'Reasonableness' Standard Will Set a High Bar for Lenders

Over the last year several decisions and regulatory actions suggest industry standards are soon going to become the way of life for lenders. As many know, a jury found that Countrywide's origination process was so flawed that it amounted to fraud, paving the way for the Department of Justice to pursue claims against Bank of America and certain executives for its rapid approval process.

Recently, regulators have stepped up action against servicers experiencing fast growth to ensure that their infrastructure was sufficient to support such growth. Regulators are investigating whether the infrastructure is generally sufficient to support the volume of business in comparison to companies of similar size and volume.

Practically, these actions suggest that as opposed to specific standards that must be met, a generalized standard of care is being developed. In other words, up to this point lenders had specific actions and goals that were required. A lender could compare its actions and performance to specific standards to determine its level of compliance.

It appears that we are witnessing the development of a generalized "reasonableness" threshold where lenders will now need to evaluate themselves based upon the processes and procedures of their competition. This obviously creates additional pressures on companies' compliance infrastructures because simply meeting minimum statutory requirements may not be sufficient in the future.

Rather, the more surrounding companies implement practices to protect consumers and avoid defaults and other problems, it could impose liability for companies lagging behind their competition. In that regard, meeting minimum statutory requirements would not be enough—lenders would need to measure themselves against their competition in regards to their compliance performance and review their own conduct from a generalized reasonableness perspective.

Put another way, a lender's compliance would essentially be viewed in hindsight, creating the need to predict possible outcomes and review them in advance to determine that their actions are generally reasonable at the time.

Lenders should keep close watch on these developments and the general marketplace to ensure their actions are main-stream. Remaining on the fringes is becoming more dangerous than ever.

Ari Karen is an attorney at Offit Kurman.