Anti-predatory Lending Research Articles

Predatory Lending and the Secondary Market

The advent of securitization has significantly increased the availability of lower-cost subprime home equity mortgage credit to consumers having flawed credit histories, and who do not meet the underwriting standards of prime lenders. Nevertheless, the proliferation of legitimate, beneficial subprime lending has unfortunately been accompanied by some limited instances of abusive lending, which has prompted federal, state, and local governments to enact burdensome, if not draconian, anti-predatory lending measures. Because originators of these loans often do not have significant resources and may not stay in business for long, legislators have focused on ensuring that consumers have redress against secondary-market purchasers of such loans. Accordingly, the purchase of subprime mortgage loans has opened the door to secondary-market investors being held liable for abusive and predatory lending practices under a panoply of stringent federal and state consumer compliance laws. In this article, the authors discuss the primary federal laws that are sued to combat predatory lending practices, such as the Truth-in-Lending Act and the Home Ownership and Equity Protection Act of 1994, and also highlight the salient provisions in certain state and local anti-predatory lending measures that have notable consequences for both originators and secondary-market participants alike. Violations of these laws could result in substantial monetary liability as well as, in certain cases, rescission of the mortgage transaction. In an effort to shield themselves from possible liability, unwinding of the transaction, and reputational harm, in many instances, an array of participants, including purchasers, financers, and underwriters are performing an increasing amount of due diligence in the secondary market. The authors close with a suggested anti-predatory lending due diligence program that could be adopted by these secondary-market participants. <b>TOPICS:</b>MBS and residential mortgage loans, information providers/credit ratings

The Wealth Effects of Preemption Announcements by the Office of the Comptroller of the Currency after the Passage of the Georgia Fair Lending Act

In 2004 the Office of the Comptroller of the Currency (OCC) concluded that federal law preempted anti-predatory lending statutes in Georgia and other states. The OCC asserted that preemption reduces compliance costs especially for smaller, multistate banking companies. Opponents countered that preemption disadvantages state banks endangering the dual banking system. Event study evidence is consistent with the OCC's assertion, but there is little support for the notion that preemption significantly disadvantages state bank-dominated companies. In fact, the excess returns of smaller state bank-dominated companies are generally positive and do not differ significantly from comparable national bank-dominated companies.

Massachusetts Predatory Home Loan Practices Act and Other Amendments to Massachusetts Law

In August 2004, Massachusetts enacted the Predatory Home Loan Practices Act, replacing previous regulations applicable to high-cost home mortgages. With poorly defined provisions and indeterminate assignee liability, the Act follows in the footsteps of the ill-conceived anti-predatory lending laws in Georgia and New Jersey, which upended the secondary mortgage markets in those states. Although it is too soon to tell whether the Massachusetts Act will prompt a similar response, the Act will certainly have a major impact on the structured finance industry. The Act significantly expands the list of penalty provisions and alters the scope of several substantive prohibitions contained in previous regulations, including the limitations on lending without regard to repayment ability, financing points and fees, prepayment penalties, modification and deferral fees, and mandatory arbitration clauses. Any person who purchases or is otherwise assigned a Massachusetts high-cost home mortgage loan will be subject to this legislation.