Subprime Predatory Lending: How to Protect Consumers
without Harming the Market?
Par Anibal Zarate, Doctorant à l'Université Panthéon-Assas Paris II, Promotion 20042005.
Predatory lending abuses, particularly rampant in the subprime residential
mortgage market1, have not only shadowed the positive results obtained in granting
low and moderate homeowners with some of the same financial options and
resources that had been previously reserved for prime borrowers2 , but equally
constitute today’s most pressing consumer protection issue in the United States. It
appears, however, that predatory lending practices were not a major topic for
federal and state bank regulators until recent problems erupted in the subprime
mortgage sector3 (i.e., deterioration in credit quality, continuing rise in mortgage
delinquencies and foreclosures4); to the extent that this issue happens today to
have been left almost exclusively to the activity of attorney generals, law
enforcement agencies, and private litigation.
In the absence of a single definition, regulators, industry and advocates employ the
term individually to refer to different practices that fall between proportionate
risk-based credit pricing and blatant fraud5. Although difficult to define, predatory
lending does target certain disadvantage classes of borrowers6. Whether affecting
the elderly, or minorities, predatory lending creates social problems as well as
market disruptions, and may also constitute a violation of our civil rights laws7 .
As more Americans continue to lose their homes, the perception that predatory
lending is an increasing problem intensifies; despite competition and selfregulation in the industry. And, although markets tend to self-correct, the
immediate effect on consumer protection of the ongoing demand by investors of
complex structured credit instruments to originators to employ tighter
underwriting standards and improve loan quality remains byzantine. This comment
briefly looks at the efficacy of current federal and state legislative and regulatory
responses to protect consumers: What states and federal financial regulators do to
monitor and prevent predatory lending abuses in the mortgage sector? Is their
activity effective in combating such practices or are lenders successfully evading
both oversight and accountability? An overview of existing remedies is therefore
necessary, prior to understanding alternative solutions to current challenges.
I. Existing remedies for subprime predatory lending
Enforcement of consumer protection statutes represents, together with private
litigation, a traditional response to predatory lending abuses8. As part of its
mandate to protect consumers9, the FTC response to the growing predatory lending
problem in the subprime market encompasses a wide-range of activities such as
increasing, individually or through coordinated efforts with other federal agencies
and the states, enforcement of section 5 of the Federal Trade Commission Act (FTC
Act)10. The Commission also enforces several laws specifically governing lending
practices, like the Truth in Lending Act (TILA)11, the Home Ownership and Equity
Protection Act (HOEPA)12, and the Equal Credit Opportunity Act (ECOA)13. Likewise,
the Office of the Comptroller of the Currency (OCC), the Board of Governors of the
Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC)
and the Office of the Thrift Supervision (OTS), enforce section 5 of the FTC Act
under section 8 of the Federal Deposit Insurance Act14.
In addition to their enforcement duties, federal and state regulators like the OTS,
the Board, and the FDIC have issued a broad array of supervisory guidance to the
institutions under their respective jurisdictions on the subject of deceptive or
unfair acts or practices. They have notably issued principles-based guidance
describing safety and soundness and consumer protection standards for non
traditional mortgages, such as interest-only and negative-amortization mortgages15.
Similarly, in July 2007, federal financial agencies issued a final interagency
statement on subprime mortgage lending to address problems relating to certain
adjustable rate mortgages (ARMs)16 products that can cause payment shock. The
main purpose of this guidance, in fact, was to set standards that banks should
follow to ensure that borrowers obtain loans that they can afford and repay and
that give them the opportunity to refinance without payment penalty for a
reasonable period before the interest rate resets17. To this end, an interagency
statement on loss mitigation strategies for servicers of residential mortgages,
which followed a previous statement encouraging federally regulated institutions
and state-supervised entities to work-out solutions with borrowers at risk of
default18, urged servicers of securitized mortgages to review the governing
documents for the securitization trusts in order to determine the full extend of
their authority to pursue strategies such as loan modifications or deferral of
payments19 .
As far as misleading advertising is concern, the OTS has, for instance, prohibited
savings associations from using advertisements or other representations that are
inaccurate or misrepresent the services or contracts offered20. In turn, the NCUA
has proscribed federally insured credit unions from using any advertising or
promotional material that is inaccurate, misleading, or deceptive in any way
concerning its products, services, or financial condition21.
The supervisory activity of federal financial regulators has also been the object of a
considerable number of speeches and testimonies by members of these agencies22.
As concern of accountability persists among regulators, a higher scrutiny surfaces in
their remarks on how they have dealt with predatory lending abuses, especially
when they describe how they have evaluated institutions’ securitization activities
in the subprime mortgage market. One main concern of federal financial regulators
has certainly been to improve the mortgage information consumers receive, so they
could be in a better position to make decisions that are in their best interest. The
FTC and several federal financial regulators have therefore intensified educational
programs oriented to consumers to help them avoid predatory lending practices.
Beyond the actions underway at the regulatory agencies, some state23 and local24
initiatives were designed to control unscrupulous brokers and lenders that originate
predatory loans. Nevertheless, since the “privileged” 25 raters (Standard & Poor’s,
Moody’s and Fitch) paid particular attention to the impact of such predatory
lending statutes on RMBS pools, and refused to rate transactions containing
mortgage loans from some jurisdictions; states and local communities were
compelled to standardize their predatory lending initiatives26. Were privileged
raters putting aside general interest, while advocating for investors? Many
commentators have denounced the lack of transparency and independence of the
raters, as well as the negative impact their response is having on the public
interest. Accordingly, they call for a limitation of the raters’ excessive power by
mainly taking away their regulatory status, so as to enhance competition in the
sector, whilst submitting them to greater regulation all together27.
However, criticism has not only risen with regard to “privileged” raters and
regulators of rating agencies. A large number of commentators have, as a matter of
fact, complained that neglect and relaxation of consumer protection statutes and
regulation has emboldened a portion of personal finance industry to engage in a
variety of abusive, misleading, and unfair practices28. As described, recent
coordinated supervisory guidance activity was in reality aimed to address these
critiques. But, was it too little, too late? And yet, are agency guidelines merely a
cluster of suggestions as to how lenders might do a better job not appearing like
“predators”29 ? This soft-law could have a positive impact in the credit industry
such as raising the quality of underwriting practices of all lenders to a uniformly
high standard; albeit supervisory and public and private enforcement activity
remain vital. As enforcement and supervisory activity produce results, lenders will
effectively find themselves implementing principles and guidelines in order to
avoid both government action and private litigation, along with improving the
quality of the services and products they provide in a competitive market that is
continuing to readjust. As we suggested early, some commentators may argue that
predatory lending practices have not declined, despite the positive results
produced by enforcement and supervisory actions30. As for us, since the situation
was due in part to the sharp growth in the subprime mortgage industry, it is likely
to ask whether such arguments are still valid considering the current financial
turmoil and housing market down turn.
II. Which response for current challenges?
In large part as a result on these complaints, momentum is building on several
fronts to standardize the operations of the subprime mortgage market, mainly
through federal regulation and legislation. For this purpose, the federal financial
agencies have issued regulations implementing such laws. The Federal Reserve has,
for example, issued regulations regarding HMDA loan price information and, in
cooperation with the OTS, produced a revised version of the Consumer Handbook
on Adjustable Rate Mortgages (CHARM booklet)31. Broadly speaking, a series of
controversial federal regulations have already preempted the application of tighter
state consumer protection laws directed at the prevention of predatory lending
abuses to a large series of lending institutions, in particular to national banks and
thrifts32. Some of these rules have though created legal and regulatory ambiguity
and have the unintended effect of substantially reducing legitimate subprime
lending. In fairness, federal regulators have levied persuasive arguments justifying
their decisions as necessary in an increasingly national financial services
marketplace33. Beyond the vivid legal debate involving the federal government’s
constitutional authority to regulate financial institutions34, partisans of federal
preemptive regulation argue that federal regulation is necessary in order to
harmonize the rules, standard of quality and practices used by thrift institutions,
banks and their agents. In their view, strengthening and increasing federal
regulation would simply bring 50 individual mortgage markets into a one more
efficient system; successfully ending with the distressing uncertainty and
inconsistency in the current model of regulation35. On the contrary, opponents of
federal preemption challenge the efficacy of the regulatory apparatus of the
United States to regulate the abusive and predatory practices of depository
institutions themselves. They fear federal regulators have only token intentions to
police actors lending through tenuous, shifting, and volatile agency relationships36.
But, even if federal regulation containing bright lines favors with the welfare of
American people and not with that one of the banking industry, the vagueness of
the term “predatory lending” could lead federal financial agencies to an erroneous
regulatory response, which could significantly harm the subprime mortgage market
and, since rules are a more rigid tool than principle-based guidelines, any
foreseeable adjustment or remedy will be arduous to operate. In any event, it is
expected that the compliance costs and burdens associated with the myriad of
state and local predatory lending laws that have been adopted, as well as the
ongoing assignee liability debate37 will continue to exert pressure for federal
action.
In the same vein, if Congress acts to arbitrarily freeze mortgage interest rates to
alleviate foreclosures, lenders will start guarding themselves against the chance
that lawmakers might do the same thing again someday38. To avoid scarce and
expensive mortgages in the future, a legislative response should instead focus in
reforming consumer protection laws and in modernizing unsuccessful programs, like
programs currently administered by the Federal Housing Administration (FHA)39. In
turn, the two government-sponsored enterprises (GSEs) could not only apply tighter
standards to their current policy consisting in refusing to purchase loans that
contain certain terms they deem abusive, such as harsh prepayment penalties, but
equally require loans originators to observe principle-based guidance40. Any hasty
response would produce the opposite effect; aggravating the investors’ loss of
confidence in an already largely shaken market.
Commentators have also worried that federal preemption of various aspects of the
consumer finance system will undermine a reform of consumer protection laws41. In
the United States alone, there are significant federal, state, and private consumer
protection, enforcement, and education mechanisms. In our view, since resources
devoted to the problem are scarce and usually target particular post hoc systems,
regulators must seek schemes that influence unscrupulous lenders’ behavior at
minimal incremental cost to attain the maximum effect upon the predatory lending
problem42. Conversely, allowing judges to tear up and rewrite loan contracts not
only raises serious constitutional questions regarding the autonomy of private
parties in contracting, but will equally increase mortgage interest rates; because
the risk of loan losses inevitably will increase as mortgage contracts become junk43.
While consumer information is an instrument for party autonomy, public responses
limiting the autonomy of private parties to determine the content of a contract
must be constitutionally justified so as to complete, not exclude, market solutions
for consumers information problems.
As a result, policymakers should continue to advantage their activity in writing
principle-based guidance and interpreting existing regulations; in reviewing bank
compliance with such regulations; in investigating complaints from the public about
fulfillment of consumer protection laws; and in conducting community
development and educational consumer programs. In doing so, they must improve
data collection and share relevant and accurate data analysis of mortgage
delinquencies with Congress, community groups and enforcement authorities44 to
efficiently and effectively target resources to areas most in need. As more
researchers and academics study and report about predatory mortgage lending
abuses, we expect research and articles to assist in fueling and defining the
ongoing public policy debate in a positive way45.
-1/ See Dan Immergluck, "Stark Differences: Explosion of the Subprime Industry and
Racial Hyper-segmentation in Home Equity Lending", in Housing Policy in the New
Millennium: Conference Proceedings, 257, 259 (Susan M. Wachter & R. Leo Penne
eds., 2001) at 237.
2. No one doubts the positive results reached through the expansion of the
subprime mortgage market over the last two decades. Indeed, “while in 2006, 69
percent of households owned their homes; in 1995, just 65 percent did”; Remarks
by Chairman of the Board of Governors of the Federal Reserve, Ben S. Bernanke, at
the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure
and Competition, Chicago, Illinois, May 17, 2007. Literature containing a detailed
explanation on the impact of the subprime mortgage market on the access of low
and moderate income borrowers to residential mortgages, credit card and other
consumer lending is considerable, See e.g., Cathy Lesser Mansfield, “The Road to
Subprime “Hel” was Paved with Good Congressional Intentions: Usury Deregulation
and The Subprime Home Equity Market”, in South Carolina Law Review, Spring
2000, 51 S.C. L. Rev. 473;
3. The practice of selling mortgages to investors may have played a role in the
weakening of underwriting standards. The securitization of residential mortgages is
in fact attractive to loan originators because these mortgages themselves are not
easily traded in the secondary market and, since each mortgage usually has its own
unique terms and risks, secondary markets rely on standardization to reduce
transaction costs and expensive evaluation. Investors have therefore become quite
comfortable investing in residential mortgage-backed securities (RMBS). Cathy
Lesser Mansfield, supra note 2, at. 531; An empirical analysis conducted by Yuliya
Demyanyk and Otto Van Hemert document that the poor performance of the
vintage 2006 loans was not confined to a particular segment of the subprime
mortgage market. The study shows that during the dramatic growth of the
subprime (securitized) mortgage market, the quality of the market deteriorated
dramatically. It concludes that subprime market experienced a classic lending
boom-bust scenario with rapid market growth, loosening underwriting standards,
deteriorating loan performance, and decreasing risk premiums. Yuliya Demyanyk
and Otto Van Hemert, Understanding the Subprime Mortgage Crisis, February 4,
2008, Electronic copy available at: http://ssrn.com/abstract=1020396; A
deceleration in the housing market, together with the moderation in economic
growth, has also contributed to produce some deterioration in credit quality.
Remarks by Chairman of the Board of Governors of the Federal Reserve, Ben S.
Bernanke, at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on
Bank Structure and Competition, supra note 2 at 2.
4. According to the Board, mortgage delinquency and foreclosures rates have
increased considerably over the past few months. At the end of last year, more
than one in five of the roughly 3.6 million outstanding subprime adjustable-rate
mortgages (ARMs) were seriously delinquent, meaning they were either in
foreclosure or ninety days or more past due. Lenders initiated roughly 1-1/2 million
foreclosures last year, up from an average of 950,000 in the preceding two years
and more than one-half of the foreclosure starts in 2007 were on subprime
mortgages; Speech by Chairman of the Board of Governors of the Federal Reserve,
Ben S. Bernanke, at the National Community Reinvestment Coalition Annual
Meeting, Washington, D.C. March 14, 2008.
5. Certain practices have been consistently identified as predatory lending, such
as, excessive fees, loan flipping, excessive interest rates, single-premium credit
insurance, lending without regard to ability to repay, prepayment penalties,
balloon payments, packing and steering. See e.g., U.S. General Accounting Office
(GAO), Consumer Protection: Federal and State Agencies Face Challenges in
Combating Predatory Lending 21 (2004), available at:
http://www.gao.gov/new.items/d04280.pdf. Likewise, consumer advocacy groups
complain of bait and switch advertising in which lenders unilaterally change
contract terms shortly after origination. Finally, the increasing use of mandatory
arbitration clauses and waivers of the right to pursue remedies in a class action
may deprive consumers of a realistic opportunity to create cease law inhibiting
these sharp practices. Christopher L. Peterson, “Preemption, Agency Cost Theory,
and Predatory Lending by Banking Agents: Are Federal Regulators Biting off more
than they can Chew?”, in American University Law Review, February 2007, 56
AMULR 515, at 518.
6. More than half of all loans in predominantly African-American and Hispanic
borrowers together make up about 6% of all prime conventional refinance
mortgages and 17% of subprime refinance mortgages. And more than a half of all
loans in predominantly African-American communities are subprime, compared to
only 9% of loans in predominantly white communities. U.S. Department of Housing
and Urban Development (HUD), Unequal Burden: Income and Racial Disparities in
Subprime Lending in America (2000), electronic copy available at
http://hud.gov/library/bookself18/pressrel/subprime.html/.
7. See e.g., John Rao, “Fair Housing: Predatory Loan Practices”, in Association of
Trial Lawyers of America (ATLA), ATLA Annual Convention Reference Materials,
Volume 1, Civil Rights Section, July 2001, 1Ann.2001 ATLA-CLE 349 (2001). For
illustrative purposes, in March 2000 the Commission in conjunction with the United
States Department of Justice (DOJ) and the Department of Housing and Urban
Development (HUD), announced a settlement with Delta Funding Corporation, a
national subprime mortgage lender. The complaint alleged that higher broker fees
were charged to African American females than to white males in violation to of
the ECOA and the Fair Housing Act, 42, U.S.C. §§ 3601-3619. See United States v.
Delta Funding Corp. and Delta Financial Corp., Civ. Action No. 001872 (E.D.N.Y.
April 2000).
8. Currently, U.S. agencies approach consumer protection from three perspectives:
First, the perpetrator perspective via direct enforcement of consumer protection
and fraud laws and the combat of specific schemes. Secondly, the individual
consumer perspective through the provision of tools for self-protection and
consumer education. Finally, the third approach defining a protected consumer
group. For a detailed description of these mechanisms, an analysis of their
effectiveness and an alternative scheme of consumer protection see David Adam
Friedman, “Reinventing Consumer Protection”, in DePaul University Law Review,
Fall 2007, 57 DePaul L. Rev. 45.
9. The Federal Trade Commission (FTC) has an extensive competence on antitrust
and consumer protection issues in nearly all segments of the economy, including
jurisdiction over most non-bank lenders. See, e.g., 15 U.S.C. § 45(a); 15 U.S.C. §
1607. In practice, the FTC has increased its enforcement actions, most of them
concluded in settlement agreements (i.e., in the area of “packing”, loans sold with
credit insurance, the FTC settled in 1997 a case against the Money Tree, a Georgiabased consumer finance lender. See The Money Tree, 123 F.T.C. 1187 (1997)).
10. Institutions offering mortgages by means of predatory lending practices face an
elevated risk that their conduct will violate section 5 of the FTC Act, which
prohibits unfair or deceptive acts or practices in or affecting commerce; See, 15
U.S.C. § 45(a).
11. 15 U.S.C. § 1601-1667(f); In July 1999, as part of “Operation Home Inequity”,
the Commission settled cases against seven subprime mortgage lenders, including
Barry Cooper, a California-based creditor, for violations of TILA, including HOEPA,
and section 5 of the FTC Act. See consent judgment and order, F.T.C v. Barry
Cooper Properties, No. 99-07782 WDK (Ex) (C.D. Cal. July 30, 1999). In F.T.C. v.
Fleet Fin. Inc., the Commission settled charges that Fleet Finance Inc. had failed to
provide accurate, timely disclosures of the costs and terms of home equity loans to
consumers and had failed to provide accurately consumers with information about
their right to cancel their transactions. The settlement provides for $ 1.3 million in
consumer redress as well as injunctive relief. See F.T.C. v. Fleet Fin. Inc., C3899
(F.T.C. October 5, 1999).
12. 15 U.S.C. § 1639. HOEPA violations often include failure to provide required
disclosures and the use of prohibited terms.
13. 15 U.S.C. § 1691. The Equal Credit Opportunity Act (ECOA) has three important
aspects. First, it sets out a general rule that creditors cannot discriminate in any
way against any applicant in any stage of a credit transaction on any of the
following grounds: race, color, religion, national origin, sex, marital status, age,
public assistance income, or exercise of rights under the Consumer Credit
Protection Act. Second, the ECOA sets out various specific actions which creditors
must or must not take, as well as factors that may not be considered in
determining credit worthiness. Third, the ECOA imposes certain notice
requirements on the creditor when the loan application is approved, denied or
when the creditor makes a counteroffer. Moreover, bait and switch tactics can
state a claim under the ECOA. Finally, the ECOA definition of creditor includes
assignees as long as they regularly participate in the decision of whether or not to
extend credit.
14. 12 U.S.C. § 1818.
15. See Interagency Guidance on Nontraditional Mortgage Product Risks of October
4, 2006, available at: Federal Register/ Vol. 71, No. 192, Wednesday, October 4,
2006/Notices 58609.
16. According to the regulators’ final statement on subprime mortgage lending,
ARM products generally offered to subprime mortgage borrowers have one or more
of the following characteristics: (1) Limited or no documentation of borrowers’
income; (2) Low initial payments based on a fixed introductory rate that expires
after a short period and then adjusts to a variable index rate plus a margin for the
remaining term of the loan; (3) Very high or no limits on how much the payment
amount or the interest rate may increase on reset dates; (4) Substantial
prepayment penalties and/or prepayment penalties that extend beyond the initial
fixed interest rate period; (5) Product features likely to result in frequent
refinancing to maintain an affordable monthly payment. See Final Interagency
Guidance-Statement on Subprime Mortgage Lending, of July 10, 2007, available at:
Federal Register / Vol. 72, No. 131 / Tuesday, July 10, 2007 / Notices 37569.
17. See Final Interagency Guidance-Statement on Subprime Mortgage Lending; of
July 10, 2007 supra note 16.
18. See Interagency Statement on Working with Borrowers; of April 17, 2007; See
OTS Memorandum for Chief Executive Officers of April 17, 2007 regarding the
Interagency Statement on Working with Mortgage Borrowers.
19. See OTS See OTS Memorandum for Chief Executive Officers of September 4,
2007 regarding the Interagency Statement on Loss Mitigation Strategies for
Servicers of Residential Mortgages.
20/ See OTS regulation 12 CFR 563.27
21. See NCUA regulation 12 CFR 740.2
22. See e.g., Speech by Vice Chairman Donald L. Kohn of the Board of Governors of
the Federal Reserve, Condition of the U.S. Banking System; before the Committee
on Banking, Housing and Urban Affairs, U.S. Senate March 4, 2008; Speech by
Governor Randall S. Kroszner of the Board of Governors of the Federal Reserve; at
the Consumer Bankers Association 2007 Fair Lending Conference, Washington D.C.,
November 5, 2007;
23. See Ohio Senate Bill 185 effective January 1, 2007 (S.B. 185, 126th Gen.
Assem., Reg. Sess. (Ohio 2006)); See Rhode Island Home Loan Protection Act
effective December 31, 2006. The Rhode Island legislation provides for assignee
liability for high-cost home loans. 2006 R.I. Pub. Laws ch. 569 (to be codified at
R.I. GEN. LAWS §§ 34-25.2-1 to 34-25.2-15); See the Tennessee Home Loan
Protection Act, 2006 Tenn. Pub. Acts ch. 801 (H.B. 3597) (Codified at Tenn. Code.
Ann. §§ 45-20-101 – 45-20-111 (West 2000 and Supp. 2006)). Under the Tennessee
Act, assignees of a high-cost loan are subject to all claims and defenses that the
borrower could assert against the lender unless the assignee can demonstrate due
diligence.
24. See Montgomery County, Md., Bill No. 36-04 (enacted Nov. 29, 2005), available
at: http://www.montgomerycountymd.gov/content/council/pdf/bill/2004/3604.pdf.
25. The term “privileged” describes the fact that the dominant rating agencies
enjoy privileged regulatory status as nationally recognized statistical rating
organizations. For a detailed analysis of the use of the term see e.g., David Reiss,
“Subprime Standardization: How Rating Agencies Allow Predatory Lending to
Flourish in the Secondary Mortgage Market”, in Florida State University, summer
2006, 33 Fla. St. U. L. Rev. 985.
26. This weakened the standards some states had taken. All of the “privileged”
raters review such statutes in particular to determine whether they are ambiguous,
allow for assignee liability, or allow for unquantifiable damages. In states where
there is both assignee liability and unquantifiable damages, some of the privileged
raters have refused to rate RMBS transactions, banning, in consequence, loans
originated in such jurisdictions, or have implemented expensive credit
enhancements to achieve the ratings desired by the securitizers of pools having
loans from such jurisdictions. Since the secondary market injects great amounts of
resources to the subprime industry, these actions can effectively shut down the
entire subprime residential mortgage market of a state that passes strong
predatory lending legislation. For an in depth analysis on the problem; See; David
Reiss, supra note 25.
27. See e.g., David Reiss, supra note 25 at 1013; See Donald C. Lampe; Predatory
Lending Initiatives, Legislation and Litigation: Federal Regulation, State Law and
Preemption, Symposium: Predatory Lending, Part Three, Consumer Finance Law
Quarterly Report, winter, 2002, 56 Consumer Fin. L.Q. Rep. 78.
28. See e.g., Helen P. Howell, Inattentive Regulators Make It Easy for Biased
Mortgage Lenders, Association of Trial Lawyers of America, ATLA Annual
Convention Reference Materials, Volume 2, Civil Rights, 2 Ann. 2006 ATLA-CLE 1465
(2006); Kathleen C. Engel & Patricia A. McCoy, “Turning A Blind Eye: Wall Street
Finance of Predatory Lending”; in Fordham Law Review, vol. 75, 101, electronic
copy of this paper is available at: http://ssrn.com/abstract=910378, at 117.
29. Part of the problem is that the rules that apply to banks and thrifts do not
apply to mortgage brokers and mortgage bankers. Most of the worst abuse was
indeed perpetrated by unregulated or virtually unregulated entities outside the
federally insured regulatory depository institutions. For a detailed description of
this issue, see e.g., Christopher L. Peterson, supra note 5.
30. See e.g., Ronald H. Silverman; “Toward Curing Predatory Lending”, Banking
Law Journal, Vol. 122, pp. 483-669, June 2005. See also, Helen P. Howell, supra
note 28 at 2; David Reiss, supra note 25.
31. The revised version of the CHARM booklet mainly includes additional
information about non traditional mortgage products, including hybrid ARMs.
32. See e.g., Christopher L. Peterson, supra note 5, at 515.
33. See OTS Legal Opinion on Ratings of Structured Finance Transactions of
February 20, 2008.
34. For illustrative purposes see, Eric C. Bartley, “And Federal Regulation for All:
Federally Regulating the Mortgage Banking Industry”, in Michigan State Law
Review, summer 2006, 2006 Mich. St. L. Rev. 477.
35. See e.g., Eric C. Bartley, supra note 34 at 486.
36. See e.g., Christopher L. Peterson, supra note 5, at 528.
37. As private litigation is concern, a federal legislative solution would have to
carefully deal with the ongoing legal question regarding the holder in due curse
(HDC) doctrine. Should we grant a civil action against the assignee? Permitting
claims against assignees could aid in general policing of abusive loans, as well as
benefit investors by operating as a signaling mechanism for the bond market. For a
detailed analysis of this question see Siddhartha Venkatesan, “Abrogating the
Holder in Due Course Doctrine in Subprime Mortgage Transactions to more
effectively Police Predatory Lending”, in NYU Journal of Legislation and Public
Policy, 2003-2004, 7 N.Y.U. J. Legis. & Pub. Pol'y 177.
38. Alan Reynolds, Housing Horrors, this article appeared in the New York Post on
February 26, 2008; available at:
http://www.cato.org/pub_display.php?pub_id=9247.
39. Congress could allow, for instance, more flexibility to the FHA to design new
products and encourage it to collaborate with the private sector to expedite the
refinancing of creditworthy subprime borrowers facing large resets.
40. Fannie Mae and Freddie Mac are the largest purchases of residential mortgages
on the secondary market and are becoming more significant players in the
subprime market. See e.g., Fannie Mae, Announcement 04-06, at 3 (Sept. 28,
2004), electronic copy available at:
http://www.mortgagebankers.org/resident/2004/fannie-04-06.pdf; Letter from
Michael C. May, Senior Vice President, Freddie Mac, to All Freddie Mac Sellers and
Servicers (Nov. 26, 2003), available
at:http://www.freddiemac.com/sell/selbultn/112603indltr.html.
41. See e.g., Christopher L. Peterson, supra note 5, at 516.
42. Given the fact that consumer protection has been a difficult, perpetual
challenge for U.S. policymakers and institutions, David Adam Friedman proposes a
mechanism based on selecting a random group for protection, so as to increase the
risk of the perpetrator’s action. In his opinion, policymakers may select a group
according to any of three criteria: unique vulnerability, reticence to report
victimization, or susceptibility to specific schemes. In unlocking the power of the
citizenry in transactions that are often hidden from sight and in situations where
enforcement can be excessively expensive, policymakers could effectively respond
to fraud; David Adam Friedman, supra note 8, at 65. With regards to the
application of such mechanism to predatory lending practices, the definition and
random assignment of special status of an “invisible” group of subprime borrowers
could certainly be an alternative, although it should be done carefully as to
increase abusive lenders’ risk, but up to a point where legitimate subprime
mortgage lending practices would not be affected.
43. Alan Reynolds, supra note 36.
44. Some States and Federal Authorities have even initiated criminal investigations
on the control activity and participation of the raters, mortgage lenders and
investments banks in the current “credit crunch”. See e.g., “Subprime: La Justice
de New York s’intéresse aux pratiques des banques”, Les Echos du 06, 12, 2007.
45. A Treasury's Blueprint for Financial Regulatory Reform (TBFRR) was indeed
released on March, 2008. This initiative seeks to increase the powers of some of
main federal banking agencies to oversee banking, market stability, and consumer
and investor protection. For a detailed description of the content and objectives of
this initiative see Remarks by Secretary Henry M. Paulson, Jr. on Blueprint for
Regulatory Reform of March 31, 2008. Electronic copy available at:
http://www.treasury.gov/press/releases/hp897.htm. For comments on this
initiative see, Washington Post staff writers David Cho, Neil Irwin and Carrie
Johnson, “Long Fight Ahead for Treasury Blueprint. Consumer Groups, Agencies
Criticize Regulatory Overhaul”, in the Washington Post, Sunday, March 30, 2008;
Page A01.