Predatory Lending is a Defense, Not a Claim

Predatory lending is a defense to foreclosure; it is not an affirmative claim that would entitle a borrower to damages from the lender.

Difference between foreclosure defenses and claims for damages

As discussed in my last post, in the Aubut case the Connecticut Appellate Court recognized that predatory lending is a defense to foreclosure. The defense depends on what the lender new or should have known at the time it made the loan. Though predatory lending might give rise to a claim for money damages against the lender that made the loan, the foreclosing plaintiff is rarely that. Most often, because of the prevalence of mortgage securitizations, the foreclosing plaintiff is an assignee of the loan. The question thus becomes whether you can hold a mortgage loan assignee liable for damages for what the original lender knew or should have known. The Aubut court answered “no.” The foreclosing plaintiff in that case was the ultimate assignee of the loan. The court noted that an assignee takes the loan subject to all defenses that might have been asserted against the assignor. But the assignee does not take the loan subject to the assignor’s liabilities unless the assignee expressly assumes those liabilities. Since the plaintiff had not assumed any liabilities, predatory lending could be a defense to foreclosure but not a counterclaim for damages.

Distinction is good for borrowers

This is a significant distinction. If it were a counterclaim instead of a defense, the courts likely would offset the damages the bank would have to pay against the amount the borrower owed on the loan. But that just reduces the debt. Since most large lenders do not pursue the borrowers for deficiencies between the amount owed and the property value in any event, the offset would be a Pyrrhic victory at best for the borrower. What borrowers really want is to save the property. A counterclaim can’t do that; this predatory lending defense can.