Mortgage Product Substitution and State Anti-Predatory Lending Laws: Better Loans and Better Borrowers?

Abstract

Mounting foreclosures and recent disclosures of abusive lending practices have led many states to adopt new anti-predatory lending laws. Researchers have examined the impact of such laws on credit flows and the cost of credit. This research extends the literature by examining if the market responded to these laws by substituting different mortgage products for those restricted by anti-predatory lending provisions. The evidence indicates that the new laws were effective in restricting loans with targeted characteristics and that the market substituted other product types to maintain affordability in the face of these restrictions.