State and local anti-predatory lending laws: The effect of legal enforcement mechanisms

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

Mortgage Product Substitution and State Anti-predatory Lending Laws: Better Loans and Better Borrowers?

“…These triggers were so high, as of 2007, that HOEPA regulated no more than one percent of subprime home loans (Gramlich, 2007 were associated with a relative increase in subprime lending, while state laws with stronger restrictions were associated with a decrease in subprime lending (Ho & Pennington-Cross, 2006;Bostic, et al, 2008;Elliehausen et al, 2006). Increasing the coverage of a state law by lowering the triggers or covering more loan products, however, helped mitigate the dampening effect of stronger restrictions on subprime loan volumes (Bostic, et al, 2008).…”

“…Increasing the coverage of a state law by lowering the triggers or covering more loan products, however, helped mitigate the dampening effect of stronger restrictions on subprime loan volumes (Bostic, et al, 2008).…”

The Impact of State Anti-Predatory Lending Laws: Policy Implications and Insights

“…Our legal index is both more complete and more nuanced than prior efforts. As it is more fully described in Bostic, et al (2008), the procedure is only sketched here. Following Ho and Pennington-Cross, we include four coverage and four restriction measures.…”

“…The city and county ordinances are either limited in scope to lenders who contract with the cities or have been preempted. Bostic et al (2008). 13 See, e.g., Annotated Laws of Mass.…”

“…25 We did not use the HMDA price information for our analysis of the 2004 data because of concerns about reporting and other errors in the data. Bostic et al (2008). 26 In a separate article (Bostic et al (2008)), we used the same data and sampling technique; however we took a different sample.…”