State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms

47 Pages Posted: 10 Aug 2007 Last revised: 26 Oct 2012

See all articles by Raphael W. Bostic

Raphael W. Bostic

Federal Reserve Bank of Atlanta

Kathleen C. Engel

Suffolk University Law School

Patricia A. McCoy

Boston College Law School

Anthony Pennington-Cross

Marquette University - Dept. of Finance

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: August 7, 2007

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.

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

JEL Classification: D82, G21, G28, H73, K23, L51, R21, R31

Suggested Citation

Bostic, Raphael W. and Engel, Kathleen and McCoy, Patricia Ann and Pennington-Cross, Anthony N. and Wachter, Susan M., State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms (August 7, 2007). Journal of Economics and Business, Vol. 60, p. 47, 2008. Available at SSRN: https://ssrn.com/abstract=1005423 or http://dx.doi.org/10.2139/ssrn.1005423

Raphael W. Bostic

Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Kathleen Engel

Suffolk University Law School ( email )

120 Tremont Street
Boston, MA 02108-4977
United States
617-994-6831 (Phone)

HOME PAGE: http://www.law.suffolk.edu/directories/administrator.cfm?InstructorID=1111

Patricia Ann McCoy (Contact Author)

Boston College Law School ( email )

885 Centre Street
Newton, MA 02459-1163
United States

Anthony N. Pennington-Cross

Marquette University - Dept. of Finance ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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