A Comment on Investor Liability and H.R. 3915

by Jeff Sovern

I have not yet had time to study the new predatory lending bill passed by the House, H.R. 3915, which others have blogged about here and here, among other places, and so I am still forming my views on it.  Still, one thing that strikes me about the rationale for the bill is the stated need to limit the remedies  against holders of the troublesome loans.  The fear is that investors would no longer purchase loans if by doing so they were exposed to liability and so imposing liability would destroy, or at least damage, the secondary market in such loans. 

It may be that that fear is entirely justified for reasons of which I am unaware.  But it is interesting that similar arguments were made back when state legislatures, courts, and the FTC abrogated the holder in due course defense in certain consumer loans back in the sixties and seventies. See, e.g., Banta, Negotiability in Consumer Sales: The Need for Further Study, 53 Neb. L. Rev. 195, 196-97 (1974) ("many banking and financial institutions argue that if they were subject to consumer defenses, consumer credit might vanish or become so expensive as to be prohibitive."); Jordan & Warren, The Uniform Consumer Credit Code, 68 Colum. L. Rev. 387, 436 (1968) ("The reason for preferring the [lender] over the [buyer] is not that he is in any better moral position but because a holding in his favor should further the flow of commercial paper and stimulate investment."); Comment, Implied Consumer Remedy Under FTC Trade Regulation Rule--Coup de Grace Dealt Holder in Due Course?, 125 U. Pa. L. Rev. 125 U.Pa. L. Rev. 876, 880 (1977) ("The policy justification for this allocation of risk is that it promotes the availability of credit essential to healthy commerce."); see generally Jeff Sovern, Paradigm and Paradox in New York Consumer Credit Law: After Holder in Due Course, 6 Annual Rev. Banking L. 119 (1987).  Of course abolition of the HDC doctrine did not end consumer credit, and while it is impossible to know whether consumer credit would have been cheaper if the HDC doctrine had persisted in such consumer transactions, it seems clear that whatever increase abrogation of the doctrine produced has not been crippling to consumer loans.  In addition, imposition of liability on lenders also serves an important policing function--something lenders are better equipped to carry out than consumers--by giving lenders an incentive to remove dishonest operators from the market by refusing to purchase obligations from them.  Perhaps the situation today is different from the situation back then, but it seems to me that once such claims have proven false in the past, the burden of proof is on those who make the claims again to explain why we should take them seriously.