"Predatory Structured Finance": Is it time for a new label within the lexicon of predatory lending?

by Christopher Peterson

Over the past five years commentators in the debate over subprime home mortgage lending have ironed out a standard list of practices and contract terms that serve as warning signs of "predatory lending." These terms and practices include high interest rates, high fees and closing costs, balloon payments, negative amortization, inflated appraisals, insurance packing, mandatory arbitration, unaffordable loans based on the value of collateral, rushed closings, multiple refinancing, abusive collection, prepayment penalties, and misleading or fraudulent disclosure. This list is both necessary and useful.

However, in a new article entitled "Predatory Structured Finance" (forthcoming in the Cardozo Law Review) I suggest that the concept of predatory lending has nevertheless been cast too narrowly.  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. 

The article includes a useful illustration (pictured above) of a typical subprime home mortgage securitization structure.  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.  Some of the institutions that sponsor and administer securitization of mortgage backed securities are complicit in predatory lending.  By encouraging, facilitating, and profiting from predatory loans, these financiers have themselves slipped into predation. In addition to transferring liability to the secondary market through assignment based rules (such as the Federal Trade Commission’s holder-notice rule or the Home Ownership and Equity Protection Act’s assignee liability provisions), courts and policy makers should explore common law imputed liability theories such as civil conspiracy, aiding and abetting, and joint venture.  Unlike assignee liability rules, these older common law theories can reach architects of predatory structured finance that never actually own predatory loans themselves.

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