A Tale of Three Markets: The Law and Economics of Predatory Lending

Exploiting Naïvete about Self-Control in the Credit Market

“…And even if a non-sophisticated borrower refinances, she might perpetually do so using contracts of the type we predict, and eventually repay according to such a contract. Indeed, Engel and McCoy (2002) document that subprime mortgages are often refinanced with similarly structured loans, and credit-card balance-transfer deals and teaser rates also draw consumers into contracts similar to those they had before.…”

“…18 As emphasized by Hill and Kozup (2007) and especially Renuart (2004) and as the logic of our model suggests, the high monthly payments or the balloon payment drive borrowers to refinance, and the high prepayment penalty-folded into the principal and financed-serves to make this profitable to the firm. In a practice known as "loan flipping," creditors sometimes refinance repeatedly (Engel and McCoy 2002). Indeed, Demyanyk and Van Hemert (2008) find that the majority of subprime mortgages is obtained for refinancing into a larger new loan for the purposes of extracting cash.…”

Securitization in East Asia

“…They are thus unwilling to see securitization as a 105 Committee on the Global Financial System (2006), page 17. 106 Engel and McCoy (2002), page 1,257, describe predatory lending as "exploitative high-cost loans to naïve borrowers." They suggest that securitization is a change to the operation of the US home mortgage market that from the 1980s caused growth in new loans to accelerate and allow new loan providers to enter the market, id at 1,273-74.…”

Discrimination in the Credit and Housing Markets: Findings and Challenges

“…36 Staten and Yezer (2004) point out, in a special issue of the Journal of Real Estate Finance and Economics on subprime lending, there is no commonly-accepted definition of predatory lending. Engel and McCoy (2002) suggest that three categories of mortgage loan be differentiated: prime, thus to foreclosures and personal financial distress. Certainly, usury has been a fine art in credit markets since the dawn of modern commerce.…”