The Impact of State Anti-Predatory Lending Laws: Policy Implications and Insights

The subprime mortgage market, which consists of high-cost loans designed for borrowers with weak credit, has grown tremendously over the past ten years. Between 1993 and 2005, the subprime market experienced an average annual growth rate of 26 percent. As this market emerged, so did allegations that subprime loans contained predatory features or were the result of predatory sales practices.3 In the worst cases, brokers deceived borrowers about the meaning of loan terms or falsely promised to assist them in obtaining future refinance loans with better terms. In other situations, borrowers entered into loans with low teaser rates, not aware how high their monthly payments could go when their interest rates reset

Federal Preemption and Consumer Financial Protection: Past and Future

Starting in 1995 and throughout the subprime boom during the next decade, Congress failed to take action to curb predatory mortgage lending. Many states and cities filled the void by passing anti-predatory lending laws of their own. Lenders, worried about potential liability, quickly organized a full-scale attack on the state and local initiatives. Their most potent strategy lay in challenging the laws and ordinances under federal preemption rules for national banks and federal savings associations that precluded states from enforcing their anti-predatory lending laws. The Dodd-Frank Act curtailed the preemption rules by establishing that state consumer financial laws can only be preempted if they discriminate against state-chartered depository institutions relative to, or prevent or significantly interfere with the powers of, national banks or federal savings associations. Dodd-Frank\u27s preemption standards became effective on July 21, 2011, at which point the U.S. Office of the Comptroller of the Currency (OCC) should have conformed its preemption rulings to the new law. Instead, on that date, the OCC issued a new rule that preempted broad swaths of existing state laws using its old preemption precedents, bypassing the Dodd-Frank procedures along the way. We contend that the OCC\u27s actions are not consistent with Congress\u27s intent and predict that there will be legal challenges to the substance of the OCC\u27s new preemption rule and to the process the OCC employed when adopting the rule

The Impact of Predatory Lending Laws: Policy Implications and Insights

Over half the states and several localities have enacted statutes and ordinances to regulate abuses in the residential mortgage market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context. We created a legal index of laws governing mortgage lending terms and practices, giving each state an overall score for the strength of its laws. In addition, we disaggregated the index to create sub-indices along three dimensions: (1) the scope of loans covered by the laws; (2) the prohibited loan terms and practices; and (3) the strength of the legal enforcement mechanisms. We use these indices to determine the effect of anti-predatory lending laws-- using both total index scores and the scores using the sub-indices-- on loan applications, originations and rejections. To control for variations within state borders, we employ a geographic sampling approach that focuses on lending activity along state borders, including only loans that were originated in a county that is geographically along a state border and if at least one of the two abutting states has an anti-predatory lending law. We find that the extent of coverage, restrictions, and enforcement embodied in a state\u27s legal framework is associated with significant changes in the probability that a subprime application is rejected and a subprime loan is originated. Coverage is associated with lower subprime rejection probabilities. Restrictions tend to increase the likelihood of rejection and hence retard originations in the subprime market. Finally, the key result in the analysis of enforcement is that stronger enforcement mechanisms reduce subprime rejection probabilities. We conclude the paper by discussing the possible implications of these findings, including how anti-predatory lending laws may have shaped borrower and lender behavior and how our results can help inform shape future lending regulations. This paper makes a timely contribution given the current crisis in subprime lending and the call for increased scrutiny of lenders and the loans they originate

The ‘Principles’ Paradox

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of liability, such a person will effectively act as if subject to a rule and, even worse, an unintended rule

Protecting Financial Markets: Lessons From the Subprime Mortgage Meltdown

Why did the recent subprime mortgage meltdown undermine financial market stability notwithstanding the protections provided by market norms and financial regulation? This article attempts to answer that question by identifying anomalies and obvious protections that failed to work, and then by examining hypotheses that might explain the anomalies and failures. The resulting explanations provide critical insights into protecting financial markets

THE CRA IMPLICATIONS OF PREDATORY LENDING

This article considers the Community Reinvestment Act\u27s role in combating predatory lending. It provides an overview of the CRA, explains how CRA-covered lenders may enable predatory lending and explores the relationship between the CRA, federal subsidies and predatory lending. The article concludes that the CRA should be used to penalize lenders that engage in predatory lending and recommends that federal bank regulators use CRA to sanction behavior that could encourage further predatory lending

Can Employers Put Genetic Information to Good Use

In my talk today I am going to try to answer the question: Can employers put genetic information to good use? Preparing this talk was a challenge because it required me to switch sides of the table. Having represented plaintiffs in employment discrimination cases for ten years, my inclination is to focus on the ways that employers can use genetic information to the detriment of their workers. I chose to talk about the value of genetic information from the employers\u27 perspective because I wanted to force myself to engage in a disciplined study of the issues, rather than simply don the hat of an employee advocate. Many employee advocates argue that employers should never have any access to their employee\u27s genetic information. What I want to do today is identify situations in which employers could use employees\u27 genetic information to benefit themselves and their employees. In giving these examples, I am not advocating that employers have unlimited access to employees\u27 genetic information. Rather, I am suggesting that with adequate controls there is the potential for employers to utilize employees\u27 genetic information in ways that are socially valuable. For the purpose of this talk, I am focusing on employees whose genetic propensities for certain diseases are not yet expressed, understanding, of course, what Dr. Zahka said earlier, that this can be a hard line to draw. There are two ways to think about using genetic information in the employment context. One is to look at an individual employee\u27s genetic information and the other is to focus on the genetic traits represented by a pool of employees