Home lenders often say the biggest problem with state anti-predator measures is the assignee liability clauses, which hold loan purchasers accountable for the misdeeds of originators.
Lenders have argued that if they could get a uniform federal standard without such a clause, business would return to normal.
But in recent years the opposite has proved to be the case. A tough, if little-discussed, assignee liability provision in federal anti-predator law has been used to launch a series of lawsuits against lenders.
Next week U.S. Bank plans to file agreements with courts in Minneapolis and Chicago to settle class actions in which borrowers in about 20 states say they were overcharged on about 13,000 home equity loans.
The U.S. Bancorp unit did not make the loans. It acquired them in 1998 and 1999 from a unit of FirstPlus Financial Corp., which went bankrupt in March 1999.
The suits arose from a provision in the Home Ownership and Equity Protection Act that was designed to encourage the industry to police itself. If a home equity loan's origination fee is more than 8% of the loan amount and higher than the limit in the state in which it was made, the borrower can sue any holder of the loan - even those that bought it in the secondary market.
Richard B. Solum, a partner with Dorsey & Whitney LP in Minneapolis who represents U.S. Bank, said Tuesday that it has agreed to pay about half of the Minnesota settlement, in which the plaintiffs would receive $10 million to $20 million. The rest would be paid by other parties he would not identify, except to say they were "in the title chain."
The settlement figure is an estimate, because no one has been able to figure out how much each borrower would get, Mr. Solum said. The amount each borrower would receive would depend on the origination fee for the loan in question and the limit in the borrower's state.
However, he said the 12,000 to 13,000 borrowers in the suit, which was consolidated with other class actions in about 20 states, would each get between $500 and $7,000. (The Minneapolis Star-Tribune first reported the agreement Sunday.)
Mr. Solum also said he had not estimated what U.S. Bank might have to pay in the Illinois suit, which involves about 1,000 borrowers. However, since that state's law governing origination fees is stricter, the borrowers should get a larger settlement, he said.
The agreements would not be approved until September or October at the earliest, he said.
U.S. Bank, which Mr. Solum said started fighting the suits shortly after FirstPlus went bankrupt, is not the only lender defending itself against litigation related to the federal assignee liability provision.
Last month the Fayetteville Observer reported a North Carolina suit against General Motors Corp.'s Residential Funding Corp. and FirstPlus over loans they purchased from another defunct lender, Eagle Capital.
Another industry lawyer, who did not want to be identified, said there are several other suits like these across the country.
Mr. Solum said the litigation contained a number of lessons for U.S. Bank and others that acquire loans through mergers or in the secondary market. The first lesson: Lenders will have to do more due diligence when they acquire loans.
When U.S. Bank evaluated the FirstPlus loans, it did not look at the origination fees FirstPlus was charging, he said.
"A lot of the loans had origination fees" that exceeded various state limits, but "U.S. Bank never got any of that," because "it bought them on the basis of yield and Fair Isaac & Co. scores," he said. "People never looked at the up-front origination fee. You have to go back in the loan file and dig up the HUD-1" settlement form.
"I think most of the buyers back then were relying on reps and warranties" from FirstPlus, Mr. Solum said. But that does not protect the buyer if the seller goes bankrupt.
Which brings him to his next point: Know your seller well. "If you're a big financial institution" buying loans, "you have to be very comfortable that the seller is financially responsible."
Another problem is that home equity loans are more likely to have higher - or exorbitant - origination fees, because they are typically smaller than other types of mortgages, he said.
All of the lawsuits surrounding second mortgages in recent years have caused lenders to pay more attention not only to the federal law but also to the state laws it can refer to, Mr. Solum said.
"For buyers, this probably wasn't subject to as much focus a couple years after HOEPA was enacted as it is today," he said. "You have to check every state law."
Another option: just stay out of the secondary market for home equity loans.
"I am confident U.S. Bank is not buying them anymore," Mr. Solum said.
