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Abstract:
Predatory lending - the practice of making exploitative high-cost loans to naive borrowers - has spurred policy-makers, activists, lenders and scholars to debate whether intervention is warranted and, if so, what type of intervention is appropriate. The solution requires understanding the incentives in the home mortgage market that have fueled predatory lending. Recent changes in the credit market have created new possibilities for lenders to profit by exploiting information asymmetries to the detriment of unsophisticated borrowers. As a result, a new, predatory lending market has emerged alongside the legitimate prime and subprime home mortgage markets. Neither market forces nor existing legal remedies are sufficient to correct predatory lending. Instead, government intervention is needed. The authors propose a new, narrowly tailored remedy - suitability - that would require predatory lenders to internalize the costs of the harm they cause.

Predatory lending, subprime mortgages, lending discrimination

Abstract:
Today, Wall Street finances up to eighty percent of subprime home loans through securitization. The subprime sector, which is designed for borrowers with blemished credit, has been dogged by predatory lending charges, many of which have been substantiated. As subprime securitization has grown, so have charges that securitization turns a blind eye to financing abusive loans. In this paper, we examine why secondary market discipline has failed to halt the securitization of predatory loans.

When investors buy securities backed by predatory loans, they face a classic lemons problem in the form of credit risk, prepayment risk, and litigation risk. Securitization exacerbates all three risks by unbundling the mortgage process, giving rise to adverse selection. In theory, the lemons problem should cause investors to flee the market for subprime mortgage-backed securities or demand a risk premium commensurate with the worst quality loans. Instead, securitization allays adverse selection concerns by structuring transactions so that risk-averse investors receive their agreed-upon return without needing to screen out predatory loans. In addition to pricing, the secondary market uses structured finance and deal terms, instead of filtering, to manage credit, prepayment, and litigation risk. Furthermore, structured finance provides incentives to securitize predatory loans. Voluntary due diligence could help ameliorate the problem, but those efforts remain sparse. To alter this perverse incentive structure, we propose legislation to impose a duty on secondary market assignees of subprime home loans to investigate and police predatory lenders.

subprime, predatory lending, securitization, lemons problem

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. Our results 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.

Subprime lending, enforcement mechanisms, predatory lending, anti-predatory lending laws, mortgage lending, homeownership

Abstract:
Traditionally, policymakers, communities, and industry have regarded the Community Reinvestment Act ("CRA") as a positive mandate for banks and thrifts to do good by increasing investment in low- and moderate-income ("LMI") neighborhoods. When Congress enacted CRA, it was inconceivable that LMI neighborhoods might eventually receive too much credit in the form of abusive mortgages. However, by the late 1990s, predatory mortgages- exploitative high-cost loans to gullible borrowers-were ravaging the inner cities.

We address the question: given the surge in predatory lending, how should CRA respond? CRA and federal subsidies to regulated lenders can create perverse incentives for lenders to engage in predatory lending. For this reason, regulators should administer CRA with the goal of curbing predatory lending. In particular, federal bank regulators should use CRA to sanction behavior that could further predatory lending. Regulators should deny both satisfactory and outstanding CRA ratings to banks and thrifts that fail to satisfy specific loan eligibility criteria designed to counteract predatory lending when originating or brokering subprime mortgages. Similarly, CRA ratings should drop where banks or thrifts finance subprime lenders-either through letters of credit or working capital loans, or purchases of subprime mortgages or interests in subprime securitizations- without instituting adequate due diligence and monitoring safeguards against predatory lending.

Conversely, CRA should be used to reward beneficial conduct by banks and thrifts that is designed to reduce predatory lending. For example, increased CRA credit for legitimate subprime lending by insured depository institutions could inject badly needed healthy competition into the subprime market. CRA credit should also be used to reward banks and thrifts for refinancing predatory loans with legitimate loans. Special marketing programs designed to offer legitimate credit to groups targeted by predatory lenders likewise deserve CRA credit, as do innovative underwriting guidelines for LMI borrowers. Finally, we advise against extending CRA examinations and ratings to non-bank subprime lenders, whether they are affiliated with insured depository institutions.

CRA, Community Reinvestment Act, predatory lending, subprime lending

Abstract:
Predatory lenders penetrate communities and, like polluters, leave distressed properties and desperate people in their wakes. The task of cleaning up falls to cities, yet predatory lending reduces the resources available for this clean up. Declining property values resulting from predatory lending mean reduced tax revenues just as empty buildings lead to increased demand for fire and police protection. City budgets are further strained as victims of predatory lending turn to cities for relief programs and protection from abusive lenders. In the language of economics, predatory lending imposes negative externalities on cities.

Lawyers across the country are pursuing claims on behalf of victims of predatory lending. Legislators are passing new laws to extend protection to borrowers and researchers are exploring the causes and cures for predatory lending. Yet, little attention has been paid to the plight of cities.

In this article, I analyze whether cities have standing to recover damages for the externalities that predatory lenders impose on them and whether cities have standing as parens patriae to pursue claims against predatory lenders. The paper begins with a description of the impact predatory lending has on municipalities and then turns to the law governing municipal standing to sue predatory lenders. I also examine particular claims cities could bring against predatory lenders and the bases for city standing to bring these claims. My conclusion is that broad grants of standing to cities to pursue claims against predatory lenders are necessary to enable cities to protect residents from lender wrongdoing, to recover damages for the injuries predatory lenders impose on cities, and to force abusive lenders to internalize the externalities of their lending practices.

Predatory lending, standing

Abstract:
For decades, cities have invested in decaying neighborhoods, leading to increases in home values and home equity. As a result, these neighborhoods have become ready targets for predatory lenders, who market their abusive loans to financially unsophisticated homeowners with home equity and no relationships with traditional lenders. Some borrowers lose their homes; others forsake home repairs to avoid default and foreclosure. Neighborhoods that once were stable become littered with abandoned and neglected homes, resulting in increased crime, falling home values, rising demands for social services, and lower tax revenues.

In the wake of the devastation done by predatory lenders, the question for policymakers is: what can be done? This paper seeks to answer this question. The paper opens by defining predatory lending. Next, the paper describes how the rise of securitization, deregulation of price terms, affordable lending incentives, bank closings, and historical credit discrimination together fueled the rise and institutionalization of predatory lending in the 1990s. Lastly, the paper evaluates different possible approaches to redressing predatory lending, including industry self-regulation, consumer education and counseling, Community Reinvestment Act oversight, criminal enforcement, existing private causes of action, and a suitability proposal.

predatory lending, community development, Community Reinvestment Act

Abstract:
Congress passed the Fair Housing Act over thirty years ago, yet housing discrimination persists. One of the harshest consequences of discrimination in housing is that upwardly mobile members of protected groups lose access to desirable communities and the attendant benefits, ranging from safe streets and good schools to productive role models. Fair housing laws and related case law have neither recognized nor provided a remedy for the loss of intangible community benefits due to housing discrimination.

In this article, I demonstrate that claims for lost access to desirable communities can be easily incorporated into an extant category of compensable injuries under the Fair Housing Act. I then introduce a method for assessing the value of this injury. In brief, the method compares the price of housing that a victim of discrimination obtained to the price of the housing the home-seeker sought and was unlawfully denied to approximate the value of living in the more desirable community. The virtue of the method is that it provides adjudicators with a concrete basis for calculating damages for lost access to a desirable community.

In the first part of the article, I discuss the extent of housing discrimination in the United States, the role discrimination plays in limiting people's access to the bundle of goods and services that desirable communities provide, the fair housing laws, current remedies under the laws, and the failure of the laws to provide a remedy to people who are denied access to desirable communities as a result of discrimination. In Part II, I describe the method for calculating damages for lost access to a desirable community and discuss some of its complexities. In Part III, I discuss the potential impact of these new damage calculations on the fair housing enforcement scheme.

Abstract:
Mounting foreclosures and recent disclosures of abusive lending practices have led many states to adopt new anti-predatory lending laws. Researchers have examined the impact of such laws on credit flows and the cost of credit. This research extends the literature by examining if the market responded to these laws by substituting different mortgage products for those restricted by anti-predatory lending provisions. The evidence indicates that the new laws were effective in restricting loans with targeted characteristics and that the market substituted other product types to maintain affordability in the face of these restrictions.

Real estate, mortgages, housing, abusive lending, predatory lending, mortgage products, product substitution, adjustment to prohibition

Abstract:
Years of discriminatory behavior against minority households have damaged their ability to build wealth. One of the most financially destructive practices endured by minority households is the excessive overpayment to finance a home purchase or access accumulated equity in a home. The market conditions that position blacks, and to a lesser extent, Latino households, to be the principal targets of predatory mortgage lending have their roots in decades of legally sanctioned housing market discrimination. Some minority households lack the financial knowledge or awareness to protect themselves. In other cases, years of discriminatory financial practices have contributed to rendering them ineligible to access low-cost financing. And, finally, vestiges of discrimination continue today with minority consumers convenient targets of unscrupulous lending behavior.

Starting in the early 1990s, federal antipoverty policies placed new emphasis on asset creation for low- and moderate-income people, especially the working poor. While federal policy embraced wealth creation as the new antidote to poverty, it failed to anticipate threats to preserving home equity once it has been created, including rising consumer debt and predatory lending. To date, the federal government has failed to combat predatory lending consistently and effectively. The failure to curb predatory lending has spawned high levels of home loan foreclosures across the U.S. and threatens the largest asset of many minority households, i.e., their homes. This paper proposes policies to improve the sustainability of minority homeownership.

homeownership sustainability, lending discrimination, subprime, predatory lending