To Assign, or Not to Assign: Rethinking Assignee Liability as a Solution to the Subprime Mortgage Crisis

Abstract

Following the subprime mortgage crash of 2007, calls for regulation of subprime lending reached fever pitch. Assignee liability or abrogation of the “holder in due course” doctrine, emerged as a consistent favorite. Praised by academics and adopted by many states, assignee liability allowed borrowers to bring claims against the trust holding their loan, as well as the originator. This provided a remedy for the homeowner when the originator disappeared and would, in theory, force the banks to police the originators. Regulators believed that by making assignees liable they would prevent some of the risk shifting that made predatory lending possible. This Note offers a novel empirical rebuke of assignee liability. The use of propensity score matching creates a more robust picture of subprime lending than did previous studies limited to cross-border controls. The results suggest that assignee liability laws may be promoting a false sense of security by appearing to eliminate predatory lending, but not doing so in fact. This Article argues that the failure of assignee liability is a failure of conception. In an attempt to remedy the effects of subprime lending, the quest became one of compensation for the victims, rather than deterrence of the practice. The result is a regime that adds a surcharge to the cost of making legitimate subprime loans, limiting the subprime market without preventing predatory practices. Solutions like those used against insider trading—putting the good of the market ahead of compensation for the individuals—provide a more sustainable approach. It is least cost avoidance, investor confidence, and deterrence, not compensation, that must form the basis of any solution.