to the institution of a
legal action. 119 TILA also protects creditors and assignees from all liability for bona fide
errors, although this provision encompasses only a narrow class of errors, such as those that
are clerical, and explicitly excludes errors of legal judgment regarding obligations under
TILA. 120 Although state predatory lending laws generally follow TILA in providing for an
exception to liability for a narrow class of bona fide errors, most state laws only permit
creditors or assignees to cure errors within a period of time from discovery that is
substantially less than 60 days.
The ASF strongly urges that any federal legislation expanding the prospective liability faced
by assignees also contain a robust cure provision permitting assignees to bring their loans
into conformity with statutory requirements. Within 60 days after discovering an error, and
prior to the institution of a legal action, the creditor or assignee should be authorized to effect
cure by (i) notifying the borrower of the error and making appropriate restitution, (ii) if it
appears that the provision of a covered loan was a mistake, modifying the terms of the credit
transaction to bring it outside of the ambit of statutory coverage; or (iii) deleting any
provisions in a mortgage agreement that violate applicable law and taking other steps as
necessary to prevent the violation from harming the borrower. The legislation should also
continue to permit a “bona fide error” defense.
K. Uniform National Standard
As discussed, TILA, as amended by HOEPA, currently establishes a minimum level of

protection for borrowers, and the states and localities are free to take action to afford
borrowers supplemental protection. Many states have indeed enacted their own laws, and, in
addition to the significant costs that are imposed by the sheer volume of legal regimes, many
of these laws have been poorly drafted, without interpretive guidance from regulators.
Moreover, federal law already bans most of the specific practices associated with predatory
lending that have been the subject of criticism, and could be expanded to address others that
are of concern. Therefore, aside from setting unwise subjective standards, state laws add
little in terms of substantive regulation. 121
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June 2007
Further, differences between the liability regimes in different states generate significant
competitive inequalities: federally chartered financial institutions are subject to federal
regulatory authority that preempts contrary state law, 122 while non-federal institutions are
forced to comply with the laws in each state. Some state banking regulators have excluded
their state-chartered banks from compliance with state predatory lending law in certain cases
where federal banking regulators have concluded that preemption of these state laws renders
them inapplicable to national banks and federal savings banks. 123 Nonetheless, even where
this has occurred, competitive imbalances remain because state licensed non-bank lenders
remain subject to these laws.
A national mortgage market demands national standards governing assignee liability. Such
standards would eliminate the inefficiencies and uncertainty generated by the proliferation of
conflicting state and local laws, and ultimately would redound to the benefit of consumers by
reducing the cost of mortgage credit. Therefore, the ASF strongly believes that it is essential
that any new federal legislation replace the existing patchwork of federal, state, and local
laws with a uniform national standard for assignee liability that covers all mortgage lenders.
In particular, the statute should contain an explicit clause preempting any state or local laws
that attempt to impose assignee liability or that limit a creditor’s ability to make certain types
of mortgage loans. States would have primary enforcement authority under the statute for
state-licensed entities.
VI. Conclusion
The reforms to the structure of existing law that this report has proposed, by reassuring the
secondary market that its liability will be manageable and quantifiable, would provide the
conditions necessary for the continued expansion of capital liquidity in the subprime market.
This liquidity would in turn allow for the enhancement of statutory protections for subprime
borrowers, including a modest reduction in the triggers at which these statutory protections
are invoked, without harming the vast majority of subprime borrowers who will remain eager
to obtain mortgage credit that is priced fairly. Recent empirical evidence demonstrates that
there is a wide variation in the response of the market to state predatory lending laws,
reinforcing the point that careful statutory design and drafting are crucial to ensuring that
legal liability does not choke off the supply of capital to fund subprime mortgages. 124
Therefore, although the imposition of assignee liability will necessarily affect the cost and
availability of subprime mortgage credit, these effects may be minimized if liability is
imposed in a clear and considered manner.
As this report has stated, the ASF would support federal legislation that preempts state
predatory lending laws and contains reasonable, balanced, and objective secondary market
assignee liability provisions. The extent to which the ASF is prepared to support federal
legislation that diverges from the preferences expressed in this report would depend, in large
part, on the extent to which any legislation that is proposed applies at triggers that are lower
than the current HOEPA triggers.
31
June 2007
1
Mark Doms & Meryl Motika, The Rise in Homeownership, FEDERAL RESERVE BANK OF
SAN FRANCISCO ECONOMIC LETTER 2006-30, at 1 (November 3, 2006), available at
http://www.frbsf.org/publications/economics/letter/2006/el2006-30.html.
2
Id. at 2-3; see also Jonas D. M. Fisher & Saad Quayyum, The great turn-of-the-century
housing boom, FEDERAL RESERVE BANK OF CHICAGO 3/Q 2006 ECONOMIC PERSPECTIVE, at 42
(2006), available at
www.chicagofed.org/publications/economicperspectives/ep_3qtr2006_part3_fisher_quayyum.pdf.
3
See Lisa Keyfetz, The Home Ownership and Equity Protection Act of 1994: Extending
Liability for Predatory Subprime Loans to Secondary Mortgage Market Participants, 18 LOY.
CONSUMER L. REV. 151 (2005); see also Office of the Comptroller of the Currency, Board of
Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of
Thrift Supervision, Expanded Guidance for Subprime Lending Programs, at 2-3 (2001), available at
http://www.federalreserve.gov/boarddocs/srletters/2001/sr0104a1.pdf; Joseph Adamson & Todd
Zywicki, Public Interest Comment on Subprime Mortgage Lending, at 2 REGULATORY STUDIES
PROGRAM, MERCATUS CENTER AT GEORGE MASON UNIVERSITY (May 7, 2007), available at
http://www.mercatus.org/repository/docLib/20070509_Public_Interest_Comment_on_Subprime_Mor
tgage_Lending.pdf.
4
See Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, Higher-Priced Home
Lending and the 2005 HMDA Data, FEDERAL RESERVE BULLETIN, last updated Sept. 25, 2006,
available at http://www.federalreserve.gov/pubs/bulletin/2006/hmda/default.htm#fn9.
5
See Inside B&C Lending, Top 25 Lenders in 2006, Feb. 9, 2007; Inside B&C Lending,
Subprime Mortgage Origination Indicators, Nov. 10, 2006.
6
See Thomas P. Boehm & Alan Schlottmann, Wealth Accumulation and Homeownership:
Evidence for Low-Income Households, at 33 OFFICE OF POLICY DEVELOPMENT & RESEARCH,
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, (Dec. 2004), available at
http://www.huduser.org/publications/pdf/wealthaccumulationandhomeownership.pdf.
7
See Avery, supra note 4; see also Adamson & Zwicki, supra note 3, at 3.
8
Adamson & Zwicki, supra note 3, at 5.
9
See id. at 3-4.
10
See Kristopher Gerardi, Harvey S. Rosen, and Paul Willen, Do Households Benefit From
Financial Deregulation and Innovation? The Case of the Mortgage Market, at 3, FEDERAL RESERVE
BANK OF BOSTON PUBLIC POLICY DISCUSSION PAPER NO. 06-6, (2007), available at
http://www.bos.frb.org/economic/ppdp/2006/ppdp066.pdf.
11
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT & DEPARTMENT OF THE TREASURY,
Predatory Lending Report, at 40-41 (July 15, 2000), available at
http://www.ustreas.gov/press/releases/reports/treasrpt.pdf.
32
June 2007
12
See Inside MBS and BS, January 12, 2007; S&P, The Subprime Market 7 (June 17, 2005).
13
See generally Thomas E. Plank, The Security of Securitization and the Future of Security, 25
CARDOZO L. REV. 1655, 1667-68 (2004); see also Schwarcz, supra, at 136.
14
See Kathleen C. Engel & Patricia A. McCoy, Turning A Blind Eye: Wall Street Finance Of
Predatory Lending, 75 FORDHAM L. REV. 2039, 2040 n.7 (2007).
15
See Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder
in Due Course Doctrine, 35 CREIGHTON L. REV. 503, 538 (2002).
16
See Steven L. Schwarcz, The Alchemy of Asset Securitization, 1 STAN. J.L. BUS. & FIN. 133,
140 (1994).
17
Id. at 135.
18
See Neil D. Baron, THE ROLE OF RATING AGENCIES IN THE SECURITIZATION PROCESS, IN A
PRIMER ON SECURITIZATION 81 (Leon T. Kendall & Michael J. Fishman eds. 1996).
19
See Kathleen C. Engel & Patricia A. McCoy, Predatory Lending: What Does Wall Street
Have to Do with It?, 15 HOUSING POLICY DEBATE 715, 717, (2004),
http://www.fanniemaefoundation.org/programs/hpd/pdf/hpd_1503_Engel.pdf.
20
See Engel & McCoy, supra note 14, at 2048.
21
See Eggert, 35 Creighton L. Rev. at 544.
22
See Schwarcz, 1 Stan. J.L. Bus. & Fin. at 136.
23
See generally Plank, supra, at 1667-68.
24
25
See Engel & McCoy, supra note 14, at 2046-47; see also Eggert, supra note 21, at 540.
26
27
See Credit Suisse, Quarterly Home Price Update: Subprime Turmoil and Housing Market 4-
5 (Mar. 29, 2007).
28
Consumer Bankruptcy News, More than 1.2 Million Foreclosures Reported in 2006, Feb. 15,
2007.
29
Merle Sharick et al., Eight Periodic Mortgage Fraud Case Report to Mortgage Bankers
Association, at 12, Mortgage Asset Research Institute, Inc. (Apr. 2006), available at http://www.mari-
inc.com/pdfs/mba/MBA8thCaseRpt.pdf.
33
June 2007
30
See Credit Suisse, supra note 27, at 9.
31
See Adamson & Zwicki, supra note 3, at 7.
32
Federal Reserve System, Regulation Z, 66 Fed. Reg. 65604, 65605 (Dec. 20, 2001), 2001 WL
1627493. We adopt this definition for the purposes of this paper, without necessarily endorsing it.
33
See Thomas A. Durkin and Glenn B. Canner, Memorandum to the Board of Governors,
Federal Reserve System, Regulatory Analysis of Proposed Revisions to Regulation Z Concerning
Predatory Lending Practices (Dec. 6, 2000) (noting that further extension of HOEPA coverage
“could have a chilling effect and raise regulatory costs in a segment of the subprime mortgage market.
* * * It seems unlikely this effect would be restricted to predatory lenders alone, * * * and it could
cause some potential legitimate competitors to forego entry into this market where competition
currently is alleged to be low.”).
34
UCC §3-302; UCC § 3-305(b).
35
See, e.g., England v. MG Invs., Inc., 93 F. Supp. 2d 718, 722-23 (S.D. W. Va. 2000).
36
See Christopher L. Peterson, Predatory Structured Finance, at 50, __CARDOZO L. REV. __
(Forthcoming Spring 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=929118;
see, e.g., Williams v. Central Money Co., 974 F.Supp. 22, 27 (D.D.C. 1997).
37
See, e.g., The Fair Housing Act, 42 U.S.C. § 3605; see also 24 C.F.R. § 100.125.
38
Pub. L. No. 103-325, Title I(B), §§ 151-58, 108 Stat. 2160 (codified as amended in scattered
sections of 15 U.S.C.).
39
15 U.S.C § 1632.
40
See In re Rodrigues, 278 B.R. 683, 687 (Bankr. D.R.I. 2002).
41
Data for HOEPA home purchase loans is not reported. See Avery, supra note 4.
42
15 U.S.C. § 1639(a).
43
15 U.S.C. § 1639(b).
44
15 U.S.C. § 1639(c)-(h); 12 C.F.R. § 226.32; see also Part V.C, infra.
45
See supra at []; see also Bryant v. Mortg. Capital Res. Corp., 197 F. Supp. 2d 1357, 1364 (D.
Ga. 2002).
46
15 U.S.C. § 1641(d)(1).
47
Cooper v. First Gov’t Mortgage & Investors Corp., 238 F.Supp.2d 50, 56 (D.D.C. 2002).
34
June 2007
48
16 C.F.R. § 433.2; see also S. Rep. No. 103-169, reprinted in 1994 U.S.C.C.A.N. 1881, 1913
(1993).
49
See In re Rodrigues, 278 B.R. at 688; In re Murray, 239 B.R. 728, 733 (Bankr. E.D.Pa.
1999).
50
Peterson, supra, at 55.
51
See Giang Ho and Anthony Pennington-Cross, The Impact of Local Predatory Lending Laws,
FEDERAL RESERVE BANK OF ST. LOUIS WORKING PAPER NO. 2005-049B (2005), available at
www.research.stlouisfed.org.
52
See Engel & McCoy, 75 FORDHAM L. REV. at 2040 N.7; see also Roberto G. Quercia,
Michael A. Stegman, and Walter R. Davis, The Impact of Predatory Loan Terms on Subprime
Foreclosures: The Special Case of Prepayment Penalties and Balloon Payments, at 35, UNIVERSITY
OF NORTH CAROLINA CENTER FOR COMMUNITY CAPITALISM, (Jan. 25, 2005) (estimating that
predatory practices involving use of prepayment penalties and balloon payments increased probability
of foreclosure by 20 percent and 50 percent, respectively).
53
See, e.g., Serena Ng, Bond Investors’ Lament—Fallout as Moody’s, S&P Cut Ratings on Issues
Tied to Subprime Loans, Wall St. J., May 3, 2007, at C1.
54
See U.S. GAO, Consumer Protection: Federal and State Agencies Face Challenges in
Combating Predatory Lending, at 78 (GAO-04-280, 2004), available at
http://www.gao.gov/new.items/d04280.pdf.
55
See, e.g., Chris Isidore, New Century’s Woes Deepen, Spread, CNNMoney.com, Mar. 12,
2007, available at http://money.cnn.com/2007/03/12/news/companies/new_century/index.htm.
56
57
58
See www.freddiemac.com/news/analysis/ambankerlet.html.
59
S&P, S&P Comments on High-Cost Residential Mortgage Loans (Aug. 16, 2001), available
at http://www.rebuz.com/research/0801-real-estate-research/standard-&-poors.htm.
60
S&P, Criteria: Anti-Predatory Lending Law Update (Oct. 20, 2006), available at
http://www2.standardandpoors.com/portal/site/sp/cn/cn/page.article/3,2,2,0,1148323222468.html
[hereinafter “Credit Enhancement Criteria”].
61
Subprime and Predatory Lending: New Regulatory Guidance, Current Market Conditions,
and Effects on Market Conditions: Hearings Before the Subcomm. on Financial Institutions and
Consumer Credit of the House Comm. on Financial Services, 110th Cong., 1st Sess. (Mar. 27, 2007)
(statement of John Robbins, Chairman, Mortgage Bankers Association); see also Engel & McCoy, 75
35
June 2007
FORDHAM L. REV. at 2096-97 n.273 (citing S&P report that capital markets financed only $87 million
in high-cost loans in 2004).
62
See Robert E. Litan, Unintended Consequences: The Risks of Premature State Regulation of
Predatory Lending, at 18-19 (Prepared on behalf of the American Bankers Association, 2003).
63
See, e.g., S&P, Criteria: Standard & Poor’s Addresses Tennessee Anti-Predatory Lending
Law (Oct. 20, 2006), available at
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/2,1,9,4,1148323378178.html.
64
See S&P, Credit Enhancement Criteria, supra note 60; Fitch Ratings, Fitch Revises Rating
Criteria in Wake of Predatory Lending Legislation (May 1, 2003), available at
http://findarticles.com/p/articles/mi_m0EIN/is_2003_May_1/ai_100975292.
65
See id.
66
Cf. Donald C. Lampe, Wrong From the Start? North Carolina’s Predatory Lending Law and
the Practice v. Product Debate, 7 CHAP. L. REV. 135, 144-45, 151-52 (2004).
67
Ga. Stat. Ann. § 7-6A-1 et seq.
68
See, e.g., Press Release, S&P, Standard & Poor’s to Disallow Georgia Fair Lending Act
Loans (Jan. 16, 2003).
69
N.J. Stat. Ann. § 46:10B-22.
70
See S&P, Credit Enhancement Criteria, supra note 60.
71
See, e.g., S&P, Standard & Poor’s Addresses New Jersey Predatory Lending Law (May 2,
2003); Fitch Ratings, Fitch Ratings Responds to New Jersey Predatory Lending Legislation (June 3,
2005); see also Fitch Ratings, Fitch Comments on New Jersey’s Amendment to 2002 NJ
Homeownership Security Act (Oct. 12, 2005).
72
See Darius Palia & Wei Yu, Analysis of Discrimination in Prime and Subprime Mortgage
Lending and the Impact of Predatory Lending Legislation, at 6, 30-31 (Sept. 2006), available at
http://www.fma.org/SLC/Papers/Lendingdiscrimination.pdf.; see also Richard F. DeMong, The
Impact of the New Jersey Home Ownership Security Act of 2002 (Mar. 26, 2004), available at
http://www.namb.org/images/namb/documents/PDF/2004_03_26_nj_results.pdf.
73
See S&P, Standard & Poor’s Addresses North Carolina Anti-Predatory Lending Law (Feb.
12, 2004), available at http://findarticles.com/p/articles/mi_m0EIN/is_2004_Feb_18/ai_113389039;
see also Lawrence Hansen, In Brokers We Trust—Mortgage Licensing Statutes Address Predatory
Lending, 14 J. OF AFFORDABLE HOUSING AND COMMUNITY DEV. L. 332, 336-337 & n.69 (2005).
North Carolina’s legislation regulating high-cost mortgages does allow victimized borrowers to
pursue remedies under North Carolina’s usury law, see N.C. Gen. Stat. § 24-10.2(e), which North
Carolina case law suggests may subject assignees to liability.
36
June 2007
74
See Gregory Ellie-Hausen & Michael E. Staten, Regulation of Subprime Mortgage Products:
An Analysis of North Carolina’s Predatory Lending Law, 29:4 JOURNAL OF REAL ESTATE FINANCE
AND ECONOMICS 411-433 (2004); see also Giang Ho and Anthony Pennington-Cross, States Fight
Predatory Lending in Different Ways, THE REGIONAL ECONOMIST (Jan. 2006), available at
http://stlouisfed.org/publications/re/2006/a/pages/predatory_lending.html.
75
See id. at 151.
76
Hansen, supra note 73, at 338 & n.97.
77
See Congressional Joint Economic Committee, Sheltering Neighborhoods From the Subprime
Foreclosure Storm, 31 (April 11, 2007) (as revised), available at
http://www.jec.senate.gov/reports.htm.
78
See Congressional Joint Economic Committee, supra note 77, at 17-18.
79
80
See S. REP. No. 103-169, reprinted in 1994 U.S.C.C.A.N. 1881, 1912; see also Bryant v.
Mortgage Capital Res. Corp., 197 F.Supp.2d 1357, 1363 (N.D. Ga.,2002) (“By assigning liability to
those who acquire mortgages on the secondary market in 1641(a), Congress was attempting to force
assignees to police their own industry.”).
81
See S. Rep. No. 103-169, reprinted in 1994 U.S.C.C.A.N. 1881, 1912.
82
See Bryant, 197 F.Supp.2d at 1365.
83
See supra note 44 and accompanying text; see also Part V.C, infra.
84
See Laurence E. Platt, No Room for Robin Hood, at 4 (Kirkpatrick & Lockhart Mortgage
Banking Commentary 2004).
85
See Part V.E, infra.
86
See Platt, supra note 84, at 2-3.
87
H.R. 1295 § 1 et seq.
88
15 U.S.C. § 1641(f); see also Clark v. Fairbanks Capital Corp., 2003 WL 21277126 (N.D.
Ill. 2003).
89
See The Responsible Lending Act, H.R. 1295 § 105(e)(3).
90
15 U.S.C § 1602(aa).
91
12 C.F.R. § 226.32
37
June 2007
92
See 15 U.S.C. § 1639(c)-(h); 12 C.F.R. 226.32.
93
94
See GAO, supra note 54, at 79.
95
96
15 U.S.C. § 1641a, § 1641(e); see also Bryant, 197 F.Supp.2d at 1357 n. 22.
97
15 U.S.C. § 1641(e)(2)(A) & (B).
98
See, e.g., Pulphus v. Sullivan, No. 02 C 5794, 2003 WL 1964333, at 21 (N.D. Ill. Apr. 28,
2003); see also In re Harvey, 2003 WL 21460063, *7 (Bkrtcy. E.D.Pa. 2003); Bryant, 197 F.Supp.2d
at 1364-65.
99
See, e.g., Dash v. Firstplus Home Loan Trust 1996-2, No. 1:01 CV 00923, 2003 WL
1038355, at *10 (M.D.N.C. Mar. 6, 2003); Dowdy v. First Metro. Mortgage Co., 2002 WL 745851, 3
(N.D.Ill. 2002); In re Barber, 266 B.R. 309, 321 (Bkrtcy. E.D.Pa. 2001).
100
15 U.S.C. § 1641(d)(2)(A); see also 15 U.S.C. § 1640.
101
15 U.S.C. § 1641(d)(2)(B).
102
15 U.S.C. § 1635.
103
Compare McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 423 (1st Cir. 2007)
(holding that class certification not available for rescission claims); James v. Home Constr. of Mobile,
Inc., 621 F.2d 727, 730 (5th Cir. 1980) (same), with Andrews v. Chevy Chase Bank, FSB, 2007 U.S.
Dist. LEXIS 3162, at *25-26 (D. Wis. Jan. 16, 2007), stayed pending appeal by 474 F. Supp. 2d 1006
(D. Wis. Feb. 14, 2007) (holding that “a TILA plaintiff seeking a declaration that she may rescind a
loan may represent a class”); In re Ameriquest Mortgage Co. Mortgage Lending Practices Litig.,
2007 U.S. Dist. LEXIS 29641, at *9-10 (D. Ill. 2007) (same).
104
15 U.S.C. § 1639(j); see also 15 U.S.C. 1635(a); 15 U.S.C. 1641(c)
105
15 U.S.C. § 1641; see also Stone v. Mehlberg, 728 F. Supp. 1341, 1348 (W.D. Mich. 1989).
106
See Rowland v. Novus Fin. Corp., 949 F. Supp. 1447, 1458 (D. Haw. 1996); In re Armstrong,
288 B.R. 404, 417 (Bankr. E.D. Pa. 2003); but see Bank of New York v. Heath, 2001 WL 1771825, *3
(Ill. Cir. 2001); Aames Cap. Corp. v. Sather, 2000 WL 343218 (Minn. Ct. App. 2000) (unpublished).
107
LaBarre v. Credit Acceptance Corp., 175 F.3d 640, 644 (8th Cir. 1999).
108
See Murray, 239 B.R. at 733.
38
June 2007
109
Compare Bryant, 197 F.Supp.2d at 1365 (authorization of affirmative claims), with Dowdy
v. First Metro. Mortgage Co., 2002 WL 745851 (N.D. Ill. 2002) (holding that HOEPA “is not
intended to bestow any rights upon the borrower nor constitute an independent basis of liability”).
110
See The Responsible Lending Act, H.R. 1295 § 105(e)(2).
111
15 U.S.C. § 1641(d)(1).
112
See In re Rodrigues, 278 B.R. 683 (Bankr. D. R.I. 2002); In re Murray, 239 B.R. 728 (Bankr.
E.D. Pa. 1999).
113
Cooper, 238 F.Supp.2d at 56.
114
Id.
115
N.J. Stat. Ann. § 46:10B-27(c); see also Engel & McCoy, supra note 61, at 2092.
116
See Responsible Lending Act, H.R. 1295 § 105(e)(2).
117
15 U.S.C. § 1640(e); 15 U.S.C. § 1635(f).
118
See 15 U.S.C. § 1640(e); see also Beach v. Ocwen Fed. Bank, 523 U.S. 410, 417-18 (1998).
119
15 U.S.C. § 1640(b).
120
15 U.S.C. § 1640(c).
121
See Litan, supra, at 5.
122
See Watters v. Wachovia Bank, N.A., 550 U.S. ___ (2007); see, e.g., Office of Thrift
Supervision (“OTS”), Chief Counsel Op. 2003-1 Regarding the Georgia Fair Lending Act (GFLA)
(issued Jan. 21, 2003); OTS, Chief Counsel Op. 2003-2 Regarding the New York Bank Law Section
(issued Jan. 30, 2003); Office of the Comptroller of the Currency (“OCC”), Preemption
Determination and Order Concerning the [GFLA], 68 Fed. Reg. 46264 (August 5, 2003).
123
See, e.g., Georgia Department of Banking and Finance, Declaratory Ruling on Effect of
Preemption of Georgia Fair Lending Act by the OCC on July 30, 2003 (issued August 2003).
124
See Ho and Pennington-Cross, supra note 51.
39

Assignee Liability in The Secondary Mortgage Market

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Assignee Liability in The Secondary Mortgage Market

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Assignee Liability in the

Secondary Mortgage Market:

I. Executive Summary ...........................................................................................................2

V. Recommendations for a New Framework for Assignee Liability ...............................21

VI. Conclusion ........................................................................................................................31

• Loan restrictions that are clear and objective.

• Restriction of assignee liability under the statute to violations of TILA, as amended.

• Limitation of an assignee’s prospective liability to the sum of the remaining value of

f Restriction of the right of a defaulting borrower to assert a violation of the

f Authorization of affirmative claims subject to:

 an absolute defense for assignees that can demonstrate that a

 a safe harbor, as described below, that would give assignees some

f Express prohibition of class action claims against assignees.

f had in place policies expressly prohibiting the acceptance of covered loans

f required by applicable contract that the assignor of covered loans represent

f had procedures in place to review either a fixed percentage of loans or a

 Authorization of statistical sampling;

 Allowance for assignees to satisfy the requirement by reviewing the

 Authorization of post-purchase due diligence; and

 Applicability of cure through the requisite loan review to the entire

f notifying the borrower of the error and making appropriate restitution;

f deleting any provisions in a mortgage agreement that violate applicable law

A. The Importance Of The Secondary Market As A Capital Source For Subprime

Technological innovation in underwriting was responsible for some of the enhanced

The securitization process functions as a pipeline through which investors seeking a

B. The Securitization Process.

As Congress considers a variety of options for addressing problems in the subprime

B. The Current Status Of The Law Governing Assignee Liability.

It is important to remember that, although the holder-in-due-course doctrine constitutes an

loans. 41 HOEPA augments TILA’s disclosure provisions, requiring lenders to provide a

As a result of HOEPA’s authorization of broad liability for innocent assignees, loan

C. The Analysis Underlying the Expansion Of Assignee Liability Through HOEPA

1. Secondary market participants have no incentive to purchase predatory

2. Secondary market participants are not well-suited to regulating the

Contrary to the wishful assumptions of proponents of expanded assignee liability, investors,

3. The primary market actors directly responsible for harmful predatory

4. Shifting the burden for predatory practices from cheated subprime

loan is predatory. 86 Therefore, the amount of recovery necessary to make a victimized

V. Recommendations For A New Framework For Assignee Liability

A. Entities Covered By Assignee Liability

(iii) passive investors in securities backed by a pool of mortgage loans, including

B. Mortgage Loan Triggers For Coverage

C. Prohibited Practices And Restrictions On Loan Terms

D. Scope Of Assignee Liability

E. Limitations On Monetary Liability For Assignees

F. Limitations On Rescission Claims Against Assignees

G. Types Of Legal Action Against Assignees

(2) Statutory authorization of affirmative claims, subject to:

H. Safe Harbor Based Upon Loan Review

In light of these considerations, the ASF is strongly in favor of:

beneficiary of a representation or warranty from a previous assignor to that

(iii) had procedures in place to review either a fixed percentage of loans or a

(a) Statistical sampling – Evidence from the securities markets

(b) Scope of required review – In order to take shelter in the safe

(c) Post-purchase due diligence – Assignees should be able to take

(d) Cure applicable to the entire chain of title – Assignees should be

J. Right To Cure Errors In Loan Documents

K. Uniform National Standard

As discussed, TILA, as amended by HOEPA, currently establishes a minimum level of

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an absolute defense for assignees that can demonstrate that a

a safe harbor, as described below, that would give assignees some

Authorization of statistical sampling;

Allowance for assignees to satisfy the requirement by reviewing the

Authorization of post-purchase due diligence; and

Applicability of cure through the requisite loan review to the entire