The Impact of Local Predatory Lending Laws on the Flow of Subprime Credit

Abstract

Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open-end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties. Empirical results show that the typical local predatory lending law tends to reduce rejections, while having little impact on the flow (application and origination) of credit. However, the strength of the law, measured by the extent of market coverage and the extent of prohibitions, can have strong impacts on both the flow of credit and rejections.

Residential mortgage default: Theory works and so does policy

“…Ho and Pennington-Cross (2006a) find that the presence of a predatory lending law alone has little impact on loan originations, while applications and rejection rates generally decline. The punitive severity of the legislation, however, appears relevant as more aggressive legislation is correlated with a decline in originations by subprime lenders.…”

Effects of prepayment regulations on termination of subprime mortgages

“…While this change affects the equilibrium number of originations as some borrowers will not accept the contract (Steinbuks and Elliehausen, 2014), the equilibrium contract rate at origination remains the same, and the arbitrage condition (16) is satisfied. The empirical studies support this assumption by showing that regulation of subprime results in a decline in subprime originations (Ho and Pennington-Cross, 2006), while having at most modest 11 To solve the fundamental PDE (5) using recursive Eqs. (11)-(14), one needs to know the equations describing the borrower's position at the time of maturity, and appropriate boundary conditions.…”

“…Table A.2 (online appendix) shows that share of loans covered by state predatory lending laws increased dramatically from 3 percent in the beginning in of 2001 to 30 percent in the end of 2002. These predatory lending laws differed significantly in terms of their scope and restrictiveness (Ho and Pennington-Cross, 2006). 28 Unfortunately, because of relatively small share of regulated states in earlier cohorts we cannot differentiate in the scope and the restrictiveness of prepayment 25 Unfortunately, we do not observe the duration and the size of prepayment penalty for most of the loans in the sample.…”

Predatory lending practices and subprime foreclosures: Distinguishing impacts by loan category

“…Ho and Pennington-Cross (2006) create an index of predatory lending laws and find that the typical law has little impact on subprime applications and originations but does reduce rejections. They also show that laws with more extensive restrictions or prohibitions can have significant impacts on applications and originations as well as rejections.…”