The Impact of Local Predatory Lending Laws on the Flow of Subprime Credit
FRB of St. Louis Working Paper No. 2006-009A
56 Pages Posted: 27 Feb 2006
Date Written: February 2006
Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties. Empirical results show that the typical local predatory lending law tends to reduce rejections, while having little impact on the flow (application and origination) of credit. However, the strength of the law, measured by the extent of market coverage and the extent of prohibitions, can have strong impacts on both the flow of credit and rejections.
Keywords: Mortgages, Predatory, Laws, Subprime
JEL Classification: G21, C25
Suggested Citation: Suggested Citation