Predatory Structured Finance

Abstract

Predatory lending is a real, pervasive, and destructive problem as demonstrated by record settlements, jury awards, media exposes, and a large body of empirical scholarship. Currently the national debate over predatory mortgage lending is shifting to the controversial question of who should bear liability for predatory lending practices. In today's subprime mortgage market, originators and brokers quickly assign home loans through a complex and opaque series of transactions involving as many as a dozen different strategically organized companies. Loans are typically transferred into large pools, and then income from those loans is structured to appeal to different types of investors. This process, usually referred to as securitization, can lower the cost of funds for lenders, allowing them to offer better prices. But, it can also capitalize fly-by-night companies that specialize in fraud, deceptive practices, abusive collections, and other predatory behavior. This article makes three intellectual contributions to this national debate: First, it argues that the current notion of predatory lending has been cast too narrowly. Some of the businesses that sponsor securitization of residential mortgage loans are aware of and capable of preventing mortgage predation. Accordingly, the label predatory structured finance is suggested as a necessary addendum to the lexicon of predatory lending. Second, this article tracks the evolution of structured finance of home loans, suggesting that as our financial technology has outpaced consumer protection law, it has effectively deregulated much of the consumer mortgage market. Third, this article argues that the reform strategy favored by many legislators and a growing number of scholars - assignee liability law - is only a partial solution. While a necessary component of the law, these rules are by themselves inadequate because they excuse many of the most culpable parties from accountability. An efficient legal response to predatory structured finance must include further development in an emerging trend of common law imputed liability theories.

Keywords: predatory lending, loan, credit, debt, bankruptcy, structured finance, securitization, Truth in Lending, Fair Debt Collection Practices, Holder in Due Course, assignment, assignee liability, Fair Housing, Equal Credit Opportunity, fraud, deceptive trade

JEL Classification: G00, G18, G20, G28, G33, G38, K42, L10, L11, L14