PT - JOURNAL ARTICLE AU - Stephen F.J. Ornstein AU - David A. Tallman AU - John P. Holahan TI - Predatory Lending and the Secondary Market AID - 10.3905/jsf.2006.661446 DP - 2006 Oct 31 TA - The Journal of Structured Finance PG - 54--64 VI - 12 IP - 3 4099 - https://pm-research.com/content/12/3/54.short 4100 - https://pm-research.com/content/12/3/54.full AB - The advent of securitization has significantly increased the availability of lower-cost subprime home equity mortgage credit to consumers having flawed credit histories, and who do not meet the underwriting standards of prime lenders. Nevertheless, the proliferation of legitimate, beneficial subprime lending has unfortunately been accompanied by some limited instances of abusive lending, which has prompted federal, state, and local governments to enact burdensome, if not draconian, anti-predatory lending measures. Because originators of these loans often do not have significant resources and may not stay in business for long, legislators have focused on ensuring that consumers have redress against secondary-market purchasers of such loans. Accordingly, the purchase of subprime mortgage loans has opened the door to secondary-market investors being held liable for abusive and predatory lending practices under a panoply of stringent federal and state consumer compliance laws. In this article, the authors discuss the primary federal laws that are sued to combat predatory lending practices, such as the Truth-in-Lending Act and the Home Ownership and Equity Protection Act of 1994, and also highlight the salient provisions in certain state and local anti-predatory lending measures that have notable consequences for both originators and secondary-market participants alike. Violations of these laws could result in substantial monetary liability as well as, in certain cases, rescission of the mortgage transaction. In an effort to shield themselves from possible liability, unwinding of the transaction, and reputational harm, in many instances, an array of participants, including purchasers, financers, and underwriters are performing an increasing amount of due diligence in the secondary market. The authors close with a suggested anti-predatory lending due diligence program that could be adopted by these secondary-market participants.TOPICS: MBS and residential mortgage loans, information providers/credit ratings