House Bill Would Impose Liability on Mortgage-Backed Securitizers

A comprehensive bill to combat abuses in the mortgage lending market and provide basic protections to mortgage consumers and investors has been introduced by House Financial Services Chair Barney Frank. The bill, H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act, would, among others things, attach limited liability to secondary market securitizers who package and sell mortgage-backed securities in home mortgage loans outside of standards enunciated in the bill. However, individual investors in these securities would not be liable.

During committee hearings on HR 3915, Federal Reserve Board Governor Randall Kroszner cautioned that any legislation in this area must not have a detrimental impact on the ability of lenders to securitize loans. For their part, securities industry groups testified that liability in the secondary market for actions of brokers or originators is inappropriate.

Section 204 of the Act provides that, for loans violating the minimum standards for reasonable ability to repay and net tangible benefits, a consumer has an individual cause of action against securitizers for rescission of the loan and the consumer’s costs. But a safe harbor in the bill states that securitizers will not be liable for a loan that violates the minimum standards if they conform the loan to the minimum standards within 90 days of receiving notice from the consumer or have a policy against buying mortgage loans that are not qualified mortgages and exercise due diligence to adhere to such policy through an adequate and consistently applied sampling procedure. In addition, liability will not apply to pools of loans or investors in pools of loans.

While securities industry groups believe that liability for the secondary market for actions of brokers or originators is inappropriate, they do appreciate that the bill limits the exposure of the secondary market investors and trusts. The bill also limits the damages that a securitizer of the trust has should the worst-case scenario arise. The views of the Securities Industry and Financial Markets Association (SIFMA) and the American Securitization Forum were delivered by SIFMA CEO Marc Lackritz.

The industry asked the committee to ensure that the safe harbor is made preferable to rescission by clarifying that the 90-day cure period starts from the time the securitizer receives the claim notice either directly from the borrower or indirectly through the servicer or other third party. The bill should also affirmatively state that consumers lose the right to rescission if they reject a qualifying offer to cure. Moreover, borrowers should not have the right to rescind a loan that they procured through fraud or misrepresentation.

One of the elements of the safe harbor provides that the securitizer must exercise due diligence based on a sample of loans to make sure that the loans are qualified mortgages. Concerned that finding one ineligible loan would cause the safe harbor to evaporate, the groups suggested that the bill clarify that the exercise of commercially reasonable due diligence based on a sample of loans is intended to prevent the securitizer from knowingly purchasing or taking assignment of a pool of mortgages as to which a material portion of such mortgages are not qualifying mortgages.