Cracks in the foundation of federal law: Ameliorating the ongoing mortgage foreclosure crisis through broader predatory lending relief and deterrence

California Law Review

Volumn 98, Issue 6, 2010, Pages 2049-2091

  Lehe, Katherine M ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 79953907264     PISSN: 00081221     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (267)

1. Foreclosure filings-which include default notices, auction sale notices, and bank repossessions -rose to approximately 1.9 million on more than 1.5 million properties in the first half of 2009. This represents a 9 percent increase in total properties from the previous six months and a 15 percent increase over the first six months of 2008. One in eighty-four housing units received a foreclosure filing in the first half of 2009. Press Release, RealtyTrac, 1.9 Million Foreclosure Filings Reported on More Than 1.5 Million U.S. Properties in First Half of 2009 (July 16, 2009), http://www.realtytrac. com/ContentManagement/PressRelease.aspx?ItemID=6802.
2. Foreclosure activity during the first quarter of 2008 increased 23 percent over the previous quarter and 112 percent over the first quarter of 2007. Press Release, RealtyTrac, U.S. Foreclosure Activity Increases 23 Percent in First Quarter (Apr. 29, 2008), http://www.realtytrac.com/ContentManagement/ pressrelease.aspx?ChannelID=9&ItemH5=4566&accnt=64847.
3. Gretchen Morgenson, Why Treasury Needs a Plan B for Mortgages, N.Y. TIMES, Dec. 6, 2009, at BU1, available at http://www.nytimes.com/2009/12/06/ business/economy/06gret.html.
4. Alt-A lending falls between prime and subprime lending. See Satish Mansukhani, Arjune Budhram & Mu'taz Qubbaj, Fixed Rate Alt-A MBS, in THE HANDBOOK OF MORTGAGE BACKED SECURITIES 207, 208 (Frank J. Fabozzi ed., 6th ed. 2006).
5. Alt-A loans typically are issued to borrowers with little or no documentation of income, employment, or assets, and with lower FICO scores than borrowers in the prime market. Id. at 210.
6. Alt-A loans also require borrowers to put down less than a 20 percent down payment, resulting in higher average Loan-To-Value (LTV) ratios than those of prime loans. Id.
7. CONG. BUDGET OFFICE, COST ESTIMATE: FEDERAL HOUSING FINANCE REGULATORY REFORM ACT OF 2008 8 (June 9, 2008), available at http://www.cbo.gov/ftpdocs/ 93xx/doc9366/Senate-Housing.pdf.
8. CTR. FOR RESPONSIBLE LENDING, SOARING SPILLOVER: ACCELERATING FORECLOSURES TO COST NEIGHBORS $502 BILLION IN 2009 ALONE; 69.5 MILLION HOMES LOSE $7,200 ON AVERAGE (2009), http://www.responsiblelending.org/ mortgage-lending/research-analysis/soaringspillover-3-09.pdf.
9. Maeve Elise Brown, Exec. Dir., Hous. & Econ. Rights Advocates, Presentation to Professor Jeffrey Selbin's Law & Poverty class at the University of California, Berkeley, School of Law(Mar. 18, 2009).
10. CTR. FOR RESPONSIBLE LENDING, supra note 5.
11. Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 TEX. L. REV. 1255, 1257 n.1 (2002).
12. Mortgage Lending - Research & Analysis, CTR. FOR RESPONSIBLE LENDING, http://www.responsiblelending.org/mortgage-lending/research-analysis/ (last visited Oct. 16, 2010).
13. For example, between October 1, 2008, and mid-January 2009, the HOPE for Homeowners (H4H) program, discussed infra, was responsible for closing only twenty-two refinanced FHA-insured mortgage loans and only 442 cases were opened. FED. HOUS. ADMIN., U.S. DEP'T OF HOUS. AND URBAN DEV., HOPE FOR HOMEOWNERS PROGRAM MONTHLY REPORT TO CONGRESS FOR JANUARY 2009 4, available at http://portal.hud.gov/portal/page/portal/FHA-Home/lenders/h4h-monthly-reports- to-congress/H4H%20Report%20to%20Congress%20January.pdf (last visited Sept. 11, 2010).
14. Case opening indicates that "the lender intends to qualify the borrower for a Program loan." Id.
15. When Congress enacted H4H on July 29, 2008, it expected to help roughly 400,000 people stay in their homes. CONG. BUDGET OFFICE, CBO's ESTIMATE OF COST OF THE ADMINISTRATION'S PROPOSAL TO AUTHORIZE FEDERAL FINANCIAL ASSISTANCE FOR THE GOVERNMENT-SPONSORED ENTERPRISES FOR HOUSING 3 (July 22, 2008), available at http://www.cbo.gov/ftpdocs/95xx/doc9574/07-22-GSEs.pdf.
16. The program has since been largely displaced by the Obama Administration's Homeowner Affordability and Stability Plan. See also infra text accompanying note 24.
17. Subprime loans, of which predatory loans are a subset, are 8.16 times more likely to be foreclosed than non-subprime loans. Elizabeth Laderman & Carolina Reid, Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown 1 (Fed. Reserve Bank of San Francisco, Cmty. Dev. Working Paper No. 2008-05, Nov. 2008), available at http://www.frbsf.org/publications/community/wpapers/2008/wp08-05.pdf.
18. See, e.g., Keith Hennessey, Should Taxpayers Subsidize Underwater Homeowners?, KENNETHHENNESSY.COM (Mar. 26, 2010), http://keithhennessey.com/ 2010/03/26/underwater/.
19. Hennessey, senior White House economic advisor to President George W. Bush, argues: A core housing policy question is whether it's better in the long run to buy time for struggling homeowners in the hope that they and the housing market will eventually recover, or instead to just rip off the band aid as quickly as possible. Allow the housing market to adjust quickly by not trying to create artificial "stability" above a market-clearing price. Such an adjustment would be excruciating in the short run, and painful for many who would lose their homes. But like ripping off a band aid, it would get all the pain behind us, so that things could return to a normal and more stable growth pattern going forward. Id.
20. See, e.g., Les Christie, Taxpayers: Furious over Homeowner Bailouts, CNNMONEY.COM (Dec. 5, 2008), http://money.cnn.com/2008/12/05/real-estate/bail- outs-fair-or-foul/index.htm;
21. Luke Mullins, The Housing Bailout Backlash, U.S. NEWS & WORLD REP., Apr. 11, 2008, http://money.usnews.com/money/business-economy/articles/2008/04/ 11/thehousing-bailout-backlash.html.
22. See Roberto G. Quercia et al., Assessing the Impact of North Carolina's Predatory Lending Law, 15 Hous. POL'Y DEBATE 573 (2004).
23. Such practices fall under the umbrella term "predatory lending," which generally refers to "subprime lending practices that are considered to be so detrimental to borrowers as to be considered abusive." Id. at 574.
24. Fannie Mae is a Government Sponsored Enterprise (GSE) charged with making mortgage investments to provide "liquidity, stability and affordability to the U.S. housing and mortgage markets." About Us, FANNIE MAE, http://www.fanniemae.com/kb/index7page=home&c=aboutus (last visited Sept. 11,2010).
25. What Is Predatory Lending?, MORTGAGE NEWS DAILY, http://www. mortgagenewsdaily.com/mortgage-fraud/Predatory-Lending.asp (last visited Dec. 12, 2009).
26. In addition, the Center for Responsible Lending has documented that six out of ten subprime borrowers in 2006 qualified for a cheaper loan. Fast Facts - Mortgage Lending, CENTER FOR RESPONSIBLE LENDING, http://www. responsiblelending.org/media-center/fast-facts/(last visited Dec. 9, 2009).
27. See Quercia et al., supra note 14;
28. Fast Facts - Mortgage Lending, supra note 16;
29. What Is Predatory Lending?, supra note 16.
30. This research concerns racial disparities in the receipt of subprime mortgage loans, rather than in the rate of default.
31. Rachel D. Godsil & David V. Simunovich, Protecting Status: The Mortgage Crisb, Eminent Domain, and the Ethic of Homeownership, 11 FORDHAM L. REV. 949, 963 (2008);
32. see also Paul S. Calem, Kevin Gillen & Susan M. Wächter, The Neighborhood Distribution of Subprime Mortgage Lending (Univ. of Pa. Inst, for Law & Econ., Research Paper No. 03-39, 2003), http://ssrn.com/abstract= 478581;
33. Richard Marsico, The Higher Cost of Being African-American or Latino: Subprime Home Mortgage Lending in New York City, 2004-2005 (N.Y. Law Sch., Pub. Law & Legal Theory, Research Paper No. 07/08-12, 2007), available at http://ssrn.com/abstract=1034265.
34. Godsil & Simunovich, supra note 19, at 964.
35. Id.
36. See Christopher E. Herbert & Eric S. Belsky, Thie Homeownership Experience of Low-Income and Minority Households: A Review and Synthesis of the Literature, 10 CITYSCAPE 5, July 2008, available at http://ssrn.com/abstract= 1341163.
37. This is not to suggest that African American, Latino, and other minority homeowners have only made inroads in homeownership through the extension of subprime loans. In fact, homeownership among minority borrowers has expanded in large part due to the "continuing and affirmative obligation" of banks under the Community Reinvestment Act (CRA) to "help meet the credit needs of the local communities in which they are chartered." 12 U.S.C. § 2901 (2006); see Part IV infra.
38. Further, default rates for all borrowers with CRA loans, which are 66 percent less likely than non-CRA loans to be high-cost, are significantly lower than default rates for subprime loans. Warren W. Traiger, The CRA: A Welcome Anomaly in the Foreclosure Crisis, 53 N.Y.L. SCH. L. REV. 227, 229 (2008-2009);
39. see Brown, supra note 6; Part IV infra.
40. See 12 U.S.C. § 2901 (2006);
41. Brown, supra note 6; Godsil & Simunovich, supra note 19, at 964;
42. Herbert & Belsky, supra note 22;
43. Traiger, supra note 22; Part IV infra.
44. Since 2007, several federal mortgage refinancing and modification programs have been introduced to offer borrowers emergency foreclosure avoidance, but the results of these efforts are unclear. In August 2007, the Bush Administration launched the mortgage industry-led FHASecure refinancing program. Press Release, U.S. Dep't of Hous. & Urban Dev., Bush Administration to Help Nearly One-Quarter of a Million Homeowners Refinance, Keep Their Homes: FHA to Implement New "FHASecure" Refinancing Product (Aug. 31, 2007), http://archives.hud.gov/news/2007/pr07-123.cfm.
45. Although the number of foreclosures prevented by FHASecure is unknown, the Bush Administration expected the FHASecure program to help up to 240,000 families avoid foreclosure. Id.
46. Congress responded in July 2008 with the HOPE for Homeowners loan refinancing and modification program. Pub. L. No. 110-289, §§ 1401-04, 122 Stat. 2654, 2800 (2008) (to be codified at 12 U.S.C. § 1715z-23). The most recent government attempt at foreclosure avoidance is President Obama's Homeowner Affordability and Stability Plan, also known as Making Home Affordable, launched in February 2009 to provide mortgage refinancing and modification. Press Release, U.S. Dep't of Treasury, Homeowner Affordability and Stability Plan Executive Summary (Feb. 18, 2009), http://www.treas.gov/press/ releases/tg33.htm.
47. In November 2009, the Treasury Department announced its intention to withhold cash incentives and otherwise pressure lending institutions to permanently lower payments for borrowers in the program, based on the program's limited success to date. Peter S. Goodman, U.S. Will Push Mortgage Firms to Reduce More Loan Payments, N.Y. TIMES, NOV. 28, 2009, at Al, available at http://www.nytimes.com/2009/11/29/business/economy/29modify.html.
48. As of October 2009, less than 2,000 of the 500,000 loan modifications in progress had become permanent. Id. Because the effectiveness of this program is uncertain and the federal response still evolving, this Comment will not address emergency foreclosure avoidance programs in detail.
49. Of course, the fact that a borrower is facing foreclosure does not necessarily mean they received a predatory loan, and a loan does not become predatory simply because a borrower no longer can afford it. Rather, this Comment advocates a more flexible predatory lending liability standard, discussed in Part III.A infra, that will enable a broader class of borrowers to challenge its loans at foreclosure if that loan was predatory. Definitions of predatory and subprime lending are discussed in Part I infra.
50. The private attorney general doctrine is an "equitable principle that allows the recovery of attorney's fees to a party who brings a lawsuit that benefits a significant number of people, requires private enforcement, and is important to society as a whole." BLACK'S LAW DICTIONARY 1315 (9th ed. 2009).
51. Predatory loans may include prime loans, but predatory loans typically are considered to be a subset of subprime loans. Engel & McCoy, supra note 8, at 1265.
52. OFFICE OF INSPECTOR GEN., FED. DEPOSIT INS. CORP., REPORT NO. 06-011, CHALLENGES AND FDIC EFFORTS RELATED TO PREDATORY LENDING 4 (2006), available at http://www.fdicig.gov/reports06/06-011 .pdf.
53. See Engel & McCoy, supra note 8, at 1258.
54. For example, in 2005, more than half of subprime loans were made by independent mortgage companies not subject to oversight by federal bank regulatory agencies. Laderman & Reid, supra note 11, at 5.
55. See OFFICE OF INSPECTOR GEN., FED. DEPOSIT INS. CORP., supra note 28, at 5.
56. See id. at 4.
57. Daniel S. Ehrenberg, If the Loan Doesn't Fit, Don't Take It: Applying the Suitability Doctrine to the Mortgage Industry to Eliminate Predatory Lending, 10 J. AFFORDABLE HOUS. & CMTY. DEV. L. 117, 130(2001).
58. Id.
59. See OFFICE OF INSPECTOR GEN., FED. DEPOSIT INS. CORP., supra note 28, at 5; Engel & McCoy, supra note 8, at 1260.
60. OFFICE OF INSPECTOR GEN., FED. DEPOSIT INS. CORP., supra note 28, app. 3 at 26.
61. Id.
62. Id.
63. Asset-based loans are approved based on the value of the home, which is used as collateral. The FDIC noted that in some cases monthly payments on asset-based loans have "equaled or exceeded the borrower's total monthly income," soon resulting in foreclosure. Id.
64. Id.
65. The fees associated with each refinancing "strips" the borrower of equity. Id. at 10.
66. Such penalties are not necessarily abusive, but may be used to "trap borrowers in high-cost loans." Id. app. 3 at 26.
67. Refinancing unsecured debt with collateral in the borrower's home is harmful because creditors of unsecured debt otherwise can rarely seize a borrower's home. Refinancing unsecured debt using one's home as collateral permits unsecured creditors to do so. Id. app. 3 at 27.
68. Open-end credit, also known as a revolving line of credit, is an "agreement by a lender to lend a specific amount to a borrower and to allow that amount to be borrowed again once it is repaid." Open End Credit, BUSINESSFINANCE.COM, http://www.businessfinance.com/open-end-credit.htm (last visited Oct. 17,2010).
69. OFFICE OF INSPECTOR GEN., FED. DEPOSIT INS. CORP., supra note 28, app. 3 at 27.
70. Engel & McCoy, supra note 8, at 1260.
71. The first category, loans structured to result in disproportionate net harm to borrowers, encompasses asset-based lending, loan-flipping and equity stripping, steering, and negative amortization mortgages. Id. at 1261-65.
72. Negative amortization mortgages require borrowers to make scheduled payments insufficient to cover the interest due, which causes the loan principal to increase over time. Id. at 1263.
73. Lenders are able to finance loans in this category only by disregarding conventional loan underwriting norms. Id. at 1262.
74. The second category, harmful rent seeking, occurs when lenders "charge rates and fees that exceed the rates and fees they would obtain in the competitive market," and may encompass steering and the inclusion of credit life insurance in the mortgage loan. Id. at 1265-67.
75. The third category, fraud and deceptive practices, involves violation of state consumer protections laws or fiduciary duties, the statute of frauds, and federal disclosure laws such as RESPA, TILA, and HOEPA, discussed in Part ILA infra. Id. at 1267-68.
76. Predatory lending committed through fraud and deceptive practices may be aimed at borrowers or at capital sources such as secondary-market loan purchasers, federal guarantors, and loan originators. Id.
77. The fourth category describes loans that lack transparency but are not actionable under existing law, including loans that exploit loopholes in the federal disclosure laws, as discussed in Part II.A infra. Id. at 1268-70.
78. 50. Id. at 1260.
79. The fifth category addresses loans that require borrowers to waive meaningful legal redress, including mandatory arbitration clauses, as well as prohibitions against joining class action lawsuits and clauses shifting lenders' attorneys' fees to borrowers. Id. at 1270.
80. See Ehrenberg, supra note 32, at 125.
81. An estimated 16 percent of all home mortgages will foreclose in the next four years. Maeve Elise Brown, supra note 6.
82. See Ehrenberg, supra note 32, at 125.
83. Congress abrogated the "holder in due course" doctrine only for mortgages that fall under HOEPA, discussed infra. 15 U.S.C. § 1641(d)(1) (2006). However, because the scope of predatory lending extends beyond the class of mortgages covered by HOEPA, this abrogation is insufficient.
84. Susan E. Häuser, Predatory Lending, Passive Judicial Activism, and the Duty to Decide, 86 N.C L. REV. 1501, 1515-16 (2008).
85. An assignee may nonetheless be liable for mortgage origination if the assignee took the negotiable instrument with notice of the problems at issue, here, the loan's predatory characteristics. See U.C.C. § 3-302(a) (2002);
86. JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE (HORNBOOK SERIES) 509 (5th ed. 2000).
87. Hauser, supra note 55, at 1528.
88. In 2007, more than eighty subprime lenders went out of business; many more subprime lenders have since stopped new loan activity, declared bankruptcy, gone out of business, or been sold. Worth Civils & Mark Gongloff, Subprime Shakeout: Lenders that Have Closed Shop, Been Acquired or Stopped Loans, WALL ST. J. ONLINE, http://online.wsj.com/public/resources/-documents/info- subprimeloans0706-sort.html (last visited May 27, 2010);
89. see also FACTBOX: Subprime Lenders Sold, Closed, or Bankrupt, REUTERS.COM, May 10, 2007, http://www.reuters.com/assets/print?aid= USN0420974520070510 (documenting fifteen subprime lenders that closed, went bankrupt, or were sold between late 2006 and May 2007, representing only a "partial list" of total subprime lender closures).
90. In addition to the federal anti-predatory lending statutes, aggrieved borrowers may pursue state law claims for fraud or deceptive business practices. However, these causes of action are beyond the scope of this paper and are also limited by the "do equity" and "holder in due course" doctrines, discussed in Part ILB infra.
91. The antifraud provisions of the Federal Trade Commission Act, which prohibit "unfair or deceptive acts or practices in or affecting commerce," apply to mortgage sales. See 15 U.S.C. § 45(a)(1) (2006).
92. For example, the Home Equity Conversion Manager program is a consumer-counseling program administered by the Department of Housing and Urban Development (HUD) that is mandatory for senior citizens contemplating purchase of a reverse mortgage. Eric C. Seitz, U.S. Subprime Crbis: H.R. 3915 - A Far-Sighted Solution to the Mortgage Crisis, 14 LAW & Bus. REV. AM. 759, 767 n.86 (2008);
93. see also HUD Approved Housing Counseling Agencies, U.S. DEP'T OF Hous. & URBAN DEV., http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?weblistaction= summary (last visited May 2, 2009).
94. The Equal Credit Opportunity Act prohibits creditors from discriminating against any applicant, with respect to any aspect of a credit transaction . . . on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract);. . . because all or part of the applicant's income derives from any public assistance program;. . . or because the applicant has in good faith exercised any right under this chapter. 15 U.S.C. § 1691(a). The Fair Housing Act prohibits discrimination on the basis of race, color, national origin, religion, sex, familial status, or disability, in the form of refusal to make a loan, refusal to provide information regarding loans, imposing different terms or conditions on loans, and property appraisal. 42 U.S.C. §§ 3604-06 (2006).
95. The federal disclosure laws are the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601-17 (2006); the Truth in Lending Act (TILA), Pub. L. No. 90-321, 82 Stat. 146 (1969) (codified as amended in scattered sections of 15 U.S.C); and the Home Ownership and Equity Protection Act (HOEPA), 15 U.S.C. §1639. Discussed infra.
96. 12 U.S.C. §§ 2601-17.
97. Pub. L. No. 90-321 (codified as amended in scattered sections of 15 U.S.C).
98. 15 U.S.C. § 1639.
99. More Information About RESPA, DEP'T OF HOUS. AND URBAN DEV., http://www.hud.gov/offices/hsg/ramh/res/respamor.cfrn (last updated Mar. 22, 2010).
100. 12 U.S.C. §§ 2603-04; 24 C.F.R. § 3500.7 (2010).
101. Seitz, supra note 60, at 768 n.96.
102. Id. at 768.
103. 15 U.S.C. § 1601(a).
104. 12 C.F.R. § 226.23(a)(3) (2010). Material loan terms that lenders must disclose include "the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule, and the disclosures and limitations referred to in § 226.32(c) and (d) and 226.35(b)(2)." Id. at n.48.
105. 12 C.F.R. § 226.23(d)(1)(2).
106. 15 U.S.C. § 1640.
107. Id. § 1611.
108. Engel & McCoy, supra note 8, at 1269.
109. 15 U.S.C. § 1640(e).
110. Seitz, supra note 60, at 769.
111. See, e.g., Turner v. Beneficial Corp., 242 F.3d 1023, 1028 (11th Cir. 2001).
112. Reverse redlining refers to the practice of targeting vulnerable communities, particularly low-income and of color communities, for subprime and predatory loans. See sources cited supra note 19.
113. HOEPA prohibits balloon payments on any non-bridge loan with a maturity of less than five years. 15 U.S.C. § 1639(e).
114. Id. § 1639(c)-(h).
115. Asset-based lending is widely considered a predatory lending practice. See, e.g., Engel & McCoy, supra note 8, at 1262 ("These quintessential predatory loans often cause borrowers to suffer bankruptcy or lose their homes to foreclosure.").
116. 15 U.S.C. § 1639(h).
117. In addition to TILA disclosure requirements, lenders and brokers must disclose the annual percentage rate (APR) and the dollar amount of monthly payments in writing three business days before closing a HOEPA loan. For HOEPA-covered loans with adjustable interest rates, lenders and brokers must inform borrowers that the interest rate could increase and must disclose the maximum future monthly payment amount. Lenders and brokers also must disclose in writing the following: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application," and "If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan." 15 U.S.C. § 1639(a)(1)(A), (B).
118. Id. § 1641(d).
119. Id.
120. Id. § 1640.
121. Id. § 1611.
122. Häuser, supra note 55, at 1519.
123. With a reverse mortgage, a lender makes payments to the borrower from its home equity and subsequently recovers the loan principal plus interest upon the borrower's sale of the home. About Reverse Mortgages for Seniors, U.S. DEP'T OF HOUS. & URBAN DEV., http://www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm (last updated Jan. 5, 2009).
124. A purchase money mortgage is "[a] mortgage executed to secure the purchase money or a part thereof by a purchaser of property, contemporaneously with the acquisition of the title thereto, or afterward, but as a part of the same transaction." BALLENTINE'S LAW DICTIONARY 1027 (3d ed. 1969).
125. Open lines of credit, or a home equity line of credit, is "a form of revolving credit in which [a] home serves as collateral." What You Should Know About Home Equity Lines of Credit, BD. OF GOVERNORS OF THE FED. RESERVE SYS., http://www.federalreserve.gov/pubs/equity/equity-english.htm (last updated Aug. 21, 2009).
126. HOEPA requirements are triggered if the APR on the loan exceeds the yield on comparable Treasury securities by more than ten percentage points, or if total points and fees paid at or before closing exceed the greater of 8 percent of the total loan amount or $400. 15 U.S.C. 1602(aa)(1) (2006). HOEPA applies to any creditor who originates two or more qualified mortgages in any twelve-month period, and to any creditor who originates one or more qualified mortgages through a mortgage broker. Id. § 1602(f).
127. Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 FORDHAM L. REV. 2039, 2069 (2007).
128. See Sally Pittman, ARMs, But No Legs to Stand On: "Subprime" Solutions Plague the Subprime Mortgage Crbis, 40 TEX. TECH. L. REV. 1089, 1106 (2008).
129. See Ehrenberg, supra note 32, at 125.
130. E-mail from Charles A. Hansen, Partner, Wendel, Rosen, Black & Dean, LLP (Sept. 20, 2009, 08:30 PST) (on file with author).
131. Hauser, supra note 55, at 1515-16.
132. Dickson, Carlson & Campillo v. Pole, 99 Cal. Rptr. 2d 678, 685 (Ct. App. 2000)
133. (quoting 2 JOHN NORTON POMEROY, A TREATISE ON EQUITY JURISPRUDENCE AS ADMINISTERED IN THE UNITED STATES OF AMERICA § 385, at 51-53 (5th ed. 1941)).
134. CALIFORNIA MORTGAGES, DEEDS OF TRUST, AND FORECLOSURE LITIGATION § 3.12 (Roger Bernhardt & Charles A. Hansen eds., 4th ed. 2009).
135. Dickson, 99 Cal. Rptr. 2d at 685.
136. Mich. Mobile Homeowners Ass'n v. Bank of the Commonwealth, 223 N.W.2d 725, 729 (Mich. Ct. App. 1974).
137. Id.
138. Dickson, 99 Cal. Rptr. 2d at 685.
139. See, e.g., Aguilar v. Bocci, 114 Cal. Rptr. 91, 92 (Ct. App. 1974) (quiet title remedy denied to original borrower who failed to pay mortgage because borrower could not "do equity" by paying debt owed);
140. Mich. Mobile Homeowners Ass 'n, 223 N.W.2d at 729 (holding that, to seek
141. equitable avoidance of a usurious mortgage, borrower must "do equity by tendering the unpaid balance due plus interest at a legal rate").
142. Telephone Interview with Katherine Porter, Visiting Assoc. Professor of Law, Univ. of Cal., Berkeley, Sch. of Law (Nov. 22, 2009).
143. Peter S. Goodman, Subprime Brokers Back as Dubious Lenders, N.Y. TIMES, July 19, 2009, available at http://www.nytimes.com/2009/07/20/business/20modify. html.
144. Hauser, supra note 55, at 1516.
145. Id.
146. Id.
147. Id. at 1528. 112. A holder in due course is "(1) a holder (2) of a negotiable instrument," such as a mortgage, "who took it (3) for value (4) in good faith" and "(5) without notice of certain problems with the instrument."
148. WHITE & SUMMERS, supra note 55, at 509; see U.C.C. § 3-302(a) (2002).
149. Häuser, supra note 55, at 1515-16.
150. Id. at 1527.
151. Id.
152. Id.
153. Id.
154. See, e.g., Civils & Gongloff, supra note 57;
155. FACTBOX: Subprime Lenders Sold, Closed, or Bankrupt, supra note 57.
156. See, e.g., Melton v. Family First Mortgage Corp., 576 S.E.2d 365 (N.C App. 2003) (declining to create an exception to the "holder in due course" doctrine to impose assignee liability for mortgagee conduct that amounts to unfair and deceptive trade practices under North Carolina law).
157. See Engel & McCoy, supra note 94, at 2069.
158. Häuser, supra note 55, at 1517.
159. 16 C.F.R. § 433.2 (2010); U.C.C. § 3-106(d) (2002). 123. For example, North Carolina's anti-predatory lending law prohibits lending based solely on collateral rather than a borrower's repayment ability, and the New York Banking Board provides for revocation of mortgage brokers' and lenders' licenses for "unfair, deceptive or unconscionable practices in the course of advertising, brokering or making high cost home loans." Engel & McCoy, supra note 8, at 1319-20;
160. see also Ehrenberg, supra note 32, at 120.
161. Ehrenberg, supra note 32, at 120.
162. See id.
163. Id.
164. Engel & McCoy, supra note 8, at 1329-34.
165. Id. at 1319-20. For example, HOEPA prohibits lenders from making high-cost loans without regard to the borrower's repayment ability; regulations implementing this provision require lenders to consider the borrower's current and expected income, current financial obligations, and employment in order to make this determination. 12 C.F.R. § 226.34(a)(4) (2010). North Carolina's anti-predatory lending law similarly requires lenders to assess borrowers' repayment ability; the standard is presumptively met when the borrower's total monthly debts, including the high-cost loan at issue, is equal to or less than 50 percent of their gross monthly income, which must be verified. N.C GEN. STAT. § 24-1.1E(c)(2) (2009).
166. In this context, scienter is a "mental state consisting in an intent to deceive, manipulate, or defraud." BLACK'S LAW DICTIONARY 1463 (9th ed. 2009).
167. Ehrenberg, supra note 32, at 120.
168. Id.
169. Id.
170. Engel & McCoy, supra note 8, at 1342.
171. Id. (quoting Mark J. Astarita, Brokers Have to Be Their Own Judge, RES. MAG. (Mar. 1997), available at http://www.seclaw.com/docs/397.htm).
172. Hanly v. Sec. & Exch. Comm'n, 415 F.2d 589, 597 (2d Cir. 1969).
173. Id.
174. Ehrenberg supra note 32, at 121-22 n.31 (noting the "New York Stock Exchange leaves it up to the judgment of the broker-dealer to determine what facts are essential, based upon the specific circumstances of the account [but] does suggest a number of factors that a brokerdealer should consider examining").
175. Engel & McCoy, supra note 8, at 1324.
176. Ehrenberg, supra note 32, at 125-26. Ehrenberg proposes several factors from the securities context to establish detrimental reliance. Specifically, the courts would evaluate: (1) the sophistication and expertise of the plaintiff in financial matters; (2) the existence of a long-standing business or personal relationship; (3) access to relevant information; (4) the existence of an explicit fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff sought out the lender and hastened to expedite the consummation of the loan; and (8) generality or specificity of the misrepresentations and disclosures. Id. at 126.
177. Id. at 126.
178. See id. at 125.
179. See Engel & McCoy, supra note 8.
180. Id. at 1337, 1341.
181. Id. at 1339.
182. 15 U.S.C. § 45(a)(1) (2006).
183. See Engel & McCoy, supra note 8, at 1340. To preserve the role of states as "laboratories for developing regulatory techniques," they argue against federal preemption of state suitability claims. Id.
184. Id. at 1342, 1345.
185. Id. at 1342.
186. Id.
187. Id.
188. Id. at 1343.
189. Id.
190. Id. This rule would prohibit asset-based lending on owner-occupied properties and require lending according to underwriting guidelines. Id.
191. Id. at 1343. For example, lenders would be required to document that "points assessed represent a tradeoff for interest, as is true in the prime market." Id.
192. Id. at 1345.
193. For the reasons set forth by Engel and McCoy, it is also desirable for Congress to effectuate industry self-regulation and a "multiple-gatekeeper system" in which suitability violations also may be enforced by industry and a federal oversight agency. Id. at 1337, 1341, 1338-39. However, because my proposal focuses on reducing foreclosures by enabling a broader class of aggrieved borrowers to seek relief from predatory loans, I will not explore these propositions in depth.
194. 15 U.S.C. § 78j(b) (2006); 17 C.F.R. § 240.10b-5 (2010).
195. Engel & McCoy, supra note 8, at 126.
196. The relevant federal regulating agencies include the Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA). Federal Bank Regulatory Agencies, Commonwealth of Massachusetts Office of Consumer Affairs & Business Regulation,http://www.mass.gov/?pageID= ocamodulechunk&L=4&L0=Home&L1=Consumer&L2=Banks+ %26+Banking&L3=Selecting+Banks+%26+Credit+Unions&sid=Eoca&b= tenmnalcontent&f=do b-feds&csid=Eoca (last visited Oct. 25, 2010).
197. Ehrenberg, supra note 32, at 130.
198. Engel & McCoy, supra note 8, at 1344.
199. Ehrenberg, supra note 32, at 126.
200. Id.
201. Id.
202. Id.
203. See id. at 125-26.
204. Id.
205. See Engel & McCoy, supra note 8, at 1325.
206. See supra notes 1-6.
207. Ehrenberg, supra note 32, at 128.
208. Engel & McCoy, supra note 8, at 1319.
209. See Part ILA supra.
210. Engel & McCoy, supra note 8, at 1352.
211. H.R. 1728, 111th Cong. (2009).
212. Id. § 102.
213. Id. (emphasis added).
214. Id. (emphasis added).
215. Id.
216. Id. § 103.
217. See Dickson, Carlson & Campillo v. Pole, 99 Cal. Rptr. 2d 678, 685 (Ct. App. 2000).
218. See id. (partnership case suggesting that the requirement of "doing equity" is not absolute).
219. For the reasons discussed above, abrogation of the holder doctrine in the real estate context would also facilitate borrowers' recovery in state law claims, which are not the focus of this Comment.
220. Hauser, supra note 55, at 1517. The idea was that purchasers of securities will be drawn to low-risk investments, and mortgage-backed securities were thought to decrease risk of default to the investor by pooling together large numbers of mortgages for division and purchase. 187. Id. at 1516-17.
221. Id. at 1517.
222. See, e.g., Civils & Gongloff, supra note 57;
223. FACTBOX: Subprime Lenders Sold, Closed, or Bankrupt, supra note 57;
224. see also Scott Horsley, Big Subprime Lender Files for Bankruptcy, (National Public Radio broadcast Apr. 3, 2007), available at http://www.npr.org/templates/story/story.php?storyld=9307852 (quoting David Olson, Home Equity Industry Analyst, Wholesale Access, referring to "disintegration of [subprime mortgage] industry").
225. WHITE & SUMMERS, supra note 55, at 534-35.
226. It may also be suggested that this would particularly diminish mortgage credit opportunities for those consumers most likely to qualify only for subprime loans.
227. See Häuser, supra note 55, at 1517-18.
228. Engel and McCoy have documented that predatory lenders market their loans to borrowers who are disconnected from the credit economy and thus are unable to engage in meaningful comparison shopping for loans. Their target markets are most likely to be "communities of color." Engel & McCoy, supra note 8, at 1294. Further, traditional lenders, the banks and thrifts, "do not have a significant presence in [low- and moderate-income] neighborhoods." Id. at 1295. In this way predatory lenders are able to exploit "information asymmetries" between brokers, lenders, secondary-market participants, and borrowers. Id. at 1280-81.
229. See Part IV infra and accompanying footnotes.
230. See U.C.C. § 3-302(a) (2002).
231. See WHITE & SUMMERS, supra note 55.
232. Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 CREIGHTON L. REV. 503, 548 (2002).
233. Engel and McCoy have noted that typical predatory lending victims are unsophisticated about their options for securing mortgage credit, often as a result of historic exclusion from the mortgage market due to discrimination and credit rationing. Engel & McCoy, supra note 8, at 1280.
234. Unlike banks, thrifts, and some credit unions, most subprime lenders are not subject to federal or state regulatory oversight. OFFICE OF INSPECTOR GEN., FED. DEPOSIT INS. CORP., supra note 30, at 9. In 2005, more than half of subprime loans were made by independent mortgage companies not subject to oversight by federal bank regulatory agencies, and 30 percent were made by affiliates of banks and thrifts that are not subject to CRA examination. Laderman & Reid, supra note 11, at 5.
235. 12 U.S.C. §§ 2601-17(2006).
236. Pub. L. No. 90-321, 82 Stat. 146 (1969) (codified as amended in scattered sections of 15 U.S.C).
237. 15 U.S.C. § 1639(2006).
238. OFFICE OF INSPECTOR GEN., FED. DEPOSIT INS. CORP., supra note 30, at 13.
239. The risk of foreclosure of subprime, or higher-cost, loans is 8.16 times higher than for non-subprime loans. Laderman & Reid, supra note 11, at 6.
240. John Taylor & Josh Silver, The Community Reinvestment Act at 30: Looking Back and Looking to the Future, 53 N.Y.L. SCH. L. REV. 203, 204 (2008-2009).
241. Many banks and thrifts have non-depository affiliates that may be excluded from the CRA evaluation process. See Richard Marsico, Introduction, Community Reinvestment Act Symposium Edition, 53 N.Y.L. SCH. L. REV. 193, 199 (2008-2009). Banks and thrifts tend to exclude their affiliates from CRA examination if affiliates "engaged in risky lending or discriminatory policies." Taylor & Silver, supra note 205, at 211.
242. H.R. 1479, 111th Cong. (2009).
243. Marsico, supra note 206, at 194.
244. 12 U.S.C. § 2901(a)(3) (2006).
245. These agencies are the Federal Reserve Board, which examines state-chartered banks; the Office of the Comptroller of the Currency, which examines nationally-chartered banks; the Office of Thrift Supervision, which examines federally-chartered thrifts; and the Federal Deposit Insurance Corporation, which examines state-chartered banks and thrifts. Taylor & Silver, supra note 205, at 204.
246. Id. at 206.
247. Marsico, supra note 206, at 196.
248. Id. at 208 (citing JOINT CTR. FOR HOUS. STUDIES, HARVARD UNIV., THE 25TH ANNIVERSARY OF THE COMMUNITY REINVESTMENT ACT: ACCESS TO CAPITAL IN AN EVOLVING FINANCIAL SERVICES SYSTEM 59 (2002), available at http://www.jchs.harvard.edu/ publications/governmentprograms/cra02-1 .pdf).
249. Taylor & Silver, supra note 205, at 207.
250. Id. at 208.
251. Id.
252. See Editorial, Misplaced Blame, N.Y. TIMES, Oct. 15, 2008, available at http://www.nytimes.com/2008/10/15/opinion/15wed2.html.
253. Id.
254. Letter from Ben Bernanke, Chairman of the Fed. Reserve Bd., to Robert Menendez, U.S. Senator (Nov. 25, 2008) (on file with author).
255. Id. 221.
256. John C. Dugan, Comptroller of the Currency, Remarks Before the Enterprise Annual Network Conference (Nov. 18, 2008), available at http://www.occ.gov/ftp/ release/2008-136a.pdf.
257. Laderman & Reid, supra note 11, at 19. Further, loans that CRA-covered lenders made within their assessment areas were half as likely to be foreclosed than loans made by independent mortgage companies.
258. Id.
259. Id. at 21.
260. Id. at 20. Some of the study's more specific findings add support to the proposition that CRA coverage discourages predatory lending. The San Francisco Federal Reserve found that 28 percent of loans made by CRA lenders in low-income areas within their assessment area were fixed-rate loans; in comparison, 18.2 percent of loans made by [independent mortgage companies] in low-income areas were fixed-rate. And only 12 percent of loans made by CRA lenders in low-income areas within their assessment areas were higher-priced, compared with 29 percent in low-income areas outside their assessment areas and with 52.4 percent of loans made by [independent mortgage companies] in low-income areas.
261. Id.
262. Traiger, supra note 22, at 229.
263. A basis point is one-hundredth of a percentage point. U.S. Commodity Futures Trading Commission, CFTC Glossary, http://www.cftc.gov/ ConsumerProtection/EducationCenter/CFTCGlossary/glossaryJj.html (last visited Oct. 25, 2010). In other words, the average annual percentage rate on higher-cost loans issued by CRA-covered banks was 0.68 percent lower than the APR on the average high-cost loan issued by non-CRA institutions.
264. Metropolitan Statistical areas (MSAs) are defined by the U.S. Census Bureau by their geographic delineation, or by a list of their geographic components at a particular point in time. For a current list of MSAs, see U.S. CENSUS BUREAU, CURRENT LISTS OF METROPOLITAN AND MICROPOLITAN STATISTICAL AREAS AND DEFINITIONS, available at http://www.census.gov/population/www/metroareas/ metrodef.html.
265. Traiger, supra note 22, at 229.
266. 12 U.S.C. § 2901(a)(3) (2006). 230.
267. See Laderman and Reid, supra note 11, at 6.