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A Tale of Three Markets: The Law and Economics of Predatory Lending

By Kathleen C. Engel and Patricia A. McCoy

Abstract

Predatory lending - the practice of making exploitative high-cost loans to naive borrowers - has spurred policy-makers, activists, lenders and scholars to debate whether intervention is warranted and, if so, what type of intervention is appropriate. The solution requires understanding the incentives in the home mortgage market that have fueled predatory lending. Recent changes in the credit market have created new possibilities for lenders to profit by exploiting information asymmetries to the detriment of unsophisticated borrowers. As a result, a new, predatory lending market has emerged alongside the legitimate prime and subprime home mortgage markets. Neither market forces nor existing legal remedies are sufficient to correct predatory lending. Instead, government intervention is needed. The authors propose a new, narrowly tailored remedy - suitability - that would require predatory lenders to internalize the costs of the harm they cause

Topics: predatory lending, subprime mortgages, lending discrimination, Consumer Protection Law, Banking and Finance Law, Consumer Protection Law, Contracts
Publisher: Digital Commons @ Boston College Law School
Year: 2002
OAI identifier: oai:lawdigitalcommons.bc.edu:lsfp-1783
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