After starting out as a civil rights lawyer, Kathleen Engel became interested in predatory lending in the late 1990s while working as a law professor in Cleveland. As a result, she was among the few academic researchers investigating subprime lending before the boom – and she’s been studying it all through the bust. Now a professor at Suffolk University Law School, she’s just released a new book, The Subprime Virus, with co-author Patricia McCoy (now at the Consumer Financial Protection Bureau). The book explores how subprime lending got so big, and the attempts by regulators to prevent another crash.
Kathleen Engel
Title: Associate Dean for Intellectual Life and Professor of Law, Suffolk University Law School; Boston
Age: 51
Experience: 8 years practicing law, 15 years as law professor
Q: What led to your interest in subprime?
A: [Before moving to Cleveland in the mid-1990s] in Boston I had a Civil Rights practice with Burnham & Hines…during that period of time, there was a lot of talk about red-lining, and I began to see credit as a civil rights issue. Part of it was just thinking about it in terms of race and sex, because there was some evidence of discrimination. But also just more generally – what was the right to quality credit? Of access to credit? At the same time, Cleveland was really the epicenter of predatory lending…mortgage brokers would go door to door, trying to sell people credit. And I think there was an issue of experience. If you’ve been denied credit historically, you don’t know how to shop for credit. People would think they were ineligible for credit, suddenly somebody shows up and says, ‘Oh, I can give you credit,’ you may well think nobody else is going to give you the credit, and so you go with what’s standing at the front door… This kind of predatory lending using brokers was fringe, [but] it started to become more mainstream as people saw the kind of money that could be made, particularly people on Wall Street.…Every investment bank owned some type of [subprime] lender or had a very strong business relationship with some type of lender.
Q: Was that something that was apparent to you when you were first looking into this?
A: We believed and still believe that the best way to curtail abusive lending – lending not based upon people’s ability to repay – was to hold Wall Street responsible. So if the trusts got hit when a lender engaged in wrongdoing or broke the law in some way, what would happen is that the secondary market would police the lenders. That happens all the time, that we use the market to perform policing functions. It’s a very efficient way to do things. And at that time we just didn’t know how much Wall Street actually knew. Our feeling was mostly that, regardless of what they knew they were in the best position to police. Now what’s come out, with the crisis and investor lawsuits and investigations, is that Wall Street knew exactly what they were doing – you see it in things like Goldman Sachs betting against the very bonds they were creating. So now it’s a much more serious situation for Wall Street, because as soon as there’s evidence that they knew what was going on, then they become complicit. And I think that the next shoe to drop – and I kind of think it’s like octopus shoes at this point – is going to be the liability of the big banks for engaging in joint ventures with lenders to make unaffordable and illegal loans. So I think we have a whole other potential source of liability that hasn’t emerged yet.
Q: Who would be the litigant in such a suit?
A: Consumers. The states. Already Massachusetts has settled two big claims [with investment banks]…and those were based on a theory that the investment banks had aided and abetted unfair lending…. [Y]ou don’t want to bring a frivolous lawsuit and say ‘The banks are responsible,’ unless you think you’re going to be able to get that evidence, and now we do have that evidence out there. So I think this door has been opened much wider. And that there’s going to be litigation.
Q: What are you researching now?
A: Well, one of the things I’m looking at is this question of investment bank liability, and the possibility that they could be liable for their participation in the lending decisions. And also the possibility that investors could suffer additional losses if consumer suits are successful. I didn’t coin this phrase, somebody else did, but if you think of it as a lending food chain – broker, lender, investment bank, investor – it’s possible that the investors could experience losses based on the consumer’s claims because of the bad record keeping that the investment banks and the trusts did. Generally, these deals are structured so that the investors would not experience losses as a result of litigation. But from my review of documents, I think that the investment banks and other [deal-]arrangers didn’t do a good job in protecting the investors from litigation. So it may both be that the investment banks may be on the hook for money that they didn’t contemplate being on the hook for, and that the investors may be on the hook for money. [We are] trying to look at the impact the various state anti-predatory lending laws have had on defaults. It’s important from a policy perspective to know whether these laws really are effective. If they aren’t effective, it doesn’t make sense to have them. We’ve done some earlier research about whether the laws affected the availability of credit, and the results of that study were fairly robust and showed that it didn’t really affect the availability of credit. This is a different question, and really goes to the quality of the credit – do you see better quality credit where these laws are in place? And the third big thing I’m looking at is the cases where banks were foreclosing where they didn’t really have the authority for foreclose, what we would call standing. And I’m looking at how courts have treated that, and what outcomes we can expect.
Kathleen Engel’s Top 5 Questions About The CFPB:
- Will the new Congress revoke pieces of the Dodd-Frank Wall Street Reform and Consumer Protection Act?
- Will new CFPB mortgage disclosures enable consumers to understand their loans and comparison shop for credit?
- Will the CFPB be staffed-up in time to take over examining the largest banks?
- Will President Obama appoint Elizabeth Warren secretary of the CFPB?
- Will the CFPB examine consumer credit scoring methods?
