Are Securitized Mortgages Subject to Usury Laws?

I’m normally loath to largely lift another post, but Adam Levitin at Credit Slips raises an interesting and potentially important question, and if I put it in Links, it would probably get less attention.

His argument is effectively the routes that allowed banks to evade state usury laws (a Supreme Court decision plus adept jurisdiction-shopping) may not extend to securitization trusts. And note this logic would apply to other types of securitizations, such as auto loans.

From Credit Slips:

Most institutional lenders in the United States are not subject to usury laws…..are debts held in securitized pools subject to usury laws?…

My belief is that securitized pools are subject to usury laws, unless usury laws are specifically preempted for the type of debt that is held. Legal title to securitized pools rests with state-law trusts. These trusts cannot, as far as I know, claim the benefits of federal preemption themselves. Their best hope is to shelter in the ability of the debtor’s originator or the securitization sponsor/depositor’s exemption from usury laws.

I don’t think this is a very good shelter, however. Usury was historically a personal defense, and when a debt is originated as part of an originate-to-distribute business model, letting the securitization trust shelter in the originator’s status allows for a type of usury laundering–the specific exemptions to usury law can then cover all takers from exempt entities.

Yves here, I love that expression, “usury laundering.” Back to the post:

Putting aside the question of whether usury laws themselves are good policy, once they are on the books, surely allowing the usury defense to transfer with the debt cannot be good policy given that it is plain on the face of a debt whether it is usurious. And more broadly, do federal preemption defenses apply to securitized pools of debts originated by national banks or federal thrifts? And what about affiliates (not operating subsidiaries) of national banks or federal thrifts, such as some major debt collection companies?

These aren’t mere academic questions. Securitization trusts hold around 60% of mortgage debt and 25% of other consumer debt. There’s no law directly on point, but if I’m correct, then usury could be raised as a viable defense to the collection of a sizable portion of consumer debt. And states would have pretty broad rein to regulate the collection of debts held by securitization trusts. Thoughts?

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  1. attempter

    This is good. Every idea for the arsenal. Even if existing governments might not be inclined to enforce the law at this time.

    At least at the state level, there might be some chance of government acting in the people’s interest.

    In the meantime, the usury theme should be propagated on the political front. Levitin put aside the question of whether usury laws are “good policy”, but they clearly are.

    Anything which can help reinstate in the public mind and in the law, in reknitting some kind of social contract, the ancient ideals of justice and fairness and morality, would indeed be a good policy.

    And this makes contect with America’s slumbering religious grassroots as well. There’s already an activist movement on this front:

    America needs to get back to its roots, dig down into the soil. Only there will we find the real nutrition, plant the real seed.

    Anti-usury as legality, yes. But even more, anti-usury as moral imperative. The banksters are existential criminals and parasites who must be utterly expunged.

    1. aet

      What does it matter whether or not “the government” wishes to “enforce the Law” or not: these arguments as to the Law of contracts and debts are made by private citizens and corps. before and to the Courts: which are still independent of the other branches of the Governments of the USA, are they not?

      Aaah, sweet Justice!

    2. DownSouth

      ► William Greider said (from article in The Nation attempter linked): “It may take several years to build momentum from the ground up for what people would recognize as true reform.”

      This is a message that George Goehl and Heather Booth, a couple of community organizers Bill Moyers interviewed last month, were also attempting to get across:

      GEORGE GOEHL: The one thing we have, our own political currency, is people. And people are ready to hit the streets. Today is a beginning of a much larger set of mobilizations that are going to take place all across the country. We’re just getting’ started.

      It takes time to mobilize and organize the masses.

      The cynics and pessimists are saying the battle is already over, and the people have lost.

      The optimists–the community organizers and people trying to bring about change–are saying the battle is just beginning.

      ► attempter said:

      Anything which can help reinstate in the public mind and in the law, in reknitting some kind of social contract, the ancient ideals of justice and fairness and morality, would indeed be a good policy.

      Again, this is an idea echoed by one of the community organizers:

      GEORGE GOEHL: What we’re trying to do is really organize around a set of ideas. And when we think a real successful movement would be more around an allegiance to ideas over party. And some of that’ll contain protests. But it’s really about a vision of what we want to create. Around a more fair and just economy. So, right now, I think a lot of the action is around banking reform. But I think we’re building the foundation for a big movement around an economy that serves us all.

      What should have become evident in the Krugman-Greenwald imbroglio is that Krugman and Gruber, with their pontifical proclamations, indeed see themselves as the high priests of the temple of orthodox economics. And we have to remember the religion they practice is pure alchemy, it’s about turning lead into gold, about turning greed and selfishness—always viewed as vices in, as attempter put it, “the ancient ideals of justice and fairness and morality”–into virtues.

      ► attempter said: “Anti-usury as legality, yes. But even more, anti-usury as moral imperative. The banksters are existential criminals and parasites who must be utterly expunged.”

      This reminds me of the exchange between Martin Luther and the Pope. Luther fired the first volley, including this:

      How comes it that we Germans must put up with such robbery and such extortion of our property at the hands of the pope?… If we justly hang thieves and behead robbers, why should we let Roman avarice go free? For he is the greatest thief and robber that has come or can come into the world, and all in the holy name of Christ and St. Peter! Who can longer endure it or keep silence?

      The Pope later sent his spokesman to Luther with a proposition that he would have the bull withdrawn if Luther would write the pope, denying malice in his assaults and presenting a reasonable case for reforms, to which Luther responded:

      But they See, which is called the Roman Curia, and of which neither thou nor any man can deny that is more corrupt than any Babylon or Sodom ever was, and which is, as far as I can see, characterized by a totally depraved, hopeless, and notorious wickedness—that See I have truly despised… The Roman Church has become the most licentious den of thieves, the most shameless of all brothels, the kingdom of sin, death, and hell… They err who ascribe to thee the right of interpreting Scripture, for under cover of thy name they seek to set up their own wickedness in the Church, and, alas, through them Satan has already made such headway under they predecessors. In short, believe none who exalt thee, believe those who humble thee…
      –Martin Luther, letter to the Pope, 1520

  2. bob

    One thing that would seem to complicate this argument is that the securities, according to my understanding, were deliberately set up across all states. This was sold as diversification at the time. If the trust is set up in Delaware and the mortgage is held by MERS in Nebraska, who has standing?

    Other than that, it is usury, plain and simple. I have wondered how long it would take for an army of trial lawyers to come charging into this space. Class action wet dream, all of the ‘money’ is already on the table.

    MERS was the beginning, but because of it size and scope it will not be allowed to fail. TBTF contract law.

    State AG’s have a very important role to play in all of this if they choose to.

    1. Siggy

      The State in which the property is sited has standing. Does matter where the corporations are sited, it’s where the property is that matters.

      1. bob

        My point, in that (very poorly worded) argument, was about the banking laws. The state banking laws, according to my limited knowledge, are usurped by federal banking laws on state to state transactions. The fed has been fighting the states on this point. The fed does not want the states to be able to regulate it. Yves brought this point up.

        Cuomo was ‘fighting’ this in NY, I haven’t heard what happened, but I don’t have much hope of anything real coming out of his office.

  3. Ina Pickle

    Bob, it isn’t standing — although I assume you just misspoke. It’s a question of venue and jurisdiction. But there are, in a great many states, venue and jurisdiction rules that permit you to get anyone who consciously comes into a state to do business with its citizens regardless of whether they can be “found” there. Service is always a matter: but if they are going to foreclose on the mortgage, they will have to come into the state asking for its help with the foreclosure, right? Availing yourself of the laws of a state is the very most basic of ways of subjecting yourself to its jurisdiction. I see no problem at all with getting them anywhere that they try to foreclose on a house.

    But what I thought when I read this argument is “NOW we’re cooking with gas!” When they created the frankenstein’s monster that is MERS, and gave it life, they left behind a whole bunch of laws that originated in a world where the mortgagor and the mortgagee looked each other in the eye, and where the real pieces of paper — with power and lives of their own — were kept in vaults. I can’t speak for other states, but in Texas, some of this seems highly problematic to me. But to date, it seemingly hasn’t been worth anyone’s while to think creatively enough about the problem. In short, “innovation” in fleecing people got ahead of the old, established state law regarding how these things get made and enforced.

    Class action indeed!

    But courts are skeptical of those. People might do better with a state-by-state tool kit of the right arguments to make and documents to demand if they are foreclosed. If every single homeowner just pushed their rights to the very limit under the contract, and forced each and every lender to produce every single piece of paper to which the mortgagor is entitled, it would severely hamper the system. That’s my thought.

    1. bob

      IANAL, so yes, I probably mis-spoke, or spoke out of ignorance.

      I spent a lot of time in those local government vaults and record rooms with some fossil of a person eyeballing my every move. They will not go quietly, not sure if they ever went anywhere really.

  4. Siggy

    If you want to defend against a MERS filed foreclosure, go to court and demand that they produce the loan and mortgage/trust document. There is a very high probability that there will not be a filing for the assumption of the trustee position. Several judges have tossed filings for that reason.

    As to folks in the county court house. You got to love em, they are doing what this country used to be all about, property rights and due process.

    1. bob

      County court houses are where the details get worked on, to the hundredth of an inch.

      My background is in civil engineering and utilities construction. Some of the older records were artwork, all drafted by hand 100 years ago. There is no database that can claim that kind of detailed resolution.

      A lot of newer jobs were done with GPS based grid systems implied. GPS has a very big problem with very small details. A lot of the problem can be traced to the assumption of GPS of not a round earth, but of as a series of flat polygons.

      The first thing I would do on those jobs was to go to the court house and get copies of the original plans for the road/area. The best record keepers were rightly paranoid about letting the plans leave the records room. They could only leave with a pre-authorized printing company after the forms requesting them were filed in triplicate and then signed by 4 other people.

      Getting records into the room was just as difficult after the project was complete.

      The inefficiency was beautiful.

  5. Dan Edstrom

    Don’t forget about the REMIC designation. I don’t know what (if anything) that means in this context (probably nothing).

    The next thing I would think about is “who is the actual creditor”? or who is the “real and indispensible party”?

    In my case the Trustee (US Bank) is “owner of mortgage loans on behalf of issuing entity for the benefit of holders of certificates”

    So in my case legal title is held (allegedly) by US Bank but the real owner is the issuing entity (the Trust) “for the benefit of holders of certificates”.

    It is also interesting that both MERS and the Trustee hold no pecuniary interest in the loan(s). That would mean (to me) that neither is a creditor. This would make the creditor the Trust (as the article seems to state) and/or the “holders of certificates”.

    It seems to me that if you are going after usury you would want to name the Trust as well as the unknown John Does who are the “holders of certificates”. I would imagine they are not exempt from usury laws.

    Disclaimer: I am not an attorney and this is not legal advice. This is for educational and informational purposes only.

    Dan Edstrom
    dmedstrom “at”

  6. Jesse

    I have to admit I am struggling a bit with this one, at least as it relates to mortgage debt.

    Is there any reasonable indication that mortgage debt is near levels that might be described as usury? Even during the high interest rate times of the Volcker period, when I bought my first house for a thirty year arm at 12%.

    Isn’t this more of a consumer debt issue? Or perhaps second lien mortgages? Is this what we are talking about?

    And if so, I am struggling again with how bundling the debt that is exempt from usury law in the first place, because of the jurisdiction of origin (which is really questionable practice in my mind, if that is what is being questioned.)

    But I admit I am not knowledgable or current in the laws of the US in this area.

  7. Psittakos

    I don’t really understand this argument. Have mortgage lenders been originating loans with terms that violate the usury laws of the states in which the properties are situated?

    There may be something here, but I would like to see examples of what we’re talking about.

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