Consumer Law

Would the Close-Connectedness Doctrine Help Defrauded Subprime Borrowers?

By Jeff Sovern

Apparently one of the big problems for defrauded subprime borrowers who seek redress is that the mortgage originators are judgment-proof while transferees with the assets to satisfy a judgment are protected by the holder in due course doctrine.  But what about the close-connectedness doctrine?  Decades ago, before the FTC adopted its holder rule, and before state legislatures abolished the holder in due course doctrine in many consumer transactions, state courts created the close-connectedness doctrine to subject lenders to consumer defenses when the lender had a sufficiently close relationship to the entity that dealt directly with the consumer.   See, e.g., Unico v. Owen, 50 N.J. 101, 232 A.2d 405 (1967).  The doctrine was sometimes cumbersome to work with--for one thing, it required proof of the requisite relationship--so it fell into disuse when the FTC promulgated its rule and legislatures enacted more helpful statutes, but so far as I know, it has never been overturned.  If borrowers can establish a similar relationship between securitizers and mortgage originators, could the borrowers get around the holder in due course status that way?  Is that something that borrowers are already trying to do?  I would be curious to read comments from those representing such borrowers.  Individual borrowers might be stymied by arbitration clauses barring class actions and the consequent need to litigate these loans one at a time, but perhaps governmental agencies can intervene to avoid that problem. 

Full post as published by CL&P Blog on January 04, 2008 (boomark / email).