NCPA - National Center for Policy Analysis

Predatory-Lending Laws May be Backfiring

October 14, 2002

More than a dozen states have passed so-called predatory-lending laws designed to eliminate mortgage loans carrying high fees and interest rates offered to high risk, "subprime" borrowers.

But there is evidence such laws are also making it harder for deserving borrowers to obtain mortgage loans.

  • Some banks have threatened to curtail credit to some families because they fear possible lawsuits in states which have adopted such laws.
  • Georgia -- which has one of the toughest laws -- restricts certain practices such as balloon payments on loans it deemed "high cost," which includes mortgages whose fees exceed 5 percent of the total loan amount.
  • That law also established penalties in cases where such loans were made without certain protections for consumers, including counseling by a third-party non-profit organization.
  • A number of lenders -- including Chase Manhattan Mortgage Corp. -- have said they will stop offering high-cost loans altogether, even though they remain legal under the law.

Freddie Mac, the government sponsored loan company that buys loans from lenders, has also announced it will stop buying high-cost loans in Georgia.

If mortgage credit dries up in Georgia and elsewhere, observers say, a slowdown in home construction would occur -- which could spread to numerous other industries, such as furniture manufacture.

Part of the problem, however, is that defining what is a "predatory" loan remains more art than science, since there is no formal definition and not all subprime loans are considered predatory. So each state must make its own definition.

Source: Patrick Barta, "Do Predatory-Lending Laws Cut Mortgage Credit?" Wall Street Journal, October 14, 2002.

For text (WSJ subscribers)


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