Renewed Efforts to Extend Assignee Liability to Mortgage Purchasers

January 26, 2009

The recent election’s changes to the executive and legislative branches of the federal government may spark renewed efforts to pass further legislation regarding mortgage practices and associated liability. Particularly concerning to securitization professionals is the possible application of “assignee liability” to mortgage-backed securities. Increased assignee liability could have significant effects on the credit markets. Those potential assignees that do not leave the market in reaction to increased legal exposure might require higher returns to compensate for the additional liability, raising rates of more borrowers.

The chief segment of the federal statutory scheme regulating assignee liability in the mortgage arena is the Truth in Lending Act (“TILA”). TILA, 15 USC 1601 et seq., was enacted on May 29, 1968, as title I of the Consumer Credit Protection Act, and it was implemented by Regulation Z (12 CFR 226), effective July 1, 1969. Significant amendments to TILA and Regulation Z were made by the Fair Credit Billing Act of 1974, the Consumer Leasing Act of 1976, the Truth in Lending Simplification and Reform Act of 1980, the Fair Credit and Charge Card Disclosure Act of 1988, the Home Equity Loan Consumer Protection Act of 1988, the Home Ownership and Equity Protection Act of 1994 (“HOEPA”), TILA Amendments of 1995, and the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). Regulation Z was amended to implement section 1204 of the Competitive Equality Banking Act of 1987, and in 1988, to include adjustable rate mortgage (ARM) loan disclosure requirements. In 1981, all consumer leasing provisions were deleted from Regulation Z and transferred to Regulation M (12 CFR 213). HOEPA is the most relevant amendment in connection with assignee liability.

HOEPA affects certain equity loans with rates or fees above a certain percentage or amount by creating certain disclosure requirements and substantive limitations. It imposes liability on those persons who are voluntarily assigned such loans for violations committed by the creditor when the violation for which an action is brought by a debtor is apparent on the face of the HOEPA-required disclosure statement. Under HOEPA, any person who purchases or is otherwise assigned certain mortgages is subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor of the mortgage. Such liability may arise unless the purchaser or assignee demonstrates, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence could not determine based on the documentation required by HOEPA that the mortgage was one covered by HOEPA. Recently, there have been further attempts to extend assignee liability.

On November 15, 2007, just over a year ago, the U.S. House of Representatives approved H.R. 3915, “The Mortgage Reform and Anti-Predatory Lending Act of 2007,” by a vote of 291 to 127, in response to their belief that the flow of capital from the secondary market to creditors is a key dynamic contributing to the occurrence of lending abuses in the loan origination process, which added significantly to the recent mortgage crisis. Under the bill, sponsored by Rep. Brad Miller (D-NC), a borrower would have had an individual cause of action against assignees and securitizers for rescission of a loan that violated standards requiring that the borrowers have a reasonable ability to repay and ensuring that there will be a net tangible benefit to the borrower. The bill was referred to the Senate Committee on Banking, Housing, and Urban Affairs.

The Senate counterpart to H.R. 3915 has languished “in committee.” On December 12, 2007, Senator Christopher Dodd (D-CT) introduced a somewhat comparable bill to H.R. 3915, namely S. 2452, titled the “Home Ownership Preservation and Protection Act of 2007.” The latter bill, referred to the Senate Committee on Banking, Housing, and Urban Affairs, remains in the first step in the legislative process-in the committee that deliberates, investigates, and revises proposed legislation before it goes to a general debate.

Assignee liability may find a revitalized audience in Congress as legislators attempt to address the current economic crisis and alleviate burdens on the financially overstretched, many of whom face unemployment and foreclosure. Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, has vowed to have a measure similar to H.R. 3915 reintroduced in 2009. Rep. Frank and the bill’s original sponsor Rep. Miller won their 2008 election races, and Sen. Dodd, the Senate bill’s sponsor, continues to serve his fifth term following his 2004 election win. Increased Democratic majorities in both the House of Representatives and the Senate may be more amenable to assignee liability legislation during the 111th Congress.