Friday, October 24, 2008

Toxic Debt Holders in Due Course

I had the opportunity to hear Christopher Peterson (Utah) speak last week at Loyola (New Orleans) on Predatory Structured Finance. His talk on the causes of the subprime crisis encompassed one issue that was hotly contested in the last few years: the potential exposure of assignees of mortgages to defenses and claims of debtors arising out of the origination of the mortgages. It is at a basic point a classic holder in due course question. Kurt Eggert has discussed at length the defense-stripping effect of the hdc doctrine in the context of predatory lending. In a related vein, efforts by states to place liability on secondary market assignees of mortgage notes for violations of state predatory lending statutes were met with, charitably, strong resistance, as this Business Week article on the political struggles between the states and the federal government pre-crisis recounts.

In the end, the issue of assignee liability boils down to a bread and butter holder in due course/doctrine of bona fide purchase question. HDC status for secondary market assignees promotes liquidity to be sure. And, liquidity of subprime loans, that we certainly got. On the other hand, stripping of hdc status forces assignees/secondary market purchasers to exert more care over the practices of the origination market. As government turns to the reform stage of the crisis, one of the more interesting commercial paper questions will be whether to continue to insulate the secondary market from abuses at the origination level through application of principles of good faith purchase, or whether to move in the other direction, for example by extending the FTC HDC regulations to encompass all or a larger portion of mortgage loans.


Jason Kilborn said...

I have heard and read from a number of sources that the notes in the securitized pools often were/are not formally transferred until and unless a problem arose--in which case it was too late for the late transferee to establish HIDC status. My strong sense is that HIDC status is largely a red herring in this discussion, though I'd love to have more emprical (even anecdotal) data on this point.

Brooke Overby said...

My take on assignee liability from the materials regarding predatory lending (particularly financial institution lobbying documents)is that it is more a bfp policy point, than an actual "apply the hdc rules" point in which the hdc doctrine is being appealed to as the justification for insulating secondary market assignees. The main UCC hurdles in establishing hdc status in court under the current rules of the Code are negotiability of the mortgage note and holder status. There are some cases on that. The policy question is whether to simply get rid of it clearly ex ante(a la the FTC and HOEPA for a small number of loans) by statute, and to clearly place the risk of origination market abuses on the secondary market assignee.