The Impact of State Anti-Predatory Lending Laws: Policy Implications and Insights
Contribution to Book
Understanding Consumer Creditt
The subprime mortgage market, which consists of high-cost loans designed for borrowers with weak credit, has grown tremendously over the past ten years. Between 1993 and 2005, the subprime market experienced an average annual growth rate of 26 percent. As this market emerged, so did allegations that subprime loans contained predatory features or were the result of predatory sales practices.3 In the worst cases, brokers deceived borrowers about the meaning of loan terms or falsely promised to assist them in obtaining future refinance loans with better terms. In other situations, borrowers entered into loans with low teaser rates, not aware how high their monthly payments could go when their interest rates reset. Many policy-makers across the country agree that subprime loans provide an important vehicle for making credit available to consumers; however, concerns about abuses in the subprime market have led the federal government and most states to enact laws that place limits on subprime lending. The federal government led the way with the Home Ownership Equity Protection Act (HOEPA), which was enacted in 1994. A growing number of states followed suit, passing laws modeled on HOEPA (known as “mini-HOEPA laws”). Today, well over half the states have anti-predatory lending statutes of one kind or another. These laws vary in terms of the loans they cover, the practices they prohibit, and the methods of enforcement they permit. In addition to the mini-HOEPA laws, numerous states have laws that pre-date HOEPA and prohibit specific loan terms such as prepayment penalties or balloon payments. These laws function alone or alongside more comprehensive mini-HOEPA laws. As home mortgage default and foreclosures rates have escalated in recent years, antipredatory lending measures have moved into the policy limelight. Lenders and others in the mortgage industry claim that the laws drive up the cost and reduce the availability of credit, especially to low-income borrowers. In contrast, those who endorse the laws argue that they are needed to protect vulnerable consumers and the communities in which they live. They further argue that any costs are de minimis relative to the protection the laws provide. Any laws that place restrictions on loan terms and lending practices invariably have some effect on credit flows in the home mortgage market. Until recently, the nature and extent of those effects have only been speculative. The availability of loan pricing and other data now makes it possible to evaluate the impact of laws on the flow and cost of credit. In this chapter, we review past studies on the impact of anti-predatory lending laws and describe the results of our own research, which expands on prior studies by: (1) using a more nuanced legal index; (2) examining anti-predatory lending laws that pre-date HOEPA as well as the HOEPA analogues; (3) looking at the role of enforcement mechanisms, including assignee liability laws, on loan volumes; and (4) disaggregating anti-predatory lending laws along three dimensions—coverage, restrictions, and enforcement.