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A Tale of Three Markets: The Law and Economics of Predatory Lending

113 Pages Posted: 11 Oct 2001 Last revised: 24 Oct 2012

Kathleen C. Engel

Suffolk University Law School

Patricia A. McCoy

Boston College Law School

Date Written: October 24, 2012

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.

Keywords: Predatory lending, subprime mortgages, lending discrimination

JEL Classification: G21, G28, K23

Suggested Citation

Engel, Kathleen C. and McCoy, Patricia A., A Tale of Three Markets: The Law and Economics of Predatory Lending (October 24, 2012). Texas Law Review, Vol. 80, No. 6, p. 1255, 2002. Available at SSRN: https://ssrn.com/abstract=286649 or http://dx.doi.org/10.2139/ssrn.286649

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

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