A Tale of Three Markets: The Law and Economics of Predatory Lending
Kathleen C. Engel
Suffolk University Law School
Patricia A. McCoy
Boston College Law School
October 24, 2012
Texas Law Review, Vol. 80, No. 6, p. 1255, 2002
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.
Number of Pages in PDF File: 113
Keywords: Predatory lending, subprime mortgages, lending discrimination
JEL Classification: G21, G28, K23Accepted Paper Series
Date posted: October 11, 2001 ; Last revised: October 24, 2012
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