Florida Suit Threatens Subprime Mortgage Lending

A lawsuit filed in Florida in mid-June must seem like déjà vu to the subprime lending industry. The state Attorney General's office is suing a unit of Lehman Brothers for allegedly helping the now defunct First Alliance Mortgage Co in perpetuating unfair and deceptive trade practices in its dealings with mortgage borrowers in Florida. Lehman Commercial Paper provided funding assistance and services for First Alliance's operations, which apparently constituted the "help" referred to in the lawsuit. According to Laurence Platt, a partner with the Washington, DC law firm Kirkpatrick and Lockhart LLC, "this is the first time of which I'm aware that a government agency has sought to hold the capital markets responsible for the misdeeds of their corporate customers in the mortgage lending context." In an interview with the American Banker, Platt said "When the State of Florida seeks to hold the capital markets responsible for the misdeeds of their customers, the capital markets naturally should ask why they should put their money at risk in Florida."

Of course, that is precisely the problem for the subprime lending industry. In Georgia last year, restrictive new state legislation designed to reduce predatory lending tactics extended legal liability for those tactics to holders of mortgage loans acquired through the secondary market. When larger purchasers of mortgage loans in the secondary market gave notice that they would no longer buy subprime loans in Georgia, the state legislature quickly amended the statute to avoid cutting off the flow of mortgage loan capital to the state. Now, it appears that Florida may be headed down the same path. The industry will be watching this case closely in the coming months.