We reply to criticisms of our recent study about North Carolina's Anti-Predatory Lending Law reducing predatory loan terms and preserving access to credit (NC's Anti-Predatory Lending Law: Doing What it's Supposed to Do). To examine whether the decline in overall subprime lending in North Carolina, following passage of the predatory lending law, was due to a decline in loans with legitimate terms or to a reduction in loans with abusive terms, we examined specific market segments and market practices using loan level data from the Loan Performance Asset Backed Securities (ABS) database. Our study revealed that, although the total volume of subprime originations in North Carolina declined, the number of home purchase loans was unaffected by the law. Given the robustness of the LP data, we are baffled by the criticism and disappointed by confusion that has arisen over mistaken data interpretation. For reasons discussed in this paper, we stand by our descriptive study and will continue to use LP data in our future work.Technology and Industry, Regulatory Reform

Davis, Walter R.

Quercia, Roberto G.

Stegman, Michael A.

English

Research Papers in Economics

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The attached material is posted on regulation2point0.org with permission.  
JOINT CENTER  
AEI-BROOKINGS JOINT CENTER FOR REGULATORY STUDIES 
 
 
NC’s Anti-Predatory Lending Law: 
Doing What It’s Supposed To Do: 
A Reply 
 
 
Michael A. Stegman, Roberto G. Quercia, and Walter R. Davis 
 
Related Publication 03-27 
November 2003 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The authors are Michael A. Stegman, Roberto G. Quercia, and Walter R. Davis of the Center for 
Community Capitalism at the University of North Carolina at Chapel Hill.  The authors can be contacted 
at stegman@email.unc.edu, quercia@email.unc.edu, and walter_davis@unc.edu. Executive Summary 
 
We reply to criticisms of our recent study about North Carolina's Anti-Predatory Lending 
Law reducing predatory loan terms and preserving access to credit (NC's Anti-Predatory Lending 
Law: Doing What it's Supposed to Do).  
 
To examine whether the decline in overall subprime lending in North Carolina, following 
passage of the predatory lending law, was due to a decline in loans with legitimate terms or to a 
reduction in loans with abusive terms, we examined specific market segments and market 
practices using loan level data from the Loan Performance Asset Backed Securities (ABS) 
database.  Our study revealed that, although the total volume of subprime originations in North 
Carolina declined, the number of home purchase loans was unaffected by the law.  
 
Given the robustness of the LP data, we are baffled by the criticism and disappointed by 
confusion that has arisen over mistaken data interpretation. For reasons discussed in this paper, 
we stand by our descriptive study and will continue to use LP data in our future work. 
 
   1
NC’s Anti-Predatory Lending Law:  Doing What It’s Supposed To Do:  A Reply 
 
Michael A. Stegman, Roberto G. Quercia, and Walter R. Davis 
 
Despite criticisms -- often based on a lack of knowledge about our database  -- by a 
number of influential people inside the Beltway over the past few months, the study released 
June 25 by the Center for Community Capitalism at The University of North Carolina clearly 
shows that North Carolina’s Anti-Predatory Lending Law is working as intended by reducing 
predatory loan terms and preserving access to credit.
 1 
Our study asked the essential question that other studies failed to ask: was the decline in 
overall subprime lending in North Carolina following passage of the predatory lending law due 
to a decline in loans with legitimate terms, or to a reduction in loans with abusive terms?  To 
answer this question, we examined specific market segments and market practices using loan 
level data from the Loan Performance Asset Backed Securities (ABS) database. Studying loans 
down to their very terms (such as prepayment penalties of a certain length and balloon payments) 
gave us a strong indication of the frequency of predatory characteristics before and after the law.  
Our study revealed that, although the total volume of subprime originations in North 
Carolina declined, the number of home purchase loans was unaffected by the law. While 
refinance originations did fall, much of the decline was in subprime loans with predatory 
features, which is what the law intended.  For example, refinance loans containing prepayment 
penalties of three years or more dropped 72 percent after the law’s passage, while rising in 
neighboring states by as much as 260 percent.  We also found that the total volume of loans to 
North Carolina borrowers with credit scores below 660, the core of the subprime market, rose in 
the post-law period by a similar or greater percentage than it did in several neighboring states.  
To our surprise, almost all of the criticism levied at our study has surrounded our use of 
Loan Performance (LP) data for the analysis. Although the name may be new, Loan Performance 
(formerly Mortgage Information Corp.) is a private company founded 20 years ago to provide 
mortgage market data and research for banks and other financial institutions. Loan Performance 
data have been used by OTS, Freddie Mac and Fannie Mae economists in their analysis of 
mortgage performance for many years.  Moreover, the LP database is the most comprehensive   2
data available on the subprime mortgage market.  In our study, we analyzed 3.3 million 
securitized loans in all 50 states made by more than 20 lenders that are reported under LP’s ABS 
loan-level database.  In terms of market share, the LP data included 42 percent of the entire 
subprime market in 1998, the starting point for our analysis, and 51 percent in 2002, the 
endpoint.  
Given the robustness of the LP data, we are baffled by the criticism and disappointed by 
confusion that has arisen over mistaken data interpretation. In August, the authors of an OCC 
“Working Paper”
2 severely criticized the data in our study, while uncritically accepting the data 
and findings of the Georgetown Credit Research Center’s (CRC) study showing adverse effects 
of the North Carolina law.
3  The CRC study used a data set that included 1.4 million loans, 
analyzing just 300,000 of them in four states that were made by nine lender members of the 
American Financial Services Association (AFSA), an industry trade group that opposes anti-
predatory lending laws. Compared to our LP ABS database, CRC’s dataset represents a smaller 
segment of the subprime market, covers substantially fewer lenders, ends before many of the 
North Carolina law’s provisions took effect, and is unavailable to other researchers for 
independent analysis.  
Finally, Robert Litan, Director of AEI-Brookings Joint Center for Regulatory Studies, 
criticizes our study primarily because all of the subprime loans in the LP ABS database were 
securitized in the secondary market.
 4  However, securitization is typical in the subprime market. 
Inside B&C Lending reports that nearly two thirds of all subprime loans were securitized in 
2002. We know of no evidence that suggests the subprime loans lenders choose to securitize are 
fundamentally different from the non-securitized loans. Moreover, our calculations suggest that 
most of the loans made by subprime lenders that are members of AFSA - the data source for the 
CRC study that both Litan and the OCC praise – are also securitized.  
                                                                                                                                                                                           
1 Roberto G. Quercia, Michael A. Stegman, and Walter R. Davis, The Impact of North Carolina’s Anti-Predatory 
Lending Law: a Descriptive Assessment, Center for Community Capitalism, University of North Carolina at Chapel 
Hill, June 25, 2003 
2 Comptroller of the Currency, Economic Issues in Predatory Lending, OCC Working Paper, July 30, 2003 
3 Gregory Elliehausen and Michael Staten, Regulation of Subprime Mortgage Products: An Analysis of North 
Carolina’s Predatory Lending Law, Georgetown University, McDonough School of Business, Credit Research 
Center, November, 2002. 
4 Robert E. Litan, North Carolina Predatory Lending Law: Still a Problem Despite New Study, Joint Center AEI-
Brookings Joint Center for Regulatory Studies, Regulatory Analysis 03-9, September 2003.  Available at: 
http://www.aei-brookings.org/publications/abstract.php?pid=380    3
Litan also implies that the Home Mortgage Disclosure Act (HMDA) database is more 
suitable for predatory lending studies than our LP data because it “includes all mortgage 
lenders.” While HMDA may be the database of choice for broader studies of the mortgage 
market, it leaves much to be desired when it comes to analyzing subprime and predatory 
lending.  This is because of the way that HUD identifies subprime lenders.  HUD designates 
lenders as being either subprime or manufactured housing lenders if at least half of their total 
originations are either subprime or manufactured housing loans.  
Since the HMDA database contains no field designating an individual loan application as 
being either prime or subprime, by convention, 100 percent of all loan applications for a HUD-
identified subprime lender are tallied as subprime, even if just 51 percent of the lender’s 
applications were actually for subprime loans. Conversely, none of the applications for subprime 
loans submitted to prime lenders whose subprime lending activities accounts for less than half 
their total business are identifiable in HMDA as subprime loans. Because it both under-states and 
over-states the subprime lending activities of different lenders with no way of estimating whether 
the errors offset, and contains fewer loan-level variables of interest to predatory lending 
researchers, we don’t share Litan’s enthusiasm for HMDA as a subprime database of choice. 
Litan also criticizes our LP database for containing too many Alt-A loans, which he 
argues are not risky enough to be classified as subprime mortgages.  Although we disagree with 
him on substantive grounds, if Alt-As are really a problem, we wonder why he does not raise this 
problem with respect to the AFSA and HMDA databases. With regard to the LP ABS database, 
just 7 percent of all NC originations between 1998 and 2002 are Alt-A, including less than one 
percent of all 2002 loan originations. Because Alt-As, relative to prime loans, carry additional 
risk for lenders--due to higher LTV or payment to income ratios, low- or limited- documentation 
of borrower income, unstable income, or some combination of these features--our decision to 
include Alt-As in our subprime database is justified. Nevertheless, to test Litan’s proposition that 
including Alt-A loans in our database somehow biased our results, we removed them, and then 
replicated the analysis in our study, and confirmed our original findings.  
But we do agree with Litan’s larger point that the mix of loans and lenders included in 
the several databases researchers use to assess the impacts of predatory lending laws can affect 
analysis outcomes.  This is why we have taken pains to look at changes in specific loan features, 
and to disclose the composition of our LP data. This is also why it is important that our critics   4
turn their attention with equal vigor to the databases used in studies that claim the NC law had 
adverse impacts.   
Litan also believes that our pre- and post-law analysis is unreliable because the market 
share of all subprime originations contained in the LP ABS database grew more rapidly than 
total originations over our study period.
5  We disagree.  First, our conclusions are based as much 
on comparisons between North Carolina and neighboring states as they are on changes in the 
volume of originations over time, and there is no reason to believe that LP’s relative coverage of 
North Carolina differs from that of neighboring states over time.  Moreover, the fact that our 
database represents a growing share of all subprime originations means that for most of our 
analyses, we may be underestimating rather than overstating the law’s positive impacts. Take, for 
example, our estimate mentioned earlier that post-law refinance originations with extended 
prepayment penalties declined by 72 percent in NC. Although our post-law database contains a 
22 percent larger market share than our pre-law database, the fact that these abusive loans 
declined in NC while increasing in neighboring states by 35 to 260 percent, suggests that our 
estimates of the law’s positive impacts are on the conservative side.  
Finally, Litan suggests that an “LP originations database” is better suited for the kind of 
studies we are undertaking than our ABS dataset, but to our knowledge, no such database exists. 
While Loan Performance does license to third parties a servicing database that contains broader 
market coverage than the one we are using, it contains only aggregate data and no loan-level 
information, which is why it is unsuitable for our purposes.  
In conclusion, we stand by our descriptive study that suggests that the North Carolina 
anti-predatory lending law is doing what it is supposed to do, and we will continue to use LP 
data in our future work, which includes a forthcoming paper that fully describes the loan-level 
composition of this important subprime database.  
 
                                                           
5 Although Litan doesn’t acknowledge it, but Elliehausen and Staten’s AFSA subprime database also 
expands over their analysis period, from about 8 percent to more than 12 percent of market coverage. This 
represents a 50 percent increase in relative market share, compared to our 22 percent increase. 
 

NC's Anti-Predatory Lending Law: Doing What It's Supposed To Do: A Reply

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NC's Anti-Predatory Lending Law: Doing What It's Supposed To Do: A Reply

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