Do you believe that there will be a flood of lawsuits after October 3rd? Assuming not, why do you think secondary market purchasers are going to be so risk averse?

I don’t think there’s going to be a flood of lawsuits right after October 3rd. I think the market will probably look a lot like it does today, which is generally a performing market. People don’t tend to file lawsuits for TILA disclosure violations when they’re happy with their loan. That’s a given. There haven’t been a whole lot of them recently. But if there’s a point in time where loans are not performing as well, I think you would see more. Before I went to the CFPB, I worked with another firm in Washington D.C. and I did a lot of litigation in this space, most of it class-action litigation on issues like TILA and RESPA. Class-action lawyers are not necessarily out there defending someone who is going through a foreclosure. In a lot of cases—and this may just be my jaded viewpoint shining through—they are looking for a payday and looking to basically file a lawsuit, find a class rep, find a violation that can be tried on a class-wide basis and file a lawsuit. There are limitations on TILA that make TILA less common than something like RESPA Section 8, where you get three times the amount of the settlement service for each kickback. Here you have a million dollar cap plus fees and costs. But in my opinion, something like the co-op issue is a good example, where you have an entire class of transactions that is either covered or it’s not, and the market has gone in a certain direction because they think that’s what the bureau wants them to do, even though if you really looked at state law, it may say a cooperative share is personal property, not real property; therefore, it’s not covered. I could see someone filing a class-action on that theory, saying that there’s a violation of the TILA disclosure rules because they used the wrong form and trying it on a class-wide basis, and maybe even winning. I think there’s a risk of lawsuits like that. There’s also just the general risk of liability. In other context, if there’s a market downturn, lawsuits like that may gain traction. I think we all hope the market doesn’t take a turn for the worse, but it could. If you’re an investor who’s planning on holding this loan for X number of years, you don’t have a crystal ball and you’re not willing to take on the risk. You simply don’t want someone else’s problem to become yours.

Answered By: Andy Arculin