Mortgage Product Substitution and State Anti-Predatory Lending Laws: Better Loans and Better Borrowers?
University of Pennsylvania Institute for Law and Economics
Download Document| Date Published | 2009 |
| Version | Research Paper No. 09-27 |
| Primary Author | Anthony Pennington-Cross, Souphala Chomsisengphet, Raphael Bostic, Kathleen C. Engel, and Patricia A. McCoy |
| Other Authors | |
| Theme | Consumer Protection / Mandatory Disclosure |
| Country |
Abstract
Mounting foreclosures and recent disclosures of abusive lending practices have led many state and federal policy-makers to consider new anti-predatory lending laws. Researchers have examined the impact of such laws on credit flows and the cost of credit, but little attention has been paid to whether and how legal restrictions placed on lenders in the subprime market influence the types of loans borrowers use. Analysis of these issues would be invaluable to legislators as they seek to draft meaningful controls on the mortgage market. Most state level anti-predatory lending laws are triggered only if a specific loan exceeds Annual Percentage Rate (APR) or points and fees thresholds. By shifting the interest rate risk to borrowers lenders can reduce required yields on loans and avoid “trigger-based” regulations. If trigger-based laws are costly to lenders, we should see an increased use of mortgage products that shift the interest rate risk to the borrower and away from the lender. However, after controlling for time and location, our results provide no evidence that lenders do in fact attempt to avoid anti-predatory lending laws by shifting product terms in this manner. Many laws also restrict the use of prepayment penalties and balloons. Both of these mortgage terms can be used to make a loan more affordable (lower monthly payments) initially. If they are barred, lenders and borrowers are likely to find substitute mortgage terms that increase affordability so that a borrower can still qualify for a loan. Possible alternative mortgage terms include the use of longer or bigger teasers and non- or negative-amortizing loans. We find that the largest impacts of anti-predatory lending laws are to reduce the use of prepayment penalties and some types of balloon payments, to increase the use of owner occupied loans and to decrease the use of investor and second home loans.