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The Siren's Call of Substantive Predatory Lending Reform: Why Procedural Reform Modeled on Workers' Compensation Will Improve and Stabilize the Mortgage Industry

Abusive lending practices clearly played a significant role in the expansion of exotic mortgage products and these loans’ subsequent high rates of default and foreclosure. The current crisis in the mortgage market partially arose because both the private and public enforcement of predatory lending laws failed to discourage lenders and brokers from making predatory loans. Securitization of loans kept the lenders and brokers from bearing any risk of predatory loans defaulting. The federal laws provided weak substantive limits, but even weaker procedures for enforcement, while preempting state laws. Currently, victims of predatory lending have little reason to attempt to bring a private suit, while the public enforcement has varied from ineffective to nonexistent. Any reform of predatory lending laws must first address the lack of adequate enforcement mechanisms. This article argues that the current state of predatory lending regulation in the home mortgage market resembles the situation that led to the creation of a workers’ compensation system. Like the lack of compensation to employees prior to the advent of workers’ compensation, victims of predatory lending today have no guarantee of compensation. Similar to employers’ before workers’ compensation, the lenders and brokers face little liability but when lawsuits are successful they can lead to large, unpredictable damages awards. A compromise between the competing groups could create effective predatory lending regulation. Combining current licensing proposals with a compensation fund and simplified administrative adjudication will both stabilize and reform the mortgage industry. Adopting such a system will benefit all parties. Victims of predatory lending will be more likely to bring claims and win compensation, while brokers and lenders will be able to better predict their liability. Investors who buy mortgage-backed securities will be assured that their liability from predatory lending will be limited. Such reforms will be more efficient and effective because guaranteed compensation and more informal dispute resolution will encourage the victim of predatory lending to come out from the shadows of the subprime mortgage market. At the same time, it will encourage investors to buy mortgage-backed securities once again.