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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.

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

Abstract:
Following the United States, many countries around the world have increasingly turned to structured finance, also known as securitization, to fund loan portfolios. This trend has taken on troubling undertones in the wake of widespread default in the American sub-prime residential mortgage backed securities market. This essay provides a brief introduction to the business practices of, and law governing residential mortgage securitization in, the United States. Moreover, it surveys the use of securitization in three influential countries: the United Kingdom, Germany, and Japan. In comparison to these countries, relatively lax regulation, poor oversight of intermediary originators, and volume-oriented underwriting have all contributed to widespread foreclosures in the United States. Private structured finance of American sub-prime mortgages has created economic incentives that promote consumer over-indebtedness as well as predatory lending. Furthermore, by drawing politically powerful financiers into aggressive and ethically questionable lending, residential mortgage backed securitization tends to empower opponents of consumer protection law. Drawing on the U.S. example, caveats for other countries are offered.

securitization, structured finance, finance, foreclosure, mortgage, predatory lending, loan, debt, borrower, default, sub-prime, regulation, united kingdom, Germany, japan, Fannie Mae, Freddie mac, pfandbrief, pfandbriefe, GHLC, jusen, yield spread premium, CDO, collateralized debt obligation, hedge

Abstract:
In the Western intellectual tradition usury law has historically been the foremost bulwark shielding consumers from harsh credit practices. Historically, the United States commitment to usury law has been deep and consistent. However, the recent rapid growth of the payday loan industry belies this longstanding American tradition. In order to understand the evolution of American usury law, this paper presents a systemic empirical analysis of all fifty state usury laws in two time periods: 1965 and the present. The highest permissible price of a typical payday loan authorized under each state's usury law was calculated. These prices were then translated into Annual Percentage Rate (APR) format following the federal Truth-in-Lending Act price disclosure regulations. Moreover, this Article also compares how each state legislature describes its most expensive permissible payday loan, with how that loan is characterized under federal price disclosure law. It does so by suggesting a new financial concept which I label: salience distortion. This analysis produces three findings: (1) usury law has become more lax; (2) usury law has become more polarized; and, (3) usury law has become more misleading. These findings suggest that the numeric language in current state usury statutes is not chosen because it helpfully describes some expectation of commercial behavior. Rather, legislatures have chosen the language of most current credit price caps because it sounds in an ancient moral tradition - a mythology of sorts - that roughly delineates popular perception of moral and immoral interest rates. Exploiting this normative tradition as well as common behavioral economic heuristics, many state legislatures use small, innocuous numbers in usury law because they are attempting to minimize the public and media outcry over their decision to legalize triple digit interest rate consumer loans.

usury, payday, loan, debt, consumer, salience, distortion, APR, interest, predatory lending

Abstract:
The culture war has become a national moniker describing a variety of policy debates between social conservatives and secular liberal Americans. Hotly contested battle grounds in this metaphorical war have included abortion policy, affirmative action, the right to bear arms, and gay marriage. Frequently these debates have divided secular Americans from people of faith. This article explores this cultural divide in the context of consumer financial services. In the past fifteen to twenty years America has witnessed a stunning transformation in financial services offered to lower and lower-middle classes. A new breed of fringe creditors charging prices far in excess of the old mafia loan sharking syndicates have spread throughout much of the country. The archetype of fringe creditors commonly referred to as payday lenders, charges average simple nominal annual interest rates of around 450 percent. This Article presents empirical research based on the largest, most comprehensive database of payday loan locations yet created. Payday lender locations are compared to an index measuring the political power of conservative Christian Americans in all fifty states. We conclude that there is a strong correlation between the density of payday lending industry and the political power of conservative Christians, suggesting that conservative Christians have become a prime demographic target of payday lenders. These findings are further discussed in light of Biblical injunctions against usury.

usury, christian, christianity, conservative, bible, payday, loan, mafia, geography, interest, credit, loan, debt, predatory

Abstract:
At the roots of the worst recession since the Great Depression were unaffordable home mortgages packaged into securities, sold to investors, and used as capital assets by financial institutions. The process of securitization, as well as financial institution over-leveraging associated with it, has been well documented and explored. However, there is one company that was a party to more questionable loans and foreclosures than any other and yet has received virtually no attention in the academic literature. Mortgage Electronic Registration Systems, Inc., commonly referred to as “MERS,” is the recorded owner of over half of the nation’s residential mortgages. MERS operates a computer database designed to track servicing and ownership rights of mortgage loans anywhere in the United States. But, it also acts as a proxy for the real parties in interest in county land title records. Most importantly, MERS is also filing foreclosure lawsuits on behalf of financiers against hundreds of thousands of American families. This Article explores the legal and public policy foundations of this odd, but extremely powerful, company that is so attached to America’s financial destiny. It begins with a brief explanation of the origins of the county real property recording systems and the law governing real property liens. Then, it explains how MERS works, why mortgage bankers created the company, and what MERS has done to transform the underlying assumptions of state real property recording law. Next, it explores controversial doctrinal issues confronting MERS and the companies that have relied on it, including (1) whether MERS actually has standing to bring foreclosure actions; (2) whether MERS should be considered a debt collector under the federal Fair Debt Collection Practices Act; and (3) whether loans recorded in MERS’ name should have priority in various collateral competitions under state law and the federal bankruptcy code. The article culminates in a discussion of MERS’ culpability in fostering the mortgage foreclosure crisis and what the long term effects of privatized land title records will have on our public information infrastructure. The Article concludes by considers whether the mortgage banking industry, in creating and embracing MERS, has subverted the democratic governance of the nation’s real property recording system.

Mortgage, Electronic Registration, Recording, Priority, MERS, Predatory Lending, Foreclosure, debt collection, Fair Debt Collection Practices Act, standing

Abstract:
A heated national debate has developed over whether one type of high-cost predatory lender, commonly known as "payday lenders," are targeting financially vulnerable military families and whether the law protects them from such predation. Writing within the relatively new interdisciplinary "law and geography" movement, this article provides geographic evidence that payday lenders do aggressively target American military personnel, irrespective of most forms of legal regulation. This paper first provides a comprehensive introduction to payday lending business practices and to the financial vulnerability of military personnel. In conducting our empirical research, we examined 20 states, 1,516 counties, 13,253 ZIP codes, nearly 15,000 payday lenders, and 109 military bases. We consistently found high concentrations of payday lending businesses in counties, zip codes, and neighborhoods in close proximity to military bases. Our observations were controlled by comparing payday lender densities in military areas to statewide averages and also by comparing payday lender locations to bank locations. Of the twenty states involved, the only legal strategy which prevented payday lender targeting of military personnel was New York's aggressive enforcement of civil and criminal usury law. Going beyond the debate over predatory lending to military personnel, our research provides a realist check on pure legal reasoning and unfounded faith in current consumer protection rules.

Abstract:
A pitched battle is currently being waged for control of the American banking industry. For over a hundred years, the federal and state governments have maintained a complex, but relatively stable truce in their contest for power. At the beginning of our republic, state governments were the primary charterers and regulators of banks. In the wake of the Civil War, the National Bank Act created parity between federal and state banks, cementing the notion of a dual banking system that endured through the twentieth century. But in the past five years, the federal government has increasingly used its powers under the Supremacy Clause of the U.S. Constitution to grab new authority for federal banking regulators and for federally chartered depository institutions. A series of controversial federal regulations have preempted the application of state consumer protection laws directed at prevention of predatory lending by national banks and thrifts. The preempted state laws address a recent rash of fraudulent, deceptive, and unconscionable lending that is having a corrosive effect on minority communities, senior citizens, and the entire lower middle class. In a related move, federal banking regulators have also recently preempted the application of state law to independent contractors of national banks and thrifts. This essay explains the potentially far reaching impact of federal preemption of state regulation of independent contractors. If these determinations are upheld, thousands of businesses, including insurance agents, mortgage brokers, and automobile dealers, will be placed beyond state oversight - provided that they have agency relationships with a national bank or thrift. Moreover, this essay uses economic agency cost theory to explore the potential for mischief posed by placing bank and thrift agents beyond the reach of state government. In particular, I argue that bank and thrift agents, by their nature, have lower incentives to forego predatory lending than the depository institutions themselves. Given the limited resources of federal banking regulators and their primary focus on safety and soundness, I conclude that preemption of state regulation of bank and thrift agents is currently inadvisable.

predatory lending, loan, credit, debt, bankruptcy, Truth in Lending, Fair Debt Collection Practices, Equal Credit Opportunity, fraud, deceptive trade, Comptroller, thrift, bank, preemption, national bank act

Abstract:
Since the inception of human civilization consumer credit has provided a paradoxically useful and dangerous social institution. Each civilization has attempted to strike the right balance between protecting vulnerable members of society and facilitating socially useful debt. Most policy strategies for addressing the harmful aspects of consumer credit can be classified into a handful of categories: debtor amnesty, contract restrictions, selective protection, self-help free markets, charitable lending, and cooperative lending. Historical case studies exploring each of these strategies are presented. During its history the United States has imported and now continues to use variations on each of these strategies, plus one more. Credit disclosure rules, such as those found in the Truth in Lending Act, are from a historical perspective a relatively new innovation. The Truth in Lending Act was possible because it sounds in a relatively rare ideological overlap shared by those tending to advocate free markets and those tending to advocate government regulation. Nevertheless, Truth in Lending has failed to live up to its theoretical promise. For disclosure law to evolve into a more meaningful consumer protection, it must be reoriented toward promoting consumer understanding of credit price and terms, rather than the current accurate but often unheeded descriptions.

Truth, Lending, credit, debt, consumer, usury, disclosure, market, regulation, bankruptcy, amnesty, charity, bank, banking, price, transparency

Abstract:
In the past two decades the American home mortgage lending market has seen the development of controversial loans which consumer advocates, federal regulators, as well as many lenders have come to call "predatory." Critics of these businesses complain that lenders make loans borrowers cannot repay in anticipation of foreclosing on the family home. Responding to the complaints of their constituents, dozens of state legislatures and local governments have passed statutes and ordinances attempting to prohibit unfair contractual terms. At the same time federal banking regulators have moved to preempt these state laws, placing state and federal leaders on a collision course. Moreover, Congress is actively considering the elimination of all state mortgage lending regulations. This article reviews predatory lending contractual terms; discusses current and past social policy focusing on the American tradition of combined federal and state regulation; and, explores potential unintended consequences from federal preemption of state law. Finally, it suggests current efforts to preempt state and local predatory lending law have more to do with a deregulatory agenda than with regulating commercial activity at the most efficient level of government.

federalism, predatory, lending, loan, consumer, credit, debt, mortgage, preemption

Abstract:
Following the Great Depression, the federal government was the primary architect of the secondary residential mortgage market. The foremost pillars of this federal involvement were the twin government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. In the public debate over the struggling American financial system, opponents of federal involvement in housing finance have persisted in asserting that Fannie Mae and Freddie Mac caused the home foreclosure crisis. This symposium essay attempts to provide a brief rebuttal to this surprisingly persistent oversimplification. It begins with historical context necessary for understanding the debate over the GSEs’ responsibility. Next it explains the development of the private, sub-prime home mortgage market, recounts the radical change in the GSEs’ investment and underwriting policies in the mid-2000s, and traces the events leading to the collapse and nationalization of the two companies. Although the GSEs began to engage in unacceptably risky investment decisions, the two companies were only one part of a larger more complex commercial and regulatory pattern that also included monetary policy, regulatory dereliction, judicial passivity, ill-advised borrowing, and reckless (or dishonest) brokering, appraising, lending, servicing, and securitizing by private financial services companies.

Fannie Mae, Freddie Mac, subprime, mortgage, predatory, foreclosure, Alt-A, GSE

Abstract:
The new legislation attempting to prevent predatory lending to military service members went into effect in October 2007. While the new rules are a step in the right direction, regulations adopted by the Pentagon do not apply the new usury limit to either banks in general or credit cards in particular. It is unclear whether the thousands of payday lender locations doing business near the gates of military bases will close up shop, offer loans within the legal limit, or search for loopholes in the new regulations that would allow business as usual. For those who hope for civilized limits on commerce with service members and veterans, it remains to be seen whether Congress has succeeded in removing the target from the backs of our nation's military community.

Abstract:
Although for millennia the Western tradition looked upon the taking of interest with a jaundiced eye, consumer credit has become an integral and accepted part of the American economy. Nevertheless, throughout the twentieth century federal and state government institutions have struggled with the dual needs of facilitating creditors' business ventures and simultaneously protecting vulnerable debtors from onerous obligations.