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					CLAIMS AGAINST
BAD BROKERS
Pursuing the Predators


                                                                                           on November 15, 2007. The legislation
                                                                                           would require that loans “benefit the
                                                                                           borrower” and that residential loan
                                                                                           refinancing result in a “net tangible
                                                                                           benefit” for the consumer. Section 201
                                                                                           of the proposed bill states that a residential
                                                                                           mortgage loan “shall be based on
                                                                                           consideration of the consumer’s credit
                                                                                           history, current income, expected income
                                                                                           the consumer is reasonably assured of
                Gary Berne                                    Yoona Park                   receiving, current obligations, debt-to-
                                                                                           income ratio, employment status, and
                                                                                           other financial resources other than the
                                                                                           consumer’s equity in the dwelling or real
By Gary Berne, OTLA President’s Club,         interest rates and better terms.             property that secures repayment of the
and Yoona Park                                Additionally, brokers have convinced
                                              borrowers to enter into loans they could
                                                                                             One idea that has gained
T    he Oregon Mortgage Broker Act
     prohibits untrue statements and
material omissions by mortgage bankers
                                              not repay when adjustable rates reset
                                              upwards. Motivated by yield spread
                                              premiums from lenders, brokers also have
                                                                                           traction is the codification
and brokers and further prohibits             sold borrowers high interest loans when
                                                                                           of a suitability standard
schemes that would operate as a fraud or      they would have qualified for lower          that would apply to
deceit. With the current crisis in mortgage   rates.
loans, the Act now has unanticipated                                                       mortgage lenders and
significance. However, there is little case    Suitability standards                        brokers.
law interpreting the Act and few written         One idea that has gained traction is
industry standards to guide                   the codification of a suitability standard,
compliance.                                   similar to that applicable to securities     loan.” Proponents of a federal suitability
   Fraudulent mortgage sales practices        brokers, that would apply to mortgage        standard also have suggested other
have injured consumers and helped to          lenders and brokers. On a federal level,     elements that might be included in a
feed the collapse in mortgage-based           there are incipient attempts to promulgate   suitability standard of care, including the
investment products that threatens the        suitability standards. House Bill 3195       number of dependents, borrower’s age,
economy. For example, borrowers have          (“The Mortgage Reform and Anti-              anticipated expenses, and objectives in
been induced to enter into sub-prime          Predatory Lending Act of 2007”), which       obtaining the loan.
mortgages when their credit ratings           proposes to modify sections of the federal                                     See Brokers p 30
qualified them for loans with lower           Truth in Lending Act, passed the House
                                                                                                                  Trial Lawyer • Winter 2008   29
Brokers
Continued from p 29                                 In the federal securities context, an       for brokers, but, in the mortgage industry,
Too little, too late                            injured plaintiff may bring a suitability       such a standard might cause lenders to
    The Federal Reserve Board has               claim under Rule 10b-5, promulgated             become overly cautious, thereby violating
proposed changes to Regulation Z, which         under Section 10(b) the Securities              the “letter of federal anti-discrimination
implements the Truth in Lending Act.            Exchange Act of 1934. The basis of a            laws and the spirit of community
For “higher-priced mortgage loans” the          suitability claim is that the broker has        reinvestment laws.”
proposed rule would prohibit creditors          omitted telling the investor that his or
from extending credit without delving           her recommendation was unsuitable for           Protecting consumers
into borrowers’ ability to repay and            the investor’s interests. A suitability claim       Putting aside the question of why
require creditors to verify income and          also can be based on negligence, although       caution in large consumer financial
assets when making a loan. Consumer             that has become a complicated issue in          transactions would be harmful, this
groups have characterized the Fed’s             Oregon.                                         argument overlooks the fact that a
action as “too little, too late.”                                                               primary purpose of the federal securities
    In the securities context, the standard     The brokers                                     laws is the maintenance of free and open
of care to determine whether a security             The mortgage and securities industries      capital markets that encourage suitable
is “suitable” is set forth in NYSE Rule         are similar in that brokers hold themselves     investments after full disclosure.
405 (the know-your-customer rule) and           out as professionals who will find the           Certainly, the current predatory lending
the Financial Industry Regulatory               “best” product suitable for the consumer’s      crisis serves as a lesson about the harmful
Authority (FINRA) Rules of Fair Practice.       objectives and needs. The drafters of the       consequences that can arise from
FINRA Rule 2301 states that the broker          mortgage broker statute acknowledged            unregulated markets. Fair lending
should have reasonable grounds for              this similarity when they lifted parts of       policies developed during the 60s and
believing that a stock recommendation           the mortgage broker statute directly from       70s were meant to ensure that loans were
is suitable for the customer, based upon        the securities statute. One category of         extended to all qualifying borrowers and
information concerning the customer’s           problems reported by the Financial Fraud        to prevent lending bias due to factors
financial status, tax status, investment         Section of the Oregon Justice Department        such as race, age, and disability. The
objectives, etc. Rule 405 requires “due         in its testimony before the Legislature         policies were not intended to shield the
diligence,” and suggests items to be            was mortgage brokers promising to get           mortgage industry from liability for
included in a New Account Form, such            loans for consumers with bad credit or          unscrupulous lending practices.
as age, occupation, estimated income and        who lacked the income to qualify for the            The mortgage industry itself should
net worth, marital status, number of            loan, or in other words, promising loans        embrace formal suitability standards as a
dependents, and investment objectives.          unsuitable for the borrower.                    way to legitimize the industry in the face
                                                    The mortgage industry will fight a           of ongoing scandal. In the meantime,
State law                                       suitability claim on the basis that there       Oregon practitioners should consider
    Ideally, the Oregon Legislature will        are no widely accepted written standards        alleging a suitability claim under the
clarify the situation for consumers and         from the Legislature or regulatory              mortgage broker statute as one recourse
the industry by enacting a written              authorities. However, the lack of a             against unethical mortgage brokers and
standard for the mortgage industry,             written standard does not necessarily           lenders. While the claim will be hotly
although lawmakers failed to do so              signify that there has been no misstatement     contested, the courts are the only recourse
during the recent (Feb. 2008) special           or material omission.                           until the Legislature takes further
session. However, the similarities between          The Mortgage Bankers Association            action.
the existing mortgage broker and                also has contended that the mortgage and
securities statutes give rise to the question   securities industries are not analogous.        Gary Berne and Yoona Park both practice
whether the mortgage broker statute             The MBA asserts that the federal                with Stoll Berne PC, where they concen-
already allows for suitability claims.          government has had a policy of making           trate on securities and consumer cases,
Section 59.925 of the Oregon Mortgage           as many loans available to as many viable       class actions and business litigation. Stoll
Brokers Act parallels the Oregon                borrowers as possible (citing the Fair          Berne is at 209 SW Oak St Ste 500,
Securities Laws, which in turn parallel         Housing Act, etc.), and that a suitability      Portland OR 97204. Phone is 503-227-
Rule 10b-5. Thus, the same type of              standard would impede that goal.                1600. Gary can be reached at gberne@
claims available under Rule 10b-5 against       According to the MBA, the only                  ssbls.com. Yoona can be contacted at
securities brokers may be available against     consequence of a suitability standard in        ypark@ssbls.com.
mortgage brokers and lenders.                   the securities industry is lost commissions
30   Trial Lawyer • Winter 2008

				
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