Federalism and Predatory Lending: Unmasking the Deregulatory Agenda

Abstract

In the past two decades the American home mortgage lending market has seen the development of controversial loans which consumer advocates, federal regulators, as well as many lenders have come to call "predatory." Critics of these businesses complain that lenders make loans borrowers cannot repay in anticipation of foreclosing on the family home. Responding to the complaints of their constituents, dozens of state legislatures and local governments have passed statutes and ordinances attempting to prohibit unfair contractual terms. At the same time federal banking regulators have moved to preempt these state laws, placing state and federal leaders on a collision course. Moreover, Congress is actively considering the elimination of all state mortgage lending regulations. This article reviews predatory lending contractual terms; discusses current and past social policy focusing on the American tradition of combined federal and state regulation; and, explores potential unintended consequences from federal preemption of state law. Finally, it suggests current efforts to preempt state and local predatory lending law have more to do with a deregulatory agenda than with regulating commercial activity at the most efficient level of government.

Keywords: federalism, predatory, lending, loan, consumer, credit, debt, mortgage, preemption