House Passes Bill Imposing Liability on Mortgage-Backed Securities

A comprehensive bill to combat abuses in the mortgage lending market and provide basic protections to mortgage consumers and investors has passed the House by a vote of 291-127. Introduced by House Financial Services Chair Barney Frank. The Mortgage Reform and Anti-Predatory Lending Act, HR 3915, 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.

The bill 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.

The House committee report, 110-441, noted that concerns initially surfaced when lenders to two leveraged hedge funds demanded additional security as collateral against the hedge funds' subprime-backed investments. The subsequent closure of these hedge funds put pressure on other market participants to reprice similar securities. The general threat of such repricing of subprime mortgage risk subsequently led to the present conditions largely for one reason: No credit provider, bond dealer, or investor knows the extent to which other parties are exposed to subprime residential mortgage-backed securities.