No abstract

Subprime mortgage lending has grown rapidly in recent years and with it, so have concerns about predatory lending. In response to evidence of predatory lending, most states have enacted new laws or expanded existing laws to address abuses in the subprime home loan market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context. The results of the analysis are consistent with the view that anti-predatory lending laws influence subprime lending markets and that disaggregating the details of the overall legal framework into its component parts is essential for understanding subprime market dynamics. The restrictions, coverage, and enforcement components all have significant relationships with subprime market outcomes, with the coverage relationship found to be broadly consistent with the reverse lemons hypothesis put forward by Ho and Pennington-Cross (2007). The results also suggest that the newer mini-HOEPA laws have had an impact on the subprime market above and beyond the older preexisting laws, particularly for subprime originations. Broader coverage through these new laws is associated with higher origination likelihoods, while increased restrictions through the mini-HOEPA laws are associated with lower origination propensities. 8/7/20072

Abstract:Mounting foreclosures and disclosures of abusive lending practices led many states to adopt new anti-predatory lending (APL) laws. Researchers have examined the impact of such laws on credit flows and the cost of credit. This research extends the literature by examining whether the market responded to these laws by substituting different mortgage products for those restricted by APL provisions. The evidence indicates that the laws were effective in restricting loans with targeted characteristics and that the market substituted other product types to maintain access to credit and affordability in the face of these restrictions. The laws did reduce the involvement investor and second home purchases but did appear to impact borrower credit scores or down payments.