The Impact of State Antipredatory Lending Laws: Policy Implications and Insights

BORROWING TO LIVE: CONSUMER AND MORTGAGE CREDIT REVISITED, Joint Center for Housing Studies, Harvard University and Brookings Institution Press, 2008

3rd Annual Conference on Empirical Legal Studies Papers

41 Pages Posted: 3 Apr 2008 Last revised: 25 Oct 2012

See all articles by Raphael W. Bostic

Raphael W. Bostic

Federal Reserve Bank of Atlanta

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

Kathleen C. Engel

Suffolk University Law School

Date Written: January 25, 2008

Abstract

Over half the states and several localities have enacted statutes and ordinances to regulate abuses in the residential mortgage 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.

We created a legal index of laws governing mortgage lending terms and practices, giving each state an overall score for the strength of its laws. In addition, we disaggregated the index to create sub-indices along three dimensions: (1) the scope of loans covered by the laws; (2) the prohibited loan terms and practices; and (3) the strength of the legal enforcement mechanisms. We use these indices to determine the effect of anti-predatory lending laws-- using both total index scores and the scores using the sub-indices-- on loan applications, originations and rejections.

To control for variations within state borders, we employ a geographic sampling approach that focuses on lending activity along state borders, including only loans that were originated in a county that is geographically along a state border and if at least one of the two abutting states has an anti-predatory lending law.

We find that the extent of coverage, restrictions, and enforcement embodied in a state's legal framework is associated with significant changes in the probability that a subprime application is rejected and a subprime loan is originated. Coverage is associated with lower subprime rejection probabilities. Restrictions tend to increase the likelihood of rejection and hence retard originations in the subprime market. Finally, the key result in the analysis of enforcement is that stronger enforcement mechanisms reduce subprime rejection probabilities.

We conclude the paper by discussing the possible implications of these findings, including how anti-predatory lending laws may have shaped borrower and lender behavior and how our results can help inform shape future lending regulations. This paper makes a timely contribution given the current crisis in subprime lending and the call for increased scrutiny of lenders and the loans they originate.

Keywords: subprime, lending regulations, mortgages, predatory lending

Suggested Citation

Bostic, Raphael W. and McCoy, Patricia Ann and Pennington-Cross, Anthony N. and Wachter, Susan M. and Engel, Kathleen, The Impact of State Antipredatory Lending Laws: Policy Implications and Insights (January 25, 2008). BORROWING TO LIVE: CONSUMER AND MORTGAGE CREDIT REVISITED, Joint Center for Housing Studies, Harvard University and Brookings Institution Press, 2008; 3rd Annual Conference on Empirical Legal Studies Papers. Available at SSRN: https://ssrn.com/abstract=1115192 or http://dx.doi.org/10.2139/ssrn.1115192

Raphael W. Bostic

Federal Reserve Bank of Atlanta

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

Patricia Ann McCoy

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

Kathleen Engel (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
22
Abstract Views
474
PlumX Metrics