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ASF Issues Paper on Subprime Mortgage Assignee Liability
Press Release
Date: June 5, 2007
New York, NY – The American Securitization Forum (ASF) today issued a position paper presenting the ASF’s policy views and recommendations on assignee liability as a potential policy response to certain perceived problems in connection with subprime mortgage financing activities. The ASF concludes that expanding the liability faced by secondary market participants for abusive loan origination practices is a misguided policy, and risks a broad contraction in the availability of mortgage credit to subprime and other borrowers. The paper also sets forth detailed recommendations for a new, national framework for assignee liability in the secondary mortgage market.
Click here for the paper.
“Any state and federal legislation that exposes investors and other secondary market participants to unquantifiable assignee liability for flaws in the mortgage loan origination process would have severe repercussions and risks limiting the availability of mortgage credit for prospective subprime borrowers, as well as those seeking to refinance their existing loans on more favorable terms,” said George Miller, executive director of the American Securitization Forum. “We believe that further expansion of assignee liability is an unwise and ineffective mechanism for remedying issues in the subprime market. However, to the extent that assignee liability is imposed on secondary market participants, it should be imposed pursuant to a uniform national standard that balances and protects both individual borrowers and the interests of the mortgage finance market.”
The ASF notes that the many proponents of expanded assignee liability believe that the flow of capital to the secondary market to loan originators contributes to the frequency of abuses in the loan origination process, and that investors and other entities that participate in the secondary market should take on the additional role of regulators of subprime mortgage lenders and brokers. The ASF believes this analysis suffers from a number of conceptual flaws.
Secondary market participants face strong incentives to avoid unprofitable loans, including those that have been originated in an abusive manner. However, secondary market participants are not equipped to conduct legally imposed and intrusive oversight over the loan origination process. Mortgage originators and brokers are already subject to extensive oversight. Rather than shift responsibilities onto the secondary market, any gaps or deficiencies in the scheme for regulating the primary lending market should be addressed. Most investors and other assignees have nothing to do with mortgage loan origination practices, nor do they have ability to discern when fraudulent or abusive mortgage lending practices are taking place.
The ASF’s paper observes that over the long term, secondary market participants that do not exit the market entirely in response to heightened prospective legal liability will demand a grater return on their investments as compensation for taking on additional legal exposure. In this way, the burden of enhanced liability will ultimately fall on all subprime borrowers, including the vast majority who are well-served by responsible mortgage originators and brokers.
“The secondary market is unsuited to engaging in regulatory policing of mortgage lenders and brokers and should not be asked to do so,” said Mr. Miller. “To the extent that secondary market participants are subject to assignee liability, in our view a thoughtfully crafted national standard would be preferable to the existing patchwork of state and local laws. Any such standard should simultaneously protect and provide redress for individual borrowers, protect the interests of secondary market participants, and promote systemic interests of facilitating the continued flow of capital to the subprime mortgage market.”
The ASF believes such a uniform national standard should replace all federal, state and local laws. Among other elements, this standard should include:
- A definition of the word “assignee” which excludes entities not directly involved in purchasing loans.
- Loan restrictions that are clear and objective.
- 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.
- A safe harbor that is effective and reasonable for secondary market participants to satisfy, which would promote the dual goals of encouraging participation in the subprime market and incenting existing participants to examine a statistically significant sample of the loans in which they invest.
The American Securitization Forum is a broadly-based professional forum through which participants in the U.S. securitization market can advocate their common interests on important legal, regulatory and market practice issues. The ASF also provides information and education on a range of securitization market issues and topics through industry conferences, seminars and various other initiatives. For more information related to the ASF, please go to www.americansecuritization.com. The ASF is a forum of the Securities Industry and Financial Markets Association.