Consumer groups are complaining that the proposed Federal Reserve rules for subprime mortgages do not contain assignee liability provisions. Under such provisions, securities holders who invest in predatory mortgages could be sued by borrowers who were treated improperly.
As I have said in other venues, my thinking on subprime has evolved considerably over the past nine months. But I continue to think assignee liability it a really, really bad idea. Securities holders already have the right incentives: predatory loans that blow up harm the investors, and so they want to avoid them. Investors are learning this very painfully right now.
At the same time, securities markets are having a difficult time pricing MBS right now--participants at the moment have little confidence that they understand embedded risk, even in securities that are very safe. Assignee liability would add another layer of uncertainty to markets, and could cause them to seize up even more. It is an example where a "cure" could be worse than the underlying disease.
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Does the assignee (lender) have any lawful obligation to do due diligence on a loan purchase.
Specifically to make sure that the borrower is able to repay the loan?
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